CASE LISTS

THE CORPORATION LAW

1. General Principles
Definition of Corporation
 Engr. Feliciano vs. COA et al, G.R. No. 147402, January 14, 2004

[G.R. NO. 147402 - January 14, 2004]

ENGR. RANULFO C. FELICIANO, in his capacity as General Manager of the Leyte Metropolitan Water District
(LMWD), Tacloban City, Petitioner, v. COMMISSION ON AUDIT, Chairman CELSO D. GANGAN,
Commissioners RAUL C. FLORES and EMMANUEL M. DALMAN, and Regional Director of COA Region
VIII, Respondents.

DECISION

CARPIO, J.:
The Case
This is a Petition for Certiorari 1 to annul the Commission on Audits ("COA") Resolution dated 3 January 2000 and the
Decision dated 30 January 2001 denying the Motion for Reconsideration. The COA denied petitioner Ranulfo C.
Felicianos request for COA to cease all audit services, and to stop charging auditing fees, to Leyte Metropolitan Water
District ("LMWD"). The COA also denied petitioners request for COA to refund all auditing fees previously paid by
LMWD.

Antecedent Facts

A Special Audit Team from COA Regional Office No. VIII audited the accounts of LMWD. Subsequently, LMWD
received a letter from COA dated 19 July 1999 requesting payment of auditing fees. As General Manager of LMWD,
petitioner sent a reply dated 12 October 1999 informing COAs Regional Director that the water district could not pay the
auditing fees. Petitioner cited as basis for his action Sections 6 and 20 of Presidential Decree 198 ("PD 198") 2, as well as
Section 18 of Republic Act No. 6758 ("RA 6758"). The Regional Director referred petitioners reply to the COA Chairman
on 18 October 1999.

On 19 October 1999, petitioner wrote COA through the Regional Director asking for refund of all auditing fees LMWD
previously paid to COA.

On 16 March 2000, petitioner received COA Chairman Celso D. Gangans Resolution dated 3 January 2000 denying his
requests. Petitioner filed a motion for reconsideration on 31 March 2000, which COA denied on 30 January 2001.

On 13 March 2001, petitioner filed this instant petition. Attached to the petition were resolutions of the Visayas
Association of Water Districts (VAWD) and the Philippine Association of Water Districts (PAWD) supporting the
petition.

The Ruling of the Commission on Audit

The COA ruled that this Court has already settled COAs audit jurisdiction over local water districts in Davao City Water
District v. Civil Service Commission and Commission on Audit,3 as follows:

The above-quoted provision [referring to Section 3(b) PD 198] definitely sets to naught petitioners contention that they
are private corporations. It is clear therefrom that the power to appoint the members who will comprise the members of
the Board of Directors belong to the local executives of the local subdivision unit where such districts are located. In
contrast, the members of the Board of Directors or the trustees of a private corporation are elected from among members
or stockholders thereof. It would not be amiss at this point to emphasize that a private corporation is created for the
private purpose, benefit, aim and end of its members or stockholders. Necessarily, said members or stockholders should
be given a free hand to choose who will compose the governing body of their corporation. But this is not the case here and
this clearly indicates that petitioners are not private corporations.

The COA also denied petitioners request for COA to stop charging auditing fees as well as petitioners request for COA to
refund all auditing fees already paid.

The Issues

Petitioner contends that COA committed grave abuse of discretion amounting to lack or excess of jurisdiction by auditing
LMWD and requiring it to pay auditing fees. Petitioner raises the following issues for resolution:

1. Whether a Local Water District ("LWD") created under PD 198, as amended, is a government-owned or controlled
corporation subject to the audit jurisdiction of COA;chanroblesvirtuallawlibrary

2. Whether Section 20 of PD 198, as amended, prohibits COAs certified public accountants from auditing local water
districts; andcralawlibrary

3. Whether Section 18 of RA 6758 prohibits the COA from charging government-owned and controlled corporations
auditing fees.

The Ruling of the Court

The petition lacks merit.

The Constitution and existing laws4 mandate COA to audit all government agencies, including government-owned and
controlled corporations ("GOCCs") with original charters. An LWD is a GOCC with an original charter. Section 2(1),
Article IX-D of the Constitution provides for COAs audit jurisdiction, as follows:

SECTION 2. (1) The Commission on Audit shall have the power, authority and duty to examine, audit, and settle all
accounts pertaining to the revenue and receipts of, and expenditures or uses of funds and property, owned or held in trust
by, or pertaining to, the Government, or any of its subdivisions, agencies, or instrumentalities, including government-
owned and controlled corporations with original charters, and on a post-audit basis: (a) constitutional bodies,
commissions and offices that have been granted fiscal autonomy under this Constitution; (b) autonomous state colleges
and universities; (c) other government-owned or controlled corporations and their subsidiaries; and (d) such non-
governmental entities receiving subsidy or equity, directly or indirectly, from or through the government, which are
required by law or the granting institution to submit to such audit as a condition of subsidy or equity. However, where the
internal control system of the audited agencies is inadequate, the Commission may adopt such measures, including
temporary or special pre-audit, as are necessary and appropriate to correct the deficiencies. It shall keep the general
accounts of the Government and, for such period as may be provided by law, preserve the vouchers and other supporting
papers pertaining thereto. (Emphasis supplied)ςrαlαωlιbrαrÿ

The COAs audit jurisdiction extends not only to government "agencies or instrumentalities," but also to "government-
owned and controlled corporations with original charters" as well as "other government-owned or controlled corporations"
without original charters.

Whether LWDs are Private or Government-Owned

and Controlled Corporations with Original Charters

Petitioner seeks to revive a well-settled issue. Petitioner asks for a re-examination of a doctrine backed by a long line of
cases culminating in Davao City Water District v. Civil Service Commission 5 and just recently reiterated in De Jesus v.
Commission on Audit.6 Petitioner maintains that LWDs are not government-owned and controlled corporations with
original charters. Petitioner even argues that LWDs are private corporations. Petitioner asks the Court to consider certain
interpretations of the applicable laws, which would give a "new perspective to the issue of the true character of water
districts."7 ςrνll
Petitioner theorizes that what PD 198 created was the Local Waters Utilities Administration ("LWUA") and not the
LWDs. Petitioner claims that LWDs are created "pursuant to" and not created directly by PD 198. Thus, petitioner
concludes that PD 198 is not an "original charter" that would place LWDs within the audit jurisdiction of COA as defined
in Section 2(1), Article IX-D of the Constitution. Petitioner elaborates that PD 198 does not create LWDs since it does not
expressly direct the creation of such entities, but only provides for their formation on an optional or voluntary
basis.8 Petitioner adds that the operative act that creates an LWD is the approval of the Sanggunian Resolution as specified
in PD 198.

Petitioners contention deserves scant consideration.

We begin by explaining the general framework under the fundamental law. The Constitution recognizes two classes of
corporations. The first refers to private corporations created under a general law. The second refers to government-owned
or controlled corporations created by special charters. Section 16, Article XII of the Constitution
provides:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

Sec. 16. The Congress shall not, except by general law, provide for the formation, organization, or regulation of private
corporations. Government-owned or controlled corporations may be created or established by special charters in the
interest of the common good and subject to the test of economic viability.

The Constitution emphatically prohibits the creation of private corporations except by a general law applicable to all
citizens.9 The purpose of this constitutional provision is to ban private corporations created by special charters, which
historically gave certain individuals, families or groups special privileges denied to other citizens. 10 ςrνll

In short, Congress cannot enact a law creating a private corporation with a special charter. Such legislation would be
unconstitutional. Private corporations may exist only under a general law. If the corporation is private, it must necessarily
exist under a general law. Stated differently, only corporations created under a general law can qualify as private
corporations. Under existing laws, that general law is the Corporation Code, 11 except that the Cooperative Code governs
the incorporation of cooperatives.12 ςrνll

The Constitution authorizes Congress to create government-owned or controlled corporations through special charters.
Since private corporations cannot have special charters, it follows that Congress can create corporations with special
charters only if such corporations are government-owned or controlled.

Obviously, LWDs are not private corporations because they are not created under the Corporation Code. LWDs are not
registered with the Securities and Exchange Commission. Section 14 of the Corporation Code states that "[A]ll
corporations organized under this code shall file with the Securities and Exchange Commission articles of incorporation x
x x." LWDs have no articles of incorporation, no incorporators and no stockholders or members. There are no
stockholders or members to elect the board directors of LWDs as in the case of all corporations registered with the
Securities and Exchange Commission. The local mayor or the provincial governor appoints the directors of LWDs for a
fixed term of office. This Court has ruled that LWDs are not created under the Corporation Code, thus:

From the foregoing pronouncement, it is clear that what has been excluded from the coverage of the CSC are those
corporations created pursuant to the Corporation Code. Significantly, petitioners are not created under the said code,
but on the contrary, they were created pursuant to a special law and are governed primarily by its
provision.13 (Emphasis supplied)ςrαlαωlιbrαrÿ

LWDs exist by virtue of PD 198, which constitutes their special charter. Since under the Constitution only government-
owned or controlled corporations may have special charters, LWDs can validly exist only if they are government-owned
or controlled. To claim that LWDs are private corporations with a special charter is to admit that their existence is
constitutionally infirm.

Unlike private corporations, which derive their legal existence and power from the Corporation Code, LWDs derive their
legal existence and power from PD 198. Sections 6 and 25 of PD 19814 provide:
Section 6. Formation of District. This Act is the source of authorization and power to form and maintain a district.
For purposes of this Act, a district shall be considered as a quasi-public corporation performing public service and
supplying public wants. As such, a district shall exercise the powers, rights and privileges given to private
corporations under existing laws, in addition to the powers granted in, and subject to such restrictions imposed,
under this Act.

(a) The name of the local water district, which shall include the name of the city, municipality, or province, or region
thereof, served by said system, followed by the words "Water District".

(b) A description of the boundary of the district. In the case of a city or municipality, such boundary may include all lands
within the city or municipality. A district may include one or more municipalities, cities or provinces, or portions thereof.

(c) A statement completely transferring any and all waterworks and/or sewerage facilities managed, operated by or under
the control of such city, municipality or province to such district upon the filing of resolution forming the district.

(d) A statement identifying the purpose for which the district is formed, which shall include those purposes outlined in
Section 5 above.

(e) The names of the initial directors of the district with the date of expiration of term of office for each.

(f) A statement that the district may only be dissolved on the grounds and under the conditions set forth in Section 44 of
this Title.

(g) A statement acknowledging the powers, rights and obligations as set forth in Section 36 of this Title.

Nothing in the resolution of formation shall state or infer that the local legislative body has the power to dissolve, alter or
affect the district beyond that specifically provided for in this Act.

If two or more cities, municipalities or provinces, or any combination thereof, desire to form a single district, a similar
resolution shall be adopted in each city, municipality and province.

xxx

Sec. 25. Authorization. The district may exercise all the powers which are expressly granted by this Title or which
are necessarily implied from or incidental to the powers and purposes herein stated. For the purpose of carrying out
the objectives of this Act, a district is hereby granted the power of eminent domain, the exercise thereof shall, however, be
subject to review by the Administration. (Emphasis supplied)ςrαlαωlιbrαrÿ

Clearly, LWDs exist as corporations only by virtue of PD 198, which expressly confers on LWDs corporate powers.
Section 6 of PD 198 provides that LWDs "shall exercise the powers, rights and privileges given to private corporations
under existing laws." Without PD 198, LWDs would have no corporate powers. Thus, PD 198 constitutes the special
enabling charter of LWDs. The ineluctable conclusion is that LWDs are government-owned and controlled corporations
with a special charter.

The phrase "government-owned and controlled corporations with original charters" means GOCCs created under special
laws and not under the general incorporation law. There is no difference between the term "original charters" and "special
charters." The Court clarified this in National Service Corporation v. NLRC 15 by citing the deliberations in the
Constitutional Commission, as follows:

THE PRESIDING OFFICER (Mr. Trenas). The session is resumed.

Commissioner Romulo is recognized.

MR. ROMULO. Mr. Presiding Officer, I am amending my original proposed amendment to now read as follows:
"including government-owned or controlled corporations WITH ORIGINAL CHARTERS." The purpose of this
amendment is to indicate that government corporations such as the GSIS and SSS, which have original charters, fall
within the ambit of the civil service. However, corporations which are subsidiaries of these chartered agencies such as the
Philippine Airlines, Manila Hotel and Hyatt are excluded from the coverage of the civil service.

THE PRESIDING OFFICER (Mr. Trenas). What does the Committee say?chanroblesvirtualawlibrary

MR. FOZ. Just one question, Mr. Presiding Officer. By the term "original charters," what exactly do we mean?
chanroblesvirtualawlibrary

MR. ROMULO. We mean that they were created by law, by an act of Congress, or by special law.

MR. FOZ. And not under the general corporation law.

MR. ROMULO. That is correct. Mr. Presiding Officer.

MR. FOZ. With that understanding and clarification, the Committee accepts the amendment.

MR. NATIVIDAD. Mr. Presiding Officer, so those created by the general corporation law are out.

MR. ROMULO. That is correct. (Emphasis supplied)ςrαlαωlιbrαrÿ

Again, in Davao City Water District v. Civil Service Commission,16 the Court reiterated the meaning of the phrase
"government-owned and controlled corporations with original charters" in this wise:

By "government-owned or controlled corporation with original charter," We mean government owned or

controlled corporation created by a special law and not under the Corporation Code of the Philippines. Thus, in the
case of Lumanta v. NLRC (G.R. No. 82819, February 8, 1989, 170 SCRA 79, 82), We held:

"The Court, in National Service Corporation (NASECO) v. National Labor Relations Commission, G.R. No. 69870,
promulgated on 29 November 1988, quoting extensively from the deliberations of the 1986 Constitutional
Commission in respect of the intent and meaning of the new phrase with original charter, in effect held that
government-owned and controlled corporations with original charter refer to corporations chartered by special
law as distinguished from corporations organized under our general incorporation statute the Corporation
Code. In NASECO, the company involved had been organized under the general incorporation statute and was a
subsidiary of the National Investment Development Corporation (NIDC) which in turn was a subsidiary of the Philippine
National Bank, a bank chartered by a special statute. Thus, government-owned or controlled corporations like NASECO
are effectively, excluded from the scope of the Civil Service." (Emphasis supplied)ςrαlαωlιbrαrÿ

Petitioners contention that the Sangguniang Bayan resolution creates the LWDs assumes that the Sangguniang Bayan has
the power to create corporations. This is a patently baseless assumption. The Local Government Code 17 does not vest in
the Sangguniang Bayan the power to create corporations. 18 What the Local Government Code empowers the Sangguniang
Bayan to do is to provide for the establishment of a waterworks system "subject to existing laws." Thus, Section 447(5)
(vii) of the Local Government Code provides:

SECTION 447. Powers, Duties, Functions and Compensation. (a) The sangguniang bayan, as the legislative body of the
municipality, shall enact ordinances, approve resolutions and appropriate funds for the general welfare of the municipality
and its inhabitants pursuant to Section 16 of this Code and in the proper exercise of the corporate powers of the
municipality as provided for under Section 22 of this Code, and shall:

xxx

(vii) Subject to existing laws, provide for the establishment, operation, maintenance, and repair of an efficient
waterworks system to supply water for the inhabitants; regulate the construction, maintenance, repair and use of hydrants,
pumps, cisterns and reservoirs; protect the purity and quantity of the water supply of the municipality and, for this
purpose, extend the coverage of appropriate ordinances over all territory within the drainage area of said water supply and
within one hundred (100) meters of the reservoir, conduit, canal, aqueduct, pumping station, or watershed used in
connection with the water service; and regulate the consumption, use or wastage of water;

x x x. (Emphasis supplied)ςrαlαωlιbrαrÿ

The Sangguniang Bayan may establish a waterworks system only in accordance with the provisions of PD 198. The
Sangguniang Bayan has no power to create a corporate entity that will operate its waterworks system. However, the
Sangguniang Bayan may avail of existing enabling laws, like PD 198, to form and incorporate a water district. Besides,
even assuming for the sake of argument that the Sangguniang Bayan has the power to create corporations, the LWDs
would remain government-owned or controlled corporations subject to COAs audit jurisdiction. The resolution of the
Sangguniang Bayan would constitute an LWDs special charter, making the LWD a government-owned and controlled
corporation with an original charter. In any event, the Court has already ruled in Baguio Water District v. Trajano 19 that
the Sangguniang Bayan resolution is not the special charter of LWDs, thus:

While it is true that a resolution of a local sanggunian is still necessary for the final creation of a district, this Court is of
the opinion that said resolution cannot be considered as its charter, the same being intended only to implement the
provisions of said decree.

Petitioner further contends that a law must create directly and explicitly a GOCC in order that it may have an original
charter. In short, petitioner argues that one special law cannot serve as enabling law for several GOCCs but only for one
GOCC. Section 16, Article XII of the Constitution mandates that "Congress shall not, except by general law,"20 provide
for the creation of private corporations. Thus, the Constitution prohibits one special law to create one private corporation,
requiring instead a "general law" to create private corporations. In contrast, the same Section 16 states that "Government-
owned or controlled corporations may be created or established by special charters." Thus, the
Constitution permits Congress to create a GOCC with a special charter. There is, however, no prohibition on Congress to
create several GOCCs of the same class under one special enabling charter.

The rationale behind the prohibition on private corporations having special charters does not apply to GOCCs. There is no
danger of creating special privileges to certain individuals, families or groups if there is one special law creating each
GOCC. Certainly, such danger will not exist whether one special law creates one GOCC, or one special enabling law
creates several GOCCs. Thus, Congress may create GOCCs either by special charters specific to each GOCC, or by one
special enabling charter applicable to a class of GOCCs, like PD 198 which applies only to LWDs.

Petitioner also contends that LWDs are private corporations because Section 6 of PD 198 21 declares that LWDs "shall be
considered quasi-public" in nature. Petitioners rationale is that only private corporations may be deemed "quasi-public"
and not public corporations. Put differently, petitioner rationalizes that a public corporation cannot be deemed "quasi-
public" because such corporation is already public. Petitioner concludes that the term "quasi-public" can only apply to
private corporations. Petitioners argument is inconsequential.

Petitioner forgets that the constitutional criterion on the exercise of COAs audit jurisdiction depends on the governments
ownership or control of a corporation. The nature of the corporation, whether it is private, quasi-public, or public is
immaterial.

The Constitution vests in the COA audit jurisdiction over "government-owned and controlled corporations with original
charters," as well as "government-owned or controlled corporations" without original charters. GOCCs with original
charters are subject to COA pre-audit, while GOCCs without original charters are subject to COA post-audit. GOCCs
without original charters refer to corporations created under the Corporation Code but are owned or controlled by the
government. The nature or purpose of the corporation is not material in determining COAs audit jurisdiction. Neither is
the manner of creation of a corporation, whether under a general or special law.

The determining factor of COAs audit jurisdiction is government ownership or control of the corporation. In Philippine
Veterans Bank Employees Union-NUBE v. Philippine Veterans Bank,22 the Court even ruled that the criterion of
ownership and control is more important than the issue of original charter, thus:
This point is important because the Constitution provides in its Article IX-B, Section 2(1) that "the Civil Service embraces
all branches, subdivisions, instrumentalities, and agencies of the Government, including government-owned or controlled
corporations with original charters." As the Bank is not owned or controlled by the Government although it does
have an original charter in the form of R.A. No. 3518, 23 it clearly does not fall under the Civil Service and should
be regarded as an ordinary commercial corporation. Section 28 of the said law so provides. The consequence is that
the relations of the Bank with its employees should be governed by the labor laws, under which in fact they have already
been paid some of their claims. (Emphasis supplied)ςrαlαωlιbrαrÿ

Certainly, the government owns and controls LWDs. The government organizes LWDs in accordance with a specific law,
PD 198. There is no private party involved as co-owner in the creation of an LWD. Just prior to the creation of LWDs, the
national or local government owns and controls all their assets. The government controls LWDs because under PD 198
the municipal or city mayor, or the provincial governor, appoints all the board directors of an LWD for a fixed term of six
years.24 The board directors of LWDs are not co-owners of the LWDs. LWDs have no private stockholders or members.
The board directors and other personnel of LWDs are government employees subject to civil service laws 25 and anti-graft
laws.26 ςrνll

While Section 8 of PD 198 states that "[N]o public official shall serve as director" of an LWD, it only means that the
appointees to the board of directors of LWDs shall come from the private sector. Once such private sector representatives
assume office as directors, they become public officials governed by the civil service law and anti-graft laws. Otherwise,
Section 8 of PD 198 would contravene Section 2(1), Article IX-B of the Constitution declaring that the civil service
includes "government-owned or controlled corporations with original charters."chanroblesvirtuallawlibrary

If LWDs are neither GOCCs with original charters nor GOCCs without original charters, then they would fall under the
term "agencies or instrumentalities" of the government and thus still subject to COAs audit jurisdiction. However, the
stark and undeniable fact is that the government owns LWDs. Section 45 27 of PD 198 recognizes government ownership
of LWDs when Section 45 states that the board of directors may dissolve an LWD only on the condition that "another
public entity has acquired the assets of the district and has assumed all obligations and liabilities attached thereto." The
implication is clear that an LWD is a public and not a private entity.

Petitioner does not allege that some entity other than the government owns or controls LWDs. Instead, petitioner advances
the theory that the "Water Districts owner is the District itself." 28 Assuming for the sake of argument that an LWD is "self-
owned,"29 as petitioner describes an LWD, the government in any event controls all LWDs. First, government officials
appoint all LWD directors to a fixed term of office. Second, any per diem of LWD directors in excess of P50 is subject to
the approval of the Local Water Utilities Administration, and directors can receive no other compensation for their
services to the LWD.30 Third, the Local Water Utilities Administration can require LWDs to merge or consolidate their
facilities or operations.31 This element of government control subjects LWDs to COAs audit jurisdiction.

Petitioner argues that upon the enactment of PD 198, LWDs became private entities through the transfer of ownership of
water facilities from local government units to their respective water districts as mandated by PD 198. Petitioner is
grasping at straws. Privatization involves the transfer of government assets to a private entity. Petitioner concedes that the
owner of the assets transferred under Section 6 (c) of PD 198 is no other than the LWD itself. 32 The transfer of assets
mandated by PD 198 is a transfer of the water systems facilities "managed, operated by or under the control of such city,
municipality or province to such (water) district."33 In short, the transfer is from one government entity to another
government entity. PD 198 is bereft of any indication that the transfer is to privatize the operation and control of water
systems.

Finally, petitioner claims that even on the assumption that the government owns and controls LWDs, Section 20 of PD
198 prevents COA from auditing LWDs.34 Section 20 of PD 198 provides:

Sec. 20. System of Business Administration. The Board shall, as soon as practicable, prescribe and define by resolution a
system of business administration and accounting for the district, which shall be patterned upon and conform to the
standards established by the Administration. Auditing shall be performed by a certified public accountant not in the
government service. The Administration may, however, conduct annual audits of the fiscal operations of the district to be
performed by an auditor retained by the Administration. Expenses incurred in connection therewith shall be borne equally
by the water district concerned and the Administration. 35 (Emphasis supplied)ςrαlαωlιbrαrÿ
Petitioner argues that PD 198 expressly prohibits COA auditors, or any government auditor for that matter, from auditing
LWDs. Petitioner asserts that this is the import of the second sentence of Section 20 of PD 198 when it states that
"[A]uditing shall be performed by a certified public accountant not in the government service." 36 ςrνll

PD 198 cannot prevail over the Constitution. No amount of clever legislation can exclude GOCCs like LWDs from COAs
audit jurisdiction. Section 3, Article IX-C of the Constitution outlaws any scheme or devise to escape COAs audit
jurisdiction, thus:

Sec. 3. No law shall be passed exempting any entity of the Government or its subsidiary in any guise whatever, or any
investment of public funds, from the jurisdiction of the Commission on Audit. (Emphasis supplied)ςrαlαωlιbrαrÿ

The framers of the Constitution added Section 3, Article IX-D of the Constitution precisely to annul provisions of
Presidential Decrees, like that of Section 20 of PD 198, that exempt GOCCs from COA audit. The following exchange in
the deliberations of the Constitutional Commission elucidates this intent of the framers:

MR. OPLE: I propose to add a new section on line 9, page 2 of the amended committee report which reads: NO LAW
SHALL BE PASSED EXEMPTING ANY ENTITY OF THE GOVERNMENT OR ITS SUBSIDIARY IN ANY GUISE
WHATEVER, OR ANY INVESTMENTS OF PUBLIC FUNDS, FROM THE JURISDICTION OF THE COMMISSION
ON AUDIT.

May I explain my reasons on record.

We know that a number of entities of the government took advantage of the absence of a legislature in the past to
obtain presidential decrees exempting themselves from the jurisdiction of the Commission on Audit, one notable
example of which is the Philippine National Oil Company which is really an empty shell. It is a holding corporation by
itself, and strictly on its own account. Its funds were not very impressive in quantity but underneath that shell there were
billions of pesos in a multiplicity of companies. The PNOC the empty shell under a presidential decree was covered by the
jurisdiction of the Commission on Audit, but the billions of pesos invested in different corporations underneath it were
exempted from the coverage of the Commission on Audit.

Another example is the United Coconut Planters Bank. The Commission on Audit has determined that the coconut levy is
a form of taxation; and that, therefore, these funds attributed to the shares of 1,400,000 coconut farmers are, in effect,
public funds. And that was, I think, the basis of the PCGG in undertaking that last major sequestration of up to 94 percent
of all the shares in the United Coconut Planters Bank. The charter of the UCPB, through a presidential decree, exempted it
from the jurisdiction of the Commission on Audit, it being a private organization.

So these are the fetuses of future abuse that we are slaying right here with this additional section.

May I repeat the amendment, Madam President: NO LAW SHALL BE PASSED EXEMPTING ANY ENTITY OF THE
GOVERNMENT OR ITS SUBSIDIARY IN ANY GUISE WHATEVER, OR ANY INVESTMENTS OF PUBLIC
FUNDS, FROM THE JURISDICTION OF THE COMMISSION ON AUDIT.

THE PRESIDENT: May we know the position of the Committee on the proposed amendment of Commissioner Ople?
chanroblesvirtualawlibrary

MR. JAMIR: If the honorable Commissioner will change the number of the section to 4, we will accept the amendment.

MR. OPLE: Gladly, Madam President. Thank you.

MR. DE CASTRO: Madam President, point of inquiry on the new amendment.

THE PRESIDENT: Commissioner de Castro is recognized.

MR. DE CASTRO: Thank you : May I just ask a few questions of Commissioner Ople.
Is that not included in Section 2 (1) where it states: "(c) government-owned or controlled corporations and their
subsidiaries"? So that if these government-owned and controlled corporations and their subsidiaries are subjected to the
audit of the COA, any law exempting certain government corporations or subsidiaries will be already unconstitutional.

So I believe, Madam President, that the proposed amendment is unnecessary.

MR. MONSOD: Madam President, since this has been accepted, we would like to reply to the point raised by
Commissioner de Castro.

THE PRESIDENT: Commissioner Monsod will please proceed.

MR. MONSOD: I think the Commissioner is trying to avoid the situation that happened in the past, because the same
provision was in the 1973 Constitution and yet somehow a law or a decree was passed where certain institutions were
exempted from audit. We are just reaffirming, emphasizing, the role of the Commission on Audit so that this problem will
never arise in the future.37

There is an irreconcilable conflict between the second sentence of Section 20 of PD 198 prohibiting COA auditors from
auditing LWDs and Sections 2(1) and 3, Article IX-D of the Constitution vesting in COA the power to audit all GOCCs.
We rule that the second sentence of Section 20 of PD 198 is unconstitutional since it violates Sections 2(1) and 3, Article
IX-D of the Constitution.

On the Legality of COAs

Practice of Charging Auditing Fees

Petitioner claims that the auditing fees COA charges LWDs for audit services violate the prohibition in Section 18 of RA
6758,38 which states:

Sec. 18. Additional Compensation of Commission on Audit Personnel and of other Agencies. In order to preserve the
independence and integrity of the Commission on Audit (COA), its officials and employees are prohibited from receiving
salaries, honoraria, bonuses, allowances or other emoluments from any government entity, local government unit,
government-owned or controlled corporations, and government financial institutions, except those compensation paid
directly by COA out of its appropriations and contributions.

Government entities, including government-owned or controlled corporations including financial institutions and local
government units are hereby prohibited from assessing or billing other government entities, including government-owned
or controlled corporations including financial institutions or local government units for services rendered by its officials
and employees as part of their regular functions for purposes of paying additional compensation to said officials and
employees. (Emphasis supplied)ςrαlαωlιbrαrÿ

Claiming that Section 18 is "absolute and leaves no doubt,"39 petitioner asks COA to discontinue its practice of charging
auditing fees to LWDs since such practice allegedly violates the law.

Petitioners claim has no basis.

Section 18 of RA 6758 prohibits COA personnel from receiving any kind of compensation from any government entity
except "compensation paid directly by COA out of its appropriations and contributions." Thus, RA 6758 itself
recognizes an exception to the statutory ban on COA personnel receiving compensation from GOCCs. In Tejada v.
Domingo,40 the Court declared:

There can be no question that Section 18 of Republic Act No. 6758 is designed to strengthen further the policy x x x to
preserve the independence and integrity of the COA, by explicitly PROHIBITING: (1) COA officials and employees from
receiving salaries, honoraria, bonuses, allowances or other emoluments from any government entity, local government
unit, GOCCs and government financial institutions, except such compensation paid directly by the COA out of its
appropriations and contributions, and (2) government entities, including GOCCs, government financial institutions and
local government units from assessing or billing other government entities, GOCCs, government financial institutions or
local government units for services rendered by the latters officials and employees as part of their regular functions for
purposes of paying additional compensation to said officials and employees.

xxx

The first aspect of the strategy is directed to the COA itself, while the second aspect is addressed directly against the
GOCCs and government financial institutions. Under the first, COA personnel assigned to auditing units of GOCCs
or government financial institutions can receive only such salaries, allowances or fringe benefits paid directly by
the COA out of its appropriations and contributions. The contributions referred to are the cost of audit services
earlier mentioned which cannot include the extra emoluments or benefits now claimed by petitioners. The COA is
further barred from assessing or billing GOCCs and government financial institutions for services rendered by its
personnel as part of their regular audit functions for purposes of paying additional compensation to such personnel. x x x.
(Emphasis supplied)ςrαlαωlιbrαrÿ

In Tejada, the Court explained the meaning of the word "contributions" in Section 18 of RA 6758, which allows COA to
charge GOCCs the cost of its audit services:

x x x the contributions from the GOCCs are limited to the cost of audit services which are based on the actual cost of the
audit function in the corporation concerned plus a reasonable rate to cover overhead expenses. The actual audit cost shall
include personnel services, maintenance and other operating expenses, depreciation on capital and equipment and out-of-
pocket expenses. In respect to the allowances and fringe benefits granted by the GOCCs to the COA personnel assigned to
the formers auditing units, the same shall be directly defrayed by COA from its own appropriations x x x. 41

COA may charge GOCCs "actual audit cost" but GOCCs must pay the same directly to COA and not to COA auditors.
Petitioner has not alleged that COA charges LWDs auditing fees in excess of COAs "actual audit cost." Neither has
petitioner alleged that the auditing fees are paid by LWDs directly to individual COA auditors. Thus, petitioners
contention must fail.

WHEREFORE, the Resolution of the Commission on Audit dated 3 January 2000 and the Decision dated 30 January
2001 denying petitioners Motion for Reconsideration are AFFIRMED. The second sentence of Section 20 of Presidential
Decree No. 198 is declared VOID for being inconsistent with Sections 2 (1) and 3, Article IX-D of the Constitution. No
costs.

SO ORDERED.

Davide, Jr., C.J., Puno, Vitug, Panganiban, Quisumbing, Ynares-Santiago, Sandoval-Gutierrez, Austria-Martinez,

Corona, Carpio-Morales, Callejo, Sr., and Azcuna, and TINGA, JJ., concur.
Control Test
 Wilson P. Gamboa vs. Teves et al, G.R. No. 176579, June 28, 2011

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

WILSON P. GAMBOA, PETITIONER, VS. FINANCE SECRETARY MARGARITO B. TEVES, FINANCE

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

PABLITO V. SANIDAD AND ARNO V. SANIDAD, PETITIONERS-IN-INTERVENTION.

DECISION

CARPIO, J.:
The Case

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

The Antecedents

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

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

In 1999, First Pacific, a Bermuda-registered, Hong Kong-based investment firm, acquired the remaining 54 percent of the
outstanding capital stock of PTIC. On 20 November 2006, the Inter-Agency Privatization Council (IPC) of the Philippine
Government announced that it would sell the 111,415 PTIC shares, or 46.125 percent of the outstanding capital stock of
PTIC, through a public bidding to be conducted on 4 December 2006. Subsequently, the public bidding was reset to 8
December 2006, and only two bidders, Parallax Venture Fund XXVII (Parallax) and Pan-Asia Presidio Capital, submitted
their bids. Parallax won with a bid of P25.6 billion or US$510 million.

Thereafter, First Pacific announced that it would exercise its right of first refusal as a PTIC stockholder and buy the
111,415 PTIC shares by matching the bid price of Parallax. However, First Pacific failed to do so by the 1 February 2007
deadline set by IPC and instead, yielded its right to PTIC itself which was then given by IPC until 2 March 2007 to buy
the PTIC shares. On 14 February 2007, First Pacific, through its subsidiary, MPAH, entered into a Conditional Sale and
Purchase Agreement of the 111,415 PTIC shares, or 46.125 percent of the outstanding capital stock of PTIC, with the
Philippine Government for the price of P25,217,556,000 or US$510,580,189. The sale was completed on 28 February
2007.
Since PTIC is a stockholder of PLDT, the sale by the Philippine Government of 46.125 percent of PTIC shares is actually
an indirect sale of 12 million shares or about 6.3 percent of the outstanding common shares of PLDT. With the sale, First
Pacific's common shareholdings in PLDT increased from 30.7 percent to 37 percent, thereby increasing the
common shareholdings of foreigners in PLDT to about 81.47 percent. This violates Section 11, Article XII of the
1987 Philippine Constitution which limits foreign ownership of the capital of a public utility to not more than 40 percent.
[3]

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

On 9 November 1967, PTIC was incorporated and had since engaged in the business of investment holdings. PTIC held
26,034,263 PLDT common shares, or 13.847 percent of the total PLDT outstanding common shares. PHI, on the other
hand, was incorporated in 1977, and became the owner of 111,415 PTIC shares or 46.125 percent of the outstanding
capital stock of PTIC by virtue of three Deeds of Assignment executed by Ramon Cojuangco and Luis Tirso Rivilla. In
1986, the 111,415 PTIC shares held by PHI were sequestered by the PCGG, and subsequently declared by this Court as
part of the ill-gotten wealth of former President Ferdinand Marcos. The sequestered PTIC shares were reconveyed to the
Republic of the Philippines in accordance with this Court's decision [4] which became final and executory on 8 August
2006.

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

During the 8 December 2006 bidding, Parallax Capital Management LP emerged as the highest bidder with a bid of
P25,217,556,000. The government notified First Pacific, the majority owner of PTIC shares, of the bidding results and
gave First Pacific until 1 February 2007 to exercise its right of first refusal in accordance with PTIC's Articles of
Incorporation. First Pacific announced its intention to match Parallax's bid.

On 31 January 2007, the House of Representatives (HR) Committee on Good Government conducted a public hearing on
the particulars of the then impending sale of the 111,415 PTIC shares. Respondents Teves and Sevilla were among those
who attended the public hearing. The HR Committee Report No. 2270 concluded that: (a) the auction of the government's
111,415 PTIC shares bore due diligence, transparency and conformity with existing legal procedures; and (b) First
Pacific's intended acquisition of the government's 111,415 PTIC shares resulting in First Pacific's 100% ownership
of PTIC will not violate the 40 percent constitutional limit on foreign ownership of a public utility since PTIC holds
only 13.847 percent of the total outstanding common shares of PLDT. [5] On 28 February 2007, First Pacific completed
the acquisition of the 111,415 shares of stock of PTIC.

Respondent Manuel V. Pangilinan admits the following facts: (a) the IPC conducted a public bidding for the sale of
111,415 PTIC shares or 46 percent of the outstanding capital stock of PTIC (the remaining 54 percent of PTIC shares was
already owned by First Pacific and its affiliates); (b) Parallax offered the highest bid amounting to P25,217,556,000; (c)
pursuant to the right of first refusal in favor of PTIC and its shareholders granted in PTIC's Articles of Incorporation,
MPAH, a First Pacific affiliate, exercised its right of first refusal by matching the highest bid offered for PTIC shares on
13 February 2007; and (d) on 28 February 2007, the sale was consummated when MPAH paid IPC P25,217,556,000 and
the government delivered the certificates for the 111,415 PTIC shares. Respondent Pangilinan denies the other allegations
of facts of petitioner.

On 28 February 2007, petitioner filed the instant petition for prohibition, injunction, declaratory relief, and declaration of
nullity of sale of the 111,415 PTIC shares. Petitioner claims, among others, that the sale of the 111,415 PTIC shares
would result in an increase in First Pacific's common shareholdings in PLDT from 30.7 percent to 37 percent, and this,
combined with Japanese NTT DoCoMo's common shareholdings in PLDT, would result to a total foreign common
shareholdings in PLDT of 51.56 percent which is over the 40 percent constitutional limit. [6][ ]Petitioner asserts:
If and when the sale is completed, First Pacific's equity in PLDT will go up from 30.7 percent to 37.0 percent of its
common - or voting- stockholdings, x x x. Hence, the consummation of the sale will put the two largest foreign investors
in PLDT - First Pacific and Japan's NTT DoCoMo, which is the world's largest wireless telecommunications firm, owning
51.56 percent of PLDT common equity. x x x With the completion of the sale, data culled from the official website of the
New York Stock Exchange (www.nyse.com) showed that those foreign entities, which own at least five percent of
common equity, will collectively own 81.47 percent of PLDT's common equity. x x x

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

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

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

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

The Issue

This Court is not a trier of facts. Factual questions such as those raised by petitioner, [9] which indisputably demand a
thorough examination of the evidence of the parties, are generally beyond this Court's jurisdiction. Adhering to this well-
settled principle, the Court shall confine the resolution of the instant controversy solely on the threshold and purely legal
issue of whether the term "capital" in Section 11, Article XII of the Constitution refers to the total common shares only or
to the total outstanding capital stock (combined total of common and non-voting preferred shares) of PLDT, a public
utility.

The Ruling of the Court

The petition is partly meritorious.

Petition for declaratory relief

treated as petition for mandamus

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

While direct resort to this Court may be justified in a petition for prohibition, [11] the Court shall nevertheless refrain from
discussing the grounds in support of the petition for prohibition since on 28 February 2007, the questioned sale was
consummated when MPAH paid IPC P25,217,556,000 and the government delivered the certificates for the 111,415 PTIC
shares.

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

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

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

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

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

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

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

The Court first encountered the issue on the definition of the term "capital" in Section 11, Article XII of the Constitution
in the case of Fernandez v. Cojuangco, docketed as G.R. No. 157360.[16] That case involved the same public utility
(PLDT) and substantially the same private respondents. Despite the importance and novelty of the constitutional issue
raised therein and despite the fact that the petition involved a purely legal question, the Court declined to resolve the case
on the merits, and instead denied the same for disregarding the hierarchy of courts. [17] There, petitioner Fernandez assailed
on a pure question of law the Regional Trial Court's Decision of 21 February 2003 via a petition for review under Rule 45.
The Court's Resolution, denying the petition, became final on 21 December 2004.

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

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

Petitioner has locus standi

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

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

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

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

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

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

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

Definition of the Term "Capital" in

Section 11, Article XII of the 1987 Constitution

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

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

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

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

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

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

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

Any citizen or juridical entity desiring to operate a public utility must therefore meet the minimum nationality requirement
prescribed in Section 11, Article XII of the Constitution. Hence, for a corporation to be granted authority to operate a
public utility, at least 60 percent of its "capital" must be owned by Filipino citizens.

The crux of the controversy is the definition of the term "capital." Does the term "capital" in Section 11, Article XII of the
Constitution refer to common shares or to the total outstanding capital stock (combined total of common and non-voting
preferred shares)?

Petitioner submits that the 40 percent foreign equity limitation in domestic public utilities refers only to common shares
because such shares are entitled to vote and it is through voting that control over a corporation is exercised. Petitioner
posits that the term "capital" in Section 11, Article XII of the Constitution refers to "the ownership of common capital
stock subscribed and outstanding, which class of shares alone, under the corporate set-up of PLDT, can vote and elect
members of the board of directors." It is undisputed that PLDT's non-voting preferred shares are held mostly by Filipino
citizens.[30] This arose from Presidential Decree No. 217, [31] issued on 16 June 1973 by then President Ferdinand Marcos,
requiring every applicant of a PLDT telephone line to subscribe to non-voting preferred shares to pay for the investment
cost of installing the telephone line.[32]
Petitioners-in-intervention basically reiterate petitioner's arguments and adopt petitioner's definition of the term
"capital."[33] Petitioners-in-intervention allege that "the approximate foreign ownership of common capital stock of PLDT
x x x already amounts to at least 63.54% of the total outstanding common stock," which means that foreigners exercise
significant control over PLDT, patently violating the 40 percent foreign equity limitation in public utilities prescribed by
the Constitution.

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

In particular, respondent Nazareno's Memorandum, consisting of 73 pages, harps mainly on the procedural infirmities of
the petition and the supposed violation of the due process rights of the "affected foreign common shareholders."
Respondent Nazareno does not deny petitioner's allegation of foreigners' dominating the common shareholdings of PLDT.
Nazareno stressed mainly that the petition "seeks to divest foreign common shareholders purportedly exceeding 40%
of the total common shareholdings in PLDT of their ownership over their shares." Thus, "the foreign natural and
juridical PLDT shareholders must be impleaded in this suit so that they can be heard." [34] Essentially, Nazareno invokes
denial of due process on behalf of the foreign common shareholders.

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

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

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

The OSG, representing public respondents Secretary Margarito Teves, Undersecretary John P. Sevilla, Commissioner
Ricardo Abcede, and Chairman Fe Barin, is likewise silent on the definition of the term "capital." In its
Memorandum[37] dated 24 September 2007, the OSG also limits its discussion on the supposed procedural defects of the
petition, i.e. lack of standing, lack of jurisdiction, non-inclusion of interested parties, and lack of basis for injunction. The
OSG does not present any definition or interpretation of the term "capital" in Section 11, Article XII of the Constitution.
The OSG contends that "the petition actually partakes of a collateral attack on PLDT's franchise as a public utility," which
in effect requires a "full-blown trial where all the parties in interest are given their day in court." [38]

Respondent Francisco Ed Lim, impleaded as President and Chief Executive Officer of the Philippine Stock Exchange
(PSE), does not also define the term "capital" and seeks the dismissal of the petition on the following grounds: (1) failure
to state a cause of action against Lim; (2) the PSE allegedly implemented its rules and required all listed companies,
including PLDT, to make proper and timely disclosures; and (3) the reliefs prayed for in the petition would adversely
impact the stock market.
In the earlier case of Fernandez v. Cojuangco, petitioner Fernandez who claimed to be a stockholder of record of PLDT,
contended that the term "capital" in the 1987 Constitution refers to shares entitled to vote or the common shares.
Fernandez explained thus:

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

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

xxxx

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

xxxx

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

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

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

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

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

In this connection, the Corporation Code - which was already in force at the time the present (1987) Constitution was
drafted - defined outstanding capital stock as follows:
Section 137. Outstanding capital stock defined. - The term "outstanding capital stock", as used in this Code, means the
total shares of stock issued under binding subscription agreements to subscribers or stockholders, whether or not fully or
partially paid, except treasury shares.

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

xxxx

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

xxxx

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

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

The Corporation Code of the Philippines[42] classifies shares as common or preferred, thus:

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

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

Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the holder of such
shares shall not be liable to the corporation or to its creditors in respect thereto: Provided; That shares without par value
may not be issued for a consideration less than the value of five (P5.00) pesos per share: Provided, further, That the entire
consideration received by the corporation for its no-par value shares shall be treated as capital and shall not be available
for distribution as dividends.

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

Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be equal
in all respects to every other share.
Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such
shares shall nevertheless be entitled to vote on the following matters:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other corporations;
7. Investment of corporate funds in another corporation or business in accordance with this Code; and
8. Dissolution of the corporation.

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

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

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

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

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

MR. VILLEGAS. That is right.

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

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

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

MR. VILLEGAS. That is right.

MR. NOLLEDO. Thank you.

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

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

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

MR. VILLEGAS. Yes.[48]

xxxx

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

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

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

MR. VILLEGAS. Yes.

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

MR. VILLEGAS. That is right.

MR. AZCUNA. But the control can be with the foreigners even if they are the minority. Let us say 40 percent of
the capital is owned by them, but it is the voting capital, whereas, the Filipinos own the nonvoting shares. So we
can have a situation where the corporation is controlled by foreigners despite being the minority because they have
the voting capital. That is the anomaly that would result here.

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

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

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

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

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

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

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

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

Compliance with the required Filipino ownership of a corporation shall be determined on the basis of outstanding
capital stock whether fully paid or not, but only such stocks which are generally entitled to vote are considered.

For stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not
enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate
voting rights is essential. Thus, stocks, the voting rights of which have been assigned or transferred to aliens cannot
be considered held by Philippine citizens or Philippine nationals.

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

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

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

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

We shall illustrate the glaring anomaly in giving a broad definition to the term "capital." Let us assume that a corporation
has 100 common shares owned by foreigners and 1,000,000 non-voting preferred shares owned by Filipinos, with both
classes of share having a par value of one peso (P1.00) per share. Under the broad definition of the term "capital," such
corporation would be considered compliant with the 40 percent constitutional limit on foreign equity of public utilities
since the overwhelming majority, or more than 99.999 percent, of the total outstanding capital stock is Filipino owned.
This is obviously absurd.
In the example given, only the foreigners holding the common shares have voting rights in the election of directors, even
if they hold only 100 shares. The foreigners, with a minuscule equity of less than 0.001 percent, exercise control over the
public utility. On the other hand, the Filipinos, holding more than 99.999 percent of the equity, cannot vote in the election
of directors and hence, have no control over the public utility. This starkly circumvents the intent of the framers of the
Constitution, as well as the clear language of the Constitution, to place the control of public utilities in the hands of
Filipinos. It also renders illusory the State policy of an independent national economy effectively controlled by Filipinos.

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

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

On the other hand, holders of common shares are granted the exclusive right to vote in the election of directors. PLDT's
Articles of Incorporation[52] state that "each holder of Common Capital Stock shall have one vote in respect of each share
of such stock held by him on all matters voted upon by the stockholders, and the holders of Common Capital Stock
shall have the exclusive right to vote for the election of directors and for all other purposes."[53]

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

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

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

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

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

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

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

Incidentally, the fact that PLDT common shares with a par value of P5.00 have a current stock market value of P2,328.00
per share,[64] while PLDT preferred shares with a par value of P10.00 per share have a current stock market value ranging
from only P10.92 to P11.06 per share,[65] is a glaring confirmation by the market that control and beneficial ownership of
PLDT rest with the common shares, not with the preferred shares.

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

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

x x x Hence, unless it is expressly provided that a legislative act is necessary to enforce a constitutional mandate, the
presumption now is that all provisions of the constitution are self-executing. If the constitutional provisions are treated as
requiring legislation instead of self-executing, the legislature would have the power to ignore and practically nullify the
mandate of the fundamental law. This can be cataclysmic. That is why the prevailing view is, as it has always been, that --

. . . in case of doubt, the Constitution should be considered self-executing rather than non-self-executing. . . . Unless the
contrary is clearly intended, the provisions of the Constitution should be considered self-executing, as a contrary
rule would give the legislature discretion to determine when, or whether, they shall be effective. These provisions
would be subordinated to the will of the lawmaking body, which could make them entirely meaningless by simply
refusing to pass the needed implementing statute. (Emphasis supplied)

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

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

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

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

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

To treat Section 11, Article XII of the Constitution as not self-executing would mean that since the 1935 Constitution, or
over the last 75 years, not one of the constitutional provisions expressly reserving specific areas of investments to
corporations, at least 60 percent of the "capital" of which is owned by Filipinos, was enforceable. In short, the framers of
the 1935, 1973 and 1987 Constitutions miserably failed to effectively reserve to Filipinos specific areas of investment,
like the operation by corporations of public utilities, the exploitation by corporations of mineral resources, the ownership
by corporations of real estate, and the ownership of educational institutions. All the legislatures that convened since 1935
also miserably failed to enact legislations to implement these vital constitutional provisions that determine who will
effectively control the national economy, Filipinos or foreigners. This Court cannot allow such an absurd interpretation of
the Constitution.

This Court has held that the SEC "has both regulatory and adjudicative functions." [69] Under its regulatory functions, the
SEC can be compelled by mandamus to perform its statutory duty when it unlawfully neglects to perform the same. Under
its adjudicative or quasi-judicial functions, the SEC can be also be compelled by mandamus to hear and decide a possible
violation of any law it administers or enforces when it is mandated by law to investigate such violation.

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

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

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

Corona, C.J., Join the dissent of J. Velasco.

Leonardo-De Castro, Brion, Peralta, Bersamin, Del Castillo, Villarama, Jr., Perez, Mendoza, and Sereno, JJ., concur.
Velasco, Jr., J., I dissent. (please see dissenting opinion.)
Abad, J., see my dissenting opinion.

 Wilson P. Gamboa vs. Teves et al, G.R. No. 176579, October 9, 2012

G.R. No. 176579               October 9, 2012

HEIRS OF WILSON P. GAMBOA,* Petitioners,

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

PABLITO V. SANIDAD and ARNO V. SANIDAD, Petitioner-in-Intervention.

RESOLUTION

CARPIO, J.:

This resolves the motions for reconsideration of the 28 June 2011 Decision filed by (1) the Philippine Stock Exchange's
(PSE) President, 1 (2) Manuel V. Pangilinan (Pangilinan),2 (3) Napoleon L. Nazareno (Nazareno ),3 and ( 4) the Securities
and Exchange Commission (SEC)4 (collectively, movants ).

The Office of the Solicitor General (OSG) initially filed a motion for reconsideration on behalfofthe SEC, 5 assailing the 28
June 2011 Decision. However, it subsequently filed a Consolidated Comment on behalf of the State, 6 declaring expressly
that it agrees with the Court's definition of the term "capital" in Section 11, Article XII of the Constitution. During the
Oral Arguments on 26 June 2012, the OSG reiterated its position consistent with the Court's 28 June 2011 Decision.

We deny the motions for reconsideration.

I.
Far-reaching implications of the legal issue justify
treatment of petition for declaratory relief as one for mandamus.

As we emphatically stated in the 28 June 2011 Decision, the interpretation of the term "capital" in Section 11, Article XII
of the Constitution has far-reaching implications to the national economy. In fact, a resolution of this issue will determine
whether Filipinos are masters, or second-class citizens, in their own country. What is at stake here is whether Filipinos or
foreigners will have effective control of the Philippine national economy. Indeed, if ever there is a legal issue that has far-
reaching implications to the entire nation, and to future generations of Filipinos, it is the threshold legal issue presented in
this case.
Contrary to Pangilinan’s narrow view, the serious economic consequences resulting in the interpretation of the term
"capital" in Section 11, Article XII of the Constitution undoubtedly demand an immediate adjudication of this
issue. Simply put, the far-reaching implications of this issue justify the treatment of the petition as one for
mandamus.7

In Luzon Stevedoring Corp. v. Anti-Dummy Board,8 the Court deemed it wise and expedient to resolve the case although
the petition for declaratory relief could be outrightly dismissed for being procedurally defective. There, appellant
admittedly had already committed a breach of the Public Service Act in relation to the Anti-Dummy Law since it had been
employing non- American aliens long before the decision in a prior similar case. However, the main issue in Luzon
Stevedoring was of transcendental importance, involving the exercise or enjoyment of rights, franchises, privileges,
properties and businesses which only Filipinos and qualified corporations could exercise or enjoy under the Constitution
and the statutes. Moreover, the same issue could be raised by appellant in an appropriate action. Thus, in Luzon
Stevedoring the Court deemed it necessary to finally dispose of the case for the guidance of all concerned, despite the
apparent procedural flaw in the petition.

The circumstances surrounding the present case, such as the supposed procedural defect of the petition and the pivotal
legal issue involved, resemble those in Luzon Stevedoring. Consequently, in the interest of substantial justice and faithful
adherence to the Constitution, we opted to resolve this case for the guidance of the public and all concerned parties.

II.
No change of any long-standing rule;
thus, no redefinition of the term "capital."

Movants contend that the term "capital" in Section 11, Article XII of the Constitution has long been settled and defined to
refer to the total outstanding shares of stock, whether voting or non-voting. In fact, movants claim that the SEC, which is
the administrative agency tasked to enforce the 60-40 ownership requirement in favor of Filipino citizens in the
Constitution and various statutes, has consistently adopted this particular definition in its numerous opinions. Movants
point out that with the 28 June 2011 Decision, the Court in effect introduced a "new" definition or "midstream
redefinition"9 of the term "capital" in Section 11, Article XII of the Constitution.

This is egregious error.

For more than 75 years since the 1935 Constitution, the Court has not interpreted or defined the term "capital" found in
various economic provisions of the 1935, 1973 and 1987 Constitutions. There has never been a judicial precedent
interpreting the term "capital" in the 1935, 1973 and 1987 Constitutions, until now. Hence, it is patently wrong and utterly
baseless to claim that the Court in defining the term "capital" in its 28 June 2011 Decision modified, reversed, or set aside
the purported long-standing definition of the term "capital," which supposedly refers to the total outstanding shares of
stock, whether voting or non-voting. To repeat, until the present case there has never been a Court ruling categorically
defining the term "capital" found in the various economic provisions of the 1935, 1973 and 1987 Philippine Constitutions.

The opinions of the SEC, as well as of the Department of Justice (DOJ), on the definition of the term "capital" as referring
to both voting and non-voting shares (combined total of common and preferred shares) are, in the first place, conflicting
and inconsistent. There is no basis whatsoever to the claim that the SEC and the DOJ have consistently and uniformly
adopted a definition of the term "capital" contrary to the definition that this Court adopted in its 28 June 2011 Decision.

In DOJ Opinion No. 130, s. 1985,10 dated 7 October 1985, the scope of the term "capital" in Section 9, Article XIV of the
1973 Constitution was raised, that is, whether the term "capital" includes "both preferred and common stocks." The issue
was raised in relation to a stock-swap transaction between a Filipino and a Japanese corporation, both stockholders of a
domestic corporation that owned lands in the Philippines. Then Minister of Justice Estelito P. Mendoza ruled that the
resulting ownership structure of the corporation would be unconstitutional because 60% of the voting stock would be
owned by Japanese while Filipinos would own only 40% of the voting stock, although when the non-voting stock is
added, Filipinos would own 60% of the combined voting and non-voting stock. This ownership structure is remarkably
similar to the current ownership structure of PLDT. Minister Mendoza ruled:

xxxx
Thus, the Filipino group still owns sixty (60%) of the entire subscribed capital stock (common and preferred) while the
Japanese investors control sixty percent (60%) of the common (voting) shares.

It is your position that x x x since Section 9, Article XIV of the Constitution uses the word "capital," which is
construed "to include both preferred and common shares" and "that where the law does not distinguish, the
courts shall not distinguish."

xxxx

In light of the foregoing jurisprudence, it is my opinion that the stock-swap transaction in question may not be
constitutionally upheld. While it may be ordinary corporate practice to classify corporate shares into common voting
shares and preferred non-voting shares, any arrangement which attempts to defeat the constitutional purpose should be
eschewed. Thus, the resultant equity arrangement which would place ownership of 60% 11 of the common (voting)
shares in the Japanese group, while retaining 60% of the total percentage of common and preferred shares in
Filipino hands would amount to circumvention of the principle of control by Philippine stockholders that is
implicit in the 60% Philippine nationality requirement in the Constitution. (Emphasis supplied)

In short, Minister Mendoza categorically rejected the theory that the term "capital" in Section 9, Article XIV of the 1973
Constitution includes "both preferred and common stocks" treated as the same class of shares regardless of differences in
voting rights and privileges. Minister Mendoza stressed that the 60-40 ownership requirement in favor of Filipino citizens
in the Constitution is not complied with unless the corporation "satisfies the criterion of beneficial ownership" and that
in applying the same "the primordial consideration is situs of control."

On the other hand, in Opinion No. 23-10 dated 18 August 2010, addressed to Castillo Laman Tan Pantaleon & San Jose,
then SEC General Counsel Vernette G. Umali-Paco applied the Voting Control Test, that is, using only the voting stock
to determine whether a corporation is a Philippine national. The Opinion states:

Applying the foregoing, particularly the Control Test, MLRC is deemed as a Philippine national because: (1) sixty
percent (60%) of its outstanding capital stock entitled to vote is owned by a Philippine national, the Trustee; and (2) at
least sixty percent (60%) of the ERF will accrue to the benefit of Philippine nationals. Still pursuant to the Control Test,
MLRC’s investment in 60% of BFDC’s outstanding capital stock entitled to vote shall be deemed as of Philippine
nationality, thereby qualifying BFDC to own private land.

Further, under, and for purposes of, the FIA, MLRC and BFDC are both Philippine nationals, considering that: (1) sixty
percent (60%) of their respective outstanding capital stock entitled to vote is owned by a Philippine national (i.e., by the
Trustee, in the case of MLRC; and by MLRC, in the case of BFDC); and (2) at least 60% of their respective board of
directors are Filipino citizens. (Boldfacing and italicization supplied)

Clearly, these DOJ and SEC opinions are compatible with the Court’s interpretation of the 60-40 ownership requirement
in favor of Filipino citizens mandated by the Constitution for certain economic activities. At the same time, these opinions
highlight the conflicting, contradictory, and inconsistent positions taken by the DOJ and the SEC on the definition of the
term "capital" found in the economic provisions of the Constitution.

The opinions issued by SEC legal officers do not have the force and effect of SEC rules and regulations because only the
SEC en banc can adopt rules and regulations. As expressly provided in Section 4.6 of the Securities Regulation
Code,12 the SEC cannot delegate to any of its individual Commissioner or staff the power to adopt any rule or regulation.
Further, under Section 5.1 of the same Code, it is the SEC as a collegial body, and not any of its legal officers, that is
empowered to issue opinions and approve rules and regulations. Thus:

4.6. The Commission may, for purposes of efficiency, delegate any of its functions to any department or office of the
Commission, an individual Commissioner or staff member of the Commission except its review or appellate authority
and its power to adopt, alter and supplement any rule or regulation.

The Commission may review upon its own initiative or upon the petition of any interested party any action of any
department or office, individual Commissioner, or staff member of the Commission.
SEC. 5. Powers and Functions of the Commission.- 5.1. The Commission shall act with transparency and shall have the
powers and functions provided by this Code, Presidential Decree No. 902-A, the Corporation Code, the Investment
Houses Law, the Financing Company Act and other existing laws. Pursuant thereto the Commission shall have, among
others, the following powers and functions:

xxxx

(g) Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions and provide guidance on
and supervise compliance with such rules, regulations and orders;

x x x x (Emphasis supplied)

Thus, the act of the individual Commissioners or legal officers of the SEC in issuing opinions that have the effect of SEC
rules or regulations is ultra vires. Under Sections 4.6 and 5.1(g) of the Code, only the SEC en banc can "issue opinions"
that have the force and effect of rules or regulations. Section 4.6 of the Code bars the SEC en banc from delegating to any
individual Commissioner or staff the power to adopt rules or regulations. In short, any opinion of individual
Commissioners or SEC legal officers does not constitute a rule or regulation of the SEC.

The SEC admits during the Oral Arguments that only the SEC en banc, and not any of its individual commissioners or
legal staff, is empowered to issue opinions which have the same binding effect as SEC rules and regulations, thus:

JUSTICE CARPIO:

So, under the law, it is the Commission En Banc that can issue an

SEC Opinion, correct?

COMMISSIONER GAITE:13

That’s correct, Your Honor.

JUSTICE CARPIO:

Can the Commission En Banc delegate this function to an SEC officer?

COMMISSIONER GAITE:

Yes, Your Honor, we have delegated it to the General Counsel.

JUSTICE CARPIO:

It can be delegated. What cannot be delegated by the Commission En Banc to a commissioner or an

individual employee of the Commission?

COMMISSIONER GAITE:

Novel opinions that [have] to be decided by the En Banc...

JUSTICE CARPIO:

What cannot be delegated, among others, is the power to adopt or amend rules and regulations, correct?

COMMISSIONER GAITE:
 That’s correct, Your Honor.

JUSTICE CARPIO:

So, you combine the two (2), the SEC officer, if delegated that power, can issue an opinion but that
opinion does not constitute a rule or regulation, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

So, all of these opinions that you mentioned they are not rules and regulations, correct?

COMMISSIONER GAITE:

They are not rules and regulations.

JUSTICE CARPIO:

If they are not rules and regulations, they apply only to that particular situation and will not constitute a
precedent, correct?

COMMISSIONER GAITE:

Yes, Your Honor.14 (Emphasis supplied)

Significantly, the SEC en banc, which is the collegial body statutorily empowered to issue rules and opinions on behalf of
the SEC, has adopted even the Grandfather Rule in determining compliance with the 60-40 ownership requirement in
favor of Filipino citizens mandated by the Constitution for certain economic activities. This prevailing SEC ruling, which
the SEC correctly adopted to thwart any circumvention of the required Filipino "ownership and control," is laid down in
the 25 March 2010 SEC en banc ruling in Redmont Consolidated Mines, Corp. v. McArthur Mining, Inc., et al.,15 to wit:

The avowed purpose of the Constitution is to place in the hands of Filipinos the exploitation of our natural
resources. Necessarily, therefore, the Rule interpreting the constitutional provision should not diminish that right
through the legal fiction of corporate ownership and control. But the constitutional provision, as interpreted and
practiced via the 1967 SEC Rules, has favored foreigners contrary to the command of the Constitution. Hence, the
Grandfather Rule must be applied to accurately determine the actual participation, both direct and indirect, of
foreigners in a corporation engaged in a nationalized activity or business.

Compliance with the constitutional limitation(s) on engaging in nationalized activities must be determined by ascertaining
if 60% of the investing corporation’s outstanding capital stock is owned by "Filipino citizens", or as interpreted, by
natural or individual Filipino citizens. If such investing corporation is in turn owned to some extent by another investing
corporation, the same process must be observed. One must not stop until the citizenships of the individual or natural
stockholders of layer after layer of investing corporations have been established, the very essence of the Grandfather Rule.

Lastly, it was the intent of the framers of the 1987 Constitution to adopt the Grandfather Rule. In one of the
discussions on what is now Article XII of the present Constitution, the framers made the following exchange:

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

MR. VILLEGAS. That is right.

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

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

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

MR. VILLEGAS. That is right.

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

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

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

MR. VILLEGAS. Yes. (Boldfacing and underscoring supplied; italicization in the original)

This SEC en banc ruling conforms to our 28 June 2011 Decision that the 60-40 ownership requirement in favor of
Filipino citizens in the Constitution to engage in certain economic activities applies not only to voting control of the
corporation, but also to the beneficial ownership of the corporation. Thus, in our 28 June 2011 Decision we stated:

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

Both the Voting Control Test and the Beneficial Ownership Test must be applied to determine whether a corporation is a
"Philippine national."

The interpretation by legal officers of the SEC of the term "capital," embodied in various opinions which respondents
relied upon, is merely preliminary and an opinion only of such officers. To repeat, any such opinion does not constitute an
SEC rule or regulation. In fact, many of these opinions contain a disclaimer which expressly states: "x x x the foregoing
opinion is based solely on facts disclosed in your query and relevant only 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 whether of similar or
dissimilar circumstances."16 Thus, the opinions clearly make a caveat that they do not constitute binding precedents on
any one, not even on the SEC itself.

Likewise, the opinions of the SEC en banc, as well as of the DOJ, interpreting the law are neither conclusive nor
controlling and thus, do not bind the Court. It is hornbook doctrine that any interpretation of the law that administrative or
quasi-judicial agencies make is only preliminary, never conclusive on the Court. The power to make a final interpretation
of the law, in this case the term "capital" in Section 11, Article XII of the 1987 Constitution, lies with this Court, not with
any other government entity.

In his motion for reconsideration, the PSE President cites the cases of National Telecommunications Commission v. Court
of Appeals17 and Philippine Long Distance Telephone Company v. National Telecommunications Commission 18 in arguing
that the Court has already defined the term "capital" in Section 11, Article XII of the 1987 Constitution. 19

The PSE President is grossly mistaken. In both cases of National Telecommunications v. Court of
Appeals20 and Philippine Long Distance Telephone Company v. National Telecommunications Commission, 21 the Court did
not define the term "capital" as found in Section 11, Article XII of the 1987 Constitution. In fact, these two cases never
mentioned, discussed or cited Section 11, Article XII of the Constitution or any of its economic provisions, and thus
cannot serve as precedent in the interpretation of Section 11, Article XII of the Constitution. These two cases dealt
solely with the determination of the correct regulatory fees under Section 40(e) and (f) of the Public Service Act, to wit:

(e) For annual reimbursement of the expenses incurred by the Commission in the supervision of other public services
and/or in the regulation or fixing of their rates, twenty centavos for each one hundred pesos or fraction thereof, of
the capital stock subscribed or paid, or if no shares have been issued, of the capital invested, or of the property and
equipment whichever is higher.

(f) For the issue or increase of capital stock, twenty centavos for each one hundred pesos or fraction thereof, of the
increased capital. (Emphasis supplied)

The Court’s interpretation in these two cases of the terms "capital stock subscribed or paid," "capital stock" and "capital"
does not pertain to, and cannot control, the definition of the term "capital" as used in Section 11, Article XII of the
Constitution, or any of the economic provisions of the Constitution where the term "capital" is found. The definition of the
term "capital" found in the Constitution must not be taken out of context. A careful reading of these two cases reveals that
the terms "capital stock subscribed or paid," "capital stock" and "capital" were defined solely to determine the basis for
computing the supervision and regulation fees under Section 40(e) and (f) of the Public Service Act.

III.
Filipinization of Public Utilities

The Preamble of the 1987 Constitution, as the prologue of the supreme law of the land, embodies the ideals that the
Constitution intends to achieve.22 The Preamble reads:

We, the sovereign Filipino people, imploring the aid of Almighty God, in order to build a just and humane society, and
establish a Government that shall embody our ideals and aspirations, promote the common good, conserve and develop
our patrimony, and secure to ourselves and our posterity, the blessings of independence and democracy under the rule of
law and a regime of truth, justice, freedom, love, equality, and peace, do ordain and promulgate this Constitution.
(Emphasis supplied)

Consistent with these ideals, Section 19, Article II of the 1987 Constitution declares as State policy the development of a
national economy "effectively controlled" by Filipinos:

Section 19. The State shall develop a self-reliant and independent national economy effectively controlled by Filipinos.

Fortifying the State policy of a Filipino-controlled economy, the Constitution decrees:

Section 10. The Congress shall, upon recommendation of the economic and planning agency, when the national interest
dictates, reserve to citizens of the Philippines or to corporations or associations at least sixty per centum of whose capital
is owned by such citizens, or such higher percentage as Congress may prescribe, certain areas of investments. The
Congress shall enact measures that will encourage the formation and operation of enterprises whose capital is wholly
owned by Filipinos.

In the grant of rights, privileges, and concessions covering the national economy and patrimony, the State shall give
preference to qualified Filipinos.

The State shall regulate and exercise authority over foreign investments within its national jurisdiction and in accordance
with its national goals and priorities.23

Under Section 10, Article XII of the 1987 Constitution, Congress may "reserve to citizens of the Philippines or to
corporations or associations at least sixty per centum of whose capital is owned by such citizens, or such higher
percentage as Congress may prescribe, certain areas of investments." Thus, in numerous laws Congress has reserved
certain areas of investments to Filipino citizens or to corporations at least sixty percent of the "capital" of which is owned
by Filipino citizens. Some of these laws are: (1) Regulation of Award of Government Contracts or R.A. No. 5183; (2)
Philippine Inventors Incentives Act or R.A. No. 3850; (3) Magna Carta for Micro, Small and Medium Enterprises or R.A.
No. 6977; (4) Philippine Overseas Shipping Development Act or R.A. No. 7471; (5) Domestic Shipping Development Act
of 2004 or R.A. No. 9295; (6) Philippine Technology Transfer Act of 2009 or R.A. No. 10055; and (7) Ship Mortgage
Decree or P.D. No. 1521.

With respect to public utilities, the 1987 Constitution specifically ordains:

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

This provision, which mandates the Filipinization of public utilities, requires that any form of authorization for the
operation of public utilities shall be granted only to "citizens of the Philippines or to corporations or associations
organized under the laws of the Philippines at least sixty per centum of whose capital is owned by such citizens." "The
provision is [an express] recognition of the sensitive and vital position of public utilities both in the national
economy and for national security."24

The 1987 Constitution reserves the ownership and operation of public utilities exclusively to (1) Filipino citizens, or (2)
corporations or associations at least 60 percent of whose "capital" is owned by Filipino citizens. Hence, in the case of
individuals, only Filipino citizens can validly own and operate a public utility. In the case of corporations or associations,
at least 60 percent of their "capital" must be owned by Filipino citizens. In other words, under Section 11, Article XII
of the 1987 Constitution, to own and operate a public utility a corporation’s capital must at least be 60 percent
owned by Philippine nationals.

IV.
Definition of "Philippine National"

Pursuant to the express mandate of Section 11, Article XII of the 1987 Constitution, Congress enacted Republic Act No.
7042 or the Foreign Investments Act of 1991 (FIA), as amended, which defined a "Philippine national" as follows:

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

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

Thus, the FIA clearly and unequivocally defines a "Philippine national" as a Philippine citizen, or a domestic corporation
at least "60% of the capital stock outstanding and entitled to vote" is owned by Philippine citizens.
The definition of a "Philippine national" in the FIA reiterated the meaning of such term as provided in its predecessor
statute, Executive Order No. 226 or the Omnibus Investments Code of 1987,25 which was issued by then President Corazon
C. Aquino. Article 15 of this Code states:

Article 15. "Philippine national" shall mean a citizen of the Philippines or a diplomatic partnership or association wholly-
owned by citizens of the Philippines; or a corporation organized under the laws of the Philippines of which at least
sixty per cent (60%) of the capital stock outstanding and entitled to vote is owned and held by citizens of the
Philippines; or a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a
Philippine national and at least sixty per cent (60%) of the fund will accrue to the benefit of Philippine nationals:
Provided, That where a corporation and its non-Filipino stockholders own stock in a registered enterprise, at least sixty
per cent (60%) of the capital stock outstanding and entitled to vote of both corporations must be owned and held by the
citizens of the Philippines and at least sixty per cent (60%) of the members of the Board of Directors of both corporations
must be citizens of the Philippines in order that the corporation shall be considered a Philippine national. (Boldfacing,
italicization and underscoring supplied)

Under Article 48(3)26 of the Omnibus Investments Code of 1987, "no corporation x x x which is not a ‘Philippine national’
x x x shall do business

x x x in the Philippines x x x without first securing from the Board of Investments a written certificate to the effect that
such business or economic activity x x x would not conflict with the Constitution or laws of the Philippines."27 Thus, a
"non-Philippine national" cannot own and operate a reserved economic activity like a public utility. This means, of course,
that only a "Philippine national" can own and operate a public utility.

In turn, the definition of a "Philippine national" under Article 15 of the Omnibus Investments Code of 1987 was a
reiteration of the meaning of such term as provided in Article 14 of the Omnibus Investments Code of 1981,28 to wit:

Article 14. "Philippine national" shall mean a citizen of the Philippines; or a domestic partnership or association wholly
owned by citizens of the Philippines; or a corporation organized under the laws of the Philippines of which at least
sixty per cent (60%) of the capital stock outstanding and entitled to vote is owned and held by citizens of the
Philippines; or a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a
Philippine national and at least sixty per cent (60%) of the fund will accrue to the benefit of Philippine nationals:
Provided, That where a corporation and its non-Filipino stockholders own stock in a registered enterprise, at least sixty
per cent (60%) of the capital stock outstanding and entitled to vote of both corporations must be owned and held by the
citizens of the Philippines and at least sixty per cent (60%) of the members of the Board of Directors of both corporations
must be citizens of the Philippines in order that the corporation shall be considered a Philippine national. (Boldfacing,
italicization and underscoring supplied)

Under Article 69(3) of the Omnibus Investments Code of 1981, "no corporation x x x which is not a ‘Philippine national’
x x x shall do business x x x in the Philippines x x x without first securing a written certificate from the Board of
Investments to the effect that such business or economic activity x x x would not conflict with the Constitution or laws of
the Philippines."29 Thus, a "non-Philippine national" cannot own and operate a reserved economic activity like a public
utility. Again, this means that only a "Philippine national" can own and operate a public utility.

Prior to the Omnibus Investments Code of 1981, Republic Act No. 518630 or the Investment Incentives Act, which took
effect on 16 September 1967, contained a similar definition of a "Philippine national," to wit:

(f) "Philippine National" shall mean a citizen of the Philippines; or a partnership or association wholly owned by citizens
of the Philippines; or a corporation organized under the laws of the Philippines of which at least sixty per cent of the
capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines; or a trustee of funds for
pension or other employee retirement or separation benefits, where the trustee is a Philippine National and at least sixty
per cent of the fund will accrue to the benefit of Philippine Nationals: Provided, That where a corporation and its non-
Filipino stockholders own stock in a registered enterprise, at least sixty per cent of the capital stock outstanding and
entitled to vote of both corporations must be owned and held by the citizens of the Philippines and at least sixty per cent
of the members of the Board of Directors of both corporations must be citizens of the Philippines in order that the
corporation shall be considered a Philippine National. (Boldfacing, italicization and underscoring supplied)
Under Section 3 of Republic Act No. 5455 or the Foreign Business Regulations Act, which took effect on 30 September
1968, if the investment in a domestic enterprise by non-Philippine nationals exceeds 30% of its outstanding capital stock,
such enterprise must obtain prior approval from the Board of Investments before accepting such investment. Such
approval shall not be granted if the investment "would conflict with existing constitutional provisions and laws regulating
the degree of required ownership by Philippine nationals in the enterprise." 31 A "non-Philippine national" cannot own and
operate a reserved economic activity like a public utility. Again, this means that only a "Philippine national" can own and
operate a public utility.

The FIA, like all its predecessor statutes, clearly defines a "Philippine national" as a Filipino citizen, or a domestic
corporation "at least sixty percent (60%) of the capital stock outstanding and entitled to vote" is owned by Filipino
citizens. A domestic corporation is a "Philippine national" only if at least 60% of its voting stock is owned by Filipino
citizens. This definition of a "Philippine national" is crucial in the present case because the FIA reiterates and clarifies
Section 11, Article XII of the 1987 Constitution, which limits the ownership and operation of public utilities to Filipino
citizens or to corporations or associations at least 60% Filipino-owned.

The FIA is the basic law governing foreign investments in the Philippines, irrespective of the nature of business and area
of investment. The FIA spells out the procedures by which non-Philippine nationals can invest in the Philippines. Among
the key features of this law is the concept of a negative list or the Foreign Investments Negative List. 32 Section 8 of the law
states:

SEC. 8. List of Investment Areas Reserved to Philippine Nationals [Foreign Investment Negative List]. - The Foreign
Investment Negative List shall have two 2 component lists: A and B:

a. List A shall enumerate the areas of activities reserved to Philippine nationals by mandate of the Constitution and
specific laws.

b. List B shall contain the areas of activities and enterprises regulated pursuant to law:

1. which are defense-related activities, requiring prior clearance and authorization from the Department of National
Defense [DND] to engage in such activity, such as the manufacture, repair, storage and/or distribution of firearms,
ammunition, lethal weapons, military ordinance, explosives, pyrotechnics and similar materials; unless such
manufacturing or repair activity is specifically authorized, with a substantial export component, to a non-Philippine
national by the Secretary of National Defense; or

2. which have implications on public health and morals, such as the manufacture and distribution of dangerous drugs; all
forms of gambling; nightclubs, bars, beer houses, dance halls, sauna and steam bathhouses and massage clinics.
(Boldfacing, underscoring and italicization supplied)

Section 8 of the FIA enumerates the investment areas "reserved to Philippine nationals." Foreign Investment Negative
List A consists of "areas of activities reserved to Philippine nationals by mandate of the Constitution and specific
laws," where foreign equity participation in any enterprise shall be limited to the maximum percentage expressly
prescribed by the Constitution and other specific laws. In short, to own and operate a public utility in the
Philippines one must be a "Philippine national" as defined in the FIA. The FIA is abundant notice to foreign
investors to what extent they can invest in public utilities in the Philippines.

To repeat, among the areas of investment covered by the Foreign Investment Negative List A is the ownership and
operation of public utilities, which the Constitution expressly reserves to Filipino citizens and to corporations at least 60%
owned by Filipino citizens. In other words, Negative List A of the FIA reserves the ownership and operation of
public utilities only to "Philippine nationals," defined in Section 3(a) of the FIA as "(1) a citizen of the Philippines; x
x x or (3) a corporation organized under the laws of the Philippines of which at least sixty percent (60%) of the
capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines; or (4) a corporation
organized abroad and registered as doing business in the Philippines under the Corporation Code of which one hundred
percent (100%) of the capital stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee of funds for
pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty
percent (60%) of the fund will accrue to the benefit of Philippine nationals."
Clearly, from the effectivity of the Investment Incentives Act of 1967 to the adoption of the Omnibus Investments Code
of 1981, to the enactment of the Omnibus Investments Code of 1987, and to the passage of the present Foreign
Investments Act of 1991, or for more than four decades, the statutory definition of the term "Philippine national"
has been uniform and consistent: it means a Filipino citizen, or a domestic corporation at least 60% of the voting
stock is owned by Filipinos. Likewise, these same statutes have uniformly and consistently required that only
"Philippine nationals" could own and operate public utilities in the Philippines. The following exchange during the
Oral Arguments is revealing:

JUSTICE CARPIO:

Counsel, I have some questions. You are aware of the Foreign Investments Act of 1991, x x x? And the
FIA of 1991 took effect in 1991, correct? That’s over twenty (20) years ago, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

And Section 8 of the Foreign Investments Act of 1991 states that []only Philippine nationals can own and
operate public utilities[], correct?

COMMISSIONER GAITE:

Yes, Your Honor.

JUSTICE CARPIO:

And the same Foreign Investments Act of 1991 defines a "Philippine national" either as a citizen of the
Philippines, or if it is a corporation at least sixty percent (60%) of the voting stock is owned by citizens of
the Philippines, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

And, you are also aware that under the predecessor law of the Foreign Investments Act of 1991, the
Omnibus Investments Act of 1987, the same provisions apply: x x x only Philippine nationals can own
and operate a public utility and the Philippine national, if it is a corporation, x x x sixty percent (60%) of
the capital stock of that corporation must be owned by citizens of the Philippines, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

And even prior to the Omnibus Investments Act of 1987, under the Omnibus Investments Act of 1981,
the same rules apply: x x x only a Philippine national can own and operate a public utility and a
Philippine national, if it is a corporation, sixty percent (60%) of its x x x voting stock, must be owned by
citizens of the Philippines, correct?
COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

And even prior to that, under [the]1967 Investments Incentives Act and the Foreign Company Act of
1968, the same rules applied, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

So, for the last four (4) decades, x x x, the law has been very consistent – only a Philippine national
can own and operate a public utility, and a Philippine national, if it is a corporation, x x x at least
sixty percent (60%) of the voting stock must be owned by citizens of the Philippines, correct?

COMMISSIONER GAITE:

Correct, Your Honor.33 (Emphasis supplied)

Government agencies like the SEC cannot simply ignore Sections 3(a) and 8 of the FIA which categorically prescribe that
certain economic activities, like the ownership and operation of public utilities, are reserved to corporations "at least sixty
percent (60%) of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines."
Foreign Investment Negative List A refers to "activities reserved to Philippine nationals by mandate of the Constitution
and specific laws." The FIA is the basic statute regulating foreign investments in the Philippines. Government
agencies tasked with regulating or monitoring foreign investments, as well as counsels of foreign investors, should start
with the FIA in determining to what extent a particular foreign investment is allowed in the Philippines. Foreign investors
and their counsels who ignore the FIA do so at their own peril. Foreign investors and their counsels who rely on opinions
of SEC legal officers that obviously contradict the FIA do so also at their own peril.

Occasional opinions of SEC legal officers that obviously contradict the FIA should immediately raise a red flag. There are
already numerous opinions of SEC legal officers that cite the definition of a "Philippine national" in Section 3(a) of the
FIA in determining whether a particular corporation is qualified to own and operate a nationalized or partially nationalized
business in the Philippines. This shows that SEC legal officers are not only aware of, but also rely on and invoke, the
provisions of the FIA in ascertaining the eligibility of a corporation to engage in partially nationalized industries. The
following are some of such opinions:

1. Opinion of 23 March 1993, addressed to Mr. Francis F. How;

2. Opinion of 14 April 1993, addressed to Director Angeles T. Wong of the Philippine Overseas Employment
Administration;

3. Opinion of 23 November 1993, addressed to Messrs. Dominador Almeda and Renato S. Calma;

4. Opinion of 7 December 1993, addressed to Roco Bunag Kapunan Migallos & Jardeleza;

5. SEC Opinion No. 49-04, addressed to Romulo Mabanta Buenaventura Sayoc & De Los Angeles;

6. SEC-OGC Opinion No. 17-07, addressed to Mr. Reynaldo G. David; and

7. SEC-OGC Opinion No. 03-08, addressed to Attys. Ruby Rose J. Yusi and Rudyard S. Arbolado.
The SEC legal officers’ occasional but blatant disregard of the definition of the term "Philippine national" in the FIA
signifies their lack of integrity and competence in resolving issues on the 60-40 ownership requirement in favor of
Filipino citizens in Section 11, Article XII of the Constitution.

The PSE President argues that the term "Philippine national" defined in the FIA should be limited and interpreted to refer
to corporations seeking to avail of tax and fiscal incentives under investment incentives laws and cannot be equated with
the term "capital" in Section 11, Article XII of the 1987 Constitution. Pangilinan similarly contends that the FIA and its
predecessor statutes do not apply to "companies which have not registered and obtained special incentives under the
schemes established by those laws."

Both are desperately grasping at straws. The FIA does not grant tax or fiscal incentives to any enterprise. Tax and fiscal
incentives to investments are granted separately under the Omnibus Investments Code of 1987, not under the FIA. In fact,
the FIA expressly repealed Articles 44 to 56 of Book II of the Omnibus Investments Code of 1987, which articles
previously regulated foreign investments in nationalized or partially nationalized industries.

The FIA is the applicable law regulating foreign investments in nationalized or partially nationalized industries. There is
nothing in the FIA, or even in the Omnibus Investments Code of 1987 or its predecessor statutes, that states, expressly or
impliedly, that the FIA or its predecessor statutes do not apply to enterprises not availing of tax and fiscal incentives under
the Code. The FIA and its predecessor statutes apply to investments in all domestic enterprises, whether or not such
enterprises enjoy tax and fiscal incentives under the Omnibus Investments Code of 1987 or its predecessor statutes. The
reason is quite obvious – mere non-availment of tax and fiscal incentives by a non-Philippine national cannot
exempt it from Section 11, Article XII of the Constitution regulating foreign investments in public utilities. In fact,
the Board of Investments’ Primer on Investment Policies in the Philippines,34 which is given out to foreign investors,
provides:

PART III. FOREIGN INVESTMENTS WITHOUT INCENTIVES

Investors who do not seek incentives and/or whose chosen activities do not qualify for incentives, (i.e., the activity is not
listed in the IPP, and they are not exporting at least 70% of their production) may go ahead and make the investments
without seeking incentives. They only have to be guided by the Foreign Investments Negative List (FINL).

The FINL clearly defines investment areas requiring at least 60% Filipino ownership. All other areas outside of this list
are fully open to foreign investors. (Emphasis supplied)

V.
Right to elect directors, coupled with beneficial ownership,
translates to effective control.

The 28 June 2011 Decision declares that the 60 percent Filipino ownership required by the Constitution to engage in
certain economic activities applies not only to voting control of the corporation, but also to the beneficial ownership of
the corporation. To repeat, we held:

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

This is consistent with Section 3 of the FIA which provides that where 100% of the capital stock is held by "a trustee of
funds for pension or other employee retirement or separation benefits," the trustee is a Philippine national if "at least sixty
percent (60%) of the fund will accrue to the benefit of Philippine nationals." Likewise, Section 1(b) of the Implementing
Rules of the FIA provides that "for stocks to be deemed owned and held by Philippine citizens or Philippine nationals,
mere legal title is not enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with
appropriate voting rights, is essential."
Since the constitutional requirement of at least 60 percent Filipino ownership applies not only to voting control of the
corporation but also to the beneficial ownership of the corporation, it is therefore imperative that such requirement apply
uniformly and across the board to all classes of shares, regardless of nomenclature and category, comprising the capital of
a corporation. Under the Corporation Code, capital stock 35 consists of all classes of shares issued to stockholders, that is,
common shares as well as preferred shares, which may have different rights, privileges or restrictions as stated in the
articles of incorporation.36

The Corporation Code allows denial of the right to vote to preferred and redeemable shares, but disallows denial of the
right to vote in specific corporate matters. Thus, common shares have the right to vote in the election of directors, while
preferred shares may be denied such right. Nonetheless, preferred shares, even if denied the right to vote in the election of
directors, are entitled to vote on the following corporate matters: (1) amendment of articles of incorporation; (2) increase
and decrease of capital stock; (3) incurring, creating or increasing bonded indebtedness; (4) sale, lease, mortgage or other
disposition of substantially all corporate assets; (5) investment of funds in another business or corporation or for a purpose
other than the primary purpose for which the corporation was organized; (6) adoption, amendment and repeal of by-laws;
(7) merger and consolidation; and (8) dissolution of corporation. 37

Since a specific class of shares may have rights and privileges or restrictions different from the rest of the shares in a
corporation, the 60-40 ownership requirement in favor of Filipino citizens in Section 11, Article XII of the Constitution
must apply not only to shares with voting rights but also to shares without voting rights. Preferred shares, denied the right
to vote in the election of directors, are anyway still entitled to vote on the eight specific corporate matters mentioned
above. Thus, if a corporation, engaged in a partially nationalized industry, issues a mixture of common and
preferred non-voting shares, at least 60 percent of the common shares and at least 60 percent of the preferred non-
voting shares must be owned by Filipinos. Of course, if a corporation issues only a single class of shares, at least 60
percent of such shares must necessarily be owned by Filipinos. In short, the 60-40 ownership requirement in favor of
Filipino citizens must apply separately to each class of shares, whether common, preferred non-voting, preferred
voting or any other class of shares. This uniform application of the 60-40 ownership requirement in favor of Filipino
citizens clearly breathes life to the constitutional command that the ownership and operation of public utilities shall be
reserved exclusively to corporations at least 60 percent of whose capital is Filipino-owned. Applying uniformly the 60-40
ownership requirement in favor of Filipino citizens to each class of shares, regardless of differences in voting rights,
privileges and restrictions, guarantees effective Filipino control of public utilities, as mandated by the Constitution.

Moreover, such uniform application to each class of shares insures that the "controlling interest" in public utilities always
lies in the hands of Filipino citizens. This addresses and extinguishes Pangilinan’s worry that foreigners, owning most of
the non-voting shares, will exercise greater control over fundamental corporate matters requiring two-thirds or majority
vote of all shareholders.

VI.
Intent of the framers of the Constitution

While Justice Velasco quoted in his Dissenting Opinion38 a portion of the deliberations of the Constitutional Commission
to support his claim that the term "capital" refers to the total outstanding shares of stock, whether voting or non-voting,
the following excerpts of the deliberations reveal otherwise. It is clear from the following exchange that the term "capital"
refers to controlling interest of a corporation, thus:

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

MR. VILLEGAS. That is right.

MR. NOLLEDO. In teaching law, we are always faced with this question: "Where do we base the equity requirement, is it
on the authorized capital stock, on the subscribed capital stock, or on the paid-up capital stock of a corporation"? Will the
Committee please enlighten me on this?
MR. VILLEGAS. We have just had a long discussion with the members of the team from the UP Law Center who
provided us a draft. The phrase that is contained here which we adopted from the UP draft is "60 percent of voting
stock."

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

MR. VILLEGAS. That is right.

MR. NOLLEDO. Thank you.

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

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

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

MR. VILLEGAS. Yes.39

xxxx

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

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

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

MR. VILLEGAS. Yes.

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

MR. VILLEGAS. That is right.

MR. AZCUNA. But the control can be with the foreigners even if they are the minority. Let us say 40 percent of
the capital is owned by them, but it is the voting capital, whereas, the Filipinos own the nonvoting shares. So we
can have a situation where the corporation is controlled by foreigners despite being the minority because they have
the voting capital. That is the anomaly that would result here.

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

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

MR. BENGZON. In the case of stock corporations, it is assumed. 40 (Boldfacing and underscoring supplied)

Thus, 60 percent of the "capital" assumes, or should result in, a "controlling interest" in the corporation.

The use of the term "capital" was intended to replace the word "stock" because associations without stocks can operate
public utilities as long as they meet the 60-40 ownership requirement in favor of Filipino citizens prescribed in Section 11,
Article XII of the Constitution. However, this did not change the intent of the framers of the Constitution to reserve
exclusively to Philippine nationals the "controlling interest" in public utilities.

During the drafting of the 1935 Constitution, economic protectionism was "the battle-cry of the nationalists in the
Convention."41 The same battle-cry resulted in the nationalization of the public utilities. 42 This is also the same intent of the
framers of the 1987 Constitution who adopted the exact formulation embodied in the 1935 and 1973 Constitutions on
foreign equity limitations in partially nationalized industries.

The OSG, in its own behalf and as counsel for the State, 43 agrees fully with the Court’s interpretation of the term "capital."
In its Consolidated Comment, the OSG explains that the deletion of the phrase "controlling interest" and replacement of
the word "stock" with the term "capital" were intended specifically to extend the scope of the entities qualified to operate
public utilities to include associations without stocks. The framers’ omission of the phrase "controlling interest" did not
mean the inclusion of all shares of stock, whether voting or non-voting. The OSG reiterated essentially the Court’s
declaration that the Constitution reserved exclusively to Philippine nationals the ownership and operation of public
utilities consistent with the State’s policy to "develop a self-reliant and independent national economy effectively
controlled by Filipinos."

As we held in our 28 June 2011 Decision, to construe broadly the term "capital" as the total outstanding capital stock,
treated as a single class regardless of the actual classification of shares, grossly contravenes the intent and letter of the
Constitution that the "State shall develop a self-reliant and independent national economy effectively controlled by
Filipinos." We illustrated the glaring anomaly which would result in defining the term "capital" as the total outstanding
capital stock of a corporation, treated as a single class of shares regardless of the actual classification of shares, to wit:

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

In the example given, only the foreigners holding the common shares have voting rights in the election of directors, even
if they hold only 100 shares. The foreigners, with a minuscule equity of less than 0.001 percent, exercise control over the
public utility. On the other hand, the Filipinos, holding more than 99.999 percent of the equity, cannot vote in the election
of directors and hence, have no control over the public utility. This starkly circumvents the intent of the framers of the
Constitution, as well as the clear language of the Constitution, to place the control of public utilities in the hands of
Filipinos. x x x

Further, even if foreigners who own more than forty percent of the voting shares elect an all-Filipino board of directors,
this situation does not guarantee Filipino control and does not in any way cure the violation of the Constitution. The
independence of the Filipino board members so elected by such foreign shareholders is highly doubtful. As the OSG
pointed out, quoting Justice George Sutherland’s words in Humphrey’s Executor v. US,44 "x x x it is quite evident that one
who holds his office only during the pleasure of another cannot be depended upon to maintain an attitude of independence
against the latter’s will." Allowing foreign shareholders to elect a controlling majority of the board, even if all the
directors are Filipinos, grossly circumvents the letter and intent of the Constitution and defeats the very purpose of our
nationalization laws.

VII.
Last sentence of Section 11, Article XII of the Constitution

The last sentence of Section 11, Article XII of the 1987 Constitution reads:

The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their
proportionate share in its capital, and all the executive and managing officers of such corporation or association must be
citizens of the Philippines.
During the Oral Arguments, the OSG emphasized that there was never a question on the intent of the framers of the
Constitution to limit foreign ownership, and assure majority Filipino ownership and control of public utilities. The OSG
argued, "while the delegates disagreed as to the percentage threshold to adopt, x x x the records show they clearly
understood that Filipino control of the public utility corporation can only be and is obtained only through the election of a
majority of the members of the board."

Indeed, the only point of contention during the deliberations of the Constitutional Commission on 23 August 1986 was the
extent of majority Filipino control of public utilities. This is evident from the following exchange:

THE PRESIDENT. Commissioner Jamir is recognized.

MR. JAMIR. Madam President, my proposed amendment on lines 20 and 21 is to delete the phrase "two thirds of whose
voting stock or controlling interest," and instead substitute the words "SIXTY PERCENT OF WHOSE CAPITAL" so that
the sentence will read: "No franchise, certificate, or any other form of authorization for the operation of a public utility
shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the
Philippines at least SIXTY PERCENT OF WHOSE CAPITAL is owned by such citizens."

xxxx

THE PRESIDENT: Will Commissioner Jamir first explain?

MR. JAMIR. Yes, in this Article on National Economy and Patrimony, there were two previous sections in which we
fixed the Filipino equity to 60 percent as against 40 percent for foreigners. It is only in this Section 15 with respect to
public utilities that the committee proposal was increased to two-thirds. I think it would be better to harmonize this
provision by providing that even in the case of public utilities, the minimum equity for Filipino citizens should be 60
percent.

MR. ROMULO. Madam President.

THE PRESIDENT. Commissioner Romulo is recognized.

MR. ROMULO. My reason for supporting the amendment is based on the discussions I have had with representatives of
the Filipino majority owners of the international record carriers, and the subsequent memoranda they submitted to me. x x
x

Their second point is that under the Corporation Code, the management and control of a corporation is vested in the board
of directors, not in the officers but in the board of directors. The officers are only agents of the board. And they believe
that with 60 percent of the equity, the Filipino majority stockholders undeniably control the board. Only on important
corporate acts can the 40-percent foreign equity exercise a veto, x x x.

x x x x45

MS. ROSARIO BRAID. Madam President.

THE PRESIDENT. Commissioner Rosario Braid is recognized.

MS. ROSARIO BRAID. Yes, in the interest of equal time, may I also read from a memorandum by the spokesman of the
Philippine Chamber of Communications on why they would like to maintain the present equity, I am referring to the 66
2/3. They would prefer to have a 75-25 ratio but would settle for 66 2/3. x x x

xxxx

THE PRESIDENT. Just to clarify, would Commissioner Rosario Braid support the proposal of two-thirds rather than the
60 percent?
MS. ROSARIO BRAID. I have added a clause that will put management in the hands of Filipino citizens.

x x x x46

While they had differing views on the percentage of Filipino ownership of capital, it is clear that the framers of the
Constitution intended public utilities to be majority Filipino-owned and controlled. To ensure that Filipinos control public
utilities, the framers of the Constitution approved, as additional safeguard, the inclusion of the last sentence of Section 11,
Article XII of the Constitution commanding that "[t]he participation of foreign investors in the governing body of any
public utility enterprise shall be limited to their proportionate share in its capital, and all the executive and managing
officers of such corporation or association must be citizens of the Philippines." In other words, the last sentence of Section
11, Article XII of the Constitution mandates that (1) the participation of foreign investors in the governing body of the
corporation or association shall be limited to their proportionate share in the capital of such entity; and (2) all officers of
the corporation or association must be Filipino citizens.

Commissioner Rosario Braid proposed the inclusion of the phrase requiring the managing officers of the corporation or
association to be Filipino citizens specifically to prevent management contracts, which were designed primarily to
circumvent the Filipinization of public utilities, and to assure Filipino control of public utilities, thus:

MS. ROSARIO BRAID. x x x They also like to suggest that we amend this provision by adding a phrase which states:
"THE MANAGEMENT BODY OF EVERY CORPORATION OR ASSOCIATION SHALL IN ALL CASES BE
CONTROLLED BY CITIZENS OF THE PHILIPPINES." I have with me their position paper.

THE PRESIDENT. The Commissioner may proceed.

MS. ROSARIO BRAID. The three major international record carriers in the Philippines, which Commissioner Romulo
mentioned – Philippine Global Communications, Eastern Telecommunications, Globe Mackay Cable – are 40-percent
owned by foreign multinational companies and 60-percent owned by their respective Filipino partners. All three, however,
also have management contracts with these foreign companies – Philcom with RCA, ETPI with Cable and Wireless PLC,
and GMCR with ITT. Up to the present time, the general managers of these carriers are foreigners. While the foreigners in
these common carriers are only minority owners, the foreign multinationals are the ones managing and controlling their
operations by virtue of their management contracts and by virtue of their strength in the governing bodies of these
carriers.47

xxxx

MR. OPLE. I think a number of us have agreed to ask Commissioner Rosario Braid to propose an amendment with
respect to the operating management of public utilities, and in this amendment, we are associated with Fr. Bernas,
Commissioners Nieva and Rodrigo. Commissioner Rosario Braid will state this amendment now.

Thank you.

MS. ROSARIO BRAID. Madam President.

THE PRESIDENT. This is still on Section 15.

MS. ROSARIO BRAID. Yes.

MR. VILLEGAS. Yes, Madam President.

xxxx

MS. ROSARIO BRAID. Madam President, I propose a new section to read: ‘THE MANAGEMENT BODY OF EVERY
CORPORATION OR ASSOCIATION SHALL IN ALL CASES BE CONTROLLED BY CITIZENS OF THE
PHILIPPINES."
This will prevent management contracts and assure control by Filipino citizens. Will the committee assure us that
this amendment will insure that past activities such as management contracts will no longer be possible under this
amendment?

xxxx

FR. BERNAS. Madam President.

THE PRESIDENT. Commissioner Bernas is recognized.

FR. BERNAS. Will the committee accept a reformulation of the first part?

MR. BENGZON. Let us hear it.

FR. BERNAS. The reformulation will be essentially the formula of the 1973 Constitution which reads: "THE
PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING BODY OF ANY PUBLIC UTILITY
ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE SHARE IN THE CAPITAL THEREOF AND..."

MR. VILLEGAS. "ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH CORPORATIONS AND
ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES."

MR. BENGZON. Will Commissioner Bernas read the whole thing again?

FR. BERNAS. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING BODY OF ANY PUBLIC
UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE SHARE IN THE CAPITAL
THEREOF..." I do not have the rest of the copy.

MR. BENGZON. "AND ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH CORPORATIONS OR
ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES." Is that correct?

MR. VILLEGAS. Yes.

MR. BENGZON. Madam President, I think that was said in a more elegant language. We accept the amendment. Is that
all right with Commissioner Rosario Braid?

MS. ROSARIO BRAID. Yes.

xxxx

MR. DE LOS REYES. The governing body refers to the board of directors and trustees.

MR. VILLEGAS. That is right.

MR. BENGZON. Yes, the governing body refers to the board of directors.

MR. REGALADO. It is accepted.

MR. RAMA. The body is now ready to vote, Madam President.

VOTING

xxxx

The results show 29 votes in favor and none against; so the proposed amendment is approved.
xxxx

THE PRESIDENT. All right. Can we proceed now to vote on Section 15?

MR. RAMA. Yes, Madam President.

THE PRESIDENT. Will the chairman of the committee please read Section 15?

MR. VILLEGAS. The entire Section 15, as amended, reads: "No franchise, certificate, or any other form of authorization
for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations
organized under the laws of the Philippines at least 60 PERCENT OF WHOSE CAPITAL is owned by such citizens."
May I request Commissioner Bengzon to please continue reading.

MR. BENGZON. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING BODY OF ANY
PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE SHARE IN THE CAPITAL
THEREOF AND ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH CORPORATIONS OR
ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES."

MR. VILLEGAS. "NOR SHALL SUCH FRANCHISE, CERTIFICATE OR AUTHORIZATION BE EXCLUSIVE IN

CHARACTER OR FOR A PERIOD LONGER THAN TWENTY-FIVE YEARS RENEWABLE FOR NOT MORE
THAN TWENTY-FIVE YEARS. Neither shall any such franchise or right be granted except under the condition that it
shall be subject to amendment, alteration, or repeal by Congress when the common good so requires. The State shall
encourage equity participation in public utilities by the general public."

VOTING

xxxx

The results show 29 votes in favor and 4 against; Section 15, as amended, is approved. 48 (Emphasis supplied)

The last sentence of Section 11, Article XII of the 1987 Constitution, particularly the provision on the limited
participation of foreign investors in the governing body of public utilities, is a reiteration of the last sentence of Section 5,
Article XIV of the 1973 Constitution,49 signifying its importance in reserving ownership and control of public utilities to
Filipino citizens.

VIII.
The undisputed facts

There is no dispute, and respondents do not claim the contrary, that (1) foreigners own 64.27% of the common shares of
PLDT, which class of shares exercises the sole right to vote in the election of directors, and thus foreigners control PLDT;
(2) Filipinos own only 35.73% of PLDT’s common shares, constituting a minority of the voting stock, and thus Filipinos
do not control PLDT; (3) preferred shares, 99.44% owned by Filipinos, have no voting rights; (4) preferred shares earn
only 1/70 of the dividends that common shares earn; 50 (5) preferred shares have twice the par value of common shares; and
(6) preferred shares constitute 77.85% of the authorized capital stock of PLDT and common shares only 22.15%.

Despite the foregoing facts, the Court did not decide, and in fact refrained from ruling on the question of whether PLDT
violated the 60-40 ownership requirement in favor of Filipino citizens in Section 11, Article XII of the 1987 Constitution.
Such question indisputably calls for a presentation and determination of evidence through a hearing, which is generally
outside the province of the Court’s jurisdiction, but well within the SEC’s statutory powers. Thus, for obvious reasons, the
Court limited its decision on the purely legal and threshold issue on the definition of the term "capital" in Section 11,
Article XII of the Constitution and directed the SEC to apply such definition in determining the exact percentage of
foreign ownership in PLDT.
 IX.
PLDT is not an indispensable party;
SEC is impleaded in this case.

In his petition, Gamboa prays, among others:

xxxx

5. For the Honorable Court to issue a declaratory relief that ownership of common or voting shares is the sole basis in
determining foreign equity in a public utility and that any other government rulings, opinions, and regulations inconsistent
with this declaratory relief be declared unconstitutional and a violation of the intent and spirit of the 1987 Constitution;

6. For the Honorable Court to declare null and void all sales of common stocks to foreigners in excess of 40 percent of the
total subscribed common shareholdings; and

7. For the Honorable Court to direct the Securities and Exchange Commission and Philippine Stock Exchange to
require PLDT to make a public disclosure of all of its foreign shareholdings and their actual and real beneficial
owners.

Other relief(s) just and equitable are likewise prayed for. (Emphasis supplied)

As can be gleaned from his prayer, Gamboa clearly asks this Court to compel the SEC to perform its statutory duty to
investigate whether "the required percentage of ownership of the capital stock to be owned by citizens of the Philippines
has been complied with [by PLDT] as required by x x x the Constitution." 51 Such plea clearly negates SEC’s argument that
it was not impleaded.

Granting that only the SEC Chairman was impleaded in this case, the Court has ample powers to order the SEC’s
compliance with its directive contained in the 28 June 2011 Decision in view of the far-reaching implications of this case.
In Domingo v. Scheer,52 the Court dispensed with the amendment of the pleadings to implead the Bureau of Customs
considering (1) the unique backdrop of the case; (2) the utmost need to avoid further delays; and (3) the issue of public
interest involved. The Court held:

The Court may be curing the defect in this case by adding the BOC as party-petitioner. The petition should not be
dismissed because the second action would only be a repetition of the first. In Salvador, et al., v. Court of Appeals, et al.,
we held that this Court has full powers, apart from that power and authority which is inherent, to amend the processes,
pleadings, proceedings and decisions by substituting as party-plaintiff the real party-in-interest. The Court has the power
to avoid delay in the disposition of this case, to order its amendment as to implead the BOC as party-respondent.
Indeed, it may no longer be necessary to do so taking into account the unique backdrop in this case, involving as it
does an issue of public interest. After all, the Office of the Solicitor General has represented the petitioner in the instant
proceedings, as well as in the appellate court, and maintained the validity of the deportation order and of the BOC’s
Omnibus Resolution. It cannot, thus, be claimed by the State that the BOC was not afforded its day in court, simply
because only the petitioner, the Chairperson of the BOC, was the respondent in the CA, and the petitioner in the instant
recourse. In Alonso v. Villamor, we had the occasion to state:

There is nothing sacred about processes or pleadings, their forms or contents. Their sole purpose is to facilitate the
application of justice to the rival claims of contending parties. They were created, not to hinder and delay, but to
facilitate and promote, the administration of justice. They do not constitute the thing itself, which courts are always
striving to secure to litigants. They are designed as the means best adapted to obtain that thing. In other words, they are a
means to an end. When they lose the character of the one and become the other, the administration of justice is at fault and
courts are correspondingly remiss in the performance of their obvious duty. 53 (Emphasis supplied)

In any event, the SEC has expressly manifested54 that it will abide by the Court’s decision and defer to the Court’s
definition of the term "capital" in Section 11, Article XII of the Constitution. Further, the SEC entered its special
appearance in this case and argued during the Oral Arguments, indicating its submission to the Court’s
jurisdiction. It is clear, therefore, that there exists no legal impediment against the proper and immediate
implementation of the Court’s directive to the SEC.

PLDT is an indispensable party only insofar as the other issues, particularly the factual questions, are concerned. In other
words, PLDT must be impleaded in order to fully resolve the issues on (1) whether the sale of 111,415 PTIC shares to
First Pacific violates the constitutional limit on foreign ownership of PLDT; (2) whether the sale of common shares to
foreigners exceeded the 40 percent limit on foreign equity in PLDT; and (3) whether the total percentage of the PLDT
common shares with voting rights complies with the 60-40 ownership requirement in favor of Filipino citizens under the
Constitution for the ownership and operation of PLDT. These issues indisputably call for an examination of the parties’
respective evidence, and thus are clearly within the jurisdiction of the SEC. In short, PLDT must be impleaded, and must
necessarily be heard, in the proceedings before the SEC where the factual issues will be thoroughly threshed out and
resolved.

Notably, the foregoing issues were left untouched by the Court. The Court did not rule on the factual issues raised by
Gamboa, except the single and purely legal issue on the definition of the term "capital" in Section 11, Article XII of the
Constitution. The Court confined the resolution of the instant case to this threshold legal issue in deference to the fact-
finding power of the SEC.

Needless to state, the Court can validly, properly, and fully dispose of the fundamental legal issue in this case even
without the participation of PLDT since defining the term "capital" in Section 11, Article XII of the Constitution does not,
in any way, depend on whether PLDT was impleaded. Simply put, PLDT is not indispensable for a complete resolution of
the purely legal question in this case.55 In fact, the Court, by treating the petition as one for mandamus, 56 merely directed
the SEC to apply the Court’s definition of the term "capital" in Section 11, Article XII of the Constitution in determining
whether PLDT committed any violation of the said constitutional provision. The dispositive portion of the Court’s
ruling is addressed not to PLDT but solely to the SEC, which is the administrative agency tasked to enforce the 60-
40 ownership requirement in favor of Filipino citizens in Section 11, Article XII of the Constitution.

Since the Court limited its resolution on the purely legal issue on the definition of the term "capital" in Section 11, Article
XII of the 1987 Constitution, and directed the SEC to investigate any violation by PLDT of the 60-40 ownership
requirement in favor of Filipino citizens under the Constitution, 57 there is no deprivation of PLDT’s property or denial of
PLDT’s right to due process, contrary to Pangilinan and Nazareno’s misimpression. Due process will be afforded to
PLDT when it presents proof to the SEC that it complies, as it claims here, with Section 11, Article XII of the
Constitution.

X.
Foreign Investments in the Philippines

Movants fear that the 28 June 2011 Decision would spell disaster to our economy, as it may result in a sudden flight of
existing foreign investors to "friendlier" countries and simultaneously deterring new foreign investors to our country. In
particular, the PSE claims that the 28 June 2011 Decision may result in the following: (1) loss of more than ₱ 630 billion
in foreign investments in PSE-listed shares; (2) massive decrease in foreign trading transactions; (3) lower PSE
Composite Index; and (4) local investors not investing in PSE-listed shares. 58

Dr. Bernardo M. Villegas, one of the amici curiae in the Oral Arguments, shared movants’ apprehension. Without
providing specific details, he pointed out the depressing state of the Philippine economy compared to our neighboring
countries which boast of growing economies. Further, Dr. Villegas explained that the solution to our economic woes is for
the government to "take-over" strategic industries, such as the public utilities sector, thus:

JUSTICE CARPIO:

I would like also to get from you Dr. Villegas if you have additional information on whether this high FDI 59 countries in
East Asia have allowed foreigners x x x control [of] their public utilities, so that we can compare apples with apples.

DR. VILLEGAS:
Correct, but let me just make a comment. When these neighbors of ours find an industry strategic, their solution is not to
"Filipinize" or "Vietnamize" or "Singaporize." Their solution is to make sure that those industries are in the hands of
state enterprises. So, in these countries, nationalization means the government takes over. And because their
governments are competent and honest enough to the public, that is the solution. x x x 60 (Emphasis supplied)

If government ownership of public utilities is the solution, then foreign investments in our public utilities serve no
purpose. Obviously, there can never be foreign investments in public utilities if, as Dr. Villegas claims, the "solution is to
make sure that those industries are in the hands of state enterprises." Dr. Villegas’s argument that foreign investments in
telecommunication companies like PLDT are badly needed to save our ailing economy contradicts his own theory that the
solution is for government to take over these companies. Dr. Villegas is barking up the wrong tree since State ownership
of public utilities and foreign investments in such industries are diametrically opposed concepts, which cannot possibly be
reconciled.

In any event, the experience of our neighboring countries cannot be used as argument to decide the present case
differently for two reasons. First, the governments of our neighboring countries have, as claimed by Dr. Villegas, taken
over ownership and control of their strategic public utilities like the telecommunications industry. Second, our
Constitution has specific provisions limiting foreign ownership in public utilities which the Court is sworn to uphold
regardless of the experience of our neighboring countries.

In our jurisdiction, the Constitution expressly reserves the ownership and operation of public utilities to Filipino citizens,
or corporations or associations at least 60 percent of whose capital belongs to Filipinos. Following Dr. Villegas’s claim,
the Philippines appears to be more liberal in allowing foreign investors to own 40 percent of public utilities, unlike in
other Asian countries whose governments own and operate such industries.

XI.
Prospective Application of Sanctions

In its Motion for Partial Reconsideration, the SEC sought to clarify the reckoning period of the application and imposition
of appropriate sanctions against PLDT if found violating Section 11, Article XII of the Constitution.1avvphi1

As discussed, the Court has directed the SEC to investigate and determine whether PLDT violated Section 11, Article XII
of the Constitution. Thus, there is no dispute that it is only after the SEC has determined PLDT’s violation, if any exists at
the time of the commencement of the administrative case or investigation, that the SEC may impose the statutory
sanctions against PLDT. In other words, once the 28 June 2011 Decision becomes final, the SEC shall impose the
appropriate sanctions only if it finds after due hearing that, at the start of the administrative case or investigation, there is
an existing violation of Section 11, Article XII of the Constitution. Under prevailing jurisprudence, public utilities that fail
to comply with the nationality requirement under Section 11, Article XII and the FIA can cure their deficiencies prior to
the start of the administrative case or investigation. 61

XII.
Final Word

The Constitution expressly declares as State policy the development of an economy "effectively controlled" by Filipinos.
Consistent with such State policy, the Constitution explicitly reserves the ownership and operation of public utilities to
Philippine nationals, who are defined in the Foreign Investments Act of 1991 as Filipino citizens, or corporations or
associations at least 60 percent of whose capital with voting rights belongs to Filipinos. The FIA’s implementing rules
explain that "[f]or stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is
not enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate
voting rights is essential." In effect, the FIA clarifies, reiterates and confirms the interpretation that the term "capital" in
Section 11, Article XII of the 1987 Constitution refers to shares with voting rights, as well as with full beneficial
ownership. This is precisely because the right to vote in the election of directors, coupled with full beneficial ownership
of stocks, translates to effective control of a corporation.

Any other construction of the term "capital" in Section 11, Article XII of the Constitution contravenes the letter and intent
of the Constitution. Any other meaning of the term "capital" openly invites alien domination of economic activities
reserved exclusively to Philippine nationals. Therefore, respondents’ interpretation will ultimately result in handing over
effective control of our national economy to foreigners in patent violation of the Constitution, making Filipinos second-
class citizens in their own country.

Filipinos have only to remind themselves of how this country was exploited under the Parity Amendment, which gave
Americans the same rights as Filipinos in the exploitation of natural resources, and in the ownership and control of public
utilities, in the Philippines. To do this the 1935 Constitution, which contained the same 60 percent Filipino ownership and
control requirement as the present 1987 Constitution, had to be amended to give Americans parity rights with Filipinos.
There was bitter opposition to the Parity Amendment 62 and many Filipinos eagerly awaited its expiration. In late 1968,
PLDT was one of the American-controlled public utilities that became Filipino-controlled when the controlling American
stockholders divested in anticipation of the expiration of the Parity Amendment on 3 July 1974. 63 No economic suicide
happened when control of public utilities and mining corporations passed to Filipinos’ hands upon expiration of the Parity
Amendment.

Movants’ interpretation of the term "capital" would bring us back to the same evils spawned by the Parity
Amendment, effectively giving foreigners parity rights with Filipinos, but this time even without any amendment to the
present Constitution. Worse, movants’ interpretation opens up our national economy to effective control not only by
Americans but also by all foreigners, be they Indonesians, Malaysians or Chinese, even in the absence of reciprocal
treaty arrangements. At least the Parity Amendment, as implemented by the Laurel-Langley Agreement, gave the
capital-starved Filipinos theoretical parity – the same rights as Americans to exploit natural resources, and to own and
control public utilities, in the United States of America. Here, movants’ interpretation would effectively mean
a unilateral opening up of our national economy to all foreigners, without any reciprocal arrangements. That would
mean that Indonesians, Malaysians and Chinese nationals could effectively control our mining companies and public
utilities while Filipinos, even if they have the capital, could not control similar corporations in these countries.

The 1935, 1973 and 1987 Constitutions have the same 60 percent Filipino ownership and control requirement for public
utilities like PLOT. Any deviation from this requirement necessitates an amendment to the Constitution as exemplified by
the Parity Amendment. This Court has no power to amend the Constitution for its power and duty is only to faithfully
apply and interpret the Constitution.

WHEREFORE, we DENY the motions for reconsideration WITH FINALITY. No further pleadings shall be

entertained.

SO ORDERED.

ANTONIO T. CARPIO
Associate Justice

WE CONCUR:

MARIA LOURDES P.A. SERENO

Chief Justice

PRESBITERO J. VELASCO, JR. TERESITA J. LEONARDO-DE CASTRO

Associate Justice Associate Justice

ARTURO D. BRION DIOSDADO M. PERALTA

Associate Justice Associate Justice

LUCAS P. BERSAMIN MARIANO C. DEL CASTILLO

Associate Justice Associate Justice

ROBERTO A. ABAD MARTIN S. VILLARAMA, JR.

Associate Justice Associate Justice
 JOSE PORTUGAL PEREZ JOSE C. MENDOZA
Associate Justice Associate Justice

BIENVENIDO L. REYES ESTELA M. PERLAS-BERNABE

Associate Justice Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in the above Resolution had been
reached in consultation before the case was assigned to the writer of the opinion of the Court.

MARIA LOURDES P.A. SERENO

Chief Justic

DISSENTING OPINION

VELASCO, JR., J.:

Before Us are separate motions for recon~ideration of the Court's June 28, 2011 Decision, 1 which partially granted the
petition for prohibition, injunction and declaratory relief interposed by Wilson P. Gamboa (petitioner or Gamboa). Very
simply, the Court held that the term "capital" appearing in Section 11, Article XII of the 1987 Constitution refers only to
common shares or shares of stock entitled to vote in the election of the members of the board of directors of a public
utility, and not to the total outstanding capital stock.

Respondents Manuel V. Pangilinan (Pangilinan) and Napoleon L.Nazare no (Nazareno) separately moved for
reconsideration on procedural and substantive grounds, but reserved their main arguments against the majority's holding
on the meaning of "capital." The Office of the Solicitor General (OSG), which initially representL:d the Securities and
Exchange Commission (SEC), also requested recon~itkratiun even as it manifested agreement with the majority's
construal ct' the \Vord "capital." Unable to join the OSG's stand on the determinative issue of capital, the SEC sought
leave to join the fray on its mvn. fn its Jtdotion to Admit A1anifestation and Omnibus Motion, the SEC stated that the
OSG’s position on said issue does not reflect its own and in fact diverges from what the Commission has consistently
adopted prior to this case. And because the decision in question has a penalty component which it is tasked to impose,
SEC requested clarification as to when the reckoning period of application of the appropriate sanctions may be
imposed on Philippine Long Distance Telephone Company (PLDT) in case the SEC determines that it has violated
Sec. 11, Art. XII of the Constitution.

To the foregoing motions, the main petitioner, now deceased, filed his Comment and/or Opposition to Motions for
Reconsideration.

Acting on the various motions and comment, the Court conducted and heard the parties in oral arguments on April 17 and
June 26, 2012.

After considering the parties’ positions as articulated during the oral arguments and in their pleadings and respective
memoranda, I vote to grant reconsideration. This disposition is consistent with my dissent, on procedural and substantive
grounds, to the June 28, 2011 majority Decision.

Conspectus

The core issue is the meaning of the word "capital" in the opening sentence of Sec. 11, Art. XII of the 1987 Constitution
which reads:
Section 11. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be
granted except to citizens of the Philippines or to corporations or associations organized under the laws of the
Philippines, at least sixty per centum of whose capital is owned by such citizens; nor shall such franchise, certificate,
or authorization be exclusive in character or for a longer period than fifty years. Neither shall any such franchise or right
be granted except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress when the
common good so requires. The State shall encourage equity participation in public utilities by the general public. The
participation of foreign investors in the governing body of any public utility enterprise shall be limited to their
proportionate share in its capital, and all the executive and managing officers of such corporation or association
must be citizens of the Philippines. (Emphasis supplied.)

For an easier comprehension of the two contrasting positions on the contentious meaning of the word "capital," as found
in the first sentence of the aforequoted provision, allow me to present a brief comparative analysis showing the
dissimilarities.

The majority, in the June 28, 2011 Decision, as reiterated in the draft resolution, is of the view that the word "capital" in
the first sentence of Sec. 11, Art. XII refers to common shares or voting shares only; thus limiting foreign ownership of
such shares to 40%. The rationale, as stated in the basic ponencia, is that this interpretation ensures that control of the
Board of Directors stays in the hands of Filipinos, since foreigners can only own a maximum of 40% of said shares and,
accordingly, can only elect the equivalent percentage of directors. As a necessary corollary, Filipino stockholders can
always elect 60% of the Board of Directors which, to the majority, translates to control over the corporation.

The opposite view is that the word "capital" in the first sentence refers to the entire capital stock of the corporation or both
voting and non-voting shares and NOT solely to common shares. From this standpoint, 60% control over the capital stock
or the stockholders owning both voting and non-voting shares is assured to Filipinos and, as a consequence, over
corporate matters voted upon and decisions reached during stockholders’ meetings. On the other hand, the last sentence of
Sec. 11, Art. XII, with the word "capital" embedded in it, is the provision that ensures Filipino control over the Board of
Directors and its decisions.

To resolve the conflicting interpretations of the word "capital," the first sentence of Sec. 11, Art. XII must be read and
considered in conjunction with the last sentence of said Sec. 11 which prescribes that "the participation of foreign
investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its capital."
After all, it is an established principle in constitutional construction that provisions in the Constitution must be
harmonized.

It has been made very clear during the oral arguments and even by the parties’ written submissions that control by
Filipinos over the public utility enterprise exists on three (3) levels, namely:

1. Sixty percent (60%) control of Filipinos over the capital stock which covers both voting and non-voting shares and
inevitably over the stockholders. This level of control is embodied in the first sentence of Sec. 11, Art. XII which reads:

Section 11. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be
granted except to citizens of the Philippines or to corporations or associations organized under the laws of the
Philippines, at least sixty per centum of whose capital is owned by such citizens x x x.

The word "capital" in the above provision refers to capital stock or both voting and non-voting shares. Sixty percent
(60%) control over the capital stock translates to control by Filipinos over almost all decisions by the stockholders during
stockholders’ meetings including ratification of the decisions and acts of the Board of Directors. During said meetings,
voting and even non-voting shares are entitled to vote. The exercise by non-voting shares of voting rights over major
corporate decisions is expressly provided in Sec. 6 of the Corporation Code which reads:

Sec. 6. x x x x

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

2. Adoption and amendment of by-laws;

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

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

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

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

8. Dissolution of the corporation.

Construing the word "capital" in the first sentence of Sec. 11, Art. XII of the Constitution as capital stock would ensure
Filipino control over the public utility with respect to major corporate decisions. If we adopt the view espoused by Justice
Carpio that the word "capital" means only common shares or voting shares, then foreigners can own even up to 100% of
the non-voting shares. In such a situation, foreigners may very well exercise control over all major corporate decisions as
their ownership of the nonvoting shares remains unfettered by the 40% cap laid down in the first sentence of Sec. 11, Art.
XII. This will spawn an even greater anomaly because it would give the foreigners the opportunity to acquire ownership
of the net assets of the corporation upon its dissolution to include what the Constitution enjoins––land ownership possibly
through dummy corporations. With the view of Justice Carpio, Filipinos will definitely lose control over major corporate
decisions which are decided by stockholders owning the majority of the non-voting shares.

2. Sixty percent (60%) control by Filipinos over the common shares or voting shares and necessarily over the Board of
Directors of the public utility. Control on this level is guaranteed by the last sentence of Sec. 11, Art. XII which reads:

The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their
proportionate share in its "capital" x x x.

In its ordinary signification, "participation" connotes "the action or state of taking part with others in an activity." 2 This
participation in its decision-making function can only be the right to elect board directors. Hence, the last sentence of
Sec. 11, Art. XII of the Constitution effectively restricts the right of foreigners to elect directors to the board in
proportion to the limit on their total shareholdings. Since the first part of Sec. 11, Art. XII of the Constitution specifies
a 40% limit of foreign ownership in the total capital of the public utility corporation, then the rights of foreigners to be
elected to the board of directors, is likewise limited to 40 percent. If the foreign ownership of common shares is lower
than 40%, the participation of foreigners is limited to their proportionate share in the capital stock.

In the highly hypothetical public utility corporation with 100 common shares and 1,000,000 preferred non-voting shares,
or a total of 1,000,100 shares cited in the June 28, 2011 Decision, foreigners can thus only own up to 400,040 shares of
the corporation, consisting of the maximum 40 (out of the 100) voting shares and 400,000 non-voting shares. And,
assuming a 10- member board, the foreigners can elect only 4 members of the board using the 40 voting shares they are
allowed to own.

Following, in fine, the dictates of Sec. 11, Art. XII, as couched, the foreign shareholders’ right to elect members of
the governing board of a given public utility corporation is proportional only to their right to hold a part of the
total shareholdings of that entity. Since foreigners can only own, in the maximum, up to 40% of the total shareholdings
of the company, then their voting entitlement as to the numerical composition of the board would depend on the
level of their shareholding in relation to the capital stock, but in no case shall it exceed the 40% threshold.

Contrary to the view of Justice Carpio that the objective behind the first sentence of Sec. 11, Art. XII is to ensure control
of Filipinos over the Board of Directors by limiting foreign ownership of the common shares or voting shares up to
40%, it is actually the first part of the aforequoted last sentence of Sec. 11, Art. XII that limits the rights of
foreigners to elect not more than 40% of the board seats thus ensuring a clear majority in the Board of Directors to
Filipinos. If we follow the line of reasoning of Justice Carpio on the meaning of the word "capital" in the first sentence,
then there is no need for the framers of the Constitution to incorporate the last sentence in Sec. 11, Art. XII on the 40%
maximum participation of the foreigners in the Board of Directors. The last sentence would be a useless redundancy, a
situation doubtless unintended by the framers of the Constitution. A construction that renders a part of the law or
Constitution being construed superfluous is an aberration, 3 for it is at all times presumed that each word used in the law is
intentional and has a particular and special role in the approximation of the policy sought to be attained, ut magis valeat
quam pereat.

3. The third level of control proceeds from the requirement tucked in the second part of the ultimate sentence that "all the
executive and managing officers of the corporation must be citizens of the Philippines." This assures full Filipino
control, at all times, over the management of the public utility.

To summarize, the Constitution, as enacted, establishes not just one but a three-tiered control-enhancing-and-locking
mechanism in Sec. 11, Article XII to ensure that Filipinos will always have full beneficial ownership and control of public
utility corporations:

1. 40% ceiling on foreign ownership in the capital stock that ensures sixty percent (60%) Filipino control over the capital
stock which covers both voting and non-voting shares. As a consequence, Filipino control over the stockholders is
assured. (First sentence of Sec. 11, Art. XII). Thus, foreigners can own only up to 40% of the capital stock.

2. 40% ceiling on the right of foreigners to elect board directors that guarantees sixty percent (60%) Filipino control over
the Board of Directors. (First part of last sentence of Sec. 11, Art. XII).

3. Reservation to Filipino citizens of the executive and managing officers, regardless of the level of alien equity
ownership to secure total Filipino control over the management of the public utility enterprise (Second part of last
sentence of Sec. 11, Art. XII). Thus, all executive and managing officers must be Filipinos.

Discussion

Undoubtedly there is a clash of conflicting opinions as to what "capital" in the first sentence of Sec. 11, Art. XII means.
The majority says it refers only to common or voting shares. The minority says it includes both voting and non-voting
shares. A resort to constitutional construction is unavoidable.

It is settled though that the "primary source from which to ascertain constitutional intent or purpose is the language of the
constitution itself."4 To this end, the words used by the Constitution should as much as possible be understood in
their ordinary meaning as the Constitution is not a lawyer’s document.5 This approach, otherwise known as the verba
legis rule, should be applied save where technical terms are employed.6

The plain meaning of "capital" in the first

sentence of Sec. 11, Art. XII of the Constitution
includes both voting and non-voting shares

J.M. Tuason & Co., Inc. v. Land Tenure Administration illustrates the verba legis rule. There, the Court cautions against
departing from the commonly understood meaning of ordinary words used in the Constitution, viz.:

We look to the language of the document itself in our search for its meaning. We do not of course stop there, but that is
where we begin. It is to be assumed that the words in which constitutional provisions are couched express the
objective sought to be attained. They are to be given their ordinary meaning except where technical terms are employed
in which case the significance thus attached to them prevails. As the Constitution is not primarily a lawyer's document, it
being essential for the rule of law to obtain that it should ever be present in the people's consciousness, its language as
much as possible should be understood in the sense they have in common use. What it says according to the text of
the provision to be construed compels acceptance and negates the power of the courts to alter it, based on the postulate
that the framers and the people mean what they say. Thus, there are cases where the need for construction is reduced to a
minimum.7 (Emphasis supplied.)

The primary reason for the verba legis approach, as pointed out by Fr. Joaquin Bernas during the June 26, 2012
arguments, is that the people who ratified the Constitution voted on their understanding of the word capital in its everyday
meaning. Fr. Bernas elucidated thus:

x x x Over the years, from the 1935 to the 1973 and finally even under the 1987 Constitution, the prevailing practice has
been to base the 60-40 proportion on total outstanding capital stock, that is, the combined total of common and non-voting
preferred shares. This is what occasioned the case under consideration.

What is the constitutional relevance of this continuing practice? I suggest that it is relevant for determining what the
people in the street voted for when they ratified the Constitution. When the draft of a Constitution is presented to the
people for ratification, what the people vote on is not the debates in the constituent body but the text of the draft.
Concretely, what the electorate voted on was their understanding of the word capital in its everyday meaning they
encounter in daily life. We cannot attribute to the voters a jurist’s sophisticated meaning of capital and its breakdown
into common and preferred. What they vote on is what they see. Nor do they vote on what the drafters saw as assumed
meaning, to use Bengzon’s explanation. In the language of the sophisticates, what voters in a plebiscite vote on is verba
legis and not anima legis about which trained jurists debate.

What then does it make of the contemporary understanding by SEC etc. Is the contemporary understanding
unconstitutional or constitutional? I hesitate to characterize it as constitutional or unconstitutional. I would merely
characterize it as popular. What I mean is it reflects the common understanding of the ordinary populi, common but
incomplete.8 (Emphasis supplied.)

"Capital" in the first sentence of Sec. 11, Art. XII must then be accorded a meaning accepted, understood, and used by an
ordinary person not versed in the technicalities of law. As defined in a non-legal dictionary, capital stock or capital is
ordinarily taken to mean "the outstanding shares of a joint stock company considered as an aggregate"9 or
"the ownership element of a corporation divided into shares and represented by certificates." 10

The term "capital" includes all the outstanding shares of a company that represent "the proprietary claim in a
business."11 It does not distinguish based on the voting feature of the stocks but refers to all shares, be they voting
or non-voting. Neither is the term limited to the management aspect of the corporation but clearly refers to the separate
aspect of ownership of the corporate shares thereby encompassing all shares representing the equity of the corporation.

This plain meaning, as understood, accepted, and used in ordinary parlance, hews with the definition given by Black who
equates capital to capital stock12 and defines it as "the total number of shares of stock that a corporation may issue under
its charter or articles of incorporation, including both common stock and preferred stock."13 This meaning is also
reflected in legal commentaries on the Corporation Code. The respected commentator Ruben E. Agpalo defines "capital"
as the "money, property or means contributed by stockholders for the business or enterprise for which the corporation was
formed and generally implies that such money or property or means have been contributed in payment for stock issued to
the contributors."14 Meanwhile, "capital stock" is "the aggregate of the shares actually subscribed [or] the amount
subscribed and paid-in and upon which the corporation is to conduct its operations, or the amount paid-in by its
stockholders in money, property or services with which it is to conduct its business." 15

This definition has been echoed by numerous other experts in the field of corporation law. Dean Villanueva wrote, thus:

In defining the relationship between the corporation and its stockholders, the capital stock represents the proportional
standing of the stockholders with respect to the corporation and corporate matters, such as their rights to vote and to
receive dividends.

In financial terms, the capital stock of the corporation as reflected in the financial statement of the corporation
represents the financial or proprietary claims of the stockholders to the net assets of the corporation upon
dissolution. In addition, the capital stock represents the totality of the portion of the corporation’s assets and receivables
which are covered by the trust fund doctrine and provide for the amount of assets and receivables of the corporation which
are deemed protected for the benefit of the corporate creditors and from which the corporation cannot declare any
dividends. 16 (Emphasis supplied.)

Similarly, renowned author Hector S. de Leon defines "capital" and "capital stock" in the following manner:

Capital is used broadly to indicate the entire property or assets of the corporation. It includes the amount invested by the
stockholders plus the undistributed earnings less losses and expenses. In the strict sense, the term refers to that portion of
the net assets paid by the stockholders as consideration for the shares issued to them, which is utilized for the prosecution
of the business of the corporation. It includes all balances or instalments due the corporation for shares of stock sold by it
and all unpaid subscription for shares.

xxxx

The term is also used synonymously with the words "capital stock," as meaning the amount subscribed and paid-in and
upon which the corporation is to conduct its operation (11 Fletcher Cyc. Corp., p. 15 [1986 ed.]) and it is immaterial how
the stock is classified, whether as common or preferred.17 (Emphasis and underscoring supplied.)

Hence, following the verba legis approach, I see no reason to stray away from what appears to be a common and settled
acceptation of the word "capital," given that, as used in the constitutional provision in question, it stands unqualified by
any restrictive or expansive word as to reasonably justify a distinction or a delimitation of the meaning of the word. Ubi
lex non distinguit nos distinguere debemus, when the law does not distinguish, we must not distinguish.18 Using this plain
meaning of "capital" within the context of Sec. 11, Art. XII, foreigners are entitled to own not more than 40% of the
outstanding capital stock, which would include both voting and non-voting shares.

Extraneous aids to ferret out constitutional intent

When the seeming ambiguity on the meaning of "capital" cannot be threshed out by looking at the language of the
Constitution, then resort to extraneous aids has become imperative. The Court can utilize the following extraneous aids, to
wit: (1) proceedings of the convention; (2) changes in phraseology; (3) history or realities existing at the time of the
adoption of the Constitution; (4) prior laws and judicial decisions; (5) contemporaneous construction; and (6)
consequences of alternative interpretations. 19 I submit that all these aids of constitutional construction affirm that the only
acceptable construction of "capital" in the first sentence of Sec. 11, Art. XII of the 1987 Constitution is that it refers
to all shares of a corporation, both voting and non-voting.

Deliberations of the Constitutional Commission

of 1986 demonstrate that capital means both
voting and non-voting shares (1st extrinsic aid)

The proceedings of the 1986 Constitutional Commission that drafted the 1987 Constitution were accurately recorded in
the Records of the Constitutional Commission.

To bring to light the true meaning of the word "capital" in the first line of Sec. 11, Art. XII, one must peruse, dissect and
analyze the entire deliberations of the Constitutional Commission pertinent to the article on national economy and
patrimony, as quoted below:

August 13, 1986, Wednesday

PROPOSED RESOLUTION NO. 496

RESOLUTION TO INCORPORATE IN THE NEW CONSTITUTION AN ARTICLE ON NATIONAL ECONOMY

AND PATRIMONY

Be it resolved as it is hereby resolved by the Constitutional Commission in session assembled, To incorporate the National
Economy and Patrimony of the new Constitution, the following provisions:
 ARTICLE____
NATIONAL ECONOMY AND PATRIMONY

SECTION 1. The State shall develop a self-reliant and independent national economy. x x x

xxxx

SEC. 3. x x x The exploration, development, and utilization of natural resources shall be under the full control and
supervision of the State. Such activities may be directly undertaken by the State, or it may enter into co-production, joint
venture, production-sharing agreements with Filipino citizens or corporations or associations at least sixty percent of
whose voting stock or controlling interest is owned by such citizens. x x x

xxxx

SEC. 9. The Congress shall reserve to citizens of the Philippines or to corporations or associations at least sixty per cent
of whose voting stock or controlling interest is owned by such citizens or such higher percentage as Congress may
prescribe, certain areas of investments when the national interest so dictates.

xxxx

SEC. 15. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted
except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines at least
two-thirds of whose voting stock or controlling interest is owned by such citizens. Neither shall any such franchise or
right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by Congress when
the common good so requires. The State shall encourage equity participation in public utilities by the general public.
(Origin of Sec. 11, Article XII)

xxxx

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

MR. VILLEGAS. That is right.

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

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

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

MR. VILLEGAS. That is right.

MR. NOLLEDO. Thank you.

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

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

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

MR. VILLEGAS. Yes.20

August 14, 1986, Thursday

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

MR. VILLEGAS. Commissioner Suarez will answer that.

MR. SUAREZ. Thank you.

As a matter of fact, this particular portion is still being reviewed by this Committee. In Section 1, Article XIII of the 1935
Constitution, the wording is that the percentage should be based on the capital which is owned by such citizens. In the
proposed draft, this phrase was proposed: "voting stock or controlling interest." This was a plan submitted by the UP Law
Center.

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

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

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

MR. BENGZON. I also share the sentiment of Commissioner Suarez in that respect. So there are already two in the
Committee who want to go back to the wording of the 1935 and the 1973 Constitution. 21

August 15, 1986, Friday

MR. MAAMBONG. I ask that Commissioner Treñas be recognized for an amendment on line 14.

THE PRESIDENT. Commissioner Treñas is recognized.

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

MR. VILLEGAS. We accept the amendment.

MR. TREÑAS. Thank you.

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

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

xxxx

THE PRESIDENT. Commissioner Suarez is recognized.

MR. SUAREZ. Thank you, Madam President.

Two points actually are being raised by Commissioner Davide’s proposed amendment. One has reference to the
percentage of holdings and the other one is the basis for that percentage. Would the body have any objection if we split it
into two portions because there may be several Commissioners who would be willing to accept the Commissioner’s
proposal on capital stock in contradistinction to a voting stock for controlling interest?

MR. VILLEGAS. The proposal has been accepted already.

MR. DAVIDE. Yes, but it was 60 percent.

MR. VILLEGAS. That is right.

MR. SUAREZ. So, it is now 60 percent as against wholly owned?

MR. DAVIDE. Yes.

MR. SUAREZ. Is the Commissioner not insisting on the voting capital stock because that was already accepted by the
Committee?

MR. DAVIDE. Would it mean that it would be 100-percent voting capital stock?

MR. SUAREZ. No, under the Commissioner’s proposal it is just "CAPITAL" not "stock."

MR. DAVIDE. No, I want it to be very clear. What is the alternative proposal of the Committee? How shall it
read?

MR. SUAREZ. It will only read something like: "the CAPITAL OF WHICH IS FULLY owned."

MR. VILLEGAS. Let me read lines 12 to 14 which state:

… enter into co-production, joint venture, production sharing agreements with Filipino citizens or corporations or
associations at least 60 percent of whose CAPITAL is owned by such citizens.

We are going back to the 1935 and 1973 formulations.

MR. DAVIDE. I cannot accept the proposal because the word CAPITAL should not really be the guiding
principle. It is the ownership of the corporation. It may be voting or not voting, but that is not the guiding
principle.

MR. SUAREZ. So, the Commissioner is insisting on the use of the term "CAPITAL STOCK"?

MR. DAVIDE. Yes, to be followed by the phrase "WHOLLY owned."

MR. SUAREZ. Yes, but we are only concentrating on the first point – "CAPITAL STOCK" or merely
"CAPITAL."

MR. DAVIDE. CAPITAL STOCK?

MR. SUAREZ. Yes, it is "CAPITAL STOCK."

SUSPENSION OF SESSION

At 4:42 p.m., the session was resumed.

THE PRESIDENT. The session is resumed.

Commissioner Davide is to clarify his point.

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

We would like to call for a vote on 100-percent Filipino versus 60- percent Filipino.

MR. ALONTO. Is it 60 percent?

MR. VILLEGAS. Sixty percent, yes.

MR. GASCON. Madam President, shall we vote on the proposed amendment of Commissioner Davide of "ONE
HUNDRED PERCENT?"

MR. VILLEGAS. Yes.

MR. GASCON. Assuming that it is lost, that does not prejudice any other Commissioner to make any recommendations
on other percentages?

MR. VILLEGAS. I would suggest that we vote on "sixty," which is indicated in the committee report.

MR. GASCON. It is the amendment of Commissioner Davide that we should vote on, not the committee report.

MR. VILLEGAS. Yes, it is all right.

MR. AZCUNA. Madam President.

THE PRESIDENT. Commissioner Azcuna is recognized.

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

MR. VILLEGAS. The portion accepted by the Committee is the deletion of the phrase "voting stock or controlling
interest."
MR. AZCUNA. Hence, without the Davide amendment, the committee report would read: "corporations or
associations at least sixty percent of whose CAPITAL is owned by such citizens."

MR. VILLEGAS. Yes.

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

MR. VILLEGAS. That is right.

MR. AZCUNA. But the control can be with the foreigners even if they are the minority. Let us say 40 percent of the
capital is owned by them, but it is the voting capital, whereas, the Filipinos own the nonvoting shares. So we can have a
situation where the corporation is controlled by foreigners despite being the minority because they have the voting capital.
That is the anomaly that would result there.

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

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

MR. BENGZON. In the case of stock corporations, it is assumed.

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

MR. BENGZON. Yes, that is understood.

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

MR. BENGZON. That is correct.

MR. AZCUNA. My concern is the situation where there is a voting stock. It is a stock corporation. What the Committee
requires is that 60 percent of the capital should be owned by Filipinos. But that would not assure control because that 60
percent may be non-voting.

MS. AQUINO. Madam President.

MR. ROMULO. May we vote on the percentage first?

THE PRESIDENT. Before we vote on this, we want to be clarified first.

MS. AQUINO. Madam President.

THE PRESIDENT. Commissioner Aquino is recognized.

MS. AQUINO. I would suggest that we vote on the Davide amendment which is 100-percent capital, and if it is voted
down, then we refer to the original draft which is "capital stock" not just "capital."

MR. AZCUNA. The phrase "controlling interest" is an important consideration.

THE PRESIDENT. Let us proceed to vote then.

MR. PADILLA. Madam President.

THE PRESIDENT. The Vice-President, Commissioner Padilla, is recognized.

MR. PADILLA. The Treñas amendment has already been approved. The only one left is the Davide amendment
which is substituting the "sixty percent" to "WHOLLY owned by Filipinos." (The Treñas amendment deleted the
phrase "whose voting stocks and controlling interest" and inserted the word "capital." It approved the phrase "associations
at least sixty percent of the CAPITAL is owned by such citizens.)(see page 16)

Madam President, I am against the proposed amendment of Commissioner Davide because that is an ideal situation where
domestic capital is available for the exploration, development and utilization of these natural resources, especially
minerals, petroleum and other mineral oils. These are not only risky business but they also involve substantial capital.
Obviously, it is an ideal situation but it is not practical. And if we adopt the 100-percent capital of Filipino citizens, I am
afraid that these natural resources, particularly these minerals and oil, et cetera, may remain hidden in our lands, or in
other offshore places without anyone being able to explore, develop or utilize them. If it were possible to have a 100-
percent Filipino capital, I would prefer that rather than the 60 percent, but if we adopt the 100 percent, my fear is that we
will never be able to explore, develop and utilize our natural resources because we do not have the domestic resources for
that.

MR. DAVIDE. Madam President, may I be allowed to react?

THE PRESIDENT. Commissioner Davide is recognized.

MR. DAVIDE. I am very glad that Commissioner Padilla emphasized minerals, petroleum and mineral oils. The
Commission has just approved the possible foreign entry into the development, exploration and utilization of these
minerals, petroleum and other mineral oils by virtue of the Jamir amendment. I voted in favour of the Jamir amendment
because it will eventually give way to vesting in exclusively Filipino citizens and corporations wholly owned by Filipino
citizens the right to utilize the other natural resources. This means that as a matter of policy, natural resources should be
utilized and exploited only by Filipino citizens or corporations wholly owned by such citizens. But by virtue of the Jamir
amendment, since we feel that Filipino capital may not be enough for the development and utilization of minerals,
petroleum and other mineral oils, the President can enter into service contracts with foreign corporations precisely for the
development and utilization of such resources. And so, there is nothing to fear that we will stagnate in the development of
minerals, petroleum, and mineral oils because we now allow service contracts. It is, therefore, with more reason that at
this time we must provide for a 100-percent Filipinization generally to all natural resources.

MR. VILLEGAS. I think we are ready to vote, Madam President.

THE PRESIDENT. The Acting Floor Leader is recognized.

MR. MAAMBONG. Madam President, we ask that the matter be put to a vote.

THE PRESIDENT. Will Commissioner Davide please read lines 14 and 15 with his amendment.

MR. DAVIDE. Lines 14 and 15, Section 3, as amended, will read: "associations whose CAPITAL stock is WHOLLY
owned by such citizens."

VOTING

THE PRESIDENT. As many as are in favour of this proposed amendment of Commissioner Davide on lines 14 and 15 of
Section 3, please raise their hand. (Few Members raised their hand.)

As many as are against the amendment, please raise their hand. (Several Members raised their hand.)

The results show 16 votes in favour and 22 against; the amendment is lost.

MR. MAAMBONG. Madam President, I ask that Commissioner Davide be recognized once more for further
amendments.
THE PRESIDENT. Commissioner Davide is recognized.

MR. DAVIDE. Thank you, Madam President.

This is just an insertion of a new paragraph between lines 24 and 25 of Section 3 of the same page. It will read as follows:
THE GOVERNING AND MANAGING BOARDS OF SUCH CORPORATIONS SHALL BE VESTED
EXCLUSIVELY IN CITIZENS OF THE PHILIPPINES.

MR. VILLEGAS. Which corporations is the Commissioner referring to?

MR. DAVIDE. This refers to corporations 60 percent of whose capital is owned by such citizens.

MR. VILLEGAS. Again the amendment will read…

MR. DAVIDE. "THE GOVERNING AND MANAGING BODIES OF SUCH CORPORATIONS SHALL BE VESTED
EXCLUSIVELY IN CITIZENS OF THE PHILIPPINES."

REV. RIGOS. Madam President.

THE PRESIDENT. Commissioner Rigos is recognized.

REV. RIGOS. I wonder if Commissioner Davide would agree to put that sentence immediately after "citizens" on line 15.

MR. ROMULO. May I ask a question. Presumably, it is 60-40?

MR. DAVIDE. Yes.

MR. ROMULO. What about the 40 percent? Would they not be entitled to a proportionate seat in the board?

MR. DAVIDE. Under my proposal, they should not be allowed to sit in the board.

MR. ROMULO. Then the Commissioner is really proposing 100 percent which is the opposite way?

MR. DAVIDE. Not necessarily, because if 40 percent of the capital stock will be owned by aliens who may sit in the
board, they can still exercise their right as ordinary stockholders and can submit the necessary proposal for, say, a policy
to be undertaken by the board.

MR. ROMULO. But that is part of the stockholder’s right – to sit in the board of directors.

MR. DAVIDE. That may be allowed but this is a very unusual and abnormal situation so the Constitution itself can
prohibit them to sit in the board.

MR. ROMULO. But it would be pointless to allow them 40 percent when they cannot sit in the board nor have a say in
the management of the company. Likewise, that would be extraordinary because both the 1935 and the 1973 Constitutions
allowed not only the 40 percent but commensurately they were represented in the board and management only to the
extent of their equity interest, which is 40 percent. The management of a company is lodged in the board; so if the 60
percent, which is composed of Filipinos, controls the board, then the Filipino part has control of the company.

I think it is rather unfair to say: "You may have 40 percent of the company, but that is all. You cannot manage, you cannot
sit in the board." That would discourage investments. Then it is like having a one hundredpercent ownership; I mean,
either we allow a 60-40 with full rights to the 40 percent, limited as it is as to a minority, or we do not allow them at all.
This means if it is allowed; we cannot have it both ways.
MR. DAVIDE. The aliens cannot also have everything. While they may be given entry into subscriptions of the capital
stock of the corporation, it does not necessarily follow that they cannot be deprived of the right of membership in the
managing or in the governing board of a particular corporation. But it will not totally deprive them of a say because they
can still exercise the ordinary rights of stockholders. They can submit their proposal and they can be heard.

MR. ROMULO. Yes, but they have no vote. That is like being represented in the Congress but not being allowed to vote
like our old resident Commissioners in the United States. They can be heard; they can be seen but they cannot vote.

MR. DAVIDE. If that was allowed under that situation, why can we not do it now in respect to our natural resources? This
is a very critical and delicate issue.

MR. ROMULO. Precisely, we used to complain how unfair that was. One can be seen and heard but he cannot vote.

MR. DAVIDE. We know that under the corporation law, we have the rights of the minority stockholders. They can be
heard. As a matter of fact, they can probably allow a proxy to vote for them and, therefore, they still retain that specific
prerogative to participate just like what we did in the Article on Social Justice.

MR. ROMULO. That would encourage dummies if we give them proxies.

MR. DAVIDE. As a matter of fact, when it comes to encouraging dummies, by allowing 40-percent ownership to come in
we will expect the proliferation of corporations actually owned by aliens using dummies.

MR. ROMULO. No, because 40 percent is a substantial and fair share and, therefore, the bona fide foreign investor is
satisfied with that proportion. He does not have to look for dummies. In fact, that is what assures a genuine investment if
we give a foreign investor the 40 percent and all the rights that go with it. Otherwise, we are either discouraging the
investment altogether or we are encouraging circumvention. Let us be fair. If it is 60-40, then we give him the right,
limited as to his minority position.

MR. MAAMBONG. Madam President, the body would like to know the position of the Committee so that we can put the
matter to a vote.

MR. VILLEGAS. The Committee does not accept the amendment.

THE PRESIDENT. The Committee does not accept.

Will Commissioner Davide insist on his amendment?

MR. DAVIDE. We request a vote.

THE PRESIDENT. Will Commissioner Davide state his proposed amendment again?

MR. DAVIDE. The proposed amendment would be the insertion of a new paragraph to Section 3, between lines 24 and
25, page 2, which reads: "THE GOVERNING AND MANAGING BODIES OF SUCH CORPORATIONS SHALL BE
VESTED EXCLUSIVELY IN CITIZENS OF THE PHILIPPINES."

MR. PADILLA. Madam President.

THE PRESIDENT. Commissioner Padilla is recognized.

MR. PADILLA. Madam President, may I just say that this Section 3 speaks of "co-production, joint venture, production
sharing agreements with Filipino citizens." If the foreign share of, say, 40 percent will not be represented in the board or
in management, I wonder if there would be any foreign investor who will accept putting capital but without any voice in
management. I think that might make the provision on "coproduction, joint venture and production sharing" illusory.
 VOTING

THE PRESIDENT. If the Chair is not mistaken, that was the same point expressed by Commissioner Romulo, a member
of the Committee.

As many as are in favour of the Davide amendment, please raise their hand. (Few Members raised their hand.)

As many as are against, please raise their hand. (Several Members raised their hand.)

As many as are abstaining, please raise their hand. (One Member raised his hand.)

xxxx

THE PRESIDENT. Commissioner Garcia is recognized.

MR. GARCIA. My amendment is on Section 3, the same item which Commissioner Davide tried to amend. It is
basically on the share of 60 percent. I would like to propose that we raise the 60 percent to SEVENTY-FIVE
PERCENT so the line would read: "SEVENTY-FIVE PERCENT of whose CAPITAL is owned by such citizens."

THE PRESIDENT. What does the Committee say?

SUSPENSION OF SESSION

MR. VILLEGAS. The Committee insists on staying with the 60 percent – 60-40.

Madam President, may we ask for a suspension of the session.

THE PRESIDENT. The session is suspended.

It was 5:07 p.m.

RESUMPTION OF SESSION

At 5:31 p.m., the session was resumed.

THE PRESIDENT. The session is resumed.

MR. SARMIENTO. Madam President.

THE PRESIDENT. The Acting Floor Leader, Commissioner Sarmiento, is recognized.

MR. SARMIENTO: Commissioner Garcia still has the floor. May I ask that he be recognized.

THE PRESIDENT. Commissioner Garcia is recognized.

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

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

MR. VILLEGAS. This is just a correction. I think Commissioner Azcuna is not insisting on the retention of the
phrase "controlling interest," so we will retain "CAPITAL" to go back really to the 1935 and 1973 formulations.
MR. BENNAGEN. May I suggest that we retain the phrase "controlling interest"?

MR. VILLEGAS. Yes, we will retain it. (The statement of Commissioner Villegas is possibly erroneous considering his
consistent statement, especially during the oral arguments, that the Constitutional Commission rejected the UP Proposal to
use the phrase "controlling interest.")

THE PRESIDENT. Are we now ready to vote?

MR. SARMIENTO. Yes, Madam President.

VOTING

THE PRESIDENT. As many as are in favour of the proposed amendment of Commissioner Garcia for "SEVENTY-
FIVE" percent, please raise their hand. (Few Members raised their hand.)

As many as are against the amendment, please raise their hand. (Several Members raised their hand.)

As many as are abstaining, please raise their hand. (One Member raised his hand.)

The results show 16 votes in favour, 18 against and 1 abstention; the Garcia amendment is lost.

MR. SARMIENTO. Madam President, may I ask that Commissioner Foz be recognized.

THE PRESIDENT. Commissioner Foz is recognized.

MR. FOZ. After losing by only two votes, I suppose that this next proposal will finally get the vote of the majority. The
amendment is to provide for at least TWO-THIRDS.

MR. SUAREZ. It is equivalent to 66 2/3.

THE PRESIDENT. Will the Commissioner repeat?

MR. FOZ. I propose "TWO-THIRDS of whose CAPITAL is owned by such citizens." Madam President, we are
referring to the same provision to which the previous amendments have been suggested. First, we called for a 100-
percent ownership; and then, second, we called for a 75-percent ownership by Filipino citizens.

So my proposal is to provide for at least TWO-THIRDS of the capital to be owned by Filipino citizens. I would like to
call the attention of the body that the same ratio or equity requirement is provided in the case of public utilities. And if we
are willing to provide such equity requirements in the case of public utilities, we should at least likewise provide the same
equity ratio in the case of natural resources.

MR. VILLEGAS. Commissioner Romulo will respond.

MR. ROMULO. I just want to point out that there is an amendment here filed to also reduce the ratio in Section 15 to 60-
40.

MR. PADILLA. Madam President.

THE PRESIDENT. Commissioner Padilla is recognized.

MR. PADILLA. The 60 percent which appears in the committee report has been repeatedly upheld in various votings.
One proposal was whole – 100 percent; another one was 75 percent and now it is 66 2/3 percent. Is not the decision of this
Commission in voting to uphold the percentage in the committee report already a decision on this issue?
MR. FOZ. Our amendment has been previously brought to the attention of the body.

MR. VILLEGAS. The Committee does not accept the Commissioner’s amendment. This has been discussed fully and,
with only one-third of the vote, it is like having nothing at all in decision-making. It can be completely vetoed.

MR. RODRIGO. Madam President.

THE PRESIDENT. Commissioner Rodrigo is recognized.

MR. RODRIGO. This is an extraordinary suggestion. But considering the circumstances that the proposals from the 100
percent to 75 percent lost, and now it went down to 66 2/3 percent, we might go down to 65 percent next time. So I
suggest that we vote between 66 2/3 and 60 percent. Which does the body want? Then that should be the end of it;
otherwise, this is ridiculous. After this, if the 66 2/3 percent will lose, then somebody can say: "Well, how about 65
percent?"

THE PRESIDENT. The Chair was made to understand that Commissioner Foz’ proposal is the last proposal on this
particular line. Will Commissioner Foz restate his proposal?

MR. FOZ. My proposal is "TWO-THIRDS of whose CAPITAL or controlling interest is owned by such citizens."

VOTING

THE PRESIDENT. We now put Commissioner Foz’ amendment to a vote.

As many as are in favour of the amendment of Commissioner Foz, please raise their hand. (Few Members raised their
hand.)

As many as are against, please raise their hand. (Several Members raised their hand.)

The results show 17 votes in favour, 20 against, and not abstention; the amendment is lost. 22

xxxx

August 22, 1986, Friday

THE PRESIDENT. Commissioner Nolledo is recognized.

MR. NOLLEDO. Thank you, Madam President.

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

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

Before I propound the final question, I would like to make a comment in relation to Section 15 since they are
related to each other. I notice that in Section 15, there still appears the phrase "voting stock or controlling
interest." The term "voting stocks" as the basis of the Filipino equity means that if 60 percent of the voting stocks
belong to Filipinos, foreigners may now own more than 40 percent of the capital as long as the 40 percent or the
excess thereof will cover nonvoting stock. This is aside from the fact that under the Corporation Code, even
nonvoting shares can vote on certain instances. Control over investments may cover aspects of management and
participation in the fruits of production or exploitation.

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

What does the committee say?

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

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

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

Thank you very much.

MR. MAAMBONG. Madam President.

THE PRESIDENT. Commissioner Maambong is recognized.

MR. MAAMBONG. In view of the manifestation of the committee, I would like to be clarified on the use of the word
"CAPITAL."

MR. VILLEGAS. Yes, that was the word used in the 1973 and 1935 Constitutions.

MR. MAAMBONG. Let us delimit ourselves to that word "CAPITAL". In the Corporation Law, if I remember
correctly, we have three types of capital: the authorized capital stock, the subscribed capital stock and the paid-up
capital stock.

The authorized capital stock could be interpreted as the capital of the corporation itself because that is the totality
of the investment of the corporation as stated in the articles of incorporation. When we refer to 60 percent, are we
referring to the authorized capital stock or the paid-up capital stock since the determinant as to who owns the
corporation, as far as equity is concerned, is the subscription of the person?

I think we should delimit ourselves also to what we mean by 60 percent. Are we referring to the authorized capital
stock or to the subscribed capital stock, because the determination, as I said, on the controlling interest of a
corporation is based on the subscribed capital stock? I would like a reply on that.

MR. VILLEGAS. Commissioner Suarez, a member of the committee, would like to answer that.

THE PRESIDENT. Commissioner Suarez is recognized.

MR. SUAREZ. Thank you, Madam President.

We stated this because there might be a misunderstanding regarding the interpretation of the term "CAPITAL" as now
used as the basis for the percentage of foreign investments in appropriate instances and the interpretation attributed to the
word is that it should be based on the paidup capital. We eliminated the use the phrase "voting stock or controlling
interest" because that is only used in connection with the matter of voting. As a matter of fact, in the declaration of
dividends for private corporations, it is usually based on the paid-up capitalization.
So, what is really the dominant factor to be considered in matters of determining the 60-40 percentage should really be the
paid-up capital of the corporation.

MR. MAAMBONG. I would like to get clarification on this. If I remember my corporation law correctly, we usually use a
determinant in order to find out what the ratio of ownership is, not really on the paid-up capital stock but on the
subscribed capital stock.

For example, if the whole authorized capital stock of the corporation is ₱ 1 million, if the subscription is 60 percent of ₱ 1
million which is ₱ 600,000, then that is supposed to be the determinant whether there is a sharing of 60 percent of
Filipinos or not. It is not really on the paid-up capital because once a person subscribes to a capital stock then whether that
capital stock is paid up or not, does not really matter, as far as the books of the corporation are concerned. The subscribed
capital stock is supposed to be owned by the person who makes the subscription. There are so many laws on how to
collect the delinquency and so on.

I view of the Commissioner’s answer, I would like to know whether he is determined to put on the record that in order to
determine the 60-40 percent sharing, we have to determine whether we will use a determinant which is the subscribed
capital stock or the paid-up capital stock.

MR SUAREZ. We are principally concerned about the interpretation which would be attached to it; that is, it should be
limited to authorized capital stock, not to subscribed capital stock.

I will give the Commissioner an illustration of what he is explaining to the Commission.

MR. MAAMBONG. Yes, thank you.

MR. SUAREZ. Let us say the authorized capital stock is ₱ 1 million. Under the present rules in the Securities and
Exchange Commission, at least 25 percent of that amount must be subscribed and at least 25 percent of this subscribed
capital must be paid up.

Now, let us discuss the basis of 60-40. To illustrate the matter further, let us say that 60 percent of the subscriptions would
be allocated to Filipinos and 40 percent of the subscribed capital would be held by foreigners. Then we come to the paid-
up capitalization. Under the present rules in the Securities and Exchange Commission, a foreign corporation is supposed
to subscribe to a 40-percent share which must be fully paid up.

On the other hand, the 60 percent allocated to Filipinos need not be paid up. However, at least 25 percent of the
subscription must be paid up for purposes of complying with the Corporation Law. We can illustrate the matter further by
saying that the compliance of 25 percent paid-up of the subscribed capital would be fulfilled by the full payment of the 40
percent by the foreigners.

So, we have a situation where the Filipino percentage of 60 may not even comply with the 25-percent requirement
because of the totality due to the fully payment of the 40-percent of the foreign investors, the payment of 25 percent paid-
up on the subscription would have been considered fulfilled. That is exactly what we are trying to avoid.

MR. MAAMBONG I appreciate very much the explanation but I wonder if the committee would subscribe to that view
because I will stick to my thinking that in the computation of the 60-40 ratio, the basis should be on the subscription. If
the subscription is being done by 60 percent Filipinos, whether it is paid-up or not and the subscription is accepted by the
corporation, I think that is the proper determinant. If we base the 60-40 on the paid-up capital stock, we have a problem
here where the 40 percent is fully paid up and the 60 percent is not fully paid up – this may be contrary to the provisions
of the Constitution. So I would like to ask for the proper advisement from the Committee as to what should be the proper
interpretation because this will cause havoc on the interpretation of our Corporation Law.

MR. ROMULO. Madam President.

THE PRESIDENT. Commissioner Romulo is recognized.

MR. ROMULO. We go by the established rule which I believe is uniformly held. It is based on the subscribed capital. I
know only of one possible exception and that is where the bylaws prohibit the subscriber from voting. But that is a very
rare provision in bylaws. Otherwise, my information and belief is that it is based on the subscribed capital.

MR. MAAMBONG. It is, therefore, the understanding of this Member that the Commissioner is somewhat revising the
answer of Commissioner Suarez to that extent?

MR. ROMULO. No, I do not think we contradict each other. He is talking really of the instance where the subscriber is a
non-resident and, therefore, must fully pay. That is how I understand his position.

MR. MAAMBONG. My understanding is that in the computation of the 60-40 sharing under the present formulation, the
determinant is the paid-up capital stock to which I disagree.

MR. ROMULO. At least, from my point of view, it is the subscribed capital stock.

MR. MAAMBONG. Then that is clarified.23

xxxx

August 23, 1986, Saturday

MS. ROSARIO BRAID. Madam President, I propose a new section to read: "THE MANAGEMENT BODY OF EVERY
CORPORATION OR ASSOCIATION SHALL IN ALL CASES BE CONTROLLED BY CITIZENS OF THE
PHILIPPINES."

This will prevent management contracts and assure control by Filipino citizens. Will the committee assure us that this
amendment will insure that past activities such as management contracts will no longer be possible under this
amendment?

MR. ROMULO. Madam President, if I may reply.

THE PRESIDENT. Commissioner Romulo is recognized.

MR. ROMULO. May I ask the proponent to read the amendment again.

MS. ROSARIO BRAID. The amendment reads: "THE MANAGEMENT BODY OF EVERY CORPORATION OR
ASSOCIATION SHALL IN ALL CASES BE CONTROLLED BY CITIZENS OF THE PHILIPPINES."

MR. DE LOS REYES. Madam President, will Commissioner Rosario Braid agree to a reformulation of her amendment
for it to be more comprehensive and all-embracing?

THE PRESIDENT. Commissioner de los Reyes is recognized.

MR. DE LOS REYES. This is an amendment I submitted to the committee which reads: "MAJORITY OF THE
DIRECTORS OR TRUSTEES AND ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH
CORPORATION OR ASSOCIATION MUST BE CITIZENS OF THE PHILIPPINES."

This amendment is more direct because it refers to particular officers to be all-Filipino citizens.

MR. BENGZON. Madam President.

THE PRESIDENT. Commissioner Bengzon is recognized.

MR. BENGZON. The committee sitting out here accepts the amendment of Commissioner de los Reyes which subsumes
the amendment of Commissioner Rosario Braid.

THE PRESIDENT. So this will be a joint amendment now of Commissioners Rosario Braid, de los Reyes and others.

MR. REGALADO. Madam President, I join in that amendment with the request that it will be the last sentence of Section
15 because we intend to put an anterior amendment. However, that particular sentence which subsumes also the proposal
of Commissioner Rosario Braid can just be placed as the last sentence of the article.

THE PRESIDENT. Is that acceptable to the committee?

MR. VILLEGAS. Yes, Madam President.

MS. ROSARIO BRAID. Thank you.

MR. RAMA, The body is now ready to vote on the amendment.

FR. BERNAS. Madam President.

THE PRESIDENT. Commissioner Bernas is recognized.

FR. BERNAS. Will the committee accept a reformulation of the first part?

MR. BENGZON. Let us hear it.

FR. BERNAS. The reformulation will be essentially the formula of the 1973 Constitution which reads: "THE
PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING BODY OF ANY PUBLIC UTILITY
ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE SHARE IN THE CAPITAL THEREOF
AND…"

MR. VILLEGAS. "ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH CORPORATIONS AND
ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES."

MR. BENGZON. Will Commissioner Bernas read the whole thing again?

FR. BERNAS. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING BODY OF ANY
PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE SHARE IN THE
CAPITAL THEREOF…" I do not have the rest of the copy.

MR. BENGZON. "AND ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH CORPORATIONS
OR ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES." Is that correct?

MR. VILLEGAS. Yes.

MR. BENGZON. Madam President, I think that was said in a more elegant language. We accept the amendment.
Is that all right with Commissioner Rosario Braid?

MS. ROSARIO BRAID. Yes.

THE PRESIDENT. The original authors of this amendment are Commissioners Rosario Braid, de los Reyes,
Regalado, Natividad, Guingona and Fr. Bernas.

MR. DE LOS REYES. The governing body refers to the board of directors and trustees.
MR. VILLEGAS. That is right.

MR. BENGZON. Yes, the governing body refers to the board of directors.

MR. REGALADO. It is accepted.

MR. RAMA. The body is now ready to vote, Madam President.

VOTING

THE PRESIDENT. As many as are in favour of this proposed amendment which should be the last sentence of Section 15
and has been accepted by the committee, pleas raise their hand. (All Members raised their hand.)

As many as are against, please raise their hand. (No Member raised his hand.)

The results show 29 votes in favour and none against; so the proposed amendment is approved. 24

It can be concluded that the view advanced by Justice Carpio is incorrect as the deliberations easily reveal that the intent
of the framers was not to limit the definition of the word "capital" as meaning voting shares/stocks.

The majority in the original decision reproduced the CONCOM deliberations held on August 13 and August 15, 1986, but
neglected to quote the other pertinent portions of the deliberations that would have shed light on the true intent of the
framers of the Constitution.

It is conceded that Proposed Resolution No. 496 on the language of what would be Art. XII of the Constitution contained
the phrase "voting stock or controlling interest," viz:

PROPOSED RESOLUTION NO. 496

RESOLUTION TO INCORPORATE IN THE NEW CONSTITUTION AN ARTICLE ON NATIONAL ECONOMY

AND PATRIMONY

Be it resolved as it is hereby resolved by the Constitutional Commission in session assembled, To incorporate the National
Economy and Patrimony of the new Constitution, the following provisions:

ARTICLE____
NATIONAL ECONOMY AND PATRIMONY

xxxx

SEC. 15. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted
except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines at least
two-thirds of whose voting stock or controlling interest is owned by such citizens. Neither shall any such franchise or
right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by Congress when
the common good so requires. The State shall encourage equity participation in public utilities by the general
public.25 (This became Sec. 11, Art. XII)(Emphasis supplied.)

The aforequoted deliberations disclose that the Commission eventually and unequivocally decided to use "capital,"
which refers to the capital stock of the corporation, "as was employed in the 1935 and 1973 Constitution," instead
of the proposed "voting stock or controlling interest" as the basis for the percentage of ownership allowed to
foreigners. The following exchanges among Commissioners Foz, Suarez and Bengzon reflect this decision, but the
majority opinion in the June 28, 2011 Decision left their statements out:
MR. FOZ. Mr. Vice-President, in Sections 3 and 9,26 the provision on equity is both 60 percent, but I notice that this is
now different from the provision in the 1973 Constitution in that the basis for the equity provision is voting stock or
controlling interest instead of the usual capital percentage as provided for in the 1973 Constitution. We would like to
know what the difference would be between the previous and the proposed provisions regarding equity interest.

xxxx

MR. SUAREZ. x x x As a matter of fact, this particular portion is still being reviewed x x x. In Section 1, Article XIII of
the 1935 Constitution, the wording is that the percentage should be based on the capital which is owned by such
citizens. In the proposed draft, this phrase was proposed: "voting stock or controlling interest." This was a
plan submitted by the UP Law Center.

x x x We would have three criteria to go by: One would be based on capital, which is capital stock of the
corporation, authorized, subscribed or paid up, as employed under the 1935 and the 1973 Constitution. The idea
behind the introduction of the phrase "voting stock or controlling interest" was precisely to avoid the perpetration of
dummies, Filipino dummies of multinationals. It is theoretically possible that a situation may develop where these
multinational interests would not really be only 40 percent but will extend beyond that in the matter of voting because
they could enter into what is known as a voting trust or voting agreement with the rest of the stockholders and, therefore,
notwithstanding the fact that on record their capital extent is only up to 40- percent interest in the corporation, actually,
they would be managing and controlling the entire company. That is why the UP Law Center members suggested that we
utilize the words "voting interest" which would preclude multinational control in the matter of voting, independent of the
capital structure of the corporation. And then they also added the phrase "controlling interest" which up to now they
have not been able to successfully define the exact meaning of. x x x And as far as I am concerned, I am not speaking in
behalf of the Committee, I would feel more comfortable if we go back to the wording of the 1935 and the 1973
Constitution, that is to say, the 60-40 percentage could be based on the capital stock of the corporation.

xxxx

MR. BENGZON. I also share the sentiment of Commissioner Suarez in that respect. So there are already two in the
Committee who want to go back to the wording of the 1935 and the 1973 Constitution. 27

In fact, in another portion of the CONCOM deliberations conveniently glossed over by the June 28, 2011 Decision, then
Commissioner Davide strongly resisted the retention of the term "capital" as used in the 1935 and 1973 Constitution on
the ground that the term refers to both voting and nonvoting. Eventually, however, he came around to accept the use of
"CAPITAL" along with the majority of the members of the Committee on Natural Economy and Patrimony in the
afternoon session held on August 15, 1986:

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

MR. VILLEGAS. We accept the amendment.

MR. TREÑAS. Thank you.

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

Is there any objection? (Silence) The Chair hears none; the amendment is approved.28

xxxx

MR. SUAREZ. x x x Two points are being raised by Commissioner Davide’s proposed amendment. One has reference to
the percentage of holdings and the other one is the basis for the percentage x x x x Is the Commissioner not insisting on
the voting capital stock because that was already accepted by the Committee?
MR. DAVIDE. Would it mean that it would be 100-percent voting capital stock?

MR. SUAREZ. No, under the Commissioner’s proposal it is just "CAPITAL" not "stock."

MR. DAVIDE. No, I want it to be very clear. What is the alternative proposal of the Committee? How shall it read?

MR. SUAREZ. It will only read something like: "the CAPITAL OF WHICH IS FULLY owned."

MR. VILLEGAS. Let me read lines 12 to 14 which state:

… enter into co-production, joint venture, production sharing agreements with Filipino citizens or corporations or
associations at least 60 percent of whose CAPITAL is owned by such citizens.

We are going back to the 1935 and 1973 formulations.

MR. DAVIDE. I cannot accept the proposal because the word CAPITAL should not really be the guiding
principle. It is the ownership of the corporation. It may be voting or not voting, but that is not the guiding
principle.

xxxx

THE PRESIDENT…. Commissioner Davide is to clarify his point.

MR. VILLEGAS. Yes, Commissioner Davide has accepted the word "CAPITAL" in place of "voting stock or
controlling interest." This is an amendment already accepted by the Committee.29

The above exchange precedes the clarifications made by then Commissioner Azcuna, which were cited in the June 28,
2011 Decision. Moreover, the statements made subsequent to the portion quoted in the June 28, 2011 Decision emphasize
the CONCOM’s awareness of the plain meaning of the term "capital" without the qualification espoused in the majority’s
decision:

MR. AZCUNA. May I be clarified as to [what] was accepted x x x.

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

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

MR. VILLEGAS. Yes.

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

MR. VILLEGAS. That is right.

MR. AZCUNA. But the control can be with the foreigners even if they are the minority. Let us say 40 percent of the
capital is owned by them, but it is the voting capital, whereas, the Filipinos own the nonvoting shares. So we can have a
situation where the corporation is controlled by foreigners despite being the minority because they have the voting capital.
That is the anomaly that would result here.

MR. BENGZON. No, the reason we eliminated the word "stock" as stated in the 1973 and 1935 Constitutions is that xxx
there are associations that do not have stocks. That is why we say "CAPITAL."
MR. AZCUNA. We should not eliminate the phrase "controlling interest."

MR. BENGZON. In the case of stock corporation, it is assumed.

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

MR. BENGZON. Yes, that is understood.

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

MR. BENGZON. That is correct.30

More importantly, on the very same August 15, 1986 session, Commissioner Azcuna no longer insisted on retaining the
delimiting phrase "controlling interest":

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

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

MR. VILLEGAS. This is just a correction. I think Commissioner Azcuna is not insisting on the retention of the
phrase "controlling interest," so we will retain "CAPITAL" to go back really to the 1935 and 1973
formulations.31 (Emphasis supplied.)

The later deliberations held on August 22, 1986 further underscore the framers’ true intent to include both voting and non-
voting shares as coming within the pale of the word "capital." The UP Law Center attempted to limit the scope of the
word along the line then and now adopted by the majority, but, as can be gleaned from the following discussion, the
framers opted not to adopt the proposal of the UP Law Center to add the more protectionist phrase "voting stock
or controlling interest":

MR. NOLLEDO. x x x I would like to propound some questions xxx. I have here a copy of the approved provisions on
Article on the National Economy and Patrimony. x x x

I notice that this provision was amended by Commissioner Davide by changing "voting stocks" to "CAPITAL," but I still
notice that there appears the term "controlling interest" x x x. Besides, the wordings may indicate that the 60 percent may
be based not only on capital but also on controlling interest; it could mean 60 percent or 51 percent.

Before I propound the final question, I would like to make a comment in relation to Section 15 since they are related to
each other. I notice that in Section 15, there still appears the phrase "voting stock or controlling interest." The term "voting
stocks" as the basis of the Filipino equity means that if 60 percent of the voting stocks belong to Filipinos, foreigners may
now own more than 40 percent of the capital as long as the 40 percent or the excess thereof will cover nonvoting stock.
This is aside from the fact that under the Corporation Code, even nonvoting shares can vote on certain instances. Control
over investments may cover aspects of management and participation in the fruits of production or exploitation.

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

What does the committee say?

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

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

MR. NOLLEDO. Not only in Section 3, but also with respect to Section 15. 32 (Emphasis supplied.)

In fact, on the very same day of deliberations, the Commissioners clarified that the proper and more specific
"interpretation" that should be attached to the word "capital" is that it refers to the "subscribed capital," a corporate
concept defined as "that portion of the authorized capital stock that is covered by subscription agreements whether fully
paid or not"33 and refers to both voting and non-voting shares:

MR. MAAMBONG. x x x I would like to be clarified on the use of the word "CAPITAL."

MR. VILLEGAS. Yes, that was the word used in the 1973 and the 1935 Constitutions.

MR. MAAMBONG. Let us delimit ourselves to that word "CAPITAL." In the Corporation Law, if I remember correctly,
we have three types of capital: the authorized capital stock, the subscribed capital stock and the paid-up capital stock.

xxxx

I would like to get clarification on this. If I remember my corporation law correctly, we usually use a determinant in
order to find out what the ratio of ownership is, not really on the paid-up capital stock but on the subscribe capital
stock.

xxxx

x x x I would like to know whether (Commissioner Suarez) is determined to put on the record that in order to determine
the 60-40 percent sharing, we have to determine whether we will use a determinant which is the subscribed capital stock
or the paid-up capital stock.

MR. SUAREZ. We are principally concerned about the interpretation which would be attached to it, that is, it
should be limited to authorized capital stock, not to subscribed capital stock.

I will give the Commissioner an illustration of what he is explaining to the Commission.

xxxx

Let us say authorized capital stock is ₱ 1 million. Under the present rules in the [SEC], at least 25 percent of that amount
must be subscribed and at least 25 percent of this subscribed capital must be paid up.

Now, let us discuss the basis of 60-40. To illustrate the matter further, let us say that 60 percent of the subscriptions would
be allocated to Filipinos and 40 percent of the subscribed capital stock would be held by foreigners. Then we come to the
paid-up capitalization. Under the present rules in the [SEC], a foreign corporation is supposed to subscribe to 40-percent
share which must be fully paid up.

On the other hand, the 60 percent allocated to Filipinos need not be paid up. However, at least 25 percent of the
subscription must be paid up for purposes of complying with the Corporation Law. We can illustrate the matter further by
saying that the compliance of 25 percent paid-up of the subscribed capital would be fulfilled by the full payment of the 40
percent by the foreigners.
So, we have a situation where the Filipino percentage of 60 may not even comply with the 25-percent requirement
because of the totality due to the full payment of the 40-percent of the foreign investors, the payment of 25 percent paid-
up on the subscription would have been considered fulfilled. That is exactly what we are trying to avoid.

MR. MAAMBONG. I appreciate very much the explanation but I wonder if the committee would subscribe to that view
because I will stick to my thinking that in the computation of the 60-40 ratio, the basis should be on the subscription. x x x

xxxx

MR. ROMULO. We go by the established rule which I believe is uniformly held. It is based on the subscribed
capital. x x x

xxxx

I do not think that we contradict each other. (Commisioner Suarez) is talking really of the instance where the subscriber is
a non-resident and, therefore, must fully pay. That is how I understand his position.

MR. MAAMBONG. My understanding is that in the computation of the 60-40 sharing under the present formulation, the
determinant is the paid-up capital stock to which I disagree.

MR . ROMULO. At least, from my point of view, it is the subscribed capital stock."34

Clearly, while the concept of voting capital as the norm to determine the 60-40 Filipino-alien ratio was initially debated
upon as a result of the proposal to use "at least two-thirds of whose voting stock or controlling interest is owned by such
citizens,"35 in what would eventually be Sec. 11, Art. XII of the Constitution, that proposal was eventually discarded. And
nowhere in the records of the CONCOM can it be deduced that the idea of full ownership of voting stocks presently
parlayed by the majority was earnestly, if at all, considered. In fact, the framers decided that the term "capital," as used in
the 1935 and 1973 Constitutions, should be properly interpreted as the "subscribed capital," which, again, does not
distinguish stocks based on their board-membership voting features.

Indeed, the phrase "voting stock or controlling interest" was suggested for and in fact deliberated, but was similarly
dropped in the approved draft provisions on National Economy and Patrimony, particularly in what would become
Sections 236 and 10,37 Article XII of the 1987 Constitution. However, the framers expressed preference to the formulation
of the provision in question in the 1935 and 1973 Constitutions, both of which employed the word "capital" alone. This
was very apparent in the aforementioned deliberations and affirmed by amicus curiae Dr. Bernardo Villegas, Chair of the
Committee on the National Economy and Patrimony in charge of drafting Section 11 and the rest of Article XII of the
Constitution. During the June 26, 2012 oral arguments, Dr. Villegas manifested that:

x x x Justice Abad was right. [If i]t was not in the minds of the Commissioners to define capital broadly, these additional
provisions would be meaningless. And it would have been really more or less expressing some kind of a contradiction in
terms. So, that is why I was pleasantly surprised that one of the most pro-Filipino members of the Commission, Atty. Jose
Suarez, who actually voted "NO" to the entire Constitution has only said, was one of the first to insist, during one of the
plenary sessions that we should reject the UP Law Center recommendation. In his words, I quote "I would feel more
comfortable if we go back to the wording of the 1935 and 1970 Constitutions that is to say the 60-40 percentage
could be based on the capital stock of the corporation." The final motion was made by Commissioner Efren Treñas, in
the same plenary session when he moved, "Madam President, may I propose an amendment on line 14 of Section 3 by
deleting therefrom ‘whose voting stock and controlling interest’ and in lieu thereof, insert capital, so the line should read:
"associations of at least sixty percent (60%) of the capital is owned by such citizens." After I accepted the amendment
since I was the chairman of the National Economy Committee, in the name of the Committee, the President of the
Commission asked for any objection. When no one objected, the President solemnly announced that the
amendment had been approved by the Plenary. It is clear, therefore, that in the minds of the Commissioners the
word "capital" in Section 11 of Article XII refers, not to voting stock, but to total subscribed capital, both common
and preferred.38 (Emphasis supplied.)
There was no change in phraseology from the 1935 and
1973 Constitutions, or a transitory provision that signals
such change, with respect to foreign ownership in public
utility corporations (2nd extrinsic aid)

If the framers wanted the word "capital" to mean voting capital stock, their terminology would have certainly been
unmistakably limiting as to leave no doubt about their intention. But the framers consciously and purposely excluded
restrictive phrases, such as "voting stocks" or "controlling interest," in the approved final draft, the proposal of the UP
Law Center, Commissioner Davide and Commissioner Azcuna notwithstanding. Instead, they retained "capital" as "used
in the 1935 and 1973 Constitutions."39 There was, therefore, a conscious design to avoid stringent words that would limit
the meaning of "capital" in a sense insisted upon by the majority. Cassus omissus pro omisso habendus est––a person,
object, or thing omitted must have been omitted intentionally. More importantly, by using the word "capital," the intent of
the framers of the Constitution was to include all types of shares, whether voting or nonvoting, within the ambit of the
word.

History or realities or circumstances prevailing during the

drafting of the Constitution validate the adoption of the plain
meaning of "Capital" (3rd extrinsic aid)

This plain, non-exclusive interpretation of "capital" also comes to light considering the economic backdrop of the 1986
CONCOM when the country was still starting to rebuild the financial markets and regain the foreign investors’ confidence
following the changes caused by the toppling of the Martial Law regime. As previously pointed out, the Court, in
construing the Constitution, must take into consideration the aims of its framers and the evils they wished to avoid and
address. In Civil Liberties Union v. Executive Secretary,40 We held:

A foolproof yardstick in constitutional construction is the intention underlying the provision under consideration. Thus, it
has been held that the Court in construing a Constitution should bear in mind the object sought to be accomplished
by its adoption, and the evils, if any, sought to be prevented or remedied. A doubtful provision will be examined in
the light of the history of the times, and the condition and circumstances under which the Constitution was framed. The
object is to ascertain the reason which induced the framers of the Constitution to enact the particular provision
and the purpose sought to be accomplished thereby, in order to construe the whole as to make the words consonant
to that reason and calculated to effect that purpose. (Emphasis supplied.)

It is, thus, proper to revisit the circumstances prevailing during the drafting period. In an astute observation of the
economic realities in 1986, quoted by respondent Pangilinan, University of the Philippines School of Economics Professor
Dr. Emmanuel S. de Dios examined the nation’s dire need for foreign investments and foreign exchange during the time
when the framers deliberated on what would eventually be the National Economy and Patrimony provisions of the
Constitution:

The period immediately after the 1986 EDSA Revolution is well known to have witnessed the country’s deepest
economic crisis since the Second World War. Official data readily show this period was characterised by the highest
unemployment, highest interest rates, and largest contractions in output the Philippine economy experienced in the
postwar period. At the start of the Aquino administration in 1986, total output had already contracted by more than seven
percent annually for two consecutive years (1984 and 1985), inflation was running at an average of 35 percent,
unemployment more than 11 percent, and the currency devalued by 35 percent.

The proximate reason for this was the moratorium on foreigndebt payments the country had called in late 1983,
effectively cutting off the country’s access to international credit markets (for a deeper contemporary analysis of what
led to the debt crisis, see de Dios 1984). The country therefore had to subsist only on its current earnings from exports,
which meant there was a critical shortage of foreign exchange. Imports especially of capital goods and intermediate
goods therefore had to be drastically curtailed x x x.

For the same reasons, obviously, new foreign investments were unlikely to be forthcoming. This is recorded by
Bautista 2003:158, who writes:
Long-term capital inflows have been rising at double-digit rates since 1980, except during 1986-1990, a time of great
political and economic uncertainty following the period of martial law under President Marcos.

The foreign-exchange controls then effectively in place will have made importing inputs difficult for new enterprises,
particularly foreign investors (especially Japanese) interested in relocating some of theirexport-oriented but import-
dependent operations to the Philippines. x x x The same foreign-exchange restrictions would have made the freedom to
remit profits a dicey affairs. Finally, however, the period was also characterised by extreme political uncertainty, which
did not cease even after the Marcos regime was toppled. 41 x x x

Surely, it was far from the minds of the framers to alienate and disenfranchise foreign investors by imposing an indirect
restriction that only exacerbates the dichotomy between management and ownership without the actual guarantee of
giving control and protection to the Filipino investors. Instead, it can be fairly assumed that the framers intended to avoid
further economic meltdown and so chose to attract foreign investors by allowing them to 40% equity ownership of the
entirety of the corporate shareholdings but, wisely, imposing limits on their participation in the governing body to ensure
that the effective control and ultimate economic benefits still remained with the Filipino shareholders.

Judicial decisions and prior laws use and/or treat

"capital" as "capital stock" (4th extrinsic aid)

That the term "capital" in Sec. 11, Art. XII is equivalent to "capital stock," which encompasses all classes of shares
regardless of their nomenclature or voting capacity, is easily determined by a review of various laws passed prior to the
ratification of the 1987 Constitution. In 1936, for instance, the Public Service Act 42 established the nationality requirement
for corporations that may be granted the authority to operate a "public service," 43 which include most of the present-day
public utilities, by referring to the paid-up "capital stock" of a corporation, viz:

Sec. 16. Proceedings of the Commission, upon notice and hearing. – The Commission shall have power, upon proper
notice and hearing in accordance with the rules and provisions of this Act, subject to the limitations and exceptions
mentioned and saving provisions to the contrary:

(a) To issue certificates which shall be known as certificates of public convenience, authorizing the
operation of public service within the Philippines whenever the Commission finds that the operation of
the public service proposed and the authorization to do business will promote the public interest in a
proper and suitable manner. Provided, That thereafter, certificates of public convenience and
certificates of public convenience and necessity will be granted only to citizens of the Philippines or
of the United States or to corporations, co-partnerships, associations or joint-stock companies
constituted and organized under the laws of the Philippines; Provided, That sixty per centum of the
stock or paid-up capital of any such corporations, co-partnership, association or joint-stock
company must belong entirely to citizens of the Philippines or of the United States: Provided, further,
That no such certificates shall be issued for a period of more than fifty years. (Emphasis supplied.)

The heading of Sec. 2 of Commonwealth Act No. (CA) 108, or the Anti-Dummy Law, which was approved on October
30, 1936, similarly conveys the idea that the term "capital" is equivalent to "capital stock" 44:

Section 2. Simulation of minimum capital stock — In all cases in which a constitutional or legal provision requires
that, in order that a corporation or association may exercise or enjoy a right, franchise or privilege, not less than a
certain per centum of its capital must be owned by citizens of the Philippines or of any other specific country, it shall
be unlawful to falsely simulate the existence of such minimum stock or capital as owned by such citizens, for the
purpose of evading said provision. The president or managers and directors or trustees of corporations or associations
convicted of a violation of this section shall be punished by imprisonment of not less than five nor more than fifteen years,
and by a fine not less than the value of the right, franchise or privilege, enjoyed or acquired in violation of the provisions
hereof but in no case less than five thousand pesos. 45 (Emphasis and underscoring supplied.)

Pursuant to these legislative acts and under the aegis of the Constitutional nationality requirement of public utilities then
in force, Congress granted various franchises upon the understanding that the "capital stock" of the grantee is at least 60%
Filipino. In 1964, Congress, via Republic Act No. (RA) 4147,46 granted Filipinas Orient Airway, Inc. a legislative
franchise to operate an air carrier upon the understanding that its "capital stock" was 60% percent Filipino-owned. Section
14 of RA 4147, provided:

Sec. 14. This franchise is granted with the understanding that the grantee is a corporation sixty per cent of the capital
stock of which is the bona fide property of citizens of the Philippines and that the interest of such citizens in its capital
stock or in the capital of the Company with which it may merge shall at no time be allowed to fall below such percentage,
under the penalty of the cancellation of this franchise. (Emphasis and underscoring supplied.)

The grant of a public utility franchise to Air Manila. Inc. to establish and maintain air transport in the country a year later
pursuant to RA 450147 contained exactly the same Filipino capitalization requirement imposed in RA 4147:

Sec. 14. This franchise is granted with the understanding that the grantee is a corporation, sixty per cent of the capital
stock of which is owned or the bona fide property of citizens of the Philippines and that the interest of such citizens in
its capital stock or in the capital of the company with which it may merge shall at no time be allowed to fall below such
percentage, under the penalty of the cancellation of this franchise. (Emphasis and underscoring supplied.)

In like manner, RA 5514,48 which granted a franchise to the Philippine Communications Satellite Corporation in 1969,
required of the grantee to execute management contracts only with corporations whose "capital or capital stock" are at
least 60% Filipino:

Sec. 9. The grantee shall not lease, transfer, grant the usufruct of, sell or assign this franchise to any person or entity,
except any branch or instrumentality of the Government, without the previous approval of the Congress of the Philippines:
Provided, That the grantee may enter into management contract with any person or entity, with the approval of the
President of the Philippines: Provided, further, That such person or entity with whom the grantee may enter into
management contract shall be a citizen of the Philippines and in case of an entity or a corporation, at least sixty per
centum of the capital or capital stock of which is owned by citizens of the Philippines. (Emphasis supplied.)

In 1968, RA 5207,49 otherwise known as the "Atomic Energy Regulatory Act of 1968," considered a corporation sixty
percent of whose capital stock as domestic:

Sec. 9. Citizenship Requirement. No license to acquire, own, or operate any atomic energy facility shall be issued to an
alien, or any corporation or other entity which is owned or controlled by an alien, a foreign corporation, or a foreign
government.

For purposes of this Act, a corporation or entity is not owned or controlled by an alien, a foreign corporation of a
foreign government if at least sixty percent (60%) of its capital stock is owned by Filipino citizens. (Emphasis
supplied.)

Anent pertinent judicial decisions, this Court has used the very same definition of capital as equivalent to the entire capital
stockholdings in a corporation in resolving various other issues. In National Telecommunications Commission v. Court
of Appeals,50 this Court, thus, held:

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 be, 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 loosely be termed
as the "trust fund" of the corporation. The "Trust Fund" doctrine considers this subscribed capital as a trust fund for the
payment of the debts of the corporation, to which the creditors may look for satisfaction. Until the liquidation of the
corporation, no part of the subscribed capital may be returned or released to the stockholder (except in the redemption of
redeemable shares) without violating this principle. Thus, dividends must never impair the subscribed capital; subscription
commitments cannot be condoned or remitted; nor can the corporation buy its own shares using the subscribed capital as
the consideration therefor.51
This is similar to the holding in Banco Filipino v. Monetary Board52 where the Court treated the term "capital" as
including both common and preferred stock, which are usually deprived of voting rights:

It is clear from the law that a solvent bank is one in which its assets exceed its liabilities. It is a basic accounting principle
that assets are composed of liabilities and capital. The term "assets" includes capital and surplus" (Exley v. Harris, 267 p.
970, 973, 126 Kan., 302). On the other hand, the term "capital" includes common and preferred stock, surplus
reserves, surplus and undivided profits. (Manual of Examination Procedures, Report of Examination on Department of
Commercial and Savings Banks, p. 3-C). If valuation reserves would be deducted from these items, the result would
merely be the networth or the unimpaired capital and surplus of the bank applying Sec. 5 of RA 337 but not the total
financial condition of the bank.

In Commissioner of Internal Revenue v. Court of Appeals,53 the Court alluded to the doctrine of equality of shares in
resolving the issue therein and held that all shares comprise the capital stock of a corporation:

A common stock represents the residual ownership interest in the corporation. It is a basic class of stock ordinarily and
usually issued without extraordinary rights or privileges and entitles the shareholder to a pro rata division of profits.
Preferred stocks are those which entitle the shareholder to some priority on dividends and asset distribution. Both shares
are part of the corporation’s capital stock. Both stockholders are no different from ordinary investors who take on
the same investment risks. Preferred and common shareholders participate in the same venture, willing to share in
the profit and losses of the enterprise. Moreover, under the doctrine of equality of shares --- all stocks issued by the
corporation are presumed equal with the same privileges and liabilities, provided that the Articles of Incorporation is
silent on such differences.54 (Emphasis supplied.)

The SEC has reflected the popular contemporaneous

construction of capital in computing the nationality
requirement based on the total capital stock, not only
the voting stock, of a corporation (5th extrinsic aid)

The SEC has confirmed that, as an institution, it has always interpreted and applied the 40% maximum
foreign ownership limit for public utilities to the total capital stock, and not just its total voting stock.

In its July 29, 2011 Manifestation and Omnibus Motion, the SEC reaffirmed its longstanding practice and history of
enforcement of the 40% maximum foreign ownership limit for public utilities, viz:

5. The Commission respectfully submits that it has always performed its duty under Section 17(4) of the Corporation
Code to enforce the foreign equity restrictions under Section 11, Article XII of the Constitution on the ownership of
public utilities.

xxxx

8. Thus, in determining compliance with the Constitutional restrictions on foreign equity, the Commission
consistently construed and applied the term "capital" in its commonly accepted usage, that is – the sum total of the
shares subscribed irrespective of their nomenclature and whether or not they are voting or non-voting (Emphasis
supplied).

9. This commonly accepted usage of the term ‘capital’ is based on persuasive authorities such as the widely
esteemed Fletcher Cyclopedia of the Law of Private Corporations, and doctrines from American Jurisprudence. To
illustrate, in its Opinion dated February 15, 1988 addresses to Gozon, Fernandez, Defensor and Associates, the
Commission discussed how the term ‘capital’ is commonly used:

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

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

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

10. Further, in adopting this common usage of the term ‘capital,’ the Commission believed in good faith and with sound
reasons that it was consistent with the intent and purpose of the Constitution. In an Opinion dated 27 December 1995
addressed to Joaquin Cunanan & Co. the Commission observed that:

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

11. The foregoing settled principles and esteemed authorities relied upon by the Commission show that its interpretation
of the term ‘capital’ is reasonable.

12. And, it is well settled that courts must give due deference to an administrative agency’s reasonable interpretation of
the statute it enforces.55

It should be borne in mind that the SEC is the government agency invested with the jurisdiction to determine at the first
instance the observance by a public utility of the constitutional nationality requirement prescribed vis-à-vis the ownership
of public utilities56 and to interpret legislative acts, like the FIA. The rationale behind the doctrine of primary jurisdiction
lies on the postulate that such administrative agency has the "special knowledge, experience and tools to determine
technical and intricate matters of fact…" 57 Thus, the determination of the SEC is afforded great respect by other executive
agencies, like the Department of Justice (DOJ), 58 and by the courts.

Verily, when asked as early as 1988– "Would it be legal for foreigners to own in a public utility entity more than 40% of
the common shares but not more than 40% of the total outstanding capital stock which would include both common and
non-voting preferred shares?" –the SEC, citing Fletcher, invariably answered in the affirmative, whether the poser was
made in light of the present or previous Constitutions:

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

"No franchise, certificate, or any form of authorization for the operation of a public utility shall be granted except to
citizens of the Philippines, or to corporations or associations organized under the laws of the Philippines at least sixty per
centum of whose capital is owned by such citizens. . ." x x x
The issue raised on your letter zeroes in on the meaning of the word "capital" as used in the above constitutional
provision. Anent thereto, please be informed that the term "capital" as applied to corporations, refers to the money,
property or means contributed by stockholders as the form or basis for the business or enterprise for which the corporation
was formed and generally implies that such money or property or means have been contributed in payment for stock
issued to the contributors. (United Grocers, Ltd. v. United States F. Supp. 834, cited in 11 Fletcher, Cyc. Corp., 1986, rev.
vol., sec. 5080 at 18). As further ruled by the court, "capital of a corporation is the fund or other property, actually or
potentially in its possession, derived or to be derived from the sale by it of shares of its stock or his exchange by it for
property other than money. This fund includes not only money or other property received by the corporation for shares of
stock but all balances of purchase money, or installments, due the corporation for shares of stock sold by it, and all unpaid
subscriptions for shares." (Williams v. Brownstein, 1F. 2d 470, cited in 11 Fletcher, Cyc. Corp., 1058 rev. vol., sec. 5080,
p. 21).

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

The Commission, in a previous opinion, ruled that the term ‘capital’ denotes the sum total of the shares subscribed
and paid by the shareholders or served to be paid, irrespective of their nomenclature. (Letter to Supreme
Technotronics Corporation, dated April 14, 1987). Hence, your query is answered in the affirmative. 59 (Emphasis
supplied.)

As it were, the SEC has held on the same positive response long before the 1987 Constitution came into effect, a matter of
fact which has received due acknowledgment from this Court. In People v. Quasha,60 a case decided under the 1935
Constitution, this Court narrated that in 1946 the SEC approved the incorporation of a common carrier, a public utility,
where Filipinos, while not holding the controlling vote, owned the majority of the capital, viz:

The essential facts are not in dispute. On November 4, 1946, the Pacific Airways Corporation registered its articles of
incorporation with the [SEC]. The articles were prepared and the registration was effected by the accused, who was in fact
the organizer of the corporation. The articles stated that the primary purpose of the corporation was to carry on the
business of a common carrier by air, land, or water, that its capital stock was ₱ 1,000,000, represented by 9,000
preferred and 100,000 common shares, each preferred share being of the par value of ₱ 100 and entitled to 1/3 vote
and each common share, of the par value of ₱ 1 and entitled to one vote; that the amount of capital stock actually
subscribed was ₱ 200,000, and the names of the subscriber were Arsenio Baylon, Eruin E. Shannahan, Albert W. Onstott,
James O’bannon, Denzel J. Cavin, and William H. Quasha, the first being a Filipino and the other five all
Americans; that Baylon’s subscription was for 1,145 preferred shares, of the total value of ₱ 114,500 and 6,500 common
shares, of the total par value of ₱ 6,500, while the aggregate subscriptions of the American subscribers were for 200
preferred shares, of the total par value of ₱ 20,000 and 59,000 common shares, of the total par value of ₱ 59,000; and that
Baylon and the American subscribers had already paid 25 percent of their respective subscriptions. Ostensibly the owner
of, or subscriber to, 60.005 per cent of the subscribed capital stock of the corporation, Baylon, did not have the
controlling vote because of the difference in voting power between the preferred shares and the common shares.
Still, with the capital structure as it was, the articles of incorporation were accepted for registration and a
certificate of incorporation was issued by the [SEC]. (Emphasis supplied.)

The SEC has, through the years, stood by this interpretation. In an Opinion dated November 21, 1989, the SEC held that
the basis of the computation for the nationality requirement is the total outstanding capital stock, to wit:

As to the basis of computation of the 60-40 percentage nationality requirement under existing laws (whether it should be
based on the number of shares or the aggregate amount in pesos of the par value of the shares), the following definitions
of corporate terms are worth mentioning.

"The term capital stock signifies the aggregate of the shares actually subscribed". (11 Fletcher, Cyc. Corps. (1971 Rev.
Vol.) sec. 5082, citing Goodnow v. American Writing Paper Co., 73 NJ Eq. 692, 69 A 1014 aff'g 72 NJ Eq. 645, 66 A,
607).
"Capital stock means the capital subscribed (the share capital)". (Ibid., emphasis supplied).

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

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

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

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

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

Then came SEC-OGC Opinion No. 08-14 dated June 02, 2008:

The instant query now centers on whether both voting and nonvoting shares are included in the computation of the
required percentage of Filipino equity, As a rule, the 1987 Constitution does not distinguish between voting and non-
voting shares with regard to the computation of the percentage interest by Filipinos and non-Filipinos in a company. In
other words, non-voting shares should be included in the computation of the foreign ownership limit for domestic
corporation. This was the rule applied [in SEC Opinion No. 04-30 x x x It was opined therein that the ownership of the
shares of stock of a corporation is based on the total outstanding or subscribed/issued capital stock regardless of whether
they are classified as common voting shares or preferred shares without voting rights. This is in line with the policy of the
State to develop an independent national economy effectively controlled by Filipinos. x x x (Emphasis added.)

The SEC again echoed the same interpretation in an Opinion issued last April 19, 2011 wherein it stated, thus:

This is, thus, the general rule, such that when the provision merely uses the term "capital" without qualification (as in
Section 11, Article XII of the 1987 Constitution, which deals with equity structure in a public utility company), the same
should be interpreted to refer to the sum total of the outstanding capital stock, irrespective of the nomenclature or
classification as common, preferred, voting or non-voting. 61

The above construal is in harmony with the letter and spirit of Sec. 11, Art. XII of the Constitution and its counterpart
provisions in the 1935 and 1973 Constitution and, thus, is entitled to respectful consideration. As the Court declared
in Philippine Global Communications, Inc. v. Relova:62

x x x As far back as In re Allen, (2 Phil. 630) a 1903 decision, Justice McDonough, as ponente, cited this excerpt from the
leading American case of Pennoyer v. McConnaughy, decided in 1891: "The principle that the contemporaneous
construction of a statute by the executive officers of the government, whose duty it is to execute it, is entitled to
great respect, and should ordinarily control the construction of the statute by the courts, is so firmly embedded in
our jurisprudence that no authorities need be cited to support it.’ x x x There was a paraphrase by Justice Malcolm of such
a pronouncement in Molina v. Rafferty, (37 Phil. 545) a 1918 decision:" Courts will and should respect the
contemporaneous construction placed upon a statute by the executive officers whose duty it is to enforce it, and unless
such interpretation is clearly erroneous will ordinarily be controlled thereby. (Ibid, 555) Since then, such a doctrine has
been reiterated in numerous decisions.63 (Emphasis supplied.)

Laxamana v. Baltazar64 restates this long-standing dictum: "[w]here a statute has received a contemporaneous and
practical interpretation and the statute as interpreted is re-enacted, the practical interpretation is accorded greater weight
than it ordinarily receives, and is regarded as presumptively the correct interpretation of the law. The rule here is based
upon the theory that the legislature is acquainted with the contemporaneous interpretation of a statute, especially when
made by an administrative body or executive officers charged with the duty of administering or enforcing the law, and
therefore impliedly adopts the interpretation upon re-enactment." 65 Hence, it can be safely assumed that the framers, in the
course of deliberating the 1987 Constitution, knew of the adverted SEC interpretation.

Parenthetically, it is immaterial whether the SEC opinion was rendered by the banc or by the SEC-Office of the General
Counsel (OGC) considering that the latter has been given the authority to issue opinions on the laws that the SEC
implements under SEC-EXS. Res. No. 106, Series of 2002.66 The conferment does not violate Sec. 4.667 of the Securities
and Regulation Code (SRC) that proscribes the non-delegation of the legislative rule making power of the SEC, which is
in the nature of subordinate legislation. As may be noted, the same Sec. 4.6 does not mention the SEC’s power to issue
interpretative "opinions and provide guidance on and supervise compliance with such rules," 68 which is incidental to the
SEC’s enforcement functions. A legislative rule and an interpretative rule are two different concepts and the distinction
between the two is established in administrative law. 69 Hence, the various opinions issued by the SEC-OGC deserve as
much respect as the opinions issued by the SEC en banc.

Nonetheless, the esteemed ponente posits that the SEC, contrary to its claim, has been less than consistent in its construal
of "capital." During the oral arguments, he drew attention to various SEC Opinions, nine (9) to be precise, that
purportedly consider "capital" as referring only to voting stocks.

Refuting this position, the SEC in its Memorandum dated July 25, 2012 explained in some detail that the Commission
has been consistent in applying the term "capital" to the total outstanding capital stock, whether voting or non-
voting. The SEC Opinions referred to by Justice Carpio, which cited the provisions of the FIA, is not, however, pertinent
or decisive of the issue on the meaning of "capital." The said SEC Memorandum states:

During the oral arguments held on 26 June 2012, the SEC was directed to explain nine (9) of its Opinions in relation to the
definition of "capital" as used in Section 11, Article XII of the Constitution, namely: (1) Opinion dated 3 March 1993 for
Mr. Francis F. How; (2) Opinion dated 14 April 1993 for Director Angeles T. Wong; (3) Opinion dated 23 November
1993 for Mssrs. Dominador Almeda and Renato S. Calma; (4) Opinion dated 7 December 1993 for Roco Buñag Kapunan
Migallos & Jardeleza Law Offices; (5) Opinion dated 22 December 2004 for Romulo Mabanta Buenaventura Sayoc & De
Los Angeles; (6) Opinion dated 27 September 2007 for Reynaldo G. David; (7) Opinion dated 28 November 2007 for
Santiago & Santiago law Offices; (8) Opinion dated 15 January 2008 for Attys. Ruby Rose J. Yusi and Rudyard S.
Arbolado; and (9) Opinion dated 18 August 2010 for Castillo Laman Tan Pantaleon & San Jose.

xxxx

With due respect, the issue of whether "capital" refers to outstanding capital stock or only voting stocks was never
raised in the requests for these opinions. In fact, the definition of "capital" could not have been a relevant and/or a
material issue in some of these opinions because the common and preferred shares involved have the same voting rights.
Also, some Opinions mentioned the FIA to emphasize that the said law mandates the application of the Control Test.
Moreover, these Opinions state they are based solely on the facts disclosed and relevant only to the issues raised therein.

For one, the Opinion dated 3 March 1993 for Mr. Francis F. How does not discuss whether "capital" refers to total
outstanding capital stock or only voting stocks. Instead, it talks about the application of the Control test in a mining
corporation by looking into the nationality of its investors. The FIA is not mentioned to provide a definition of
"capital," but to explain the nationality requirement pertinent to investors of a mining corporation.

The Opinion dated 14 April 1993 for Dir. Angeles T. Wong also does not define "capital" as referring to total
outstanding capital or only to voting shares, but talks about the application of the Control Test x x x. The FIA is
again mentioned only to explain the nationality required of investors of a corporation engaged in overseas recruitment.

The Opinion dated 23 November 1993 for Mssrs. Dominador Almeda and Renato S. Calma distinguishes between the
nationality of a corporation as an investing entity and the nationality of a corporation as an investee corporation.
The FIA is mentioned only in the discussion of the nationality of the investors of a corporation owning land in the
Philippines, composed of a trustee for pension or other employee retirement or separation benefits, where the trustee is a
Philippine national and at least sixty percent (60%) of the fund will accrue to the benefit of Philippine nationals, and
another domestic corporation which is 100% foreign owned.
Unlike the Decision rendered by this Honorable Court on 28 June 2011, the Opinion dated 07 December 1993 for Roco
Buñag Kapunan Migallos & Jardeleza does not parley on the issue of the proper interpretation of "capital" because
it is not a relevant and/or a material issue in this opinion xxx. The FIA is mentioned only to explain the application
of the control test. Note, however, that manufacturing fertilizer is neither a nationalized or partly nationalized activity,
which is another reason why this Opinion has no relevance in this case.

The Opinion dated 22 December 2004 for Romulo Mabanta Buenaventura Sayoc & De Los Angeles focuses on the
nationality of the investors of a corporation that will acquire land wherein one of the investors is a foundation. It confirms
the view that the test for compliance with the nationality requirement is based on the total outstanding capital
stock irrespective of the amount of the par value of shares. The FIA is used merely to justify the application of the
Control Test as adopted in the Department of Justice Opinion, No. 18, Series of 1989, dated 19 January 1989m viz –

xxxx

The Opinion dated 27 September 2007 for Mr. Reynaldo G. David, likewise, does not discuss whether "capital" refers
to total outstanding capital stock or only to voting stocks, but rather whether the Control Test is applicable in
determining the nationality of the proposed corporate bidder or buyer of PNOC-EDC shares. x x x The FIA was
cited only to emphasize that the said law mandates the application of the Control Test.

The Opinion dated 28 November 2007 for Santiago & Santiago Law Offices maintains and supports the position of the
Commission that Section 11, Article XII of the Constitution makes no distinction between common and preferred
shares, thus, both shares should be included in the computation of the foreign equity cap for domestic
corporations. Simply put, the total outstanding capital stock, without regard to how the shares are classified, should be
used as the basis in determining the compliance by public utilities with the nationality requirement as provided for in
Section 11, Article XII of the Constitution. Notably, all shares of the subject corporation, Pilipinas First, have voting
rights, whether common or preferred. Hence, the issue on whether "capital" refers to total outstanding capital stock or
only to voting stocks has no relevance in this Opinion.

In the same way, the Opinion dated 15 January 2008 for Attys. Ruby Rose J. Yusi and Rudyard S. Arbolada never
discussed whether "capital" refers to outstanding capital stock or only to voting stocks, but rather whether the
Control Test is applicable or not. The FIA was used merely to justify the application of the Control Test. More
importantly, the term "capital" could not have been relevant and/or material issue in this Opinion because the common
and preferred shares involved have the same voting rights.

The Opinion dated 18 August 2010 for Castillo Laman Tan Pantaleon & San Jose reiterates that the test for compliance
with the nationality requirement is based on the total outstanding capital stock, irrespective of the amount of the
par value of the shares. The FIA is mentioned only to explain the application of the Control Test and the
Grandfather Rule in a corporation owning land in the Philippines by looking into the nationality of its investors.
(Emphasis supplied).70

In view of the foregoing, it is submitted that the long-established interpretation and mode of computing by the SEC of the
total capital stock strongly recognize the intent of the framers of the Constitution to allow access to much-needed foreign
investments confined to 40% of the capital stock of public utilities.

Consequences of alternative interpretation: mischievous

effects of the construction proposed in the petition and
sustained in the June 28, 2011 Decision. (6th extrinsic aid)

Filipino shareholders will not

control the fundamental corporate
matters nor own the majority
economic benefits of the public
utility corporation.
Indeed, if the Court persists in adhering to the rationale underlying the majority’s original interpretation of "capital" found
in the first sentence of Section 11, Article XII, We may perhaps be allowing Filipinos to direct and control the daily
business of our public utilities, but would irrevocably and injudiciously deprive them of effective "control" over the
major and equally important corporate decisions and the eventual beneficial ownership of the corporate assets that
could include, among others, claim over our soil––our land. This undermines the clear textual commitment under the
Constitution that reserves ownership of disposable lands to Filipino citizens. The interplay of the ensuing provisions of
Article XII is unmistakable:

SECTION 2. All lands of the public domain x x x forests or timber, wildlife, flora and fauna, and other natural resources
are owned by the State. With the exception of agricultural lands, all other natural resources shall not be alienated. The
exploration, development, and utilization of natural resources shall be under the full control and supervision of the
State. x x x

xxxx

SECTION 3. Lands of the public domain are classified into agricultural, forest or timber, mineral lands, and national
parks. Agricultural lands of the public domain may be further classified by law according to the uses which they may be
devoted. Alienable lands of the public domain shall be limited to agricultural lands. Private corporations or associations
may not hold such alienable lands except by lease, for a period not exceeding twenty-five years, renewable for not more
than twenty-five years, and not to exceed one thousand hectares in area. Citizens of the Philippines may lease not more
than five hundred hectares, or acquire not more than twelve hectares thereof by purchase, homestead or grant.

xxxx

SECTION 7. Save in cases of hereditary succession, no private lands shall be transferred or conveyed except to
individuals, corporations or associations qualified to acquire or hold lands of the public domain. (Emphasis
supplied.)

Consider the hypothetical case presented in the original ponencia:

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

Albeit trying not to appear to, the majority actually finds fault in the wisdom of, or motive behind, the provision in
question through "highly unlikely scenarios of clinical extremes," to borrow from Veterans Federation Party v.
COMELEC.71 It is submitted that the flip side of the ponencia’s hypothetical illustration, which will be exhaustively
elucidated in this opinion, is more anomalous and prejudicial to Filipino interests.

For instance, let us suppose that the authorized capital stock of a public utility corporation is divided into 100 common
shares and 1,000,000 non-voting preferred shares. Since, according to the Court’s June 28, 2011 Decision, the word
"capital" in Sec. 11, Art. XII refers only to the voting shares, then the 40% cap on foreign ownership applies only to the
100 common shares. Foreigners can, therefore, own 100% of the 1,000,000 nonvoting preferred shares. But then again,
the ponencia continues, at least, the "control" rests with the Filipinos because the 60% Filipino-owned common shares
will necessarily ordain the majority in the governing body of the public utility corporation, the board of directors/trustees.
Hence, Filipinos are assured of control over the day-to-day activities of the public utility corporation.

Let us, however, take this corporate scenario a little bit farther and consider the irresistible implications of changes and
circumstances that are inevitable and common in the business world. Consider the simple matter of a possible investment
of corporate funds in another corporation or business, or a merger of the public utility corporation, or a possible
dissolution of the public utility corporation. Who has the "control" over these vital and important corporate
matters? The last paragraph of Sec. 6 of the Corporation Code provides:
Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such
(non-voting) shares shall nevertheless be entitled to vote on the following matters:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;

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

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

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

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

8. Dissolution of the corporation."(Emphasis and underscoring supplied.)

In our hypothetical case, all 1,000,100 (voting and non-voting) shares are entitled to vote in cases involving fundamental
and major changes in the corporate structure, such as those listed in Sec. 6 of the Corporation Code. Hence, with only 60
out of the 1,000,100 shares in the hands of the Filipino shareholders, control is definitely in the hands of the foreigners.
The foreigners can opt to invest in other businesses and corporations, increase its bonded indebtedness, and even dissolve
the public utility corporation against the interest of the Filipino holders of the majority voting shares. This cannot
plausibly be the constitutional intent.

Consider further a situation where the majority holders of the total outstanding capital stock, both voting and non-voting,
decide to dissolve our hypothetical public utility corporation. Who will eventually acquire the beneficial ownership of
the corporate assets upon dissolution and liquidation? Note that Sec. 122 of the Corporation Code states:

Section 122. Corporate liquidation.–Every corporation whose charter expires by its own limitation or is annulled by
forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall
nevertheless be continued as a body corporate for three (3) years… to dispose of and convey its property and to
distribute its assets, but not for the purpose of continuing the business for which it was established.

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

Clearly then, the bulk of the assets of our imaginary public utility corporation, which may include private lands, will go to
the beneficial ownership of the foreigners who can hold up to 40 out of the 100 common shares and the entire 1,000,000
preferred non-voting shares of the corporation. These foreign shareholders will enjoy the bulk of the proceeds of the sale
of the corporate lands, or worse, exercise control over these lands behind the façade of corporations nominally owned by
Filipino shareholders. Bluntly, while the Constitution expressly prohibits the transfer of land to aliens, foreign
stockholders may resort to schemes or arrangements where such land will be conveyed to their dummies or nominees. Is
this not circumvention, if not an outright violation, of the fundamental Constitutional tenet that only Filipinos can own
Philippine land?

A construction of "capital" as referring to the total shareholdings of the company is an acknowledgment of the existence
of numerous corporate control-enhancing mechanisms, besides ownership of voting rights, that limits the proportion
between the separate and distinct concepts of economic right to the cash flow of the corporation and the right to
corporate control (hence, they are also referred to as proportionality-limiting measures). This corporate reality is reflected
in SRC Rule 3(E) of the Amended Implementing Rules and Regulations (IRR) of the SRC and Sec. 3(g) of The Real
Estate Investment Trust Act (REIT) of 2009,72 which both provide that control can exist regardless of ownership of
voting shares. The SRC IRR states:

Control is the power to govern the financial and operating policies of an enterprise so as to obtain benefits from its
activities. Control is presumed to exist when the parent owns, directly or indirectly through subsidiaries, more than one
half of the voting power of an enterprise unless, in exceptional circumstances, it can be clearly demonstrated that such
ownership does not constitute control. Control also exists even when the parent owns one half or less of the voting
power of an enterprise when there is:

i. Power over more than one half of the voting rights by virtue of an agreement with other investors;

ii. Power to govern the financial and operating policies of the enterprise under a statute or
an agreement;

iii. Power to appoint or remove the majority of the members of the board of directors or equivalent
governing body;

iv. Power to cast the majority of votes at meetings of the board of directors or equivalent governing
body. (Emphasis and underscoring supplied.)

As shown above, ownership of voting shares or power alone without economic control of the company does not
necessarily equate to corporate control. A shareholder’s agreement can effectively clip the voting power of a
shareholder holding voting shares. In the same way, a voting right ceiling, which is "a restriction prohibiting shareholders
to vote above a certain threshold irrespective of the number of voting shares they hold," 73 can limit the control that may be
exerted by a person who owns voting stocks but who does not have a substantial economic interest over the company. So
also does the use of financial derivatives with attached conditions to ensure the acquisition of corporate control separately
from the ownership of voting shares, or the use of supermajority provisions in the bylaws and articles of incorporation or
association. Indeed, there are innumerable ways and means, both explicit and implicit, by which the control of a
corporation can be attained and retained even with very limited voting shares, i.e.., there are a number of ways by which
control can be disproportionately increased compared to ownership 74 so long as economic rights over the majority of the
assets and equity of the corporation are maintained.

Hence, if We follow the construction of "capital" in Sec. 11, Art. XII stated in the ponencia of June 28, 2011 and turn a
blind eye to these realities of the business world, this Court may have veritably put a limit on the foreign ownership
of common shares but have indirectly allowed foreigners to acquire greater economic right to the cash flow of
public utility corporations, which is a leverage to bargain for far greater control through the various enhancing
mechanisms or proportionality-limiting measures available in the business world.

In our extremely hypothetical public utility corporation with the equity structure as thus described, since the majority
recognized only the 100 common shares as the "capital" referred to in the Constitution, the entire economic right to the
cash flow arising from the 1,000,000 non-voting preferred shares can be acquired by foreigners. With this economic
power, the foreign holders of the minority common shares will, as they easily can, bargain with the holders of the majority
common shares for more corporate control in order to protect their economic interest and reduce their economic risk in the
public utility corporation. For instance, they can easily demand the right to cast the majority of votes during the meeting
of the board of directors. After all, money commands control.

The court cannot, and ought not, accept as correct a holding that routinely disregards legal and practical considerations as
significant as above indicated. Committing an error is bad enough, persisting in it is worse.

Foreigners can be owners of fully

nationalized industries

Lest it be overlooked, "capital" is an oft-used term in the Constitution and various legislative acts that regulate corporate
entities. Hence, the meaning assigned to it within the context of a constitutional provision limiting foreign ownership in
corporations can affect corporations whose ownership is reserved to Filipinos, or whose foreign equity is limited by law
pursuant to Sec. 10, Art. XII of the Constitution which states:

SECTION 10. The Congress shall, upon recommendation of the economic and planning agency, when the national
interest dictates, reserve to citizens of the Philippines or to corporations or associations at least sixty per centum of
whose capital is owned by such citizens, or such higher percentage as Congress may prescribe, certain areas of
investments. The Congress shall enact measures that will encourage the formation and operation of enterprises
whose capital is wholly owned by Filipinos. (Emphasis supplied).

For instance, Republic Act No. 7042, also known as the Foreign Investments Act of 199175 (FIA), provides for the
formation of a Regular Foreign Investment Negative List (RFINL) covering investment areas/activities that are partially
or entirely reserved to Filipinos. The 8th RFINL76 provides that "No Foreign Equity" is allowed in the following areas of
investments/activities:

1. Mass Media except recording (Article XVI, Section 1 of the Constitution and Presidential Memorandum dated May 4,
1994);

2. Practice of all professions (Article XII, Section 14 of the Constitution and Section 1, RA 5181); 77

3. Retail trade enterprises with paid-up capital of less than $2,500,000 (Section 5, RA 8762);

4. Cooperatives (Chapter III, Article 26, RA 6938);

5. Private Security Agencies (Section 4, RA 5487);

6. Small-scale Mining (Section 3, RA 7076)

7. Utilization of Marine Resources in archipelagic waters, territorial sea, and exclusive economic zone as well as small
scale utilization of natural resources in rivers, lakes, bays, and lagoons (Article XII, Section 2 of the Constitution);

8. Ownership, operation and management of cockpits (Section 5, PD 449);

9. Manufacture, repair, stockpiling and/or distribution of nuclear weapons (Article II, Section 8 of the Constitution);

10. Manufacture, repair, stockpiling and/or distribution of biological, chemical and radiological weapons and anti-
personnel mines (Various treaties to which the Philippines is a signatory and conventions supported by the Philippines);

11. Manufacture of fire crackers and other pyrotechnic devices (Section 5, RA 7183).

If the construction of "capital," as espoused by the June 28, 2011 Decision, were to be sustained, the reservation of the full
ownership of corporations in the foregoing industries to Filipinos could easily be negated by the simple expedience of
issuing and making available non-voting shares to foreigners. After all, these non-voting shares do not, following the June
28, 2011 Decision, form part of the "capital" of these supposedly fully nationalized industries. Consequently, while
Filipinos can occupy all of the seats in the board of directors of corporations in fully nationalized industries, it is possible
for foreigners to own the majority of the equity of the corporations through "non-voting" shares, which are nonetheless
allowed to determine fundamental corporate matters recognized in Sec. 6 of the Corporation Code. Filipinos may
therefore be unwittingly deprived of the "effective" ownership of corporations supposedly reserved to them by the
Constitution and various laws.

The Foreign Investments Act of 1991 does

not qualify or restrict the meaning of "capital"
in Sec. 11, Art. XII of the Constitution.

Nonetheless, Justice Carpio parlays the thesis that the FIA, and its predecessors, the Investments Incentives Act of 1967
("1967 IIA"),78 Omnibus Investments Code of 1981 ("1981 OIC"),79 and the Omnibus Incentives Code of 1987 ("1987
OIC"),80 (collectively, "Investment Incentives Laws") more particularly their definition of the term "Philippine National,"
constitutes a good guide for ascertaining the intent behind the use of the term "capital" in Sec. 11, Art. XII—that it refers
only to voting shares of public utility corporations.

I cannot share this posture. The Constitution may only be amended through the procedure outlined in the basic
document itself.81 An amendment cannot, therefore, be made through the expedience of a legislative action that
diagonally opposes the clear provisions of the Constitution.

Indeed, the constitutional intent on the equity prescribed by Sec. 11, Art. XII cannot plausibly be fleshed out by a look
through the prism of economic statutes passed after the adoption of the Constitution, such as the cited FIA,
the Magna Carta for Micro, Small and Medium Industries (Republic Act No. 6977) and other kindred laws envisaged to
Filipinize certain areas of investment. It should be the other way around. Surely, the definition of a "Philippine National"
in the FIA, or for that matter, the 1987 OIC82 could not have influenced the minds of the 1986 CONCOM or the people
when they ratified the Constitution. As heretofore discussed, the primary source whence to ascertain constitutional intent
or purpose is the constitutional text, or, to be more precise, the language of the provision itself, 83 as inquiry on any
controversy arising out of a constitutional provision ought to start and end as much as possible with the provision
itself.84 Legislative enactments on commerce, trade and national economy must be so construed, when appropriate,
to determine whether the purpose underlying them is in accord with the policies and objectives laid out in the
Constitution. Surely, a law cannot validly broaden or restrict the thrust of a constitutional provision unless
expressly sanctioned by the Constitution itself. And the Court may not read into the Constitution an intent or purpose
that is not there. Any attempt to enlarge the breadth of constitutional limitations beyond what its provision dictates should
be stricken down.

In fact, it is obvious from the FIA itself that its framers deemed it necessary to qualify the term "capital" with the phrase
"stock outstanding and entitled to vote" in defining a "Philippine National" in Sec. 3(a). This only supports the construal
that the term "capital," standing alone as in Sec. 11, Art. XII of the Constitution, applies to all shares, whether classified as
voting or non-voting, and this is the interpretation in harmony with the Constitution.

In passing the FIA, the legislature could not have plausibly intended to restrict the 40% foreign ownership limit imposed
by the Constitution on all capital stock to only voting stock. Precisely, Congress enacted the FIA to liberalize the laws on
foreign investments. Such intent is at once apparent in the very title of the statute, i.e., "An Act to Promote Foreign
Investments," and the policy: "attract, promote and welcome productive investments from foreign individuals,
partnerships, corporations, and government,"85 expresses the same.

The Senate, through then Senator Vicente Paterno, categorically stated that the FIA is aimed at "liberalizing foreign
investments"86 because "Filipino investment is not going to be enough [and] we need the support and the assistance of
foreign investors x x x."87 The senator made clear that "the term ‘Philippine national’" means either Filipino citizens or
enterprises of which the "total Filipino ownership" is 60 percent or greater, thus:

Senator Paterno. May I first say that the term "Philippine national" means either Filipino citizens or enterprises of
which the total Filipino ownership is 60 percent or greater. In other words, we are not excluding foreign participation
in domestic market enterprises with total assets of less than ₱ 25 million. We are merely limiting foreign participation to
not more than 40 percent in this definition.88

Even granting, arguendo, that the definition of a "Philippine National" in the FIA was lifted from the Investment
Incentives Laws issued in 1967, 1981, and 1987 that defined "Philippine National" as a corporation 60% of whose voting
stocks is owned by Filipino citizens, such definition does not limit or qualify the nationality requirement prescribed for
public utility corporations by Sec. 11, Art. XII of the 1987 Constitution. The latter does not refer to the definition of a
"Philippine National." Instead, Sec. 11, Art. XII reiterates the use of the unqualified term "capital" in the 1935 and
1973 Constitutions. In fact, neither the 1973 Constitutional Convention nor the 1986 CONCOM alluded to the Investment
Incentives Laws in their deliberations on the nationality requirement of public utility corporations. With the unequivocal
rejection of the UP Law Center proposal to use the qualifying "voting stock or controlling interest," the non-consideration
of the Investment Incentives Laws means that these laws are not pertinent to the issue of the Filipino-foreign capital ratio
in public utility corporations.
Besides, none of the Investment Incentives Laws defining a "Philippine National" has sought to expand or modify the
definition of "capital," as used in the Constitutions then existing. The definition of a "Philippine National" in these laws
was, to stress, only intended to identify the corporations qualified for registration to avail of the incentives prescribed
therein. The definition was not meant to find context outside the scope of the various Investment Incentives Laws, much
less to modify a nationality requirement set by the then existing Constitution. This much is obvious in the very heading of
the first of these Investment Incentives Laws, 1967 IIA :

SECTION 3. Definition of Terms. - For purposes of this Act:

xxxx

(f) "Philippine National" shall mean a citizen of the Philippines; or a partnership or association wholly owned by citizens
of the Philippines; or a corporation organized and existing under the laws of the Philippines of which at least sixty per
cent of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines xxxx (Emphasis
and underscoring supplied.)

Indeed, the definition of a "Philippine National" in the FIA cannot apply to the ownership structure of enterprises applying
for, and those granted, a franchise to operate as a public utility under Sec. 11, Art. XII of the Constitution. As aptly
observed by the SEC, the definition of a "Philippine National" provided in the FIA refers only to a corporation that is
permitted to invest in an enterprise as a Philippine citizen (investorcorporation). The FIA does not prescribe the equity
ownership structure of the enterprise granted the franchise or the power to operate in a fully or partially
nationalized industry (investee-corporation). This is apparent from the FIA itself, which also defines the act of an
"investment" and "foreign investment":

Section 3. Definitions. – As used in this Act:

a) The term "Philippine national" shall mean a citizen of the Philippines, or a domestic partnership or association wholly
owned by citizens of the Philippines; or a corporation organized under the laws of the Philippines of which at least sixty
percent [60%] of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines x x x

b) The term "investment" shall mean equity participation in any enterprise organized or existing the laws of the
Philippines;

c) The term "foreign investment" shall mean as equity investment made by a non-Philippine national in the form of
foreign exchange and/or other assets actually transferred to the Philippines and duly registered with the Central Bank
which shall assess and appraise the value of such assets other than foreign exchange.

In fact, Sec. 7 of the FIA, as amended, allows aliens or non-Philippine nationals to own an enterprise up to the extent
provided by the Constitution, existing laws or the FINL:

Sec. 7. Foreign investments in domestic market enterprises. – Non- Philippine nationals may own up to one hundred
percent [100%] of domestic market enterprises unless foreign ownership therein is prohibited or limited by the
Constitution and existing laws or the Foreign Investment Negative List under Section 8 hereof. (Emphasis supplied.)

Hence, pursuant to the Eight Regular FINL, List A, the foreign "equity" is up to 40% in enterprises engaged in the
operation and management of public utilities while the remaining 60% of the "equity" is reserved to Filipino citizens and
"Philippine Nationals" as defined in Sec. 3(a) of the FIA. Notably, the term "equity" refers to the "ownership interest in…
a business"89 or a "share in a publicly traded company,"90 and not to the "controlling" or "management" interest in a
company. It necessarily includes all and every share in a corporation, whether voting or non-voting.

Again, We must recognize the distinction of the separate concepts of "ownership" and "control" in modern corporate
governance in order to realize the intent of the framers of our Constitution to reserve for Filipinos the ultimate and all-
encompassing control of public utility entities from their daily administration to the acts of ownership enumerated in Sec.
6 of the Corporation Code.91 As elucidated, by equating the word "capital" in Sec. 11, Art. XII to the limited aspect of the
right to control the composition of the board of directors, the Court could very well be depriving Filipinos of the majority
economic interest in the public utility corporation and, thus, the effective control and ownership of such corporation.

The Court has no jurisdiction over PLDT and foreign

stockholders who are indispensable parties in interest

More importantly, this Court cannot apply a new doctrine adopted in a precedent-setting decision to parties that have
never been given the chance to present their own views on the substantive and factual issues involved in the precedent-
setting case.

To recall, the instant controversy arose out of an original petition filed in February 2007 for, among others, declaratory
relief on Sec. 11, Art. XII of the 1987 Constitution "to clarify the intent of the Constitutional Commission that crafted the
1987 Constitution to determine the very nature of such limitation on foreign ownership." 92

The petition impleaded the following personalities as the respondents: (1) Margarito B. Teves, then Secretary of Finance
and Chair of the Privatization Council; (2) John P. Sevilla, then undersecretary for privatization of the Department of
Finance; (3) Ricardo Abcede, commissioner of the Presidential Commission on Good Government; (4) Anthoni Salim,
chair of First Pacific Co. Ltd. and director of Metro Pacific Asset Holdings, Inc. (MPAH); (5) Manuel V. Pangilinan,
chairman of the board of PLDT; (6) Napoleon L. Nazareno, the president of PLDT; (7) Fe Barin (Barin), then chair of the
SEC; and (8) Francis Lim (Lim), then president of the PSE.

Notably, neither PLDT itself nor any of its stockholders were named as respondents in the petition, albeit it sought from
the Court the following main reliefs:

5. x x x to issue a declaratory relief that ownership of common or voting shares is the sole basis in determining foreign
equity in a public utility and that any other government rulings, opinions, and regulations inconsistent with this
declaratory relief be declared as unconstitutional and a violation of the intent and spirit of the 1987 Constitution;

6. x x x to declare null and void all sales of common stocks to foreigners in excess of 40 percent of the total subscribed
common shareholdings; and

7. x x x to direct the [SEC] and [PSE] to require PLDT to make a public disclosure of all of its foreign shareholdings and
their actual and real beneficial owners."

Clearly, the petition seeks a judgment that can adversely affect PLDT and its foreign shareholders. If this Court were to
accommodate the petition’s prayer, as the majority did in the June 28, 2011 Decision and proposes to do presently, PLDT
stands to lose its franchise, while the foreign stockholders will be compelled to divest their voting shares in excess of 40%
of PLDT’s voting stock, if any, even at a loss. It cannot, therefore, be gainsaid that PLDT and its foreign shareholders are
indispensable parties to the instant case under the terms of Secs. 2 and 7, Rule 3 of the Rules of Civil Procedure, which
read:

Section 2. Parties in interest.–Every action must be prosecuted and defended in the name of the real party in interest. All
persons having an interest in the subject of the action and in obtaining the relief demanded shall be joined as plaintiffs. All
persons who claim an interest in the controversy or the subject thereof adverse to the plaintiff, or who are necessary to a
complete determination or settlement of the questions involved therein, shall be joined as defendants.

xxxx

Section 7. Compulsory joinder of indispensable parties.– Parties in interest without whom no final determination can be
had of an action shall be joined either as plaintiffs or defendants.

Yet, again, PLDT and its foreign shareholders have not been given notice of this petition to appear before, much less
heard by, this Court. Nonetheless, the majority has allowed such irregularity in contravention of the settled jurisprudence
that an action cannot proceed unless indispensable parties are joined 93 since the non-joinder of these indispensable parties
deprives the court the jurisdiction to issue a decision binding on the indispensable parties that have not been joined or
impleaded. In other words, if an indispensable party is not impleaded, any personal judgment would have no
effectiveness94 as to them for the tribunal’s want of jurisdiction.

In Arcelona v. Court of Appeals,95 We explained that the basic notions of due process require the observance of this rule
that refuses the effectivity of a decision that was rendered despite the non-joinder of indispensable parties:

Basic considerations of due process, however, impel a similar holding in cases involving jurisdiction over the persons of
indispensable parties which a court must acquire before it can validly pronounce judgments personal to said defendants.
Courts acquire jurisdiction over a party plaintiff upon the filing of the complaint. On the other hand, jurisdiction over the
person of a party defendant is assured upon the service of summons in the manner required by law or otherwise by his
voluntary appearance. As a rule, if a defendant has not been summoned, the court acquires no jurisdiction over his person,
and a personal judgment rendered against such defendant is null and void. A decision that is null and void for want of
jurisdiction on the part of the trial court is not a decision in the contemplation of law and, hence, it can never
become final and executory.

Rule 3, Section 7 of the Rules of Court, defines indispensable parties as parties-in-interest without whom there can be no
final determination of an action. As such, they must be joined either as plaintiffs or as defendants. The general rule with
reference to the making of parties in a civil action requires, of course, the joinder of all necessary parties where
possible, and the joinder of all indispensable parties under any and all conditions, their presence being a sine qua
non for the exercise of judicial power. It is precisely "when an indispensable party is not before the court (that) the
action should be dismissed." The absence of an indispensable party renders all subsequent actions of the court null
and void for want of authority to act, not only as to the absent parties but even as to those present. 96

Hence, the June 28, 2011 Decision having been rendered in a case where the indispensable parties have not been
impleaded, much less summoned or heard, cannot be given any effect and is, thus, null and void. Ergo, the assailed June
28, 2011 Decision is virtually a useless judgment, at least insofar as it tends to penalize PLDT and its foreign
stockholders. It cannot bind and affect PLDT and the foreign stockholders or be enforced and executed against them. It is
settled that courts of law "should not render judgments which cannot be enforced by any process known to the
law,"97 hence, this Court should have refused to give cognizance to the petition.

The ineffectivity caused by the non-joinder of the indispensable parties, the deprivation of their day in court, and the
denial of their right to due process, cannot be cured by the sophistic expedience of naming PLDT in the fallo of the
decision as a respondent. The dispositive portion of the June 28, 2011 Decision all the more only highlights the
unenforceability of the majority’s disposition and serves as an implied admission of this Court’s lack of jurisdiction over
the persons of PLDT and its foreign stockholders when it did not directly order the latter to dispose the common shares in
excess of the 40% limit. Instead, it took the circuitous route of ordering the SEC, in the fallo of the assailed decision, "to
apply this definition of the term ‘capital’ in determining the extent of allowable ownership in respondent PLDT and, if
there is a violation of Sec. 11, Art. XII of the Constitution, to impose the appropriate sanctions under the law." 98

Clearly, since PLDT and the foreign stockholders were not impleaded as indispensable parties to the case, the
majority would want to indirectly execute its decision which it could not execute directly. The Court may be
criticized for violating the very rules it promulgated and for trenching the provisions of Sec. 5, Art. VIII of the
Constitution, which defines the powers and jurisdiction of this Court.

It is apropos to stress, as a reminder, that the Rules of Court is not a mere body of technical rules that can be disregarded
at will whenever convenient. It forms an integral part of the basic notion of fair play as expressed in this Constitutional
caveat: "No person shall be deprived of life, liberty or property without due process of law," 99 and obliges this Court, as
well as other courts and tribunals, to hear a person first before rendering a judgment for or against him. As Daniel Webster
explained, "due process of law is more clearly intended the general law, a law which hears before it condemns; which
proceeds upon enquiry, and renders judgment only after trial." 100 The principle of due process of law "contemplates notice
and opportunity to be heard before judgment is rendered, affecting one’s person or property." 101 Thus, this Court has
stressed the strict observance of the following requisites of procedural due process in judicial proceedings in order to
comply with this honored principle:

(1) There must be a court or tribunal clothed with judicial power to hear and determine the matter before it;
(2) Jurisdiction must be lawfully acquired over the person of the defendant or over the property which is the subject of the
proceedings;

(3) The defendant must be given an opportunity to be heard; and

(4) Judgment must be rendered upon lawful hearing. 102

Apparently, not one of these requisites has been complied with before the June 28, 2011 Decision was rendered. Instead,
PLDT and its foreign stockholders were not given their day in court, even when they stand to lose their properties, their
shares, and even the franchise to operate as a public utility. This stands counter to our discussion in Agabon v.
NLRC,103 where We emphasized that the principle of due process comports with the simplest notions of what is fair and
just:

To be sure, the Due Process Clause in Article III, Section 1 of the Constitution embodies a system of rights based on
moral principles so deeply imbedded in the traditions and feelings of our people as to be deemed fundamental to a
civilized society as conceived by our entire history. Due process is that which comports with the deepest notions of
what is fair and right and just. It is a constitutional restraint on the legislative as well as on the executive
and judicial powers of the government provided by the Bill of Rights.104

Parenthetically, the present petition partakes of a collateral attack on PLDT’s franchise as a public utility. Giving due
course to the recourse is contrary to the Court’s ruling in PLDT v. National Telecommunications Commission,105 where
We declared a franchise to be a property right that can only be questioned in a direct proceeding. 106 Worse, the June 28,
2011 Decision facilitates and guarantees the success of that unlawful attack by allowing it to be undertaken in the
absence of PLDT.

The Philippine Government is barred by estoppel from

ordering foreign investors to divest voting shares
in public utilities in excess of the 40 percent cap

The Philippine government’s act of pushing for and approving the sale of the PTIC shares, which is equivalent to 12
million PLDT common shares, to foreign investors precludes it from asserting that the purchase violates the Constitutional
limit on foreign ownership of public utilities so that the foreign investors must now divest the common PLDT shares
bought. The elementary principle that a person is prevented from going back on his own act or representation to the
prejudice of another who relied thereon107 finds application in the present case.

Art. 1431 of the Civil Code provides that an "admission or representation is rendered conclusive upon the person making
it, and cannot be denied or disproved as against a person relying thereon." This rule is supported by Section 2(a) of Rule
131 of the Rules of Court on the burden of proof and presumptions, which states:

Section 2. Conclusive presumptions. – The following are instances of conclusive presumptions:

(a) Whenever a party has, by his own declaration, act, or omission, intentionally and deliberately led another to believe a
particular thing true, and to act upon such belief, he cannot, in any litigation arising out of such declaration, act or
omission, be permitted to falsify it.

The government cannot plausibly hide behind the mantle of its general immunity to resist the application of this equitable
principle for "the rule on non-estoppel of the government is not designed to perpetrate an injustice." 108 Hence, this Court
has allowed several exceptions to the rule on the government’s non-estoppel. As succinctly explained in Republic of the
Philippines v. Court of Appeals:109

The general rule is that the State cannot be put in estoppel by the mistakes or errors of its officials or agents. However,
like all general rules, this is also subject to exceptions, viz.:

"Estoppel against the public are little favored. They should not be invoked except in rare and unusual circumstances and
may not be invoked where they would operate to defeat the effective operation of a policy adopted to protect the public.
They must be applied with circumspection and should be applied only in those special cases where the interests of justice
clearly require it. Nevertheless, the government must not be allowed to deal dishonorably or capriciously with its
citizens, and must not play an ignoble part or do a shabby thing; and subject to limitations . . ., the doctrine of
equitable estoppel may be invoked against public authorities as well as against private individuals."

In Republic v. Sandiganbayan, the government, in its effort to recover ill-gotten wealth, tried to skirt the application of
estoppel against it by invoking a specific constitutional provision. The Court countered:

"We agree with the statement that the State is immune from estoppel, but this concept is understood to refer to acts and
mistakes of its officials especially those which are irregular (Sharp International Marketing vs. Court of Appeals, 201
SCRA 299; 306 1991; Republic v. Aquino, 120 SCRA 186 1983), which peculiar circumstances are absent in the case at bar.
Although the State's right of action to recover ill-gotten wealth is not vulnerable to estoppel[;] it is non sequitur to suggest
that a contract, freely and in good faith executed between the parties thereto is susceptible to disturbance ad
infinitum. A different interpretation will lead to the absurd scenario of permitting a party to unilaterally jettison a
compromise agreement which is supposed to have the authority of res judicata (Article 2037, New Civil Code), and
like any other contract, has the force of law between parties thereto (Article 1159, New Civil Code; Hernaez vs. Kao,
17 SCRA 296 1966; 6 Padilla, Civil Code Annotated, 7th ed., 1987, p. 711; 3 Aquino, Civil Code, 1990 ed., p. 463) . . ."

The Court further declared that "(t)he real office of the equitable norm of estoppel is limited to supply[ing] deficiency in
the law, but it should not supplant positive law."110 (Emphasis supplied.)

Similarly, in Ramos v. Central Bank of the Philippines,111 this Court berated the government for reneging on its
representations and urged it to keep its word, viz:

Even in the absence of contract, the record plainly shows that the CB [Central Bank] made express representations to
petitioners herein that it would support the OBM [Overseas Bank of Manila], and avoid its liquidation if the petitioners
would execute (a) the Voting Trust Agreement turning over the management of OBM to the CB or its nominees, and (b)
mortgage or assign their properties to the Central Bank to cover the overdraft balance of OBM. The petitioners having
complied with these conditions and parted with value to the profit of the CB (which thus acquired additional security for
its own advances), the CB may not now renege on its representations and liquidate the OBM, to the detriment of its
stockholders, depositors and other creditors, under the rule of promissory estoppel (19 Am. Jur., pages 657-658; 28 Am.
Jur. 2d, 656-657; Ed. Note, 115 ALR, 157).

"The broad general rule to the effect that a promise to do or not to do something in the future does not work an estoppel
must be qualified, since there are numerous cases in which an estoppel has been predicated on promises or assurances as
to future conduct. The doctrine of ‘promissory estoppel’ is by no means new, although the name has been adopted only in
comparatively recent years. According to that doctrine, an estoppel may arise from the making of a promise even though
without consideration, if it was intended that the promise should be relied upon and in fact it was relied upon, and if a
refusal to enforce it would be virtually to sanction the perpetration of fraud or would result in other injustice. In this
respect, the reliance by the promises is generally evidenced by action or forbearance on his part, and the idea has been
expressed that such action or forbearance would reasonably have been expected by the promisor. Mere omission by the
promisee to do whatever the promisor promised to do has been held insufficient ‘forbearance’ to give rise to a promissory
estoppel." (19 Am. Jur., loc. cit.)

The exception established in the foregoing cases is particularly appropriate presently since the "indirect" sale of PLDT
common shares to foreign investors partook of a propriety business transaction of the government which was not
undertaken as an incident to any of its governmental functions. Accordingly, the government, by concluding the sale, has
descended to the level of an ordinary citizen and stripped itself of the vestiges of immunity that is available in the
performance of governmental acts.112

Ergo, the government is vulnerable to, and cannot hold off, the application of the principle of estoppel that the foreign
investors can very well invoke in case they are compelled to divest the voting shares they have previously acquired
through the inducement of no less the government. In other words, the government is precluded from penalizing these
alien investors for an act performed upon its guarantee, through its facilities, and with its imprimatur.
Under the "fair and equitable treatment" clause of our bilateral
investment treaties and fair trade agreements, foreign investors
have the right to rely on the same legal framework existing at the
time they made their investments

Not only is the government put in estoppel by its acts and representations during the sale of the PTIC shares to MPAH, it
is likewise bound by its guarantees in the Bilateral Investment Treaties (BITs) and Free Trade Agreements (FTAs) with
other countries.

To date, the Philippines has concluded numerous BITs and FTAs to encourage and facilitate foreign direct investments in
the country. These BITs and FTAs invariably contain guarantees calculated to ensure the safety and stability of these
foreign investments. Foremost of these is the commitment to give fair and equitable treatment (FET) to the foreign
investors and investments in the country.

Take for instance the BIT concluded between the Philippines and China, 113 Article 3(1) thereof provides that "investments
and activities associated with such investments of investors of either Contracting Party shall be accorded equitable
treatment and shall enjoy protection in the territory of the other Contracting Party."114 The same assurance is in the
Agreement on Investment of the Framework Agreement on Comprehensive Economic Cooperation Between the
Association of Southeast Asian Nations and the People’s Republic of China (ASEAN-China Investment
Agreement)115 where the Philippines assured Chinese investors that the country "shall accord to [them] fair and equitable
treatment and full protection and security."116 In the same manner, the Philippines agreed to "accord investments [made
by Japanese investors] treatment in accordance with international law, including fair and equitable treatment and full
protection and security"117 in the Agreement between the Republic of the Philippines and Japan for Economic Partnership
(JPEPA).118

Similar provisions are found in the ASEAN Comprehensive Investment Agreement (ACIA) 119 and the BITs concluded by
the Philippines with, among others, the Argentine
Republic,120 Australia,121 Austria,122 Bangladesh,123 Belgium,124 Cambodia,125 Canada,126 Chile,127 the Czech
Republic,128 Denmark,129 Finland,130 France,131 Germany,132 India,133 Indonesia,134 Iran,135 Italy,136 Mongolia,137 Myanmar,138 
Netherlands,139 Pakistan,140 Portuguese Republic,141 Romania,142 Russia,143 Saudi
Arabia,144 Spain,145 Sweden,146 Switzerland,147 Thailand,148 Turkey,149 United Kingdom,150 and Vietnam.151

Explaining the FET as a standard concordant with the rule of law, Professor Vandevelde wrote that it requires the host
county to treat foreign investments with consistency, security, non-discrimination and reasonableness:

The thesis is that the awards issued to date implicitly have interpreted the fair and equitable treatment standard as
requiring treatment in accordance with the concept of the rule of law. That is, the concept of legality is the unifying
theory behind the fair and equitable treatment standard.

xxxx

Thus, international arbitral awards interpreting the fair and equitable treatment standard have incorporated the substantive
and procedural principles of the rule of law into that standard. The fair and equitable treatment standard in BITs has
been interpreted as requiring that covered investment or investors receive treatment that is reasonable, consistent,
non-discriminatory, transparent, and in accordance with due process. As will be seen, these principles explain
virtually all of the awards applying the fair and equitable treatment standard. No award is inconsistent with this theory of
the standard.

Understanding fair and equitable treatment as legality is consistent with the purposes of the BITs. BITs essentially are
instruments that impose legal restraints on the treatment of covered investments and investors by host states. The very
essence of a BIT is a partial subordination of the sovereign's power to the legal constraints of the treaty. Further,
individual BIT provisions are themselves a reflection of the principles of the rule of law. (Emphasis and underscoring
supplied.)152
On the requirement of consistency, the International Centre for the Settlement of Investment Disputes (ICSID) explained
in Tecnicas Medioambientales Tecmed S.A. v. The united Mexican States 153 that the host country must maintain a
stable and predictable legal and business environment to accord a fair and equitable treatment to foreign investors.

153. The Arbitral Tribunal finds that the commitment of fair and equitable treatment included in Article 4(1) of the
Agreement is an expression and part of the bona fide principle recognized in international law, although bad faith
from the State is not required for its violation:

To the modern eye, what is unfair or inequitable need not equate with the outrageous or the egregious. In particular, a
State may treat foreign investment unfairly and inequitably without necessarily acting in bad faith.

154. The Arbitral Tribunal considers that this provision of the Agreement, in light of the good faith principle established
by international law, requires the Contracting Parties to provide to international investments treatment that does
not affect the basic expectations that were taken into account by the foreign investor to make the investment. The
foreign investor expects the host State to act in a consistent manner, free from ambiguity and totally transparently
in its relations with the foreign investor, so that it may know beforehand any and all rules and regulations that will
govern its investments, as well as the goals of the relevant policies and administrative practices or directives, to be
able to plan its investment and comply with such regulations. Any and all State actions conforming to such criteria
should relate not only to the guidelines, directives or requirements issued, or the resolutions approved thereunder, but also
to the goals underlying such regulations. The foreign investor also expects the host State to act consistently, i.e.
without arbitrarily revoking any preexisting decisions or permits issued by the State that were relied upon by the
investor to assume its commitments as well as to plan and launch its commercial and business activities. The
investor also expects the State to use the legal instruments that govern the actions of the investor or the investment
in conformity with the function usually assigned to such instruments, and not to deprive the investor of its
investment without the required compensation. In fact, failure by the host State to comply with such pattern of conduct
with respect to the foreign investor or its investments affects the investor’s ability to measure the treatment and protection
awarded by the host State and to determine whether the actions of the host State conform to the fair and equitable
treatment principle. Therefore, compliance by the host State with such pattern of conduct is closely related to the
above-mentioned principle, to the actual chances of enforcing such principle, and to excluding the possibility that
state action be characterized as arbitrary; i.e. as presenting insufficiencies that would be recognized "…by any
reasonable and impartial man," or, although not in violation of specific regulations, as being contrary to the law because:

...(it) shocks, or at least surprises, a sense of juridical propriety. (Emphasis and underscoring supplied added.)

The Philippines, therefore, cannot, without so much as a notice of policy shift, alter and change the legal and
business environment in which the foreign investments in the country were made in the first place. These investors
obviously made the decision to come in after studying the country’s legal framework-its restrictions and incentives––and
so, as a matter of fairness, they must be accorded the right to expect that the same legal climate and the same substantive
set of rules will remain during the period of their investments.

The representation that foreigners can invest up to 40% of the entirety of the total stockholdings, and not just the voting
shares, of a public utility corporation is an implied covenant that the Philippines cannot renege without violating the FET
guarantee. Especially in this case where the Philippines made specific commitments to countries like Japan and China that
their investing nationals can own up to 40% of the equity of a public utility like a telecommunications corporation. In the
table contained in Schedule 1(B), Annex 6 of the JPEPA, the Philippines categorically represented that Japanese
investors’ entry into the Philippine telecommunications industry, specifically corporations offering "voice telephone
services," is subject to only the following requirements and conditions:

A. Franchise from Congress of the Philippines

B. Certificate of Public Convenience and Necessity (CPCN) from the National Telecommunications Commission

C. Foreign equity is permitted up to 40 percent.

D. x x x154 (Emphasis supplied.)
The same representation is made in the Philippines’ Schedule of Specific Commitments appended to the ASEAN-China
Agreement on Trade in Services.155

Further, as previously pointed out, it was the Philippine government that pushed for and approved the sale of the 111,415
PTIC shares to MPAH, thereby indirectly transferring the ownership of 6.3 percent of the outstanding common shares of
PLDT, to a foreign firm and so increasing the foreign voting shareholding in PLDT. Hence, the presence of good faith
may not be convincingly argued in favour of the Philippine government in a suit for violation of its FET guarantee.

In fact, it has been held that a bona fide change in policy by a branch of government does not excuse compliance with the
FET obligations. In Occidental Exploration and Production Company (OEPC) v. the Republic of Ecuador,156 the United
Nations Commission on International Trade Law (UNCITRAL) ruled that Ecuador violated the US/Ecuador BIT by
denying OEPC fair and equitable treatment when it failed to provide a predictable framework for its investment planning.
Ruling thus, the tribunal cited Ecuador’s change in tax law and its tax authority’s unsatisfactory and vague response to
OEPC’s consulta, viz:

183. x x x The stability of the legal and business framework is thus an essential element of fair and equitable treatment.

184. The tribunal must note in this context that the framework under which the investment was made and operates
has been changed in an important manner by actions adopted by [the Ecuadorian tax authority]. … The
clarifications that OEPC sought on the applicability of VAT by means of "consulta" made to [the Ecuadorian tax
authority] received a wholly unsatisfactory and thoroughly vague answer. The tax law was changed without providing
any clarity abut its meaning and extend and the practice and regulations were also inconsistent with such changes.

185. Various arbitral tribunals have recently insisted on the need for this stability. The tribunal in Metalcad held that the
Respondent "failed to ensure a transparent and predictable framework for Metalcad’s business planning and investment.
The totality of these circumstances demonstrate a lack of orderly process and timely disposition in relation to an investor
of a Party acting in the expectation that it would be treated fairly and justly…" x x x

186. It is quite clear from the record of this case and from the events discussed in this Final Award that such requirements
were not met by Ecuador. Moreover, this is an objective requirement that does not depend on whether the
Respondent has proceeded in good faith or not.

187. The Tribunal accordingly holds that the Respondent has breached its obligations to accord fair and equitable
treatment under Article II (3)

(a) of the Treaty. x x x

xxxx

191. The relevant question for international law in this discussion is not whether there is an obligation to refund VAT,
which is the point on which the parties have argued most intensely, but rather whether the legal and business
framework meets the requirements of stability and predictability under international law. It was earlier concluded
that there is not a VAT refund obligation under international law, except in the specific case of the Andean Community
Law, which provides for the option of either compensation or refund, but there is certainly an obligation not to alter the
legal and business environment in which the investment has been made. In this case it is the latter question that
triggers a treatment that is not fair and equitable. (Emphasis supplied.)

To maintain the FET guarantee contained in the various BITs and FTAs concluded by the country and avert a deluge of
investor suits before the ICSID, the UNCITRAL or other fora, any decision of this court that tends to drastically alter
the foreign investors’ basic expectations when they made their investments, taking into account the consistent SEC
Opinions and the executive and legislative branches’ Specific Commitments, must be applied prospectively.

This Court cannot turn oblivious to the fact that if We diverge from the prospectivity rule and implement the resolution on
the present issue immediately and, without giving due deference to the foreign investors’ rights to due process and the
equal protection of the laws, compel the foreign stockholders to divest their voting shares against their wishes at prices
lower than the acquisition costs, these foreign investors may very well shy away from Philippine stocks and avoid
investing in the Philippines. Not to mention, the validity of the franchise granted to PLDT and similarly situated public
utilities will be put under a cloud of doubt. Such uncertainty and the unfair treatment of foreign investors who merely
relied in good faith on the policies, rules and regulations of the PSE and the SEC will likely upset the volatile capital
market as it would have a negative impact on the value of these companies that will discourage investors, both local and
foreign, from purchasing their shares. In which case, foreign direct investments (FDIs) in the country (which already lags
behind our Asian neighbors) will take a nosedive. Indeed, it cannot be gainsaid that a sudden and unexpected deviation
from the accepted and consistent construction of the term "capital" will create a domino effect that may cripple our capital
markets.

Therefore, in applying the new comprehensive interpretation of Sec. 11, Art. XII of the Constitution, the current voting
shares of the foreign investors in public utilities in excess of the 40% capital shall be maintained and honored. Otherwise
the due process guarantee under the Constitution and the long established precepts of justice, equity and fair play would
be impaired.

Prospective application of new laws or changes in interpretation

The June 28, 2011 Decision construed "capital" in the first sentence of Section 11, Article XII of the Constitution as "full
beneficial ownership of 60 percent of the outstanding capital stocks coupled with 60 percent of the voting rights." In the
Resolution denying the motions for reconsideration, it further amplified the scope of the word "capital" by clarifying that
"the 60- 40 ownership requirement in favor of Filipino citizens must apply separately to each class of shares whether
common, preferred, preferred voting or any other class of shares." This is a radical departure from the clear intent of the
framers of the 1987 Constitution and the long established interpretation ascribed to said word by the Securities and
Exchange Commission—that "capital" in the first sentence of Sec. 11, Art. XII means capital stock or BOTH voting and
non-voting shares. The recent interpretation enunciated in the June 28, 2011 and in the Resolution at hand can only be
applied PROSPECTIVELY. It cannot be applied retroactively to corporations such as PLDT and its investors such as its
shareholders who have all along relied on the consistent reading of "capital" by SEC and the Philippine government to
apply it to a public utility’s total capital stock.

Lex prospicit, non respicit – "laws have no retroactive effect unless the contrary is provided." 157 As a necessary corollary,
judicial rulings should not be accorded retroactive effect since "judicial decisions applying or interpreting the laws or the
Constitution shall form part of the legal system of the Philippines." 158 It has been the constant holding of the Court that a
judicial decision setting a new doctrine or principle ("precedent-setting decision") shall not retroactively apply to parties
who relied in good faith on the principles and doctrines standing prior to the promulgation thereof ("old
principles/doctrines"), especially when a retroactive application of the precedent-setting decision would impair the rights
and obligations of the parties. So it is that as early as 1940, the Court has refused to apply the new doctrine of jus
sanguinis to persons who relied in good faith on the principle of jus soli adopted in Roa v. Collector of
Customs.159 Similarly, in Co v. Court of Appeals,160 the Court sustained petitioner Co’s bona fide reliance on the Minister
of Justice’s Opinion dated December 15, 1981 that the delivery of a "rubber" check as guarantee for an obligation is not a
punishable offense despite the Court’s pronouncement on September 21, 1987 in Que v. People that Batas Pambansa
Blg. (BP) 22 nonetheless covers a check issued to guarantee the payment of an obligation. In so ruling, the Court quoted
various decisions applying precedent-setting decisions prospectively. We held:

Judicial decisions applying or interpreting the laws or the Constitution shall form a part of the legal system of the
Philippines," according to Article 8 of the Civil Code. "Laws shall have no retroactive effect, unless the contrary is
provided," declares Article 4 of the same Code, a declaration that is echoed by Article 22 of the Revised Penal Code:
"Penal laws shall have a retroactive effect insofar as they favor the person guilty of a felony, who is not a habitual
criminal . . ."

xxxx

The principle of prospectivity has also been applied to judicial decisions which, "although in themselves not laws,
are nevertheless evidence of what the laws mean, . . . (this being) the reason why under Article 8 of the New Civil
Code, 'Judicial decisions applying or interpreting the laws or the Constitution shall form a part of the legal
system . . .' "
So did this Court hold, for example, in Peo. v. Jabinal, 55 SCRA 607, 611:

xxxx

So, too, did the Court rule in Spouses Gauvain and Bernardita Benzonan v. Court of Appeals, et al. (G.R. No. 97973)
and Development Bank of the Philippines v. Court of Appeals, et al. (G.R. No 97998), Jan. 27, 1992, 205 SCRA 515, 527-
528:

xxxx

A compelling rationalization of the prospectivity principle of judicial decisions is well set forth in the oft-cited case
of Chicot County Drainage Dist. v. Baxter States Bank, 308 US 371, 374 1940. The Chicot doctrine advocates the
imperative necessity to take account of the actual existence of a statute prior to its nullification, as an operative fact
negating acceptance of "a principle of absolute retroactive invalidity."

xxxx

Much earlier, in De Agbayani v. PNB, 38 SCRA 429 xxx the Court made substantially the same observations…

xxxx

Again, treating of the effect that should be given to its decision in Olaguer v. Military Commission No 34, — declaring
invalid criminal proceedings conducted during the martial law regime against civilians, which had resulted in the
conviction and incarceration of numerous persons — this Court, in Tan vs. Barrios, 190 SCRA 686, at p. 700, ruled as
follows:

"In the interest of justice and consistency, we hold that Olaguer should, in principle, be applied prospectively only
to future cases and cases still ongoing or not yet final when that decision was promulgated. x x x"

It would seem, then, that the weight of authority is decidedly in favor of the proposition that the Court’s decision of
September 21, 1987 in Que v. People, 154 SCRA 160 (1987) — i.e., that a check issued merely to guarantee the
performance of an obligation is nevertheless covered by B.P. Blg. 22 — should not be given retrospective effect to the
prejudice of the petitioner and other persons similarly situated, who relied on the official opinion of the Minister of
Justice that such a check did not fall within the scope of B.P. Blg. 22. (Emphasis supplied).

Indeed, pursuant to the doctrine of prospectivity, new doctrines and principles must be applied only to acts and events
transpiring after the precedent-setting judicial decision, and not to those that occurred and were caused by persons who
relied on the "old" doctrine and acted on the faith thereof.

Not content with changing the rule in the middle of the game, the majority, in the June 28, 2011 Decision, went a little
further by ordering respondent SEC Chairperson "to apply this definition of the term ‘capital’ in determining the extent of
allowable foreign ownership in respondent Philippine Long Distance Telephone Company, and if there is a violation of
Section 11, Article XII of the Constitution, to impose the appropriate sanctions under the law." This may be viewed as
unreasonable and arbitrary. The Court in the challenged June 28, 2011 Decision already made a finding that foreigners
hold 64.27% of the total number of PLDT common shares while Filipinos hold only 35.73%. 161 In this factual setting,
PLDT will, as clear as day, face sanctions since its present capital structure is presently in breach of the rule on the 40%
cap on foreign ownership of voting shares even without need of a SEC investigation.

In answering the SEC’s query regarding the proper period of application and imposition of appropriate sanctions against
PLDT, Justice Carpio tersely stated that "once the 28 June 2011 Decision becomes final, the SEC shall impose the
appropriate sanctions only if it finds after due hearing that, at the start of the administrative cases or investigation, there is
an existing violation of Sec. 11, Art. XII of the Constitution."162 As basis therefor, Justice Carpio cited Halili v. Court of
Appeals163 and United Church Board for World Ministries (UCBWM) v. Sebastian.164 However, these cases do not provide
a jurisprudential foundation to this mandate that may very well deprive PLDT foreign shareholders of their voting shares.
In fact, UCBWM v. Sebastian respected the voluntary transfer in a will by an American of his shares of stocks in a land-
holding corporation. In the same manner, Halili v. Court of Appeals sustained as valid the waiver by an alien of her right
of inheritance over a piece of land in favour of her son. Nowhere in these cases did this Court order the involuntary
dispossession of corporate stocks by alien stockholders. At most, these two cases only recognized the principle validating
the transfer of land to an alien who, after the transfer, subsequently becomes a Philippine citizen or transfers the land to a
Filipino citizen. They do not encompass the situation that will eventually ensue after the investigation conducted by the
SEC in accordance with the June 28, 2011 and the present resolution. They do not justify the compulsory deprivation of
voting shares in public utility corporations from foreign stockholders who had legally acquired these stocks in the first
instance.

The abrupt application of the construction of Sec. 11, Art. XII of the Constitution to foreigners currently holding voting
shares in a public utility corporation is not only constitutionally problematic; it is likewise replete with pragmatic
difficulties that could hinder the real-world translation of this Court’s Resolution. Although apparently benevolent, the
majority’s concession to allow "public utilities that fail to comply with the nationality requirement under Section 11,
Article XII and the FIA [to] cure their deficiencies prior to the start of the administrative case or
investigation"165 could indirectly occasion a compulsory deprivation of the public utilities’ foreign stockholders of their
voting shares. Certainly, these public utilities must immediately pare down their foreign-owned voting shares to avoid the
imposable sanctions. This holds true especially for PLDT whose 64.27% of its common voting shares are foreign-
subscribed and held. PLDT is, therefore, forced to immediately deprive, or at the very least, dilute the property rights of
their foreign stockholders before the commencement of the administrative proceedings, which would be a mere farce
considering the transparency of the public utility from the onset.

Even with the chance granted to the public utilities to remedy their supposed deficiency, the nebulous time-frame given by
the majority, i.e., "prior to the start of the administrative case or investigation," 166 may very well prove too short for these
public utilities to raise the necessary amount of money to increase the number of their authorized capital stock in order to
dilute the property rights of their foreign stockholders holding voting shares. 167 Similarly, if they induce their foreign
stockholders to transfer the excess voting shares to qualified Philippine nationals, this period before the filing of the
administrative may not be sufficient for these stockholders to find Philippine nationals willing to purchase these voting
shares at the market price. This Court cannot ignore the fact that the voting shares of Philippine public utilities like PLDT
are listed and sold at large in foreign capital markets. Hence, foreigners who have previously purchased their voting
shares in these markets will not have a ready Philippine market to immediately transfer their shares. More than likely,
these foreign stockholders will be forced to sell their voting shares at a loss to the few Philippine nationals with money to
spare, or the public utility itself will be constrained to acquire these voting shares to the prejudice of its retained
earnings.168

Whatever means the public utilities choose to employ in order to cut down the foreign stockholdings of voting shares, it is
necessary to determine who among the foreign stockholders of these public utilities must bear the burden of unloading the
voting shares or the dilution of their property rights. In a situation like this, there is at present no settled rule on who
should be deprived of their property rights. Will it be the foreign stockholders who bought the latest issuances? Or the first
foreign stockholders of the public utility corporations? This issue cannot be realistically settled within the time-frame
given by the majority without raising more disputes. With these loose ends, the majority cannot penalize the public
utilities if they should fail to comply with the directive of complying with the "nationality requirement under Section 11,
Article XII and the FIA" within the unreasonably nebulous and limited period "prior to the start of the administrative case
or investigation."169

In the light of the new pronouncement of the Court that public utilities that fail to comply with the nationality requirement
under Section 11, Article XII of the Constitution CAN CURE THEIR DEFICIENCIES prior to the start of the
administrative case or investigation, I submit that affected companies like PLDT should be given reasonable time to
undertake the necessary measures to make their respective capital structure compliant, and the SEC, as the regulatory
authority, should come up with the appropriate guidelines on the process and supervise the same. SEC should likewise
adopt the necessary rules and regulations to implement the prospective compliance by all affected companies with the new
ruling regarding the interpretation of the provision in question. Such rules and regulations must respect the due process
rights of all affected corporations and define a reasonable period for them to comply with the June 28, 2011 Decision.

A final note.
Year in and year out, the government’s trade managers attend economic summits courting businessmen to invest in the
country, doubtless promising them a playing field where the rules are friendly as they are predictable. So it would appear
odd if a branch of government would make business life complicated for investors who are already here. Indeed, stability
and predictability are the key pillars on which our legal system must be founded and run to guarantee a business
environment conducive to the country’s sustainable economic growth. Hence, it behoves this Court to respect the basic
expectations taken into account by the investors at the time they made the investments. In other words, it is the duty of
this Court to stand guard against any untoward change of the rules in the middle of the game.

I, therefore, vote to GRANT the motions for reconsideration and accordingly REVERSE and SET ASIDE the June 28,
2011 Decision. The Court should declare that the word "capital" in the first sentence of Section 11, Article Xll of the 1987
Constitution means the entire capital stock or both voting and non-voting shares.

Since the June 28, 2011 Decision was however sustained, I submit that said decision should take effect only on the date of
its finality and should be applied prospectively.

PLDT should be given time to umkrtake the nec~ssary meast1res to make its capital structure compliant, and th~
Securities and Exchange Commission should formulalc appropriate guidelines and supervise the process. Said
Commission should also adopt ruks and regulations to implement the prospective compliance by all affected companies
with the new ruling on the interpretation of Sec. 11, Art. XII of the Constitution. Such rules and regulations must respect
the due process rights of all affected corporations and provide a reasonable period for them to com pi y with the June 28,
2011 Decision. The rights of foreigners over the voting shares they presently own in excess of 40% of said shares should,
in the meantime, be respected.

PRESBITERO J. VELASCO, JR.

Associate Justice
  Jose M. Roy III vs. Chairperson Teresita Herbosa, G.R. No. 207246; April 18, 2017

G.R. No. 207246

JOSE M. ROY III, Petitioner

vs.
CHAIRPERSON TERESITA HERBOSA, THE SECURITIES AND EXCHANGE COMMISSION, and
PHILIPPINE LONG DISTANCE TELEPHONE COMP ANY,, Respondents

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

WILSON C. GAMBOA, JR., DANIEL V. CARTAGENA, JOHN WARREN P. GABINETE, ANTONIO V.

PESINA, JR., MODESTO MARTINY. MAMON III, and GERARDO C. EREBAREN, Petitioners-in-Intervention,

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

PHILIPPINE STOCK EXCHANGE, INC. Respondent-in-Intervention,

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

SHAREHOLDERS' ASSOCIATION OF THE PHILIPPINES, INC., Respondent-in-Intervention.

RESOLUTION

CAGUIOA, J.:

Before the Court is the Motion for Reconsideration dated January 19, 2017 1 (the Motion) filed by petitioner Jose M. Roy
III (movant) seeking the reversal and setting aside of the Decision dated November 22, 2016 2 (the Decision) which denied
the movant's petition, and declared that the Securities and Exchange Commission (SEC) did not commit grave abuse of
discretion in issuing Memorandum Circular No. 8, Series of 2013 (SEC-MC No. 8) as the same was in compliance with,
and in fealty to, the decision of the Court in Gamboa v. Finance Secretary Teves,3 (Gamboa Decision) and the
resolution4 denying the Motion for Reconsideration therein (Gamboa Resolution).

The Motion presents no compelling and new arguments to justify the reconsideration of the Decision.

The grounds raised by movant are: (1) He has the requisite standing because this case is one of transcendental importance;
(2) The Court has the constitutional duty to exercise judicial review over any grave abuse of discretion by any
instrumentality of government; (3) He did not rely on an obiter dictum; and (4) The Court should have treated the petition
as the appropriate device to explain the Gamboa Decision.

The Decision has already exhaustively discussed and directly passed upon these grounds. Movant's petition was dismissed
based on both procedural and substantive grounds.

Regarding the procedural grounds, the Court ruled that petitioners (movant and petitioners-in-intervention) failed to
sufficiently allege and establish the existence of a case or controversy and locus standi on their part to warrant the Court's
exercise of judicial review; the rule on the hierarchy of courts was violated; and petitioners failed to implead
indispensable parties such as the Philippine Stock Exchange, Inc. and Shareholders' Association of the Philippines, Inc. 5

In connection with the failure to implead indispensable parties, the Court's Decision held:

Under Section 3, Rule 7 of the Rules of Court, an indispensable party is a party-in-interest without whom there can be no
final determination of an action. Indispensable parties are those with such a material and direct interest in the controversy
that a final decree would necessarily affect their rights, so that the court cannot proceed without their presence. The
interests of such indispensable parties in the subject matter of the suit and the relief are so bound with those of the other
parties that their legal presence as parties to the proceeding is an absolute necessity and a complete and efficient
determination of the equities and rights of the parties is not possible if they are not joined.

Other than PLDT, the petitions failed to join or implead other public utility corporations subject to the same restriction
imposed by Section 11, Article XII of the Constitution. These corporations are in danger of losing their franchise and
property if they are found not compliant with the restrictive interpretation of the constitutional provision under review
which is being espoused by petitioners. They should be afforded due notice and opportunity to be heard, lest they be
deprived of their property without due process.

Not only are public utility corporations other than PLDT directly and materially affected by the outcome of the petitions,
their shareholders also stand to suffer in case they will be forced to divest their shareholdings to ensure compliance with
the said restrictive interpretation of the term "capital". As explained by SHAREPHIL, in five corporations alone, more
than Php158 Billion worth of shares must be divested by foreign shareholders and absorbed by Filipino investors if
petitioners' position is upheld.

Petitioners' disregard of the rights of these other corporations and numerous shareholders constitutes another fatal
procedural flaw, justifying the dismissal of their petitions. Without giving all of them their day in court, they will
definitely be deprived of their property without due process of law. 6

This is highlighted to clear any misimpression that the Gamboa Decision and Gamboa Resolution made a categorical
ruling on the meaning of the word "capital" under Section 11, Article XII of the Constitution only in respect of, or only
confined to, respondent Philippine Long Distance Telephone Company (PLDT). Nothing is further from the truth. Indeed,
a fair reading of the Gamboa Decision and Gamboa Resolution shows that the Court's pronouncements therein would
affect all public utilities, and not just respondent PLDT.

On the substantive grounds, the Court disposed of the issue on whether the SEC gravely abused its discretion in ruling that
respondent PLDT is compliant with the limitation on foreign ownership under the Constitution and other relevant laws as
without merit. The Court reasoned that "in the absence of a definitive ruling by the SEC on PLDT's compliance with the
capital requirement pursuant to the Gamboa Decision and Resolution, any question relative to the inexistent ruling is
premature."7

In resolving the other substantive issue raised by petitioners, the Court held that:

[E]ven if the resolution of the procedural issues were conceded in favor of petitioners, the petitions, being anchored on
Rule 65, must nonetheless fail because the SEC did not commit grave abuse of discretion amounting to lack or excess of
jurisdiction when it issued SEC-MC No. 8. To the contrary, the Court finds SEC-MC No. 8 to have been issued in fealty
to the Gamboa Decision and Resolution.8

To belabor the point, movant's petition is not a continuation of the Gamboa case as the Gamboa Decision attained finality
on October 18, 2012, and thereafter Entry of Judgment was issued on December 11, 2012. 9

As regards movant's repeated invocation of the transcendental importance of the Gamboa case, this does not ipso
facto accord locus standi to movant. Being a new petition, movant had the burden to justify his locus standi in his own
petition. The Court, however, was not persuaded by his justification.

Pursuant to the Court's constitutional duty to exercise judicial review, the Court has conclusively found no grave abuse of
discretion on the part of SEC in issuing SEC-MC No. 8.

The Decision has painstakingly explained why it considered as obiter dictum that pronouncement in
the Gamboa Resolution that the constitutional requirement on Filipino ownership should "apply uniformly and across the
board to all classes of shares, regardless of nomenclature and category, comprising the capital of a corporation."[[9-a]]
The Court stated that:
[T]he fallo or decretal/dispositive portions of both the Gamboa Decision and Resolution are definite, clear and
unequivocal. While there is a passage in the body of the Gamboa Resolution that might have appeared contrary to
the fallo of the Gamboa Decision x x x the definiteness and clarity of the fallo of the Gamboa Decision must control over
the obiter dictum in the Gamboa Resolution regarding the application of the 60-40 Filipino-foreign ownership
requirement to "each class of shares, regardless of differences in voting rights, privileges and restrictions." 10

To the Court's mind and, as exhaustively demonstrated in the Decision, the dispositive portion of the Gamboa Decision
was in no way modified by the Gamboa Resolution.

The heart of the controversy is the interpretation of Section 11, Article XII of the Constitution, which provides: "No
franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to
citizens of the Philippines or to corporations or associations organized under the laws of the Philippines at least sixty per
centum of whose capital is owned by such citizens x x x."

The Gamboa Decision already held, in no uncertain terms, that what the Constitution requires is "[fJull [and legal]
beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60 percent of the voting rights x x x
must rest in the hands of Filipino nationals x x x." 11 And, precisely that is what SEC-MC No. 8 provides, viz.: "x x x
For purposes of determining compliance [with the constitutional or statutory ownership], the required percentage of
Filipino ownership shall be applied to BOTH (a) the total number of outstanding shares of stock entitled to vote in the
election of directors; AND (b) the total number of outstanding shares of stock, whether or not entitled to vote x x x." 12

In construing "full beneficial ownership," the Implementing Rules and Regulations of the Foreign Investments Act of
1991 (FIA-IRR) provides:

For stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not enough to
meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate voting rights is
essential. Thus, stocks, the voting rights of which have been assigned or transferred to aliens cannot be considered held by
Philippine citizens or Philippine nationals. 13

In turn, "beneficial owner" or "beneficial ownership" is defined in the Implementing Rules and Regulations of the
Securities Regulation Code (SRC-IRR) as:

[A]ny person who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has
or shares voting power (which includes the power to vote or direct the voting of such security) and/or investment returns
or power (which includes the power to dispose of, or direct the disposition of such security) x x x. 14

Thus, the definition of "beneficial owner or beneficial ownership" in the SRC-IRR, which is in consonance with the
concept of "full beneficial ownership" in the FIA-IRR, is, as stressed in the Decision, relevant in resolving only the
question of who is the beneficial owner or has beneficial ownership of each "specific stock" of the public utility company
whose stocks are under review. If the Filipino has the voting power of the "specific stock", i.e., he can vote the stock or
direct another to vote for him, or the Filipino has the investment power over the "specific stock", i.e., he can dispose of
the stock or direct another to dispose of it for him, or both, i.e., he can vote and dispose of that "specific stock" or direct
another to vote or dispose it for him, then such Filipino is the "beneficial owner" of that "specific stock." Being
considered Filipino, that "specific stock" is then to be counted as part of the 60% Filipino ownership requirement under
the Constitution. The right to the dividends, jus fruendi - a right emanating from ownership of that "specific stock"
necessarily accrues to its Filipino "beneficial owner."

Once more, this is emphasized anew to disabuse any notion that the dividends accruing to any particular stock are
determinative of that stock's "beneficial ownership." Dividend declaration is dictated by the corporation's unrestricted
retained earnings. On the other hand, the corporation's need of capital for expansion programs and special reserve for
probable contingencies may limit retained earnings available for dividend declaration. 15 It bears repeating here that the
Court in the Gamboa Decision adopted the foregoing definition of the term "capital" in Section 11, Article XII of the
1987 Constitution in express recognition of the sensitive and vital position of public utilities both in the national economy
and for national security, so that the evident purpose of the citizenship requirement is to prevent aliens from assuming
control of public utilities, which may be inimical to the national interest. 16 This purpose prescinds from the
"benefits"/dividends that are derived from or accorded to the particular stocks held by Filipinos vis-a-vis the stocks held
by aliens. So long as Filipinos have controlling interest of a public utility corporation, their decision to declare more
dividends for a particular stock over other kinds of stock is their sole prerogative - an act of ownership that would
presumably be for the benefit of the public utility corporation itself. Thus, as explained in the Decision:

In this regard, it would be apropos to state that since Filipinos own at least 60% of the outstanding shares of stock entitled
to vote directors, which is what the Constitution precisely requires, then the Filipino stockholders control the
corporation, i.e., they dictate corporate actions and decisions, and they have all the rights of ownership including, but not
limited to, offering certain preferred shares that may have greater economic interest to foreign investors - as the need for
capital for corporate pursuits (such as expansion), may be good for the corporation that they own. Surely, these "true
owners" will not allow any dilution of their ownership and control if such move will not be beneficial to them. 17

Finally, as to how the SEC will classify or treat certain stocks with voting rights held by a trust fund that is created by the
public entity whose compliance with the limitation on foreign ownership under the Constitution is under scrutiny, and
how the SEC will determine if such public utility does, in fact, control how the said stocks will be voted, and whether,
resultantly, the trust fund would be considered as Philippine national or not - lengthily discussed in the dissenting opinion
of Justice Carpio - is speculative at this juncture. The Court cannot engage in guesswork. Thus, there is need of an actual
case or controversy before the Court may exercise its power of judicial review. The movant's petition is not that actual
case or controversy.

Thus, the discussion of Justice Carpio' s dissenting opinion as to the voting preferred shares created by respondent PLDT,
their acquisition by BTF Holdings, Inc., which appears to be a wholly-owned company of the PLDT Beneficial Trust
Fund (BTF), and whether or not it is respondent PLDT's management that controls BTF and BTF Holdings, Inc. - all these
are factual matters that are outside the ambit of this Court's review which, as stated in the beginning, is confined to
determining whether or not the SEC committed grave abuse of discretion in issuing SEC-MC No. 8; that is, whether or
not SEC-MC No. 8 violated the ruling of the Court in Gamboa v. Finance Secretary Teves,  18 and the resolution in Heirs
of Wilson P. Gamboa v. Finance Sec. Teves19denying the Motion for Reconsideration therein as to the proper
understanding of "capital".

To be sure, it would be more prudent and advisable for the Court to await the SEC's prior determination of the citizenship
of specific shares of stock held in trust - based on proven facts - before the Court proceeds to pass upon the legality of
such determination.

As to whether respondent PLDT is currently in compliance with the Constitutional provision regarding public utility
entities, the Court must likewise await the SEC's determination thereof applying SEC-MC No. 8. After all, as stated in the
Decision, it is the SEC which is the government agency with the competent expertise and the mandate of law to make
such determination.

In conclusion, the basic issues raised in the Motion having been duly considered and passed upon by the Court in the
Decision and no substantial argument having been adduced to warrant the reconsideration sought, the Court resolves
to DENY the Motion with FINALITY.

WHEREFORE, the subject Motion for Reconsideration is hereby DENIED WITH FINALITY. No further pleadings or
motions shall be entertained in this case. Let entry of final judgment be issued immediately.

SO ORDERED.

ALFREDO BENJAMIN S. CAGUIOA,

Associate Justice

WE CONCUR:

MARIA LOURDES P.A. SERENO

Chief Justice
 (See Dissenting Opinion) (Pls. see concuring opinion)
ANTONIO T. CARPIO PRESBITERO J. VELASCO, JR.
Associate Justice Associate Justice

I join the dissent opinion of justice carpio:

DIOSDADO M. PERALTA
TERESITA J. LEONARDO-DE CASTRO
Associate Justice
Associate Justice

LUCAS P. BERSAMIN MARIANO C. DEL CASTILLO

Associate Justice Associate Justice

I join the dissent opinion of J. carpio

BIENVENIDO L. REYES
JOSE CATRAL MENDOZA
Associate Justice
Associate Justice

(No Part) I dissent. See separate opinion

ESTELA M. PERLAS-BERNABE MARVIC M.V.F. LEONEN
Associate Justice Associate Justice

(No Part) I join the dissent opinion of J. carpio:

FRANCIS H. JARDELEZA SAMUEL R. MARTIRES
Associate Justice Associate Justice

NOEL G. TIJAM
Associate Justice

CERTIFICATION

Pursuant to the Section 13, Article VIII of the Constitution and the Division Chairperson’s Attestation, I certify that the
conclusions in the above Resolution had been reached in consultation before the case was assigned to the writer of the
opinion of the Court’s Division.

MARIA LOURDES P.A. SERENO

Chief Justice
Grandfather Rule
 Narra Nickel Mining and Development Corp.et al vs. Redmont Consolidated Mines Corp, G.R No. 195580; April
21, 2014

G.R. No. 195580               April 21, 2014

NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND DEVELOPMENT, INC.,
and MCARTHUR MINING, INC., Petitioners,
vs.
REDMONT CONSOLIDATED MINES CORP., Respondent.

DECISION

VELASCO, JR., J.:

Before this Court is a Petition for Review on Certiorari under Rule 45 filed by Narra Nickel and Mining Development
Corp. (Narra), Tesoro Mining and Development, Inc. (Tesoro), and McArthur Mining Inc. (McArthur), which seeks to
reverse the October 1, 2010 Decision1 and the February 15, 2011 Resolution of the Court of Appeals (CA).

The Facts

Sometime in December 2006, respondent Redmont Consolidated Mines Corp. (Redmont), a domestic corporation
organized and existing under Philippine laws, took interest in mining and exploring certain areas of the province of
Palawan. After inquiring with the Department of Environment and Natural Resources (DENR), it learned that the areas
where it wanted to undertake exploration and mining activities where already covered by Mineral Production Sharing
Agreement (MPSA) applications of petitioners Narra, Tesoro and McArthur.

Petitioner McArthur, through its predecessor-in-interest Sara Marie Mining, Inc. (SMMI), filed an application for an
MPSA and Exploration Permit (EP) with the Mines and Geo-Sciences Bureau (MGB), Region IV-B, Office of the
Department of Environment and Natural Resources (DENR).

Subsequently, SMMI was issued MPSA-AMA-IVB-153 covering an area of over 1,782 hectares in Barangay Sumbiling,
Municipality of Bataraza, Province of Palawan and EPA-IVB-44 which includes an area of 3,720 hectares in Barangay
Malatagao, Bataraza, Palawan. The MPSA and EP were then transferred to Madridejos Mining Corporation (MMC) and,
on November 6, 2006, assigned to petitioner McArthur. 2

Petitioner Narra acquired its MPSA from Alpha Resources and Development Corporation and Patricia Louise Mining &
Development Corporation (PLMDC) which previously filed an application for an MPSA with the MGB, Region IV-B,
DENR on January 6, 1992. Through the said application, the DENR issued MPSA-IV-1-12 covering an area of 3.277
hectares in barangays Calategas and San Isidro, Municipality of Narra, Palawan. Subsequently, PLMDC conveyed,
transferred and/or assigned its rights and interests over the MPSA application in favor of Narra.

Another MPSA application of SMMI was filed with the DENR Region IV-B, labeled as MPSA-AMA-IVB-154 (formerly
EPA-IVB-47) over 3,402 hectares in Barangays Malinao and Princesa Urduja, Municipality of Narra, Province of
Palawan. SMMI subsequently conveyed, transferred and assigned its rights and interest over the said MPSA application to
Tesoro.

On January 2, 2007, Redmont filed before the Panel of Arbitrators (POA) of the DENR three (3) separate petitions for the
denial of petitioners’ applications for MPSA designated as AMA-IVB-153, AMA-IVB-154 and MPSA IV-1-12.

In the petitions, Redmont alleged that at least 60% of the capital stock of McArthur, Tesoro and Narra are owned and
controlled by MBMI Resources, Inc. (MBMI), a 100% Canadian corporation. Redmont reasoned that since MBMI is a
considerable stockholder of petitioners, it was the driving force behind petitioners’ filing of the MPSAs over the areas
covered by applications since it knows that it can only participate in mining activities through corporations which are
deemed Filipino citizens. Redmont argued that given that petitioners’ capital stocks were mostly owned by MBMI, they
were likewise disqualified from engaging in mining activities through MPSAs, which are reserved only for Filipino
citizens.

In their Answers, petitioners averred that they were qualified persons under Section 3(aq) of Republic Act No. (RA) 7942
or the Philippine Mining Act of 1995 which provided:

Sec. 3 Definition of Terms. As used in and for purposes of this Act, the following terms, whether in singular or plural,
shall mean:

xxxx

(aq) "Qualified person" means any citizen of the Philippines with capacity to contract, or a corporation, partnership,
association, or cooperative organized or authorized for the purpose of engaging in mining, with technical and financial
capability to undertake mineral resources development and duly registered in accordance with law at least sixty per cent
(60%) of the capital of which is owned by citizens of the Philippines: Provided, That a legally organized foreign-owned
corporation shall be deemed a qualified person for purposes of granting an exploration permit, financial or technical
assistance agreement or mineral processing permit.

Additionally, they stated that their nationality as applicants is immaterial because they also applied for Financial or
Technical Assistance Agreements (FTAA) denominated as AFTA-IVB-09 for McArthur, AFTA-IVB-08 for Tesoro and
AFTA-IVB-07 for Narra, which are granted to foreign-owned corporations. Nevertheless, they claimed that the issue on
nationality should not be raised since McArthur, Tesoro and Narra are in fact Philippine Nationals as 60% of their capital
is owned by citizens of the Philippines. They asserted that though MBMI owns 40% of the shares of PLMC (which owns
5,997 shares of Narra),3 40% of the shares of MMC (which owns 5,997 shares of McArthur) 4 and 40% of the shares of
SLMC (which, in turn, owns 5,997 shares of Tesoro),5 the shares of MBMI will not make it the owner of at least 60% of
the capital stock of each of petitioners. They added that the best tool used in determining the nationality of a corporation is
the "control test," embodied in Sec. 3 of RA 7042 or the Foreign Investments Act of 1991. They also claimed that the
POA of DENR did not have jurisdiction over the issues in Redmont’s petition since they are not enumerated in Sec. 77 of
RA 7942. Finally, they stressed that Redmont has no personality to sue them because it has no pending claim or
application over the areas applied for by petitioners.

On December 14, 2007, the POA issued a Resolution disqualifying petitioners from gaining MPSAs. It held:

[I]t is clearly established that respondents are not qualified applicants to engage in mining activities. On the other hand,
[Redmont] having filed its own applications for an EPA over the areas earlier covered by the MPSA application of
respondents may be considered if and when they are qualified under the law. The violation of the requirements for the
issuance and/or grant of permits over mining areas is clearly established thus, there is reason to believe that the
cancellation and/or revocation of permits already issued under the premises is in order and open the areas covered to other
qualified applicants.

xxxx

WHEREFORE, the Panel of Arbitrators finds the Respondents, McArthur Mining Inc., Tesoro Mining and Development,
Inc., and Narra Nickel Mining and Development Corp. as, DISQUALIFIED for being considered as Foreign
Corporations. Their Mineral Production Sharing Agreement (MPSA) are hereby x x x DECLARED NULL AND VOID. 6

The POA considered petitioners as foreign corporations being "effectively controlled" by MBMI, a 100% Canadian
company and declared their MPSAs null and void. In the same Resolution, it gave due course to Redmont’s EPAs.
Thereafter, on February 7, 2008, the POA issued an Order 7 denying the Motion for Reconsideration filed by petitioners.

Aggrieved by the Resolution and Order of the POA, McArthur and Tesoro filed a joint Notice of Appeal 8 and
Memorandum of Appeal9 with the Mines Adjudication Board (MAB) while Narra separately filed its Notice of
Appeal10 and Memorandum of Appeal.11
In their respective memorandum, petitioners emphasized that they are qualified persons under the law. Also, through a
letter, they informed the MAB that they had their individual MPSA applications converted to FTAAs. McArthur’s FTAA
was denominated as AFTA-IVB-0912 on May 2007, while Tesoro’s MPSA application was converted to AFTA-IVB-
0813 on May 28, 2007, and Narra’s FTAA was converted to AFTA-IVB-0714 on March 30, 2006.

Pending the resolution of the appeal filed by petitioners with the MAB, Redmont filed a Complaint 15 with the Securities
and Exchange Commission (SEC), seeking the revocation of the certificates for registration of petitioners on the ground
that they are foreign-owned or controlled corporations engaged in mining in violation of Philippine laws. Thereafter,
Redmont filed on September 1, 2008 a Manifestation and Motion to Suspend Proceeding before the MAB praying for the
suspension of the proceedings on the appeals filed by McArthur, Tesoro and Narra.

Subsequently, on September 8, 2008, Redmont filed before the Regional Trial Court of Quezon City, Branch 92 (RTC) a
Complaint16 for injunction with application for issuance of a temporary restraining order (TRO) and/or writ of preliminary
injunction, docketed as Civil Case No. 08-63379. Redmont prayed for the deferral of the MAB proceedings pending the
resolution of the Complaint before the SEC.

But before the RTC can resolve Redmont’s Complaint and applications for injunctive reliefs, the MAB issued an Order on
September 10, 2008, finding the appeal meritorious. It held:

WHEREFORE, in view of the foregoing, the Mines Adjudication Board hereby REVERSES and SETS ASIDE the
Resolution dated 14 December 2007 of the Panel of Arbitrators of Region IV-B (MIMAROPA) in POA-DENR Case Nos.
2001-01, 2007-02 and 2007-03, and its Order dated 07 February 2008 denying the Motions for Reconsideration of the
Appellants. The Petition filed by Redmont Consolidated Mines Corporation on 02 January 2007 is hereby ordered
DISMISSED.17

Belatedly, on September 16, 2008, the RTC issued an Order 18 granting Redmont’s application for a TRO and setting the
case for hearing the prayer for the issuance of a writ of preliminary injunction on September 19, 2008.

Meanwhile, on September 22, 2008, Redmont filed a Motion for Reconsideration 19 of the September 10, 2008 Order of
the MAB. Subsequently, it filed a Supplemental Motion for Reconsideration 20 on September 29, 2008.

Before the MAB could resolve Redmont’s Motion for Reconsideration and Supplemental Motion for Reconsideration,
Redmont filed before the RTC a Supplemental Complaint 21 in Civil Case No. 08-63379.

On October 6, 2008, the RTC issued an Order22 granting the issuance of a writ of preliminary injunction enjoining the
MAB from finally disposing of the appeals of petitioners and from resolving Redmont’s Motion for Reconsideration and
Supplement Motion for Reconsideration of the MAB’s September 10, 2008 Resolution.

On July 1, 2009, however, the MAB issued a second Order denying Redmont’s Motion for Reconsideration and
Supplemental Motion for Reconsideration and resolving the appeals filed by petitioners.

Hence, the petition for review filed by Redmont before the CA, assailing the Orders issued by the MAB. On October 1,
2010, the CA rendered a Decision, the dispositive of which reads:

WHEREFORE, the Petition is PARTIALLY GRANTED. The assailed Orders, dated September 10, 2008 and July 1,
2009 of the Mining Adjudication Board are reversed and set aside. The findings of the Panel of Arbitrators of the
Department of Environment and Natural Resources that respondents McArthur, Tesoro and Narra are foreign corporations
is upheld and, therefore, the rejection of their applications for Mineral Product Sharing Agreement should be
recommended to the Secretary of the DENR.

With respect to the applications of respondents McArthur, Tesoro and Narra for Financial or Technical Assistance
Agreement (FTAA) or conversion of their MPSA applications to FTAA, the matter for its rejection or approval is left for
determination by the Secretary of the DENR and the President of the Republic of the Philippines.

SO ORDERED.23
In a Resolution dated February 15, 2011, the CA denied the Motion for Reconsideration filed by petitioners.

After a careful review of the records, the CA found that there was doubt as to the nationality of petitioners when it
realized that petitioners had a common major investor, MBMI, a corporation composed of 100% Canadians. Pursuant to
the first sentence of paragraph 7 of Department of Justice (DOJ) Opinion No. 020, Series of 2005, adopting the 1967 SEC
Rules which implemented the requirement of the Constitution and other laws pertaining to the exploitation of natural
resources, the CA used the "grandfather rule" to determine the nationality of petitioners. It provided:

Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be
considered as of Philippine nationality, but if the percentage of Filipino ownership in the corporation or partnership is less
than 60%, only the number of shares corresponding to such percentage shall be counted as of Philippine nationality. Thus,
if 100,000 shares are registered in the name of a corporation or partnership at least 60% of the capital stock or capital,
respectively, of which belong to Filipino citizens, all of the shares shall be recorded as owned by Filipinos. But if less than
60%, or say, 50% of the capital stock or capital of the corporation or partnership, respectively, belongs to Filipino
citizens, only 50,000 shares shall be recorded as belonging to aliens. 24 (emphasis supplied)

In determining the nationality of petitioners, the CA looked into their corporate structures and their corresponding
common shareholders. Using the grandfather rule, the CA discovered that MBMI in effect owned majority of the common
stocks of the petitioners as well as at least 60% equity interest of other majority shareholders of petitioners through joint
venture agreements. The CA found that through a "web of corporate layering, it is clear that one common controlling
investor in all mining corporations involved x x x is MBMI."25 Thus, it concluded that petitioners McArthur, Tesoro and
Narra are also in partnership with, or privies-in-interest of, MBMI.

Furthermore, the CA viewed the conversion of the MPSA applications of petitioners into FTAA applications suspicious in
nature and, as a consequence, it recommended the rejection of petitioners’ MPSA applications by the Secretary of the
DENR.

With regard to the settlement of disputes over rights to mining areas, the CA pointed out that the POA has jurisdiction
over them and that it also has the power to determine the of nationality of petitioners as a prerequisite of the Constitution
prior the conferring of rights to "co-production, joint venture or production-sharing agreements" of the state to mining
rights. However, it also stated that the POA’s jurisdiction is limited only to the resolution of the dispute and not on the
approval or rejection of the MPSAs. It stipulated that only the Secretary of the DENR is vested with the power to approve
or reject applications for MPSA.

Finally, the CA upheld the findings of the POA in its December 14, 2007 Resolution which considered petitioners
McArthur, Tesoro and Narra as foreign corporations. Nevertheless, the CA determined that the POA’s declaration that the
MPSAs of McArthur, Tesoro and Narra are void is highly improper.

While the petition was pending with the CA, Redmont filed with the Office of the President (OP) a petition dated May 7,
2010 seeking the cancellation of petitioners’ FTAAs. The OP rendered a Decision 26 on April 6, 2011, wherein it canceled
and revoked petitioners’ FTAAs for violating and circumventing the "Constitution x x x[,] the Small Scale Mining Law
and Environmental Compliance Certificate as well as Sections 3 and 8 of the Foreign Investment Act and E.O. 584." 27 The
OP, in affirming the cancellation of the issued FTAAs, agreed with Redmont stating that petitioners committed violations
against the abovementioned laws and failed to submit evidence to negate them. The Decision further quoted the December
14, 2007 Order of the POA focusing on the alleged misrepresentation and claims made by petitioners of being domestic or
Filipino corporations and the admitted continued mining operation of PMDC using their locally secured Small Scale
Mining Permit inside the area earlier applied for an MPSA application which was eventually transferred to Narra. It also
agreed with the POA’s estimation that the filing of the FTAA applications by petitioners is a clear admission that they are
"not capable of conducting a large scale mining operation and that they need the financial and technical assistance of a
foreign entity in their operation, that is why they sought the participation of MBMI Resources, Inc." 28 The Decision
further quoted:

The filing of the FTAA application on June 15, 2007, during the pendency of the case only demonstrate the violations and
lack of qualification of the respondent corporations to engage in mining. The filing of the FTAA application conversion
which is allowed foreign corporation of the earlier MPSA is an admission that indeed the respondent is not Filipino but
rather of foreign nationality who is disqualified under the laws. Corporate documents of MBMI Resources, Inc. furnished
its stockholders in their head office in Canada suggest that they are conducting operation only through their local
counterparts.29

The Motion for Reconsideration of the Decision was further denied by the OP in a Resolution 30 dated July 6, 2011.
Petitioners then filed a Petition for Review on Certiorari of the OP’s Decision and Resolution with the CA, docketed as
CA-G.R. SP No. 120409. In the CA Decision dated February 29, 2012, the CA affirmed the Decision and Resolution of
the OP. Thereafter, petitioners appealed the same CA decision to this Court which is now pending with a different
division.

Thus, the instant petition for review against the October 1, 2010 Decision of the CA. Petitioners put forth the following
errors of the CA:

I.

The Court of Appeals erred when it did not dismiss the case for mootness despite the fact that the subject matter
of the controversy, the MPSA Applications, have already been converted into FTAA applications and that the
same have already been granted.

II.

The Court of Appeals erred when it did not dismiss the case for lack of jurisdiction considering that the Panel of
Arbitrators has no jurisdiction to determine the nationality of Narra, Tesoro and McArthur.

III.

The Court of Appeals erred when it did not dismiss the case on account of Redmont’s willful forum shopping.

IV.

The Court of Appeals’ ruling that Narra, Tesoro and McArthur are foreign corporations based on the "Grandfather
Rule" is contrary to law, particularly the express mandate of the Foreign Investments Act of 1991, as amended,
and the FIA Rules.

V.

The Court of Appeals erred when it applied the exceptions to the res inter alios acta rule.

VI.

The Court of Appeals erred when it concluded that the conversion of the MPSA Applications into FTAA
Applications were of "suspicious nature" as the same is based on mere conjectures and surmises without any
shred of evidence to show the same.31

We find the petition to be without merit.

This case not moot and academic

The claim of petitioners that the CA erred in not rendering the instant case as moot is without merit.

Basically, a case is said to be moot and/or academic when it "ceases to present a justiciable controversy by virtue of
supervening events, so that a declaration thereon would be of no practical use or value." 32 Thus, the courts "generally
decline jurisdiction over the case or dismiss it on the ground of mootness." 33
The "mootness" principle, however, does accept certain exceptions and the mere raising of an issue of "mootness" will not
deter the courts from trying a case when there is a valid reason to do so. In David v. Macapagal-Arroyo (David), the Court
provided four instances where courts can decide an otherwise moot case, thus:

1.) There is a grave violation of the Constitution;

2.) The exceptional character of the situation and paramount public interest is involved;

3.) When constitutional issue raised requires formulation of controlling principles to guide the bench, the bar, and
the public; and

4.) The case is capable of repetition yet evading review. 34

All of the exceptions stated above are present in the instant case. We of this Court note that a grave violation of the
Constitution, specifically Section 2 of Article XII, is being committed by a foreign corporation right under our country’s
nose through a myriad of corporate layering under different, allegedly, Filipino corporations. The intricate corporate
layering utilized by the Canadian company, MBMI, is of exceptional character and involves paramount public interest
since it undeniably affects the exploitation of our Country’s natural resources. The corresponding actions of petitioners
during the lifetime and existence of the instant case raise questions as what principle is to be applied to cases with similar
issues. No definite ruling on such principle has been pronounced by the Court; hence, the disposition of the issues or
errors in the instant case will serve as a guide "to the bench, the bar and the public." 35 Finally, the instant case is capable of
repetition yet evading review, since the Canadian company, MBMI, can keep on utilizing dummy Filipino corporations
through various schemes of corporate layering and conversion of applications to skirt the constitutional prohibition against
foreign mining in Philippine soil.

Conversion of MPSA applications to FTAA applications

We shall discuss the first error in conjunction with the sixth error presented by petitioners since both involve the
conversion of MPSA applications to FTAA applications. Petitioners propound that the CA erred in ruling against them
since the questioned MPSA applications were already converted into FTAA applications; thus, the issue on the prohibition
relating to MPSA applications of foreign mining corporations is academic. Also, petitioners would want us to correct the
CA’s finding which deemed the aforementioned conversions of applications as suspicious in nature, since it is based on
mere conjectures and surmises and not supported with evidence.

We disagree.

The CA’s analysis of the actions of petitioners after the case was filed against them by respondent is on point. The
changing of applications by petitioners from one type to another just because a case was filed against them, in truth,
would raise not a few sceptics’ eyebrows. What is the reason for such conversion? Did the said conversion not stem from
the case challenging their citizenship and to have the case dismissed against them for being "moot"? It is quite obvious
that it is petitioners’ strategy to have the case dismissed against them for being "moot."

Consider the history of this case and how petitioners responded to every action done by the court or appropriate
government agency: on January 2, 2007, Redmont filed three separate petitions for denial of the MPSA applications of
petitioners before the POA. On June 15, 2007, petitioners filed a conversion of their MPSA applications to FTAAs. The
POA, in its December 14, 2007 Resolution, observed this suspect change of applications while the case was pending
before it and held:

The filing of the Financial or Technical Assistance Agreement application is a clear admission that the respondents are not
capable of conducting a large scale mining operation and that they need the financial and technical assistance of a foreign
entity in their operation that is why they sought the participation of MBMI Resources, Inc. The participation of MBMI in
the corporation only proves the fact that it is the Canadian company that will provide the finances and the resources to
operate the mining areas for the greater benefit and interest of the same and not the Filipino stockholders who only have a
less substantial financial stake in the corporation.
 xxxx

x x x The filing of the FTAA application on June 15, 2007, during the pendency of the case only demonstrate the
violations and lack of qualification of the respondent corporations to engage in mining. The filing of the FTAA
application conversion which is allowed foreign corporation of the earlier MPSA is an admission that indeed the
respondent is not Filipino but rather of foreign nationality who is disqualified under the laws. Corporate documents of
MBMI Resources, Inc. furnished its stockholders in their head office in Canada suggest that they are conducting operation
only through their local counterparts.36

On October 1, 2010, the CA rendered a Decision which partially granted the petition, reversing and setting aside the
September 10, 2008 and July 1, 2009 Orders of the MAB. In the said Decision, the CA upheld the findings of the POA of
the DENR that the herein petitioners are in fact foreign corporations thus a recommendation of the rejection of their
MPSA applications were recommended to the Secretary of the DENR. With respect to the FTAA applications or
conversion of the MPSA applications to FTAAs, the CA deferred the matter for the determination of the Secretary of the
DENR and the President of the Republic of the Philippines. 37

In their Motion for Reconsideration dated October 26, 2010, petitioners prayed for the dismissal of the petition asserting
that on April 5, 2010, then President Gloria Macapagal-Arroyo signed and issued in their favor FTAA No. 05-2010-IVB,
which rendered the petition moot and academic. However, the CA, in a Resolution dated February 15, 2011 denied their
motion for being a mere "rehash of their claims and defenses." 38 Standing firm on its Decision, the CA affirmed the ruling
that petitioners are, in fact, foreign corporations. On April 5, 2011, petitioners elevated the case to us via a Petition for
Review on Certiorari under Rule 45, questioning the Decision of the CA. Interestingly, the OP rendered a Decision dated
April 6, 2011, a day after this petition for review was filed, cancelling and revoking the FTAAs, quoting the Order of the
POA and stating that petitioners are foreign corporations since they needed the financial strength of MBMI, Inc. in order
to conduct large scale mining operations. The OP Decision also based the cancellation on the misrepresentation of facts
and the violation of the "Small Scale Mining Law and Environmental Compliance Certificate as well as Sections 3 and 8
of the Foreign Investment Act and E.O. 584."39 On July 6, 2011, the OP issued a Resolution, denying the Motion for
Reconsideration filed by the petitioners.

Respondent Redmont, in its Comment dated October 10, 2011, made known to the Court the fact of the OP’s Decision
and Resolution. In their Reply, petitioners chose to ignore the OP Decision and continued to reuse their old arguments
claiming that they were granted FTAAs and, thus, the case was moot. Petitioners filed a Manifestation and Submission
dated October 19, 2012,40 wherein they asserted that the present petition is moot since, in a remarkable turn of events,
MBMI was able to sell/assign all its shares/interest in the "holding companies" to DMCI Mining Corporation (DMCI), a
Filipino corporation and, in effect, making their respective corporations fully-Filipino owned.

Again, it is quite evident that petitioners have been trying to have this case dismissed for being "moot." Their final act,
wherein MBMI was able to allegedly sell/assign all its shares and interest in the petitioner "holding companies" to DMCI,
only proves that they were in fact not Filipino corporations from the start. The recent divesting of interest by MBMI will
not change the stand of this Court with respect to the nationality of petitioners prior the suspicious change in their
corporate structures. The new documents filed by petitioners are factual evidence that this Court has no power to verify.

The only thing clear and proved in this Court is the fact that the OP declared that petitioner corporations have violated
several mining laws and made misrepresentations and falsehood in their applications for FTAA which lead to the
revocation of the said FTAAs, demonstrating that petitioners are not beyond going against or around the law using shifty
actions and strategies. Thus, in this instance, we can say that their claim of mootness is moot in itself because their
defense of conversion of MPSAs to FTAAs has been discredited by the OP Decision.

Grandfather test

The main issue in this case is centered on the issue of petitioners’ nationality, whether Filipino or foreign. In their
previous petitions, they had been adamant in insisting that they were Filipino corporations, until they submitted their
Manifestation and Submission dated October 19, 2012 where they stated the alleged change of corporate ownership to
reflect their Filipino ownership. Thus, there is a need to determine the nationality of petitioner corporations.
Basically, there are two acknowledged tests in determining the nationality of a corporation: the control test and the
grandfather rule. Paragraph 7 of DOJ Opinion No. 020, Series of 2005, adopting the 1967 SEC Rules which implemented
the requirement of the Constitution and other laws pertaining to the controlling interests in enterprises engaged in the
exploitation of natural resources owned by Filipino citizens, provides:

Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be
considered as of Philippine nationality, but if the percentage of Filipino ownership in the corporation or partnership is less
than 60%, only the number of shares corresponding to such percentage shall be counted as of Philippine nationality. Thus,
if 100,000 shares are registered in the name of a corporation or partnership at least 60% of the capital stock or capital,
respectively, of which belong to Filipino citizens, all of the shares shall be recorded as owned by Filipinos. But if less than
60%, or say, 50% of the capital stock or capital of the corporation or partnership, respectively, belongs to Filipino
citizens, only 50,000 shares shall be counted as owned by Filipinos and the other 50,000 shall be recorded as belonging to
aliens.

The first part of paragraph 7, DOJ Opinion No. 020, stating "shares belonging to corporations or partnerships at least 60%
of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality," pertains to the
control test or the liberal rule. On the other hand, the second part of the DOJ Opinion which provides, "if the percentage
of the Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to
such percentage shall be counted as Philippine nationality," pertains to the stricter, more stringent grandfather rule.

Prior to this recent change of events, petitioners were constant in advocating the application of the "control test" under RA
7042, as amended by RA 8179, otherwise known as the Foreign Investments Act (FIA), rather than using the stricter
grandfather rule. The pertinent provision under Sec. 3 of the FIA provides:

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

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

The grandfather rule, petitioners reasoned, has no leg to stand on in the instant case since the definition of a "Philippine
National" under Sec. 3 of the FIA does not provide for it. They further claim that the grandfather rule "has been
abandoned and is no longer the applicable rule."41 They also opined that the last portion of Sec. 3 of the FIA admits the
application of a "corporate layering" scheme of corporations. Petitioners claim that the clear and unambiguous wordings
of the statute preclude the court from construing it and prevent the court’s use of discretion in applying the law. They said
that the plain, literal meaning of the statute meant the application of the control test is obligatory.

We disagree. "Corporate layering" is admittedly allowed by the FIA; but if it is used to circumvent the Constitution and
pertinent laws, then it becomes illegal. Further, the pronouncement of petitioners that the grandfather rule has already
been abandoned must be discredited for lack of basis.

Art. XII, Sec. 2 of the Constitution provides:

Sec. 2. All lands of the public domain, waters, minerals, coal, petroleum and other mineral oils, all forces of potential
energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural resources are owned by the State. With the
exception of agricultural lands, all other natural resources shall not be alienated. The exploration, development, and
utilization of natural resources shall be under the full control and supervision of the State. The State may directly
undertake such activities, or it may enter into co-production, joint venture or production-sharing agreements with Filipino
citizens, or corporations or associations at least sixty per centum of whose capital is owned by such citizens. Such
agreements may be for a period not exceeding twenty-five years, renewable for not more than twenty-five years, and
under such terms and conditions as may be provided by law.

xxxx

The President may enter into agreements with Foreign-owned corporations involving either technical or financial
assistance for large-scale exploration, development, and utilization of minerals, petroleum, and other mineral oils
according to the general terms and conditions provided by law, based on real contributions to the economic growth and
general welfare of the country. In such agreements, the State shall promote the development and use of local scientific and
technical resources. (emphasis supplied)

The emphasized portion of Sec. 2 which focuses on the State entering into different types of agreements for the
exploration, development, and utilization of natural resources with entities who are deemed Filipino due to 60 percent
ownership of capital is pertinent to this case, since the issues are centered on the utilization of our country’s natural
resources or specifically, mining. Thus, there is a need to ascertain the nationality of petitioners since, as the Constitution
so provides, such agreements are only allowed corporations or associations "at least 60 percent of such capital is owned
by such citizens." The deliberations in the Records of the 1986 Constitutional Commission shed light on how a citizenship
of a corporation will be determined:

Mr. BENNAGEN: Did I hear right that the Chairman’s interpretation of an independent national economy is freedom
from undue foreign control? What is the meaning of undue foreign control?

MR. VILLEGAS: Undue foreign control is foreign control which sacrifices national sovereignty and the welfare of the
Filipino in the economic sphere.

MR. BENNAGEN: Why does it have to be qualified still with the word "undue"? Why not simply freedom from foreign
control? I think that is the meaning of independence, because as phrased, it still allows for foreign control.

MR. VILLEGAS: It will now depend on the interpretation because if, for example, we retain the 60/40 possibility in the
cultivation of natural resources, 40 percent involves some control; not total control, but some control.

MR. BENNAGEN: In any case, I think in due time we will propose some amendments.

MR. VILLEGAS: Yes. But we will be open to improvement of the phraseology.

Mr. BENNAGEN: Yes.

Thank you, Mr. Vice-President.

xxxx

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

MR. VILLEGAS: That is right.

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

MR. VILLEGAS: We have just had a long discussion with the members of the team from the UP Law Center who
provided us with a draft. The phrase that is contained here which we adopted from the UP draft is ‘60 percent of the
voting stock.’
MR. NOLLEDO: That must be based on the subscribed capital stock, because unless declared delinquent, unpaid capital
stock shall be entitled to vote.

MR. VILLEGAS: That is right.

MR. NOLLEDO: Thank you.

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

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

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

MR. VILLEGAS: Yes.42 (emphasis supplied)

It is apparent that it is the intention of the framers of the Constitution to apply the grandfather rule in cases where
corporate layering is present.

Elementary in statutory construction is when there is conflict between the Constitution and a statute, the Constitution will
prevail. In this instance, specifically pertaining to the provisions under Art. XII of the Constitution on National Economy
and Patrimony, Sec. 3 of the FIA will have no place of application. As decreed by the honorable framers of our
Constitution, the grandfather rule prevails and must be applied.

Likewise, paragraph 7, DOJ Opinion No. 020, Series of 2005 provides:

The above-quoted SEC Rules provide for the manner of calculating the Filipino interest in a corporation for purposes,
among others, of determining compliance with nationality requirements (the ‘Investee Corporation’). Such manner of
computation is necessary since the shares in the Investee Corporation may be owned both by individual stockholders
(‘Investing Individuals’) and by corporations and partnerships (‘Investing Corporation’). The said rules thus provide for
the determination of nationality depending on the ownership of the Investee Corporation and, in certain instances, the
Investing Corporation.

Under the above-quoted SEC Rules, there are two cases in determining the nationality of the Investee Corporation. The
first case is the ‘liberal rule’, later coined by the SEC as the Control Test in its 30 May 1990 Opinion, and pertains to the
portion in said Paragraph 7 of the 1967 SEC Rules which states, ‘(s)hares belonging to corporations or partnerships at
least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality.’ Under the
liberal Control Test, there is no need to further trace the ownership of the 60% (or more) Filipino stockholdings of the
Investing Corporation since a corporation which is at least 60% Filipino-owned is considered as Filipino.

The second case is the Strict Rule or the Grandfather Rule Proper and pertains to the portion in said Paragraph 7 of the
1967 SEC Rules which states, "but if the percentage of Filipino ownership in the corporation or partnership is less than
60%, only the number of shares corresponding to such percentage shall be counted as of Philippine nationality." Under the
Strict Rule or Grandfather Rule Proper, the combined totals in the Investing Corporation and the Investee Corporation
must be traced (i.e., "grandfathered") to determine the total percentage of Filipino ownership.

Moreover, the ultimate Filipino ownership of the shares must first be traced to the level of the Investing Corporation and
added to the shares directly owned in the Investee Corporation x x x.

xxxx

In other words, based on the said SEC Rule and DOJ Opinion, the Grandfather Rule or the second part of the SEC Rule
applies only when the 60-40 Filipino-foreign equity ownership is in doubt (i.e., in cases where the joint venture
corporation with Filipino and foreign stockholders with less than 60% Filipino stockholdings [or 59%] invests in other
joint venture corporation which is either 60-40% Filipino-alien or the 59% less Filipino). Stated differently, where the 60-
40 Filipino- foreign equity ownership is not in doubt, the Grandfather Rule will not apply. (emphasis supplied)

After a scrutiny of the evidence extant on record, the Court finds that this case calls for the application of the grandfather
rule since, as ruled by the POA and affirmed by the OP, doubt prevails and persists in the corporate ownership of
petitioners. Also, as found by the CA, doubt is present in the 60-40 Filipino equity ownership of petitioners Narra,
McArthur and Tesoro, since their common investor, the 100% Canadian corporation––MBMI, funded them. However,
petitioners also claim that there is "doubt" only when the stockholdings of Filipinos are less than 60%. 43

The assertion of petitioners that "doubt" only exists when the stockholdings are less than 60% fails to convince this Court.
DOJ Opinion No. 20, which petitioners quoted in their petition, only made an example of an instance where "doubt" as to
the ownership of the corporation exists. It would be ludicrous to limit the application of the said word only to the
instances where the stockholdings of non-Filipino stockholders are more than 40% of the total stockholdings in a
corporation. The corporations interested in circumventing our laws would clearly strive to have "60% Filipino
Ownership" at face value. It would be senseless for these applying corporations to state in their respective articles of
incorporation that they have less than 60% Filipino stockholders since the applications will be denied instantly. Thus,
various corporate schemes and layerings are utilized to circumvent the application of the Constitution.

Obviously, the instant case presents a situation which exhibits a scheme employed by stockholders to circumvent the law,
creating a cloud of doubt in the Court’s mind. To determine, therefore, the actual participation, direct or indirect, of
MBMI, the grandfather rule must be used.

McArthur Mining, Inc.

To establish the actual ownership, interest or participation of MBMI in each of petitioners’ corporate structure, they have
to be "grandfathered."

As previously discussed, McArthur acquired its MPSA application from MMC, which acquired its application from
SMMI. McArthur has a capital stock of ten million pesos (PhP 10,000,000) divided into 10,000 common shares at one
thousand pesos (PhP 1,000) per share, subscribed to by the following: 44

Name Nationality Number of Amount Amount Paid

Shares Subscribed
Madridejos Mining Filipino 5,997 PhP 5,997,000.00 PhP 825,000.00
Corporation
MBMI Resources, Canadian 3,998 PhP 3,998,000.0 PhP 1,878,174.60
Inc.
Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00
Esguerra
Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00
Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00
Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
  Total 10,000 PhP 10,000,000.00 PhP 2,708,174.60
(emphasis supplied)

Interestingly, looking at the corporate structure of MMC, we take note that it has a similar structure and composition as
McArthur. In fact, it would seem that MBMI is also a major investor and "controls" 45 MBMI and also, similar nominal
shareholders were present, i.e. Fernando B. Esguerra (Esguerra), Lauro L. Salazar (Salazar), Michael T. Mason (Mason)
and Kenneth Cawkell (Cawkell):
Madridejos Mining Corporation

Name Nationalit Number of Amount Amount Paid

y Shares Subscribed
Olympic Mines & Filipino 6,663 PhP 6,663,000.00 PhP 0

Development

Corp.
MBMI Canadian 3,331 PhP 3,331,000.00 PhP 2,803,900.00
Resources,

Inc.
Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00
Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00

Esguerra
Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
Emmanuel G. Filipino 1 PhP 1,000.00 PhP 1,000.00

Hernando
Michael T. American 1 PhP 1,000.00 PhP 1,000.00
Mason
Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
  Total 10,000 PhP 10,000,000.00 PhP 2,809,900.00

(emphasis supplied)

Noticeably, Olympic Mines & Development Corporation (Olympic) did not pay any amount with respect to the number of
shares they subscribed to in the corporation, which is quite absurd since Olympic is the major stockholder in MMC.
MBMI’s 2006 Annual Report sheds light on why Olympic failed to pay any amount with respect to the number of shares
it subscribed to. It states that Olympic entered into joint venture agreements with several Philippine companies, wherein it
holds directly and indirectly a 60% effective equity interest in the Olympic Properties. 46 Quoting the said Annual report:

On September 9, 2004, the Company and Olympic Mines & Development Corporation ("Olympic") entered into a series
of agreements including a Property Purchase and Development Agreement (the Transaction Documents) with respect to
three nickel laterite properties in Palawan, Philippines (the "Olympic Properties"). The Transaction Documents effectively
establish a joint venture between the Company and Olympic for purposes of developing the Olympic Properties. The
Company holds directly and indirectly an initial 60% interest in the joint venture. Under certain circumstances and upon
achieving certain milestones, the Company may earn up to a 100% interest, subject to a 2.5% net revenue
royalty.47 (emphasis supplied)

Thus, as demonstrated in this first corporation, McArthur, when it is "grandfathered," company layering was utilized by
MBMI to gain control over McArthur. It is apparent that MBMI has more than 60% or more equity interest in McArthur,
making the latter a foreign corporation.

Tesoro Mining and Development, Inc.

Tesoro, which acquired its MPSA application from SMMI, has a capital stock of ten million pesos (PhP 10,000,000)
divided into ten thousand (10,000) common shares at PhP 1,000 per share, as demonstrated below:

[[reference = http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pdf]]

Name Nationality Number of Amount Amount Paid

Shares Subscribed

Sara Marie Filipino 5,997 PhP 5,997,000.00 PhP 825,000.00

Mining, Inc.

MBMI Canadian 3,998 PhP 3,998,000.00 PhP 1,878,174.60

Resources, Inc.

Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00

Esguerra

Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00

Agcaoili

Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

  Total 10,000 PhP 10,000,000.00 PhP 2,708,174.60

(emphasis supplied)

Except for the name "Sara Marie Mining, Inc.," the table above shows exactly the same figures as the corporate structure
of petitioner McArthur, down to the last centavo. All the other shareholders are the same: MBMI, Salazar, Esguerra,
Agcaoili, Mason and Cawkell. The figures under "Nationality," "Number of Shares," "Amount Subscribed," and "Amount
Paid" are exactly the same. Delving deeper, we scrutinize SMMI’s corporate structure:

Sara Marie Mining, Inc.

[[reference = http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pdf]]

Name Nationality Number of Amount Amount Paid

Shares Subscribed

Olympic Mines & Filipino 6,663 PhP 6,663,000.00 PhP 0

Development

Corp.

MBMI Resources, Canadian 3,331 PhP 3,331,000.00 PhP 2,794,000.00

 Inc.

Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00

Esguerra

Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Emmanuel G. Filipino 1 PhP 1,000.00 PhP 1,000.00

Hernando

Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

  Total 10,000 PhP 10,000,000.00 PhP 2,809,900.00

(emphasis supplied)

After subsequently studying SMMI’s corporate structure, it is not farfetched for us to spot the glaring similarity between
SMMI and MMC’s corporate structure. Again, the presence of identical stockholders, namely: Olympic, MBMI, Amanti
Limson (Limson), Esguerra, Salazar, Hernando, Mason and Cawkell. The figures under the headings "Nationality,"
"Number of Shares," "Amount Subscribed," and "Amount Paid" are exactly the same except for the amount paid by
MBMI which now reflects the amount of two million seven hundred ninety four thousand pesos (PhP 2,794,000). Oddly,
the total value of the amount paid is two million eight hundred nine thousand nine hundred pesos (PhP 2,809,900).

Accordingly, after "grandfathering" petitioner Tesoro and factoring in Olympic’s participation in SMMI’s corporate
structure, it is clear that MBMI is in control of Tesoro and owns 60% or more equity interest in Tesoro. This makes
petitioner Tesoro a non-Filipino corporation and, thus, disqualifies it to participate in the exploitation, utilization and
development of our natural resources.

Narra Nickel Mining and Development Corporation

Moving on to the last petitioner, Narra, which is the transferee and assignee of PLMDC’s MPSA application, whose
corporate structure’s arrangement is similar to that of the first two petitioners discussed. The capital stock of Narra is ten
million pesos (PhP 10,000,000), which is divided into ten thousand common shares (10,000) at one thousand pesos (PhP
1,000) per share, shown as follows:

[[reference = http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pdf]]

Name Nationality Number of Amount Amount Paid

Shares Subscribed

Patricia Louise Filipino 5,997 PhP 5,997,000.00 PhP 1,677,000.00

Mining &

Development

Corp.
 MBMI Canadian 3,998 PhP 3,996,000.00 PhP 1,116,000.00

Resources, Inc.

Higinio C. Filipino 1 PhP 1,000.00 PhP 1,000.00

Mendoza, Jr.

Henry E. Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernandez

Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00

Agcaoili

Ma. Elena A. Filipino 1 PhP 1,000.00 PhP 1,000.00

Bocalan

Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1,000.00

Robert L. American 1 PhP 1,000.00 PhP 1,000.00

McCurdy

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

  Total 10,000 PhP 10,000,000.00 PhP 2,800,000.00

(emphasis supplied)

Again, MBMI, along with other nominal stockholders, i.e., Mason, Agcaoili and Esguerra, is present in this corporate
structure.

Patricia Louise Mining & Development Corporation

Using the grandfather method, we further look and examine PLMDC’s corporate structure:

Name Nationality Number of Amount Amount Paid

Shares Subscribed
Palawan Alpha South Resources Filipino 6,596 PhP PhP 0
Development Corporation 6,596,000.00
MBMI Resources, Canadian 3,396 PhP PhP
3,396,000.00 2,796,000.00
Inc.
Higinio C. Mendoza, Jr. Filipino 1 PhP 1,000.00 PhP 1,000.00
Fernando B. Esguerra Filipino 1 PhP 1,000.00 PhP 1,000.00
Henry E. Fernandez Filipino 1 PhP 1,000.00 PhP 1,000.00
Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00
 Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1,000.00
Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00
Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
  Total 10,000 PhP PhP
10,000,000.00 2,708,174.60
(emphasis
supplied)

Yet again, the usual players in petitioners’ corporate structures are present. Similarly, the amount of money paid by the
2nd tier majority stock holder, in this case, Palawan Alpha South Resources and Development Corp. (PASRDC), is zero.

Studying MBMI’s Summary of Significant Accounting Policies dated October 31, 2005 explains the reason behind the
intricate corporate layering that MBMI immersed itself in:

JOINT VENTURES The Company’s ownership interests in various mining ventures engaged in the acquisition,
exploration and development of mineral properties in the Philippines is described as follows:

(a) Olympic Group

The Philippine companies holding the Olympic Property, and the ownership and interests therein, are as follows:

Olympic- Philippines (the "Olympic Group")

Sara Marie Mining Properties Ltd. ("Sara Marie") 33.3%

Tesoro Mining & Development, Inc. (Tesoro) 60.0%

Pursuant to the Olympic joint venture agreement the Company holds directly and indirectly an effective equity interest in
the Olympic Property of 60.0%. Pursuant to a shareholders’ agreement, the Company exercises joint control over the
companies in the Olympic Group.

(b) Alpha Group

The Philippine companies holding the Alpha Property, and the ownership interests therein, are as follows:

Alpha- Philippines (the "Alpha Group")

Patricia Louise Mining Development Inc. ("Patricia") 34.0%

Narra Nickel Mining & Development Corporation (Narra) 60.4%

Under a joint venture agreement the Company holds directly and indirectly an effective equity interest in the Alpha
Property of 60.4%. Pursuant to a shareholders’ agreement, the Company exercises joint control over the companies in the
Alpha Group.48 (emphasis supplied)

Concluding from the above-stated facts, it is quite safe to say that petitioners McArthur, Tesoro and Narra are not Filipino
since MBMI, a 100% Canadian corporation, owns 60% or more of their equity interests. Such conclusion is derived from
grandfathering petitioners’ corporate owners, namely: MMI, SMMI and PLMDC. Going further and adding to the picture,
MBMI’s Summary of Significant Accounting Policies statement– –regarding the "joint venture" agreements that it entered
into with the "Olympic" and "Alpha" groups––involves SMMI, Tesoro, PLMDC and Narra. Noticeably, the ownership of
the "layered" corporations boils down to MBMI, Olympic or corporations under the "Alpha" group wherein MBMI has
joint venture agreements with, practically exercising majority control over the corporations mentioned. In effect, whether
looking at the capital structure or the underlying relationships between and among the corporations, petitioners are NOT
Filipino nationals and must be considered foreign since 60% or more of their capital stocks or equity interests are owned
by MBMI.

Application of the res inter alios acta rule

Petitioners question the CA’s use of the exception of the res inter alios acta or the "admission by co-partner or agent" rule
and "admission by privies" under the Rules of Court in the instant case, by pointing out that statements made by MBMI
should not be admitted in this case since it is not a party to the case and that it is not a "partner" of petitioners.

Secs. 29 and 31, Rule 130 of the Revised Rules of Court provide:

Sec. 29. Admission by co-partner or agent.- The act or declaration of a partner or agent of the party within the scope of his
authority and during the existence of the partnership or agency, may be given in evidence against such party after the
partnership or agency is shown by evidence other than such act or declaration itself. The same rule applies to the act or
declaration of a joint owner, joint debtor, or other person jointly interested with the party.

Sec. 31. Admission by privies.- Where one derives title to property from another, the act, declaration, or omission of the
latter, while holding the title, in relation to the property, is evidence against the former.

Petitioners claim that before the above-mentioned Rule can be applied to a case, "the partnership relation must be shown,
and that proof of the fact must be made by evidence other than the admission itself." 49 Thus, petitioners assert that the CA
erred in finding that a partnership relationship exists between them and MBMI because, in fact, no such partnership exists.

Partnerships vs. joint venture agreements

Petitioners claim that the CA erred in applying Sec. 29, Rule 130 of the Rules by stating that "by entering into a joint
venture, MBMI have a joint interest" with Narra, Tesoro and McArthur. They challenged the conclusion of the CA which
pertains to the close characteristics of

"partnerships" and "joint venture agreements." Further, they asserted that before this particular partnership can be formed,
it should have been formally reduced into writing since the capital involved is more than three thousand pesos (PhP
3,000). Being that there is no evidence of written agreement to form a partnership between petitioners and MBMI, no
partnership was created.

We disagree.

A partnership is defined as two or more persons who bind themselves to contribute money, property, or industry to a
common fund with the intention of dividing the profits among themselves. 50 On the other hand, joint ventures have been
deemed to be "akin" to partnerships since it is difficult to distinguish between joint ventures and partnerships. Thus:

[T]he relations of the parties to a joint venture and the nature of their association are so similar and closely akin to a
partnership that it is ordinarily held that their rights, duties, and liabilities are to be tested by rules which are closely
analogous to and substantially the same, if not exactly the same, as those which govern partnership. In fact, it has been
said that the trend in the law has been to blur the distinctions between a partnership and a joint venture, very little law
being found applicable to one that does not apply to the other. 51

Though some claim that partnerships and joint ventures are totally different animals, there are very few rules that
differentiate one from the other; thus, joint ventures are deemed "akin" or similar to a partnership. In fact, in joint venture
agreements, rules and legal incidents governing partnerships are applied. 52

Accordingly, culled from the incidents and records of this case, it can be assumed that the relationships entered between
and among petitioners and MBMI are no simple "joint venture agreements." As a rule, corporations are prohibited from
entering into partnership agreements; consequently, corporations enter into joint venture agreements with other
corporations or partnerships for certain transactions in order to form "pseudo partnerships."
Obviously, as the intricate web of "ventures" entered into by and among petitioners and MBMI was executed to
circumvent the legal prohibition against corporations entering into partnerships, then the relationship created should be
deemed as "partnerships," and the laws on partnership should be applied. Thus, a joint venture agreement between and
among corporations may be seen as similar to partnerships since the elements of partnership are present.

Considering that the relationships found between petitioners and MBMI are considered to be partnerships, then the CA is
justified in applying Sec. 29, Rule 130 of the Rules by stating that "by entering into a joint venture, MBMI have a joint
interest" with Narra, Tesoro and McArthur.

Panel of Arbitrators’ jurisdiction

We affirm the ruling of the CA in declaring that the POA has jurisdiction over the instant case. The POA has jurisdiction
to settle disputes over rights to mining areas which definitely involve the petitions filed by Redmont against petitioners
Narra, McArthur and Tesoro. Redmont, by filing its petition against petitioners, is asserting the right of Filipinos over
mining areas in the Philippines against alleged foreign-owned mining corporations. Such claim constitutes a "dispute"
found in Sec. 77 of RA 7942:

Within thirty (30) days, after the submission of the case by the parties for the decision, the panel shall have exclusive and
original jurisdiction to hear and decide the following:

(a) Disputes involving rights to mining areas

(b) Disputes involving mineral agreements or permits

We held in Celestial Nickel Mining Exploration Corporation v. Macroasia Corp.: 53

The phrase "disputes involving rights to mining areas" refers to any adverse claim, protest, or opposition to an application
for mineral agreement. The POA therefore has the jurisdiction to resolve any adverse claim, protest, or opposition to a
pending application for a mineral agreement filed with the concerned Regional Office of the MGB. This is clear from
Secs. 38 and 41 of the DENR AO 96-40, which provide:

Sec. 38.

xxxx

Within thirty (30) calendar days from the last date of publication/posting/radio announcements, the authorized officer(s)
of the concerned office(s) shall issue a certification(s) that the publication/posting/radio announcement have been
complied with. Any adverse claim, protest, opposition shall be filed directly, within thirty (30) calendar days from the last
date of publication/posting/radio announcement, with the concerned Regional Office or through any concerned PENRO or
CENRO for filing in the concerned Regional Office for purposes of its resolution by the Panel of Arbitrators pursuant to
the provisions of this Act and these implementing rules and regulations. Upon final resolution of any adverse claim,
protest or opposition, the Panel of Arbitrators shall likewise issue a certification to that effect within five (5) working days
from the date of finality of resolution thereof. Where there is no adverse claim, protest or opposition, the Panel of
Arbitrators shall likewise issue a Certification to that effect within five working days therefrom.

xxxx

No Mineral Agreement shall be approved unless the requirements under this Section are fully complied with and any
adverse claim/protest/opposition is finally resolved by the Panel of Arbitrators.

Sec. 41.

xxxx
Within fifteen (15) working days form the receipt of the Certification issued by the Panel of Arbitrators as provided in
Section 38 hereof, the concerned Regional Director shall initially evaluate the Mineral Agreement applications in areas
outside Mineral reservations. He/She shall thereafter endorse his/her findings to the Bureau for further evaluation by the
Director within fifteen (15) working days from receipt of forwarded documents. Thereafter, the Director shall endorse the
same to the secretary for consideration/approval within fifteen working days from receipt of such endorsement.

In case of Mineral Agreement applications in areas with Mineral Reservations, within fifteen (15) working days from
receipt of the Certification issued by the Panel of Arbitrators as provided for in Section 38 hereof, the same shall be
evaluated and endorsed by the Director to the Secretary for consideration/approval within fifteen days from receipt of
such endorsement. (emphasis supplied)

It has been made clear from the aforecited provisions that the "disputes involving rights to mining areas" under Sec. 77(a)
specifically refer only to those disputes relative to the applications for a mineral agreement or conferment of mining
rights.

The jurisdiction of the POA over adverse claims, protest, or oppositions to a mining right application is further elucidated
by Secs. 219 and 43 of DENR AO 95-936, which read:

Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the provisions of Sections 28, 43 and 57
above, any adverse claim, protest or opposition specified in said sections may also be filed directly with the Panel of
Arbitrators within the concerned periods for filing such claim, protest or opposition as specified in said Sections.

Sec. 43. Publication/Posting of Mineral Agreement.-

xxxx

The Regional Director or concerned Regional Director shall also cause the posting of the application on the bulletin
boards of the Bureau, concerned Regional office(s) and in the concerned province(s) and municipality(ies), copy furnished
the barangays where the proposed contract area is located once a week for two (2) consecutive weeks in a language
generally understood in the locality. After forty-five (45) days from the last date of publication/posting has been made and
no adverse claim, protest or opposition was filed within the said forty-five (45) days, the concerned offices shall issue a
certification that publication/posting has been made and that no adverse claim, protest or opposition of whatever nature
has been filed. On the other hand, if there be any adverse claim, protest or opposition, the same shall be filed within forty-
five (45) days from the last date of publication/posting, with the Regional Offices concerned, or through the Department’s
Community Environment and Natural Resources Officers (CENRO) or Provincial Environment and Natural Resources
Officers (PENRO), to be filed at the Regional Office for resolution of the Panel of Arbitrators. However previously
published valid and subsisting mining claims are exempted from posted/posting required under this Section.

No mineral agreement shall be approved unless the requirements under this section are fully complied with and any
opposition/adverse claim is dealt with in writing by the Director and resolved by the Panel of Arbitrators. (Emphasis
supplied.)

It has been made clear from the aforecited provisions that the "disputes involving rights to mining areas" under Sec. 77(a)
specifically refer only to those disputes relative to the applications for a mineral agreement or conferment of mining
rights.

The jurisdiction of the POA over adverse claims, protest, or oppositions to a mining right application is further elucidated
by Secs. 219 and 43 of DENRO AO 95-936, which reads:

Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the provisions of Sections 28, 43 and 57
above, any adverse claim, protest or opposition specified in said sections may also be filed directly with the Panel of
Arbitrators within the concerned periods for filing such claim, protest or opposition as specified in said Sections.

Sec. 43. Publication/Posting of Mineral Agreement Application.-

 xxxx

The Regional Director or concerned Regional Director shall also cause the posting of the application on the bulletin
boards of the Bureau, concerned Regional office(s) and in the concerned province(s) and municipality(ies), copy furnished
the barangays where the proposed contract area is located once a week for two (2) consecutive weeks in a language
generally understood in the locality. After forty-five (45) days from the last date of publication/posting has been made and
no adverse claim, protest or opposition was filed within the said forty-five (45) days, the concerned offices shall issue a
certification that publication/posting has been made and that no adverse claim, protest or opposition of whatever nature
has been filed. On the other hand, if there be any adverse claim, protest or opposition, the same shall be filed within forty-
five (45) days from the last date of publication/posting, with the Regional offices concerned, or through the Department’s
Community Environment and Natural Resources Officers (CENRO) or Provincial Environment and Natural Resources
Officers (PENRO), to be filed at the Regional Office for resolution of the Panel of Arbitrators. However, previously
published valid and subsisting mining claims are exempted from posted/posting required under this Section.

No mineral agreement shall be approved unless the requirements under this section are fully complied with and any
opposition/adverse claim is dealt with in writing by the Director and resolved by the Panel of Arbitrators. (Emphasis
supplied.)

These provisions lead us to conclude that the power of the POA to resolve any adverse claim, opposition, or protest
relative to mining rights under Sec. 77(a) of RA 7942 is confined only to adverse claims, conflicts and oppositions
relating to applications for the grant of mineral rights.

POA’s jurisdiction is confined only to resolutions of such adverse claims, conflicts and oppositions and it has no authority
to approve or reject said applications. Such power is vested in the DENR Secretary upon recommendation of the MGB
Director. Clearly, POA’s jurisdiction over "disputes involving rights to mining areas" has nothing to do with the
cancellation of existing mineral agreements. (emphasis ours)

Accordingly, as we enunciated in Celestial, the POA unquestionably has jurisdiction to resolve disputes over MPSA
applications subject of Redmont’s petitions. However, said jurisdiction does not include either the approval or rejection of
the MPSA applications, which is vested only upon the Secretary of the DENR. Thus, the finding of the POA, with respect
to the rejection of petitioners’ MPSA applications being that they are foreign corporation, is valid.

Justice Marvic Mario Victor F. Leonen, in his Dissent, asserts that it is the regular courts, not the POA, that has
jurisdiction over the MPSA applications of petitioners.

This postulation is incorrect.

It is basic that the jurisdiction of the court is determined by the statute in force at the time of the commencement of the
action.54

Sec. 19, Batas Pambansa Blg. 129 or "The Judiciary Reorganization

Act of 1980" reads:

Sec. 19. Jurisdiction in Civil Cases.—Regional Trial Courts shall exercise exclusive original jurisdiction:

1. In all civil actions in which the subject of the litigation is incapable of pecuniary estimation.

On the other hand, the jurisdiction of POA is unequivocal from Sec. 77 of RA 7942:

Section 77. Panel of Arbitrators.—

x x x Within thirty (30) days, after the submission of the case by the parties for the decision, the panel shall have
exclusive and original jurisdiction to hear and decide the following:
 (c) Disputes involving rights to mining areas

(d) Disputes involving mineral agreements or permits

It is clear that POA has exclusive and original jurisdiction over any and all disputes involving rights to mining areas. One
such dispute is an MPSA application to which an adverse claim, protest or opposition is filed by another interested
applicant.1âwphi1 In the case at bar, the dispute arose or originated from MPSA applications where petitioners are
asserting their rights to mining areas subject of their respective MPSA applications. Since respondent filed 3 separate
petitions for the denial of said applications, then a controversy has developed between the parties and it is POA’s
jurisdiction to resolve said disputes.

Moreover, the jurisdiction of the RTC involves civil actions while what petitioners filed with the DENR Regional Office
or any concerned DENRE or CENRO are MPSA applications. Thus POA has jurisdiction.

Furthermore, the POA has jurisdiction over the MPSA applications under the doctrine of primary jurisdiction. Euro-med
Laboratories v. Province of Batangas55 elucidates:

The doctrine of primary jurisdiction holds that if a case is such that its determination requires the expertise, specialized
training and knowledge of an administrative body, relief must first be obtained in an administrative proceeding before
resort to the courts is had even if the matter may well be within their proper jurisdiction.

Whatever may be the decision of the POA will eventually reach the court system via a resort to the CA and to this Court
as a last recourse.

Selling of MBMI’s shares to DMCI

As stated before, petitioners’ Manifestation and Submission dated October 19, 2012 would want us to declare the instant
petition moot and academic due to the transfer and conveyance of all the shareholdings and interests of MBMI to DMCI, a
corporation duly organized and existing under Philippine laws and is at least 60% Philippine-owned. 56 Petitioners
reasoned that they now cannot be considered as foreign-owned; the transfer of their shares supposedly cured the "defect"
of their previous nationality. They claimed that their current FTAA contract with the State should stand since "even
wholly-owned foreign corporations can enter into an FTAA with the State." 57 Petitioners stress that there should no longer
be any issue left as regards their qualification to enter into FTAA contracts since they are qualified to engage in mining
activities in the Philippines. Thus, whether the "grandfather rule" or the "control test" is used, the nationalities of
petitioners cannot be doubted since it would pass both tests.

The sale of the MBMI shareholdings to DMCI does not have any bearing in the instant case and said fact should be
disregarded. The manifestation can no longer be considered by us since it is being tackled in G.R. No. 202877 pending
before this Court.1âwphi1 Thus, the question of whether petitioners, allegedly a Philippine-owned corporation due to the
sale of MBMI's shareholdings to DMCI, are allowed to enter into FTAAs with the State is a non-issue in this case.

In ending, the "control test" is still the prevailing mode of determining whether or not a corporation is a Filipino
corporation, within the ambit of Sec. 2, Art. II of the 1987 Constitution, entitled to undertake the exploration,
development and utilization of the natural resources of the Philippines. When in the mind of the Court there is doubt,
based on the attendant facts and circumstances of the case, in the 60-40 Filipino-equity ownership in the corporation, then
it may apply the "grandfather rule."

WHEREFORE, premises considered, the instant petition is DENIED. The assailed Court of Appeals Decision dated
October 1, 2010 and Resolution dated February 15, 2011 are hereby AFFIRMED.

SO ORDERED.

PRESBITERO J. VELASCO, JR.

Associate Justice
WE CONCUR:

DIOSDADO M. PERALTA
Associate Justice

ROBERTO A. ABAD JOSE CATRAL MENDOZA

Associate Justice Associate Justice

I dissent. See Separate Opinion

MARVIC MARIO VICTOR F. LEONEN
Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned to the
writer of the opinion of the Court's Division.

PRESBITERO J. VELASCO, JR.

Associate Justice
Chairperson

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's Attestation, I certify that the
conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the
opinion of the Court's Division.

MARIA LOURDES P. A. SERENO

Chief Justice

Corporate Juridical Personality

 International Express Travel & Tour Services, Inc. vs. CA et al., G.R. No. 119002; October 19, 2000

G.R. No. 119002               October 19, 2000

INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES, INC., petitioner,
vs.
HON. COURT OF APPEALS, HENRI KAHN, PHILIPPINE FOOTBALL FEDERATION, respondents.

DECISION

KAPUNAN, J.:

On June 30 1989, petitioner International Express Travel and Tour Services, Inc., through its managing director, wrote a
letter to the Philippine Football Federation (Federation), through its president private respondent Henri Kahn, wherein the
former offered its services as a travel agency to the latter. 1 The offer was accepted.

Petitioner secured the airline tickets for the trips of the athletes and officials of the Federation to the South East Asian
Games in Kuala Lumpur as well as various other trips to the People's Republic of China and Brisbane. The total cost of
the tickets amounted to P449,654.83. For the tickets received, the Federation made two partial payments, both in
September of 1989, in the total amount of P176,467.50.2

On 4 October 1989, petitioner wrote the Federation, through the private respondent a demand letter requesting for the
amount of P265,894.33.3 On 30 October 1989, the Federation, through the Project Gintong Alay, paid the amount of
P31,603.00.4

On 27 December 1989, Henri Kahn issued a personal check in the amount of P50,000 as partial payment for the
outstanding balance of the Federation.5 Thereafter, no further payments were made despite repeated demands.

This prompted petitioner to file a civil case before the Regional Trial Court of Manila. Petitioner sued Henri Kahn in his
personal capacity and as President of the Federation and impleaded the Federation as an alternative defendant. Petitioner
sought to hold Henri Kahn liable for the unpaid balance for the tickets purchased by the Federation on the ground that
Henri Kahn allegedly guaranteed the said obligation. 6

Henri Kahn filed his answer with counterclaim. While not denying the allegation that the Federation owed the amount
P207,524.20, representing the unpaid balance for the plane tickets, he averred that the petitioner has no cause of action
against him either in his personal capacity or in his official capacity as president of the Federation. He maintained that he
did not guarantee payment but merely acted as an agent of the Federation which has a separate and distinct juridical
personality.7

On the other hand, the Federation failed to file its answer, hence, was declared in default by the trial court. 8

In due course, the trial court rendered judgment and ruled in favor of the petitioner and declared Henri Kahn personally
liable for the unpaid obligation of the Federation. In arriving at the said ruling, the trial court rationalized:

Defendant Henri Kahn would have been correct in his contentions had it been duly established that defendant Federation
is a corporation. The trouble, however, is that neither the plaintiff nor the defendant Henri Kahn has adduced any evidence
proving the corporate existence of the defendant Federation. In paragraph 2 of its complaint, plaintiff asserted that
"Defendant Philippine Football Federation is a sports association xxx." This has not been denied by defendant Henri Kahn
in his Answer. Being the President of defendant Federation, its corporate existence is within the personal knowledge of
defendant Henri Kahn. He could have easily denied specifically the assertion of the plaintiff that it is a mere sports
association, if it were a domestic corporation. But he did not.

xxx

A voluntary unincorporated association, like defendant Federation has no power to enter into, or to ratify, a contract. The
contract entered into by its officers or agents on behalf of such association is not binding on, or enforceable against it. The
officers or agents are themselves personally liable.

x x x9
The dispositive portion of the trial court's decision reads:

WHEREFORE, judgment is rendered ordering defendant Henri Kahn to pay the plaintiff the principal sum of
P207,524.20, plus the interest thereon at the legal rate computed from July 5, 1990, the date the complaint was filed, until
the principal obligation is fully liquidated; and another sum of P15,000.00 for attorney's fees.

The complaint of the plaintiff against the Philippine Football Federation and the counterclaims of the defendant Henri
Kahn are hereby dismissed.

With the costs against defendant Henri Kahn. 10

Only Henri Kahn elevated the above decision to the Court of Appeals. On 21 December 1994, the respondent court
rendered a decision reversing the trial court, the decretal portion of said decision reads:

WHEREFORE, premises considered, the judgment appealed from is hereby REVERSED and SET ASIDE and another
one is rendered dismissing the complaint against defendant Henri S. Kahn. 11

In finding for Henri Kahn, the Court of Appeals recognized the juridical existence of the Federation. It rationalized that
since petitioner failed to prove that Henri Kahn guaranteed the obligation of the Federation, he should not be held liable
for the same as said entity has a separate and distinct personality from its officers.

Petitioner filed a motion for reconsideration and as an alternative prayer pleaded that the Federation be held liable for the
unpaid obligation. The same was denied by the appellate court in its resolution of 8 February 1995, where it stated that:

As to the alternative prayer for the Modification of the Decision by expressly declaring in the dispositive portion thereof
the Philippine Football Federation (PFF) as liable for the unpaid obligation, it should be remembered that the trial court
dismissed the complaint against the Philippine Football Federation, and the plaintiff did not appeal from this decision.
Hence, the Philippine Football Federation is not a party to this appeal and consequently, no judgment may be pronounced
by this Court against the PFF without violating the due process clause, let alone the fact that the judgment dismissing the
complaint against it, had already become final by virtue of the plaintiff's failure to appeal therefrom. The alternative
prayer is therefore similarly DENIED. 12

Petitioner now seeks recourse to this Court and alleges that the respondent court committed the following assigned
errors:13

A. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER HAD DEALT
WITH THE PHILIPPINE FOOTBALL FEDERATION (PFF) AS A CORPORATE ENTITY AND IN NOT
HOLDING THAT PRIVATE RESPONDENT HENRI KAHN WAS THE ONE WHO REPRESENTED THE
PFF AS HAVING A CORPORATE PERSONALITY.

B. THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING PRIVATE RESPONDENT HENRI
KAHN PERSONALLY LIABLE FOR THE OBLIGATION OF THE UNINCORPORATED PFF, HAVING
NEGOTIATED WITH PETITIONER AND CONTRACTED THE OBLIGATION IN BEHALF OF THE PFF,
MADE A PARTIAL PAYMENT AND ASSURED PETITIONER OF FULLY SETTLING THE OBLIGATION.

C. ASSUMING ARGUENDO THAT PRIVATE RESPONDENT KAHN IS NOT PERSONALLY LIABLE,

THE HONORABLE COURT OF APPEALS ERRED IN NOT EXPRESSLY DECLARING IN ITS DECISION
THAT THE PFF IS SOLELY LIABLE FOR THE OBLIGATION.

The resolution of the case at bar hinges on the determination of the existence of the Philippine Football Federation as a
juridical person. In the assailed decision, the appellate court recognized the existence of the Federation. In support of this,
the CA cited Republic Act 3135, otherwise known as the Revised Charter of the Philippine Amateur Athletic Federation,
and Presidential Decree No. 604 as the laws from which said Federation derives its existence.
As correctly observed by the appellate court, both R.A. 3135 and P.D. No. 604 recognized the juridical existence of
national sports associations. This may be gleaned from the powers and functions granted to these associations. Section 14
of R.A. 3135 provides:

SEC. 14. Functions, powers and duties of Associations. - The National Sports' Association shall have the following
functions, powers and duties:

1. To adopt a constitution and by-laws for their internal organization and government;

2. To raise funds by donations, benefits, and other means for their purposes.

3. To purchase, sell, lease or otherwise encumber property both real and personal, for the accomplishment of their
purpose;

4. To affiliate with international or regional sports' Associations after due consultation with the executive
committee;

xxx

13. To perform such other acts as may be necessary for the proper accomplishment of their purposes and not
inconsistent with this Act.

Section 8 of P.D. 604, grants similar functions to these sports associations:

SEC. 8. Functions, Powers, and Duties of National Sports Association. - The National sports associations shall have the
following functions, powers, and duties:

1. Adopt a Constitution and By-Laws for their internal organization and government which shall be submitted to
the Department and any amendment thereto shall take effect upon approval by the Department: Provided,
however, That no team, school, club, organization, or entity shall be admitted as a voting member of an
association unless 60 per cent of the athletes composing said team, school, club, organization, or entity are
Filipino citizens;

2. Raise funds by donations, benefits, and other means for their purpose subject to the approval of the
Department;

3. Purchase, sell, lease, or otherwise encumber property, both real and personal, for the accomplishment of their
purpose;

4. Conduct local, interport, and international competitions, other than the Olympic and Asian Games, for the
promotion of their sport;

5. Affiliate with international or regional sports associations after due consultation with the Department;

xxx

13. Perform such other functions as may be provided by law.

The above powers and functions granted to national sports associations clearly indicate that these entities may acquire a
juridical personality. The power to purchase, sell, lease and encumber property are acts which may only be done by
persons, whether natural or artificial, with juridical capacity. However, while we agree with the appellate court that
national sports associations may be accorded corporate status, such does not automatically take place by the mere passage
of these laws.
It is a basic postulate that before a corporation may acquire juridical personality, the State must give its consent either in
the form of a special law or a general enabling act. We cannot agree with the view of the appellate court and the private
respondent that the Philippine Football Federation came into existence upon the passage of these laws. Nowhere can it be
found in R.A. 3135 or P.D. 604 any provision creating the Philippine Football Federation. These laws merely recognized
the existence of national sports associations and provided the manner by which these entities may acquire juridical
personality. Section 11 of R.A. 3135 provides:

SEC. 11. National Sports' Association; organization and recognition. - A National Association shall be organized for each
individual sports in the Philippines in the manner hereinafter provided to constitute the Philippine Amateur Athletic
Federation. Applications for recognition as a National Sports' Association shall be filed with the executive committee
together with, among others, a copy of the constitution and by-laws and a list of the members of the proposed association,
and a filing fee of ten pesos.

The Executive Committee shall give the recognition applied for if it is satisfied that said association will promote the
purposes of this Act and particularly section three thereof. No application shall be held pending for more than three
months after the filing thereof without any action having been taken thereon by the executive committee. Should the
application be rejected, the reasons for such rejection shall be clearly stated in a written communication to the applicant.
Failure to specify the reasons for the rejection shall not affect the application which shall be considered as unacted upon:
Provided, however, That until the executive committee herein provided shall have been formed, applications for
recognition shall be passed upon by the duly elected members of the present executive committee of the Philippine
Amateur Athletic Federation. The said executive committee shall be dissolved upon the organization of the executive
committee herein provided: Provided, further, That the functioning executive committee is charged with the responsibility
of seeing to it that the National Sports' Associations are formed and organized within six months from and after the
passage of this Act.

Section 7 of P.D. 604, similarly provides:

SEC. 7. National Sports Associations. - Application for accreditation or recognition as a national sports association for
each individual sport in the Philippines shall be filed with the Department together with, among others, a copy of the
Constitution and By-Laws and a list of the members of the proposed association.

The Department shall give the recognition applied for if it is satisfied that the national sports association to be organized
will promote the objectives of this Decree and has substantially complied with the rules and regulations of the
Department: Provided, That the Department may withdraw accreditation or recognition for violation of this Decree and
such rules and regulations formulated by it.

The Department shall supervise the national sports association: Provided, That the latter shall have exclusive technical
control over the development and promotion of the particular sport for which they are organized.

Clearly the above cited provisions require that before an entity may be considered as a national sports association, such
entity must be recognized by the accrediting organization, the Philippine Amateur Athletic Federation under R.A. 3135,
and the Department of Youth and Sports Development under P.D. 604. This fact of recognition, however, Henri Kahn
failed to substantiate. In attempting to prove the juridical existence of the Federation, Henri Kahn attached to his motion
for reconsideration before the trial court a copy of the constitution and by-laws of the Philippine Football Federation.
Unfortunately, the same does not prove that said Federation has indeed been recognized and accredited by either the
Philippine Amateur Athletic Federation or the Department of Youth and Sports Development. Accordingly, we rule that
the Philippine Football Federation is not a national sports association within the purview of the aforementioned laws and
does not have corporate existence of its own.

Thus being said, it follows that private respondent Henry Kahn should be held liable for the unpaid obligations of the
unincorporated Philippine Football Federation. It is a settled principal in corporation law that any person acting or
purporting to act on behalf of a corporation which has no valid existence assumes such privileges and becomes personally
liable for contract entered into or for other acts performed as such agent. 14 As president of the Federation, Henri Kahn is
presumed to have known about the corporate existence or non-existence of the Federation. We cannot subscribe to the
position taken by the appellate court that even assuming that the Federation was defectively incorporated, the petitioner
cannot deny the corporate existence of the Federation because it had contracted and dealt with the Federation in such a
manner as to recognize and in effect admit its existence. 15 The doctrine of corporation by estoppel is mistakenly applied by
the respondent court to the petitioner. The application of the doctrine applies to a third party only when he tries to escape
liability on a contract from which he has benefited on the irrelevant ground of defective incorporation. 16 In the case at bar,
the petitioner is not trying to escape liability from the contract but rather is the one claiming from the contract.

WHEREFORE, the decision appealed from is REVERSED and SET ASIDE. The decision of the Regional Trial Court of
Manila, Branch 35, in Civil Case No. 90-53595 is hereby REINSTATED.

SO ORDERED.

Davide, Jr., C.J., (Chairman), Puno, Pardo, and Ynares-Santiago, JJ., concur.

Doctrine of Separate Juridical Personality

 PNB v. CA et.al, G.R. No. L-27155; May 18, 1978

G.R. No. L-27155 May 18, 1978

PHILIPPINE NATIONAL BANK, petitioner,
vs.
THE COURT OF APPEALS, RITA GUECO TAPNIO, CECILIO GUECO and THE PHILIPPINE AMERICAN
GENERAL INSURANCE COMPANY, INC., respondents.

Medina, Locsin, Coruña, & Sumbillo for petitioner.

Manuel Lim & Associates for private respondents.

ANTONIO, J.:

Certiorari to review the decision of the Court of Appeals which affirmed the judgment of the Court of First Instance of
Manila in Civil Case No. 34185, ordering petitioner, as third-party defendant, to pay respondent Rita Gueco Tapnio, as
third-party plaintiff, the sum of P2,379.71, plus 12% interest per annum from September 19, 1957 until the same is fully
paid, P200.00 attorney's fees and costs, the same amounts which Rita Gueco Tapnio was ordered to pay the Philippine
American General Insurance Co., Inc., to be paid directly to the Philippine American General Insurance Co., Inc. in full
satisfaction of the judgment rendered against Rita Gueco Tapnio in favor of the former; plus P500.00 attorney's fees for
Rita Gueco Tapnio and costs. The basic action is the complaint filed by Philamgen (Philippine American General
Insurance Co., Inc.) as surety against Rita Gueco Tapnio and Cecilio Gueco, for the recovery of the sum of P2,379.71 paid
by Philamgen to the Philippine National Bank on behalf of respondents Tapnio and Gueco, pursuant to an indemnity
agreement. Petitioner Bank was made third-party defendant by Tapnio and Gueco on the theory that their failure to pay
the debt was due to the fault or negligence of petitioner.

The facts as found by the respondent Court of Appeals, in affirming the decision of the Court of First Instance of Manila,
are quoted hereunder:

Plaintiff executed its Bond, Exh. A, with defendant Rita Gueco Tapnio as principal, in favor of the
Philippine National Bank Branch at San Fernando, Pampanga, to guarantee the payment of defendant Rita
Gueco Tapnio's account with said Bank. In turn, to guarantee the payment of whatever amount the
bonding company would pay to the Philippine National Bank, both defendants executed the indemnity
agreement, Exh. B. Under the terms and conditions of this indemnity agreement, whatever amount the
plaintiff would pay would earn interest at the rate of 12% per annum, plus attorney's fees in the amount of
15 % of the whole amount due in case of court litigation.

The original amount of the bond was for P4,000.00; but the amount was later reduced to P2,000.00.

It is not disputed that defendant Rita Gueco Tapnio was indebted to the bank in the sum of P2,000.00,
plus accumulated interests unpaid, which she failed to pay despite demands. The Bank wrote a letter of
demand to plaintiff, as per Exh. C; whereupon, plaintiff paid the bank on September 18, 1957, the full
amount due and owing in the sum of P2,379.91, for and on account of defendant Rita Gueco's obligation
(Exhs. D and D-1).

Plaintiff, in turn, made several demands, both verbal and written, upon defendants (Exhs. E and F), but to
no avail.

Defendant Rita Gueco Tapnio admitted all the foregoing facts. She claims, however, when demand was
made upon her by plaintiff for her to pay her debt to the Bank, that she told the Plaintiff that she did not
consider herself to be indebted to the Bank at all because she had an agreement with one Jacobo-Nazon
whereby she had leased to the latter her unused export sugar quota for the 1956-1957 agricultural year,
consisting of 1,000 piculs at the rate of P2.80 per picul, or for a total of P2,800.00, which was already in
excess of her obligation guaranteed by plaintiff's bond, Exh. A. This lease agreement, according to her,
was with the knowledge of the bank. But the Bank has placed obstacles to the consummation of the lease,
and the delay caused by said obstacles forced 'Nazon to rescind the lease contract. Thus, Rita Gueco
Tapnio filed her third-party complaint against the Bank to recover from the latter any and all sums of
money which may be adjudged against her and in favor of the plaitiff plus moral damages, attorney's fees
and costs.

Insofar as the contentions of the parties herein are concerned, we quote with approval the following
findings of the lower court based on the evidence presented at the trial of the case:

It has been established during the trial that Mrs. Tapnio had an export sugar quota of
1,000 piculs for the agricultural year 1956-1957 which she did not need. She agreed to
allow Mr. Jacobo C. Tuazon to use said quota for the consideration of P2,500.00 (Exh.
"4"-Gueco). This agreement was called a contract of lease of sugar allotment.

At the time of the agreement, Mrs. Tapnio was indebted to the Philippine National Bank
at San Fernando, Pampanga. Her indebtedness was known as a crop loan and was secured
by a mortgage on her standing crop including her sugar quota allocation for the
agricultural year corresponding to said standing crop. This arrangement was necessary in
order that when Mrs. Tapnio harvests, the P.N.B., having a lien on the crop, may
effectively enforce collection against her. Her sugar cannot be exported without sugar
quota allotment Sometimes, however, a planter harvest less sugar than her quota, so her
excess quota is utilized by another who pays her for its use. This is the arrangement
entered into between Mrs. Tapnio and Mr. Tuazon regarding the former's excess quota
for 1956-1957 (Exh. "4"-Gueco).

Since the quota was mortgaged to the P.N.B., the contract of lease had to be approved by
said Bank, The same was submitted to the branch manager at San Fernando, Pampanga.
The latter required the parties to raise the consideration of P2.80 per picul or a total of
P2,800.00 (Exh. "2-Gueco") informing them that "the minimum lease rental acceptable to
the Bank, is P2.80 per picul." In a letter addressed to the branch manager on August 10,
1956, Mr. Tuazon informed the manager that he was agreeable to raising the
consideration to P2.80 per picul. He further informed the manager that he was ready to
pay said amount as the funds were in his folder which was kept in the bank.

Explaining the meaning of Tuazon's statement as to the funds, it was stated by him that
he had an approved loan from the bank but he had not yet utilized it as he was intending
to use it to pay for the quota. Hence, when he said the amount needed to pay Mrs. Tapnio
was in his folder which was in the bank, he meant and the manager understood and knew
he had an approved loan available to be used in payment of the quota. In said Exh. "6-
Gueco", Tuazon also informed the manager that he would want for a notice from the
manager as to the time when the bank needed the money so that Tuazon could sign the
corresponding promissory note.

Further Consideration of the evidence discloses that when the branch manager of the Philippine National
Bank at San Fernando recommended the approval of the contract of lease at the price of P2.80 per picul
(Exh. 1 1-Bank), whose recommendation was concurred in by the Vice-president of said Bank, J. V.
Buenaventura, the board of directors required that the amount be raised to 13.00 per picul. This act of the
board of directors was communicated to Tuazon, who in turn asked for a reconsideration thereof. On
November 19, 1956, the branch manager submitted Tuazon's request for reconsideration to the board of
directors with another recommendation for the approval of the lease at P2.80 per picul, but the board
returned the recommendation unacted upon, considering that the current price prevailing at the time was
P3.00 per picul (Exh. 9-Bank).

The parties were notified of the refusal on the part of the board of directors of the Bank to grant the
motion for reconsideration. The matter stood as it was until February 22, 1957, when Tuazon wrote a
letter (Exh. 10-Bank informing the Bank that he was no longer interested to continue the deal, referring to
the lease of sugar quota allotment in favor of defendant Rita Gueco Tapnio. The result is that the latter
 lost the sum of P2,800.00 which she should have received from Tuazon and which she could have paid
the Bank to cancel off her indebtedness,

The court below held, and in this holding we concur that failure of the negotiation for the lease of the
sugar quota allocation of Rita Gueco Tapnio to Tuazon was due to the fault of the directors of the
Philippine National Bank, The refusal on the part of the bank to approve the lease at the rate of P2.80 per
picul which, as stated above, would have enabled Rita Gueco Tapnio to realize the amount of P2,800.00
which was more than sufficient to pay off her indebtedness to the Bank, and its insistence on the rental
price of P3.00 per picul thus unnecessarily increasing the value by only a difference of P200.00.
inevitably brought about the rescission of the lease contract to the damage and prejudice of Rita Gueco
Tapnio in the aforesaid sum of P2,800.00. The unreasonableness of the position adopted by the board of
directors of the Philippine National Bank in refusing to approve the lease at the rate of P2.80 per picul
and insisting on the rate of P3.00 per picul, if only to increase the retail value by only P200.00 is shown
by the fact that all the accounts of Rita Gueco Tapnio with the Bank were secured by chattel mortgage on
standing crops, assignment of leasehold rights and interests on her properties, and surety bonds, aside
from the fact that from Exh. 8-Bank, it appears that she was offering to execute a real estate mortgage in
favor of the Bank to replace the surety bond This statement is further bolstered by the fact that Rita Gueco
Tapnio apparently had the means to pay her obligation fact that she has been granted several value of
almost P80,000.00 for the agricultural years from 1952 to 56. 1

Its motion for the reconsideration of the decision of the Court of Appeals having been denied, petitioner filed the present
petition.

The petitioner contends that the Court of Appeals erred:

(1) In finding that the rescission of the lease contract of the 1,000 piculs of sugar quota allocation of respondent Rita
Gueco Tapnio by Jacobo C. Tuazon was due to the unjustified refusal of petitioner to approve said lease contract, and its
unreasonable insistence on the rental price of P3.00 instead of P2.80 per picul; and

(2) In not holding that based on the statistics of sugar price and prices of sugar quota in the possession of the petitioner,
the latter's Board of Directors correctly fixed the rental of price per picul of 1,000 piculs of sugar quota leased by
respondent Rita Gueco Tapnio to Jacobo C. Tuazon at P3.00 per picul.

Petitioner argued that as an assignee of the sugar quota of Tapnio, it has the right, both under its own Charter and under
the Corporation Law, to safeguard and protect its rights and interests under the deed of assignment, which include the
right to approve or disapprove the said lease of sugar quota and in the exercise of that authority, its

Board of Directors necessarily had authority to determine and fix the rental price per picul of the sugar quota subject of
the lease between private respondents and Jacobo C. Tuazon. It argued further that both under its Charter and the
Corporation Law, petitioner, acting thru its Board of Directors, has the perfect right to adopt a policy with respect to
fixing of rental prices of export sugar quota allocations, and in fixing the rentals at P3.00 per picul, it did not act arbitrarily
since the said Board was guided by statistics of sugar price and prices of sugar quotas prevailing at the time. Since the
fixing of the rental of the sugar quota is a function lodged with petitioner's Board of Directors and is a matter of policy,
the respondent Court of Appeals could not substitute its own judgment for that of said Board of Directors, which acted in
good faith, making as its basis therefore the prevailing market price as shown by statistics which were then in their
possession.

Finally, petitioner emphasized that under the appealed judgment, it shall suffer a great injustice because as a creditor, it
shall be deprived of a just claim against its debtor (respondent Rita Gueco Tapnio) as it would be required to return to
respondent Philamgen the sum of P2,379.71, plus interest, which amount had been previously paid to petitioner by said
insurance company in behalf of the principal debtor, herein respondent Rita Gueco Tapnio, and without recourse against
respondent Rita Gueco Tapnio.
We must advert to the rule that this Court's appellate jurisdiction in proceedings of this nature is limited to reviewing only
errors of law, accepting as conclusive the factual fin dings of the Court of Appeals upon its own assessment of the
evidence. 2

The contract of lease of sugar quota allotment at P2.50 per picul between Rita Gueco Tapnio and Jacobo C. Tuazon was
executed on April 17, 1956. This contract was submitted to the Branch Manager of the Philippine National Bank at San
Fernando, Pampanga. This arrangement was necessary because Tapnio's indebtedness to petitioner was secured by a
mortgage on her standing crop including her sugar quota allocation for the agricultural year corresponding to said standing
crop. The latter required the parties to raise the consideration to P2.80 per picul, the minimum lease rental acceptable to
the Bank, or a total of P2,800.00. Tuazon informed the Branch Manager, thru a letter dated August 10, 1956, that he was
agreeable to raising the consideration to P2.80 per picul. He further informed the manager that he was ready to pay the
said sum of P2,800.00 as the funds were in his folder which was kept in the said Bank. This referred to the approved loan
of Tuazon from the Bank which he intended to use in paying for the use of the sugar quota. The Branch Manager
submitted the contract of lease of sugar quota allocation to the Head Office on September 7, 1956, with a recommendation
for approval, which recommendation was concurred in by the Vice-President of the Bank, Mr. J. V. Buenaventura. This
notwithstanding, the Board of Directors of petitioner required that the consideration be raised to P3.00 per picul.

Tuazon, after being informed of the action of the Board of Directors, asked for a reconsideration thereof. On November
19, 1956, the Branch Manager submitted the request for reconsideration and again recommended the approval of the lease
at P2.80 per picul, but the Board returned the recommendation unacted, stating that the current price prevailing at that
time was P3.00 per picul.

On February 22, 1957, Tuazon wrote a letter, informing the Bank that he was no longer interested in continuing the lease
of sugar quota allotment. The crop year 1956-1957 ended and Mrs. Tapnio failed to utilize her sugar quota, resulting in
her loss in the sum of P2,800.00 which she should have received had the lease in favor of Tuazon been implemented.

It has been clearly shown that when the Branch Manager of petitioner required the parties to raise the consideration of the
lease from P2.50 to P2.80 per picul, or a total of P2,800-00, they readily agreed. Hence, in his letter to the Branch
Manager of the Bank on August 10, 1956, Tuazon informed him that the minimum lease rental of P2.80 per picul was
acceptable to him and that he even offered to use the loan secured by him from petitioner to pay in full the sum of
P2,800.00 which was the total consideration of the lease. This arrangement was not only satisfactory to the Branch
Manager but it was also approves by Vice-President J. V. Buenaventura of the PNB. Under that arrangement, Rita Gueco
Tapnio could have realized the amount of P2,800.00, which was more than enough to pay the balance of her indebtedness
to the Bank which was secured by the bond of Philamgen.

There is no question that Tapnio's failure to utilize her sugar quota for the crop year 1956-1957 was due to the disapproval
of the lease by the Board of Directors of petitioner. The issue, therefore, is whether or not petitioner is liable for the
damage caused.

As observed by the trial court, time is of the essence in the approval of the lease of sugar quota allotments, since the same
must be utilized during the milling season, because any allotment which is not filled during such milling season may be
reallocated by the Sugar Quota Administration to other holders of allotments. 3 There was no proof that there was any
other person at that time willing to lease the sugar quota allotment of private respondents for a price higher than P2.80 per
picul. "The fact that there were isolated transactions wherein the consideration for the lease was P3.00 a picul", according
to the trial court, "does not necessarily mean that there are always ready takers of said price. " The unreasonableness of
the position adopted by the petitioner's Board of Directors is shown by the fact that the difference between the amount of
P2.80 per picul offered by Tuazon and the P3.00 per picul demanded by the Board amounted only to a total sum of
P200.00. Considering that all the accounts of Rita Gueco Tapnio with the Bank were secured by chattel mortgage on
standing crops, assignment of leasehold rights and interests on her properties, and surety bonds and that she had
apparently "the means to pay her obligation to the Bank, as shown by the fact that she has been granted several sugar crop
loans of the total value of almost P80,000.00 for the agricultural years from 1952 to 1956", there was no reasonable basis
for the Board of Directors of petitioner to have rejected the lease agreement because of a measly sum of P200.00.

While petitioner had the ultimate authority of approving or disapproving the proposed lease since the quota was
mortgaged to the Bank, the latter certainly cannot escape its responsibility of observing, for the protection of the interest
of private respondents, that degree of care, precaution and vigilance which the circumstances justly demand in approving
or disapproving the lease of said sugar quota. The law makes it imperative that every person "must in the exercise of his
rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good
faith, 4 This petitioner failed to do. Certainly, it knew that the agricultural year was about to expire, that by its disapproval
of the lease private respondents would be unable to utilize the sugar quota in question. In failing to observe the reasonable
degree of care and vigilance which the surrounding circumstances reasonably impose, petitioner is consequently liable for
the damages caused on private respondents. Under Article 21 of the New Civil Code, "any person who wilfully causes
loss or injury to another in a manner that is contrary to morals, good customs or public policy shall compensate the latter
for the damage." The afore-cited provisions on human relations were intended to expand the concept of torts in this
jurisdiction by granting adequate legal remedy for the untold number of moral wrongs which is impossible for human
foresight to specifically provide in the statutes. 5

A corporation is civilly liable in the same manner as natural persons for torts, because "generally speaking, the rules
governing the liability of a principal or master for a tort committed by an agent or servant are the same whether the
principal or master be a natural person or a corporation, and whether the servant or agent be a natural or artificial person.
All of the authorities agree that a principal or master is liable for every tort which he expressly directs or authorizes, and
this is just as true of a corporation as of a natural person, A corporation is liable, therefore, whenever a tortious act is
committed by an officer or agent under express direction or authority from the stockholders or members acting as a body,
or, generally, from the directors as the governing body." 6

WHEREFORE, in view of the foregoing, the decision of the Court of Appeals is hereby AFFIRMED.

Fernando, Aquino, Concepcion, Jr., and Santos, JJ., concur.

Separate Opinions

BARREDO, J., concurring:

concurs on the basis of Article 19 of the Civil Code, or at least, of equity. He reserves his opinion on the matter of torts
relied upon in the main opinion.

Separate Opinions

BARREDO, J., concurring:

concurs on the basis of Article 19 of the Civil Code, or at least, of equity. He reserves his opinion on the matter of torts
relied upon in the main opinion.
  Manila Electric Co. vs. Nordec Philippines, G.R. No. 196116; April 18, 2018

G.R. No. 196116, April 18, 2018

NORDEC PHILIPPINES REPRESENTED BY ITS PRESIDENT, DR. POTENCIANO R.

MALVAR, Petitioner, v. MANILA ELECTRIC COMPANY, VICENTE MONTERO, MR. BONDOC, AND MR.
BAYONA, Respondents.

DECISION

LEONEN, J.:

A distribution utility is mandated to strictly comply with the legal requisites before disconnecting an electric supply due to
the serious consequences this disconnection may have on the consumer.

These are two (2) Petitions for Review on Certiorari 1 under Rule 45 of the Rules of Court, both assailing the January 21,
2011 Decision2 and March 9, 2011 Resolution3 of Court of Appeals in CA-G.R. CV No. 85564. The Court of Appeals
reversed and set aside the June 15, 2005 Decision4 of Branch 85, Regional Trial Court, Quezon City in Civil Case No. Q-
49651. It ordered Manila Electric Company (Meralco) to pay Nordec Philippines (Nordec) the amounts of P5,625.00,
representing overbilling for November 23, 1987; P200,000.00 as exemplary damages; P100,000.00 as attorney's fees; and
costs of suit.

Meralco was contracted to supply electricity to Marvex Industrial Corporation (Marvex) under an Agreement for Sale of
Electric Energy, with Service Account No. 9396-3422-15. 5 It installed metering devices at Marvex's premises on January
18, 1985. Marvex was billed according to the monthly electric consumption recorded in its meter. 6

On May 29, 1985, Meralco service inspectors inspected Marvex's electric metering facilities and found that the main
meter terminal and cover seals had been tampered with. During a second inspection on September 18, 1985, Meralco
found that the metering devices were tampered with again. Subsequently, Meralco assessed Marvex a differential billing
of P371,919.58 for January 18, 1985 to May 29, 1985, and P124,466.71 for June 17, 1985 to September 18, 1985, in the
total amount of P496,386.29. Meralco sent demand letters dated August 7, 1985 and November 29, 1985, and
disconnected Marvex's electric service when it did not pay. 7

On December 23, 1986, Nordec, the new owner of Marvex, 8 sued Meralco for damages with prayer for preliminary
mandatory injunction with Branch 85, Regional Trial Court, Quezon City. 9 Likewise, impleaded as defendants were
Meralco's legal officer, Vicente Montero, and two (2) Meralco employees, Mr. Bondoc and Mr. Bayona. 10 It alleged that
Meralco's service inspectors conducted the 1985 inspections without its consent or approval. Following the inspections,
Meralco's inspectors gave an unnamed Nordec employee a Power Field Order that did not mention the alleged defects in
the metering devices. Nordec further claimed that the parties exchanged letters on the alleged unregistered electric bill,
and that it requested a recomputation, which Meralco denied in its April 25, 1986 letter. However, in May 1986, Meralco
asked Nordec to show the basis for its recomputation request, to which Nordec complied in its June 10, 1986 letter. On
August 14, 1986, Meralco required Nordec to pay P371,919.58 for the unregistered electricity bill. Nordec then informed
Meralco of the pending resolution of the recomputation. Nordec claimed that Meralco then disconnected its service
without prior notice on December 18, 1986, resulting to loss of income and cancellation of other business opportunities. 11

In its defense, Meralco claimed that the 1985 inspections had been conducted in the presence of Nordec's representatives.
Further, Meralco had repeatedly warned Nordec of service disconnection in case of failure to pay the differential bill.
Finally, it averred that there was no contractual relation between Nordec and Marvex, and that Nordec and its president,
Dr. Potenciano Malvar (Dr. Malvar), failed to show proof that they were authorized to sue on Marvex's behalf. 12

On January 22, 1987, the Regional Trial Court issued a writ of preliminary injunction directing Meralco to restore
Nordec's electric supply.13

On November 23, 1987, Meralco conducted another inspection of Nordec's premises in the presence of Nordec's
president, Dr. Malvar. The inspecting group observed that there were irregularities in Nordec's metering devices, as they
continued to register power consumption even though its entire power supply equipment was turned off. Meralco offered
to reimburse Nordec's excess bill of P5,625.10, but Nordec rejected this offer. 14

Nordec filed a second supplemental complaint on January 4, 1991, praying that Meralco be declared guilty of tampering,
and be made to refund its excess bill of not less than P5,625.10. 15

In its June 15, 2005 Decision,16 the Regional Trial Court dismissed Nordec's original complaint and second supplemental
complaint. The trial court found that there was sufficient evidence to prove that the electric meter and metering
installation at Marvex premises had been tampered with. 17 It found that Nordec did not dispute that the inspections of its
premises were conducted with the consent and in the presence of its representatives. Moreover, Nordec failed to prove
that Meralco's inspectors had ill motives to falsify their findings regarding the tampered meter, or that the inspectors were
responsible for the tampering.18

The trial court further found that Ridjo Tape & Chemical Corporation v. Court of Appeals was inapplicable to this case,
since that case did not involve tampering of meters. It held Nordec liable for violating its Terms and Conditions of Service
with Meralco, such that Meralco was justified in disconnecting its electric service. 19 Because it was Nordec which
committed the tampering, it was not entitled to the reliefs prayed for because it did not come to court with clean hands. 20

There was also no contractual relationship between Nordec and Meralco, since the service contract was between Meralco
and Marvex. Thus, Nordec had no cause of action against Meralco. 21

The dispositive portion of the Regional Trial Court June 15, 2005 Decision stated:

WHEREFORE, the original complaint as well as the second supplemental complaint are hereby DISMISSED.

Anent the second supplemental complaint, the same is found to be without merit, for failure of plaintiff to substantiate
with clear and convincing evidence.

And, finding defendant's counterclaim to be with merit, the same is GRANTED. Accordingly, plaintiffs are hereby
ordered to pay, jointly and severally, defendants the total amount of FOUR HUNDRED NINETY[]SIX THOUSAND
THREE HUNDRED EIGHTY-SIX PESOS & 29/100 (Php 496,386.29), representing the value of used but unregistered
electric current; the sum of TEN THOUSAND PESOS (Php 10,000.00) as exemplary damages; and the sum of TWENTY
THOUSAND PESOS (Php 20,000.00) as and for attorney's fees plus costs.

SO ORDERED.22
Nordec appealed to the Court of Appeals, which docketed the case as CA-G.R. CV No. 85564. On January 21, 2011, the
Court of Appeals issued its Decision,23 reversing and setting aside the Regional Trial Court June 15, 2005 Decision.

First, it held that there was a contractual relationship between Nordec and Meralco. It found that after the service contract
between Meralco and Marvex, Nordec bought Marvex from the Development Bank of the Philippines. Thus, Nordec
stepped into Marvex's shoes and assumed its rights and obligations as its assignee or successor-in-interest. As Marvex's
right to receive electricity is not intransmissible, it was deemed to have been transmitted to Nordec. Moreover, Meralco's
continued supply of electricity to Nordec and Nordec's payment for this supply indicate that there was an implied contract
existing between these two (2) parties.24

Second, the Court of Appeals found that Meralco was negligent in discovering the alleged tampering only on May 29,
1985, or four (4) months after it first found irregularities in the metering devices, despite the monthly meter readings.
There was no evidence that Nordec was responsible for tampering with its own metering devices. The Court of Appeals
found that it was unlikely that a company previously charged with tampering and had been demanded payment for
differential billing would again tamper with a newly installed meter. On the other hand, there was proof that the new
metering devices were defective, since they continued to run despite a complete power shutdown. Meralco even offered to
refund P5,625.10 due to the defect in the new meter. 25

Third, Meralco did not deny that there was a pending communication on Nordec's request for recomputation.
Citing Spouses Quisumbing v. Manila Electric Company, the Court of Appeals found that Meralco failed to give the'
required 48-hour written notice of disconnection before disconnecting Nordec's power supply. 26
Finally, the Court of Appeals awarded Nordec exemplary damages and attorney's fees, but not actual damages. As to
actual damages, Nordec failed to prove that it actually sustained pecuniary losses due to Meralco's disconnection. But
Nordec was entitled to exemplary damages as an example or correction for the public good, and to attorney's fees since
Nordec was forced to litigate to protect its rights. 27 The Court of Appeals granted only the P5,625.00 refund since there
was no proof presented beyond this amount.28

The dispositive portion of the Court of Appeals January 21, 2011 Decision stated:
Accordingly, the appeal is GRANTED. The Decision dated June 15, 2005 of the Regional Trial Court (RTC), Quezon
City, Branch 85 is REVERSED and SET ASIDE and a new one rendered ordering [Meralco] to pay [Nordec]:
1.) P5,625.00, representing overbilling for November 23, 1987[;]

2.) P200,000.00 as exemplary damages;

3.) P100,000.00 as attorney's fees; and

4.) Costs of suit.

SO ORDERED.29
The Court of Appeals denied Meralco's Motion for Reconsideration 30 and Nordec's Motion for Partial Reconsideration31 in
its March 9, 2011 Resolution.32

On March 29, 2011, Meralco filed a motion for extension of time, praying for additional 30 days within which to file its
petition for review.33

This was docketed as G.R. No. 196020. On April 4, 2011, Nordec filed its motion for extension of time, likewise praying
for additional 30 days within which to file its petition for review, which was docketed as G.R. No. 196116. 34

This Court consolidated G.R. Nos. 196020 and 196116 in its April 11, 2011 Resolution. 35

On May 3, 2011, Meralco filed its Petition for Review in G.R. No. 196020, assailing the Court of Appeals January 21,
2011 Decision and March 9, 2011 Resolution.36

Meralco argues that the Court of Appeals erred in making its findings, which were contrary to the findings of the Regional
Trial Court. It claims that the Court of Appeals relied on Nordec's unsubstantiated arguments; first, in finding that Nordec
was Marvex's assignee or successor-in-interest, and second, that Meralco was inexcusably negligent in the late discovery
of the tampered metering devices.37

Meralco claims that at the time of the inspections, the applicable law was Commonwealth Act No. 349, which provided
that distribution utilities were required to discover tampered meters during the prescribed inspections, which were only
once every two (2) years. In contrast, the four (4)-month period as found by the Court of Appeals was unreasonable, and
even contrary to the rules laid down by the Energy Regulatory Commission on the conduct of meter testing. 38 Meralco
argues that distribution utilities' meter readers are not required to discover any defect or tampering in the meters installed
in their customers' premises, and are only required to test their customers' meters only once every two (2) years, unless the
customer requests otherwise. It avers that cases of meter tampering should not be equated with cases involving defective
meters, since the former prejudices public utilities like Meralco, due to consumers' unlawful acts. 39

Further, Meralco claims that the inspections conducted on Marvex's metering facilities were valid and in accordance with
Presidential Decree No. 401, as amended.40 It argues that this law did not require the presence of the customer during
inspections. Nonetheless, the two (2) inspections in 1985 were conducted with the consent and in the presence of Nordec's
representatives.41

Meralco also claims that it exercised due diligence in maintaining its electric meters, which was the standard set by law.
By applying Ridjo Tape v. Court of Appeals,42 the Court of Appeals imposed a degree of diligence beyond what
Commonwealth Act No. 349 provided.43 Meralco asserts that the imposition of .a degree of diligence beyond what the law
provides its judicial legislation.44
Moreover, Meralco holds that the demand letter on the assessed value of the differential billing contained a notice that
Marvex's electric service would be disconnected if the billing was not paid, and that this was sufficient notice. Thus,
Marvex, as the registered customer, was aware that the non-payment of the differential billing would result in the
disconnection of the electric service. 45

Meralco argues that Nordec was not Marvex's assignee or successor-in-interest. It maintains that the service contract was
never transferred in Nordec's name. As such, at the time Nordec filed its complaint against Meralco, it had no authority to
act on Marvex's behalf. Meralco pointed out that the Deed of Absolute Sale between Nordec and the Development Bank
of the Philippines was executed only three (3) years after the 1985 inspections, or on August 16, 1988. There was also no
implied contract between Meralco and Nordec, since there was no act or conduct on Meralco's part to be bound to this
contract.46

Finally, Meralco contests the awards of refund, exemplary damages, and attorney's fees to Nordec. It claims that Nordec
was not entitled to the refund since it already refused without just cause to accept it, and thus, had waived its right to
accept the payment.47 It argues that since the Court of Appeals itself found that Nordec was not entitled to actual damages,
it could not award exemplary damages or attorney's fees to Nordec. 48

In its Comment,49 Nordec argues that Meralco's reliance on Commonwealth Act No. 349 was misplaced, since the two
(2)-year period stated in it referred to testing conducted by the Standardizing Meter Laboratory, and nut by the distribution
utilities themselves.50 Further, Nordec claims that what Meralco failed to comply with was the 48-hour written notice of
disconnection rule, and its previous demand letters did not constitute this notice. 51

In its Reply,52 Meralco reiterated its claims that Ridjo Tape v. Court of Appeals was inapplicable53 and that it gave Nordec
due notice of the disconnection.54

On May 5, 2011, Nordec filed its Petition for Review in G.R. No. 196116, assailing the Court of Appeals March 9, 2011
Resolution, denying its Motion for Partial Reconsideration and praying for the modification of the Court of Appeals
January 21, 2011 Decision.55

Nordec claims that it should be awarded at least P500,000.00 in temperate damages, P150,000.00 in moral damages, and
legal interest by the Court of Appeals. It argues that temperate damages are warranted since Meralco's unceremonious and
unreasonable disconnection led to Nordec's inability to fulfill its contractual obligations and was even forced to cancel its
clients' purchase orders.56

Further, Nordec claims that the Court of Appeals erred in finding that it was entitled to only P5,625.00 as a refund. It
argues that it proved overbilling in excess of P5,625.00, through a letter showing that Nordec had been charged
P103,412.48 by Meralco, when a past billing was only for P78,860.58, which Meralco did not refute. While Nordec
admits that it failed to adduce proof of the accurate amount of damages that it sustained, it holds that it estimates
Meralco's acts to cause at least P1,000,000.00 worth of damage due to Meralco's electricity disconnection, fraud in
downgrading the overbilling, and installation of defective meters. 57

It its Comment,58 Meralco argues that Nordec's petition should be denied outright for failing to raise questions of law, but
merely prayed for a modification of the Court of Appeals January 21, 2011 Decision. 59 It claims that the Court of Appeals
correctly denied the award of actual and temperate or moderate damages. 60 Further, it asserts that Nordec, as a
corporation, was not entitled to moral damages.61 Finally, it reiterates that Nordec was not entitled to any award, since
Meralco acted in accordance with the standard set by law. 62

In its Reply,63 Nordec claims that this Court may take cognizance of its petition since there was no longer any need to
examine the probative value of the evidence presented. 64 It argues that corporations may be entitled to damages if their
reputations have been besmirched, such as in this case. 65 Nordec reiterates its entitlement to the damages it prayed for. 66

The issues for this Court's resolution are:

First, whether or not the Court of Appeals erred in making findings of fact contrary to those of the Regional Trial Court;

Second, whether or not Nordec Philippines has a cause of action against Manila Electric Company;
Third, whether or not Manila Electric Company was inexcusably negligent when it disconnected Nordec Philippines'
electric supply; and

Finally, whether or not Nordec Philippines is entitled to actual, temperate, moral or exemplary damages, attorney's fees,
and legal interest.

In its petition for review, Meralco faults the Court of Appeals for making findings of fact contrary to those of the Regional
Trial Court. It claims that the trial court's findings of fact should be accorded the highest degree of respect and that the
Court of Appeals failed to find that the trial court's findings were based on mere conjecture, and not evidence. Thus,
Meralco claims that this Court must review the facts and evidence of this case

Meralco is mistaken in arguing that this Court is duty-bound to review the factual findings in this case due to the contrary
findings of the Regional Trial Court and of the Court of Appeals. The Court of Appeals has the jurisdiction to review, and
even reverse, the factual findings of the trial court. For the Court of Appeals' factual findings to be reviewed by this Court,
it must be shown that it gravely abused its discretion in appreciating the parties' respective evidence. In Pascual v.
Burgos:67
The Court of Appeals must have gravely abused its discretion in its appreciation of the evidence presented by the parties
and in its factual findings to warrant a review of factual issues by this court. Grave abuse of discretion is defined, thus:
By grave abuse of discretion is meant such capricious and whimsical exercise of judgment as is equivalent to lack of
jurisdiction. The abuse of discretion must be grave as where the power is exercised in an arbitrary or despotic manner by
reason of passion or personal hostility and must be so patent and gross as to amount to an evasion of positive duty or to a
virtual refusal to perform the duty enjoined by or to act at all in contemplation of law.

Grave abuse of discretion refers not merely to palpable errors of jurisdiction; or to violations of the Constitution, the law
and jurisprudence. It refers also to cases which, for various reasons, there has been a gross misapprehension of facts.
(Citations omitted)
This exception was first laid down in Buyco v. People, et al.:
In the case at bar, the Tenth Amnesty Commission, the court of first instance and the Court of Appeals found, in effect,
that the evidence did not suffice to show that appellant had acted in the manner contemplated in the amnesty
proclamation. Moreover, unlike the Barrioquinto cases, which were appealed directly to this Court, which, accordingly,
had authority to pass upon the validity of the findings of fact of the court of first instance and of its conclusions on the
veracity of the witnesses, the case at bar is before us on appeal by certiorari from a decision of the Court of Appeals, the
findings and conclusions of which, on the aforementioned subjects, are not subject to our review, except in cases of grave
abuse of discretion, which has not been shown to exist. 68 (Citations omitted)
Meralco has failed to show how the Court of Appeals acted with grave abuse of discretion in arriving at its factual
findings and conclusions, or how it grossly misapprehended the evidence presented as to warrant a finding that its review
and reversal of the trial court's findings of fact had been in error.

II

A cause of action "is the act or omission by which a party violates a right of another." 69 For a cause of action to exist, there
must be, first, a plaintiff's legal right; second, defendant's correlative obligation; and third, an injury to the plaintiff as a
result of the defendant's violation of plaintiff's right. 70 Here, the Regional Trial Court found that Nordec had no cause of
action against Meralco since they had no contractual relationship, as Meralco's service contract was with Marvex.

The beneficial users of an electric service have a cause of action against this distribution utility. In Manila Electric
Company v. Spouses Chua,71 it was the beneficial users who were awarded damages due to the unjust disconnection of the
electric supply, even though the service contract with Meralco was registered in the name of another person.

Further, Meralco is deemed to have knowledge of the fact that Nordec was the beneficial user of Marvex's service contract
with Meralco. It admits that the inspections of the metering devices were conducted in the presence of Nordec's
maintenance personnel and with the consent of its manager. 72 It further admits that it corresponded with Nordec regarding
the differential billing, and entertained Nordec's demand for an explanation on the finding of tampering and the
recomputation of the amount to be paid by Nordec.73 Clearly, Meralco knew that it was dealing with Nordec as the
beneficial user of the electricity supply.

III

It is well-settled that electricity distribution utilities, which rely on mechanical devices and equipment for the orderly
undertaking of their business, are duty-bound to make reasonable and proper periodic inspections of their equipment. If
they are remiss in carrying out this duty due to their own negligence, they risk forfeiting the amounts owed by the
customers affected.

In Ridjo Tape & Chemical Corporation v. Court of Appeals:74

At this juncture, we hasten to point out that the production and distribution of electricity is a highly technical business
undertaking, and in conducting its operation, it is only logical for public utilities, such as MERALCO, to employ
mechanical devices and equipment for the orderly pursuit of its business.

It is to be expected that the parties were consciously aware that these devices or equipment are susceptible to defects and
mechanical failure. Hence, we are not prepared to believe that petitioners were ignorant of the fact that stoppages in
electric meters can also result from inherent defects or flaws and not only from tampering or intentional mishandling....

....

Corollarily, it must be underscored that MERALCO has the imperative duty to make a reasonable and proper inspection
of its apparatus and equipment to ensure that they do not malfunction, and the due diligence to discover and repair defects
therein. Failure to perform such duties constitutes negligence.

A review of the records, however, discloses that the unpaid charges covered the periods from November 7, 1990 to
February 13, 1991 for Civil Case No. Q-92-13045 and from July 15, 1991 to April 13, 1992 for Civil Case No. 13879,
approximately three months and nine months, respectively. On such basis, we take judicial notice that during those
periods, personnel representing MERALCO inspected and examined the electric meters of petitioners regularly for the
purpose of determining the monthly dues payable. So, why were these defects not detected and reported on time?

It has been held that notice of a defect need not be direct and express; it is enough that the same had existed for such a
length of time that it is reasonable to presume that it had been detected, and the presence of a conspicuous defect which
has existed for a considerable length of time will create a presumption of constructive notice thereof. Hence, MERALCO's
failure to discover the defect, if any, considering the length of time, amounts to inexcusable negligence. Furthermore, we
need not belabor the point that as a public utility, MERALCO has the obligation to discharge its functions with utmost
care and diligence.75 (Citations omitted)
Moreover, the duty of inspecting for defects is not limited to inherent mechanical defects of the distribution utilities'
devices, but extends to intentional and unintentional ones, such as those, which are due to tampering and mistakes in
computation.76 In Manila Electric Co. v. Wilcon Builders Supply, Inc.:77
The Ridjo doctrine simply states that the public utility has the imperative duty to make a reasonable and proper inspection
of its apparatus and equipment to ensure that they do not malfunction. Its failure to discover the defect, if any, considering
the length of time, amounts to inexcusable negligence; its failure to make the necessary repairs and replace the defective
electric meter installed within the consumer's premises limits the latter's liability. The use of the words "defect" and
"defective" in the above-cited case does not restrict the application of the doctrine to cases of "mechanical defects" in the
installed electric meters. A more plausible interpretation is to apply the rule on negligence whether the defect is inherent,
intentional or unintentional, which therefore covers tampering, mechanical defects and mistakes in the computation of the
consumers' billing.78 (Citation omitted)
Meralco argues that the degree of diligence imposed upon it was beyond the prevailing law at the time, namely,
Commonwealth Act No. 349. It claims that under this law, it is only required to test metering devices once every two (2)
years. Thus, for it to be penalized for taking four (4) months to rectify and repair the defective meter, was tantamount to
judicial legislation.

However, as pointed out by Nordec, the two (2)-year period prescribed under Commonwealth Act No. 349 79 is for the
testing required of meters and appliances for measurements used by all public services by a standardized meter laboratory
under the control of the then Public Service Commission. It does not pertain to distribution utilities inspections of the
metering devices installed in their consumers' premises.

Further, contrary to Meralco's claim, the duty imposed upon it pursuant to Ridjo is not beyond the standard of care
imposed by law. Distribution utilities are public utilities vested with public interest, and thus, are held to a higher degree
of diligence. In Ridjo:
The rationale behind this ruling is that public utilities should be put on notice, as a deterrent, that if they completely
disregard their duty of keeping their electric meters in serviceable condition, they run the risk of forfeiting, by reason of
their negligence, amounts originally due from their customers. Certainly, we cannot sanction a situation wherein the
defects in the electric meter are allowed to continue indefinitely until suddenly the public utilities concerned demand
payment for the unrecorded electricity utilized when, in the first place, they should have remedied the situation
immediately. If we turn a blind eye on MERALCO's omission, it may encourage negligence on the part of public utilities,
to the detriment of the consuming public.

....

To summarize, it is worth emphasizing that it is not our intention to impede or diminish the business viability of
MERALCO, or any public utility company for that matter. On the contrary, we would like to stress that, being a public
utility vested with vital public interest, MERALCO is impressed with certain obligations towards its customers and any
omission on its part to perform such duties would be prejudicial to its interest. For in the final analysis, the bottom line is
that those who do not exercise such prudence in the discharge of their duties shall be made to bear the consequences of
such oversight.80
Should a distribution utility not exercise the standard of care required of it due to its negligence in the inspection and
repair of its apparatus, then it can no longer recover the amounts of allegedly used but uncharged electricity.

The distribution utility's negligence is all the more apparent when it had made prior findings of tampering, and yet still
failed to correct these defects. In Manila Electric Company v. T.E.A.M. Electronics Corp.,81 Meralco conducted an
inspection on September 28, 1987 and found that the meters therein were tampered, and then conducted a second
inspection on June 7, 1988, which yielded similar evidence of tampering. Likewise, the respondent in that case was in the
midst of a differential billing dispute with Meralco, and had previously been assessed P7,000,000.00 due to alleged
tampering. There, this Court found that Meralco was negligent for failing to repair the defects in respondent's meters after
the first inspection:
Petitioner likewise claimed that when the subject meters were again inspected on June 7, 1988, they were found to have
been tampered anew. The Court notes that prior to the inspection, [T.E.A.M. Electronics Corporation] was informed about
it; and months before the inspection, there was an unsettled controversy between [T.E.A.M. Electronics Corporation] and
petitioner, brought about by the disconnection of electric power and the non-payment of differential billing. We are more
disposed to accept the trial court's conclusion that it is hard to believe that a customer previously apprehended for
tampered meters and assessed P7 million would further jeopardize itself in the eyes of petitioner. If it is true that there was
evidence of tampering found on September 28, 1987 and again on June 7, 1988, the better view would be that the
defective meters were not actually corrected after the first inspection. If so, then Manila Electric Company v. Macro
Textile Mills Corporation would apply, where we said that we cannot sanction a situation wherein the defects in the
electric meter are allowed to continue indefinitely until suddenly, the public utilities demand payment for the unrecorded
electricity utilized when they could have remedied the situation immediately. Petitioner's failure to do so may encourage
neglect of public utilities to the detriment of the consuming public. Corollarily, it must he underscored that petitioner has
the imperative duty to make a reasonable and proper inspection of its apparatus and equipment to ensure that they do not
malfunction, and the due diligence to discover and repair defects therein. Failure to perform such duties constitutes
negligence. By reason of said negligence, public utilities run the risk of forfeiting amounts originally due from their
customers.82 (Citations omitted)
Here, as observed by the Court of Appeals, Meralco itself claimed that the irregularities in the electricity consumption
recorded in Nordec's metering devices started on January 18, 1985, as evidenced by their August 7, 1985 demand letter,
covering January 18, 1985 to May 29, 1985. However, the alleged tampering was only discovered during the May 29,
1985 inspection. Considering that Nordec's meters were read monthly, Meralco's belated discovery of the cause of the
alleged irregularities, or four (4) months after they purportedly started, can only lead to a conclusion of negligence. Notice
of a defect may be constructive when it has conspicuously existed for a considerable length of time. 83 It is also worth
noting that during a third inspection on November 23, 1987, further irregularities in Nordec's metering devices were
observed, showing electricity consumption even when Nordec's entire power supply equipment was switched off. Clearly,
Meralco had been remiss in its duty as required by law and jurisprudence of a public utility.
Meralco is also duty-bound to explain the basis for its billings, especially when these are for unregistered consumption, to
prevent consumers from being solely at its mercy. 84 Here, the Power Field Orders given to Nordec following the
inspections did not mention the alleged defects that were discovered. Nordec's request for recomputation of the alleged
unregistered electric bill was still pending when its electric supply was disconnected on December 18, 1986.

Finally, as found by the Court of Appeals, Meralco failed to comply with the 48-hour disconnection notice rule. Meralco
claims that the statements in its demand letters, that failure to pay would result in disconnection, were sufficient notice.
However, pursuant to Section 97 of Revised General Order No. 1, the governing rule when the disconnection occurred,
disconnection due to non-payment of bills requires that a 48-hour written notice be given to the customer. 85

It must be emphasized that electricity is "a basic necessity whose generation and distribution is imbued with public
interest, and its provider is a public utility subject to strict regulation by the State in the exercise of police power." 86 The
serious consequences on a consumer, whose electric supply has been cut off, behoove a distribution utility to strictly
comply with the legal requisites before disconnection may be done. 87 This is all the more true considering Meralco's
dominant position in the market compared to its customers' weak bargaining position. 88

IV

At the outset, a party's entitlement to damages is a question of fact not generally cognizable in a petition for
review.89 However, in this case, the Court of Appeals' failure to apply the applicable law and jurisprudence by awarding
damages to Nordec prompts this Court's review.

The Court of Appeals declined to award actual damages to Nordec as it failed to prove its pecuniary losses due to
Meralco's disconnection:
We concede that MERALCO's service disconnection bore a domino effect on NORDEC's business but in the absence of
actual proof of losses, We cannot award actual damages to NORDEC. For one is only entitled to adequate compensation
for pecuniary loss that he has duly proven.90
The Court of Appeals then proceeded to award exemplary damages to Nordec by way of example or correction for the
public good. This is contrary to the requirement in Article 2234 of the Civil Code, which requires proof of entitlement to
moral, temperate or compensatory damages before exemplary damages may be awarded:
Article 2234. While the amount of the exemplary damages need not be proved, the plaintiff must show that he is entitled
to moral, temperate or compensatory damages before the court may consider the question of whether or not exemplary
damages should be awarded. In case liquidated damages have been agreed upon, although no proof of loss is necessary in
order that such liquidated damages may be recovered, nevertheless, before the court may consider the question of granting
exemplary in addition to the liquidated damages, the plaintiff must show that he would be entitled to moral, temperate or
compensatory damages were it not for the stipulation for liquidated damages.
Exemplary damages, which cannot be recovered as a matter of right, may not be awarded if no moral, temperate, or
compensatory damages have been granted. 91 Since exemplary damages cannot be awarded, the award of attorney's fees
should likewise be deleted.

Moral damages are also not proper, in line with Manila Electric Company v. TE.A.M Electronics Corporation:92
We, however, deem it proper to delete the award of moral damages. [T.E.A.M. Electronics Corporation] claim was
premised allegedly on the damage to its goodwill and reputation. As a rule, a corporation is not entitled to moral damages
because, not being a natural person, it cannot experience physical suffering or sentiments like wounded feelings, serious
anxiety, mental anguish and moral shock. The only exception to this rule is when the corporation has a reputation that is
debased, resulting in its humiliation in the business realm. But in such a case, it is imperative for the claimant to present
proof to justify the award. It is essential to prove the existence of the factual basis of the damage and its causal relation to
petitioner's acts. In the present case, the records are bereft of any evidence that the name or reputation of [T.E.A.M.
Electronics Corporation/Technology Electronics Assembly and Management Pacific Corporation] has been debased as a
result of petitioner's acts. Besides, the trial court simply awarded moral damages in the dispositive portion of its decision
without stating the basis thereof.93 (Citations omitted)
Here, the records are bereft of evidence that would show that Nordec's name or reputation suffered due to the
disconnection of its electric supply.
Moreover, contrary to Nordec's claim, it cannot be awarded temperate or moderate damages. Under Article 2224 of the
Civil Code:
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 can not, from the nature of
the case, be proved with certainty.
When the court finds that a party fails to prove the fact of pecuniary loss, and not just the amount of this loss, then Article
2224 does not apply. In Seven Brothers Shipping Corporation v. DMC-Construction Resources, Inc.:94
In contrast, under Article 2224, temperate or moderate 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. This
principle was thoroughly explained in Araneta v. Bank of America, which cited the Code Commission, to wit:
The Code Commission, in explaining the concept of temperate damages under Article 2224, makes the following
comment:
In some States of the American Union, temperate damages are allowed. There are cases where from the nature of the
case, definite proof of pecuniary loss cannot be offered, although the court is convinced that there has been such
loss. For instance, injury to one's commercial credit or to the goodwill of a business firm is often hard to show with
certainty in terms of money. Should damages be denied for that reason? The judge should be empowered to calculate
moderate damages in such cases, rather than that the plaintiff should suffer, without redress from the defendant's wrongful
act. (Emphasis ours)
Thus, in Tan v. OMC Carriers, Inc., temperate damages were rightly awarded because plaintiff suffered a loss, although
definitive proof of its amount cannot be presented as the photographs produced as evidence were deemed insufficient.
Established in that case, however, was the fact that respondent's truck was responsible for the damage to petitioner's
property and that petitioner suffered some form of pecuniary loss. In Canada v. All Commodities Marketing Corporation,
temperate damages were also awarded wherein respondent's goods did not reach the Pepsi Cola Plant at Muntinlupa City
as a result of the negligence of petitioner in conducting its trucking and hauling services, even if the amount of the
pecuniary loss had not been proven. In Philtranco Services Enterprises, Inc. v. Paras, the respondent was likewise
awarded temperate damages in an action for breach of contract of carriage, even if his medical expenses had not been
established with certainty. In People v. Briones, in which the accused was found guilty of murder, temperate damages
were given even if the funeral expenses for the victim had not been sufficiently proven.

Given these findings, we are of the belief that temperate and not nominal damages should have been awarded, considering
that it has been established that respondent herein suffered a loss, even if the amount thereof cannot be proven with
certainty.95 (Citations omitted)
Here, the Court of Appeals found that Meralco's disconnection had a "domino effect" 96 on Nordec's business, but that
Nordec did not offer actual proof of its losses. Nordec even admitted in its petition for review that there was an
"oversight" on its part in "adducing proof of the accurate amount of damages it sustained" due to Meralco's acts. 97 No
pecuniary loss has been established in this case, apart from the claim in Nordec's complaint that the "serious anxiety" of
the disconnection had caused Nordec's president to cancel business appointments, purchase orders, and fail to fulfill
contractual obligations, among others.98

In this instance, nominal damages may be awarded. In Philippine Telegraph & Telephone Corporation v. Court of
Appeals:99
Temperate or moderate damages may only be given if the "court finds that some pecuniary loss has been suffered but that
its amount cannot, from the nature of the case, be proved with certainty." The factual findings of the appellate court that
respondent has failed to establish such pecuniary loss or, if proved, cannot from their nature be precisely quantified
precludes the application of the rule on temperate or moderate damages. The result comes down to only a possible award
of nominal damages. Nominal damages are adjudicated in order that a right of the plaintiff, which has been violated or
invaded by the defendant, may be vindicated or recognized and not for the purpose of indemnifying the plaintiff for any
loss suffered by him. The court may award nominal damages in every obligation arising from any source enumerated in
article 1157 of the Civil Code or, generally, in every case where property right is invaded. 100 (Citations omitted)
Nominal damages are awarded to vindicate the violation of a right suffered by a party, in an amount considered by the
courts reasonable under the circumstances. 101 Meralco's negligence in not providing Nordec sufficient notice of
disconnection of its electric supply, especially when there was an ongoing dispute between them concerning the
recomputation of the electricity bill to be paid, violated Nordec's rights. Because of this, Nordec is entitled to nominal
damages in the amount of P30,000.00.
WHEREFORE, the Petitions for Review on Certiorari in G.R. Nos. 196020 and 196116 are DENIED. The Court of
Appeals January 21, 2011 Decision and March 9, 2011 Resolution in CA-G.R. CV No. 85564
are AFFIRMED with MODIFICATION. Manila Electric Company is ordered to pay Nordec Philippines P5,625.00,
representing overbilling for November 23, 1987; P30,000.00 in nominal damages; and costs of suit. The awards for
exemplary damages and attorney's fees are deleted.

SO ORDERED.

Velasco, Jr., (Chairperson), Bersamin, Martires, and Gesmundo, JJ., concur.

June 26, 2018

NOTICE OF JUDGMENT

Sirs/ Mesdames:

Please take notice that on April 18, 2018 a Decision, copy attached hereto, was rendered by the Supreme Court in the
above-entitled cases, the original of which was received by this Office on June 26, 2018 at 1:18 p.m.
  Boyer-Roxas and Roxas vs. CA and Roxas, G.R. No. 100866, July 14, 1992

G.R. No. 100866 July 14, 1992

REBECCA BOYER-ROXAS and GUILLERMO ROXAS, petitioners,

vs.
HON. COURT OF APPEALS and HEIRS OF EUGENIA V. ROXAS, INC., respondents.

GUTIERREZ, JR., J.:

This is a petition to review the decision and resolution of the Court of Appeals in CA-G.R. No. 14530 affirming the earlier
decision of the Regional Trial Court of Laguna, Branch 37, at Calamba, in the consolidated RTC Civil Case Nos. 802-84-
C and 803-84-C entitled "Heirs of Eugenia V. Roxas, Inc. v. Rebecca Boyer-Roxas" and Heirs of Eugenia V. Roxas, Inc.
v. Guillermo Roxas," the dispositive portion of which reads:

IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of the plaintiff and against the
defendants, by ordering as it is hereby ordered that:

1) In RTC Civil Case No. 802-84-C: Rebecca Boyer-Roxas and all persons claiming under her to:

a) Immediately vacate the residential house near the Balugbugan pool located inside the premises of the
Hidden Valley Springs Resort at Limao, Calauan, Laguna;

b) Pay the plaintiff the amount of P300.00 per month from September 10, 1983, for her occupancy of the
residential house until the same is vacated;

c) Remove the unfinished building erected on the land of the plaintiff within ninety (90) days from receipt
of this decision;

d) Pay the plaintiff the amount of P100.00 per month from September 10, 1983, until the said unfinished
building is removed from the land of the plaintiff; and

e) Pay the costs.

2) In RTC Civil Case No. 803-84-C: Guillermo Roxas and all persons claiming under him to:

a) Immediately vacate the residential house near the tennis court located within the premises of the
Hidden Valley Springs Resort at Limao, Calauan, Laguna;

b) Pay the plaintiff the amount of P300.00 per month from September 10, 1983, for his occupancy of the
said residential house until the same is vacated; and

c) Pay the costs. (Rollo, p. 36)

In two (2) separate complaints for recovery of possession filed with the Regional Trial Court of Laguna against petitioners
Rebecca Boyer-Roxas and Guillermo Roxas respectively, respondent corporation, Heirs of Eugenia V. Roxas, Inc., prayed
for the ejectment of the petitioners from buildings inside the Hidden Valley Springs Resort located at Limao, Calauan,
Laguna allegedly owned by the respondent corporation.
In the case of petitioner Rebecca Boyer-Roxas (Civil Case No-802-84-C), the respondent corporation alleged that
Rebecca is in possession of two (2) houses, one of which is still under construction, built at the expense of the respondent
corporation; and that her occupancy on the two (2) houses was only upon the tolerance of the respondent corporation.

In the case of petitioner Guillermo Roxas (Civil Case No. 803-84-C), the respondent corporation alleged that Guillermo
occupies a house which was built at the expense of the former during the time when Guillermo's father, Eriberto Roxas,
was still living and was the general manager of the respondent corporation; that the house was originally intended as a
recreation hall but was converted for the residential use of Guillermo; and that Guillermo's possession over the house and
lot was only upon the tolerance of the respondent corporation.

In both cases, the respondent corporation alleged that the petitioners never paid rentals for the use of the buildings and the
lots and that they ignored the demand letters for them to vacate the buildings.

In their separate answers, the petitioners traversed the allegations in the complaint by stating that they are heirs of Eugenia
V. Roxas and therefore, co-owners of the Hidden Valley Springs Resort; and as co-owners of the property, they have the
right to stay within its premises.

The cases were consolidated and tried jointly.

At the pre-trial, the parties limited the issues as follows:

1) whether plaintiff is entitled to recover the questioned premises;

2) whether plaintiff is entitled to reasonable rental for occupancy of the premises in question;

3) whether the defendant is legally authorized to pierce the veil of corporate fiction and interpose the
same as a defense in an accion publiciana;

4) whether the defendants are truly builders in good faith, entitled to occupy the questioned premises;

5) whether plaintiff is entitled to damages and reasonable compensation for the use of the questioned
premises;

6) whether the defendants are entitled to their counterclaim to recover moral and exemplary damages as
well as attorney's fees in the two cases;

7) whether the presence and occupancy by the defendants on the premises in questioned (sic) hampers,
deters or impairs plaintiff's operation of Hidden Valley Springs Resort; and

8) whether or not a unilateral and sudden withdrawal of plaintiffs tolerance allowing defendants'
occupancy of the premises in questioned (sic) is unjust enrichment. (Original Records, 486)

Upon motion of the plaintiff respondent corporation, Presiding Judge Francisco Ma. Guerrero of Branch 34 issued an
Order dated April 25, 1986 inhibiting himself from further trying the case. The cases were re-raffled to Branch 37
presided by Judge Odilon Bautista. Judge Bautista continued the hearing of the cases.

For failure of the petitioners (defendants below) and their counsel to attend the October 22, 1986 hearing despite notice,
and upon motion of the respondent corporation, the court issued on the same day, October 22, 1986, an Order considering
the cases submitted for decision. At this stage of the proceedings, the petitioners had not yet presented their evidence
while the respondent corporation had completed the presentation of its evidence.

The evidence of the respondent corporation upon which the lower court based its decision is as follows:

To support the complaints, the plaintiff offered the testimonies of Maria Milagros Roxas and that of
Victoria Roxas Villarta as well as Exhibits "A" to "M-3".
 The evidence of the plaintiff established the following: that the plaintiff, Heirs of Eugenia V Roxas,
Incorporated, was incorporated on December 4, 1962 (Exh. "C") with the primary purpose of engaging in
agriculture to develop the properties inherited from Eugenia V. Roxas and that of y Eufrocino Roxas; that
the Articles of Incorporation of the plaintiff, in 1971, was amended to allow it to engage in the resort
business (Exh.
"C-1"); that the incorporators as original members of the board of directors of the plaintiff were all
members of the same family, with Eufrocino Roxas having the biggest share; that accordingly, the
plaintiff put up a resort known as Hidden Valley Springs Resort on a portion of its land located at Bo.
Limao, Calauan, Laguna, and covered by TCT No. 32639 (Exhs. "A" and "A-l"); that improvements were
introduced in the resort by the plaintiff and among them were cottages, houses or buildings, swimming
pools, tennis court, restaurant and open pavilions; that the house near the Balugbugan Pool (Exh. "B-l")
being occupied by Rebecca B. Roxas was originally intended as staff house but later used as the residence
of Eriberto Roxas, deceased husband of the defendant Rebecca Boyer-Roxas and father of Guillermo
Roxas; that this house presently being occupied by Rebecca B. Roxas was built from corporate funds; that
the construction of the unfinished house (Exh. "B-2") was started by the defendant Rebecca Boyer-Roxas
and her husband Eriberto Roxas; that the third building (Exh. "B-3") presently being occupied by
Guillermo Roxas was originally intended as a recreation hall but later converted as a residential house;
that this house was built also from corporate funds; that the said house occupied by Guillermo Roxas
when it was being built had nipa roofing but was later changed to galvanized iron sheets; that at the
beginning, it had no partition downstairs and the second floor was an open space; that the conversion
from a recreation hall to a residential house was with the knowledge of Eufrocino Roxas and was not
objected to by any of the Board of Directors of the plaintiff; that most of the materials used in converting
the building into a residential house came from the materials left by Coppola, a film producer, who filmed
the movie "Apocalypse Now"; that Coppola left the materials as part of his payment for rents of the
rooms that he occupied in the resort; that after the said recreation hall was converted into a residential
house, defendant Guillermo Roxas moved in and occupied the same together with his family sometime in
1977 or 1978; that during the time Eufrocino Roxas was still alive, Eriberto Roxas was the general
manager of the corporation and there was seldom any board meeting; that Eufrocino Roxas together with
Eriberto Roxas were (sic) the ones who were running the corporation; that during this time, Eriberto
Roxas was the restaurant and wine concessionaire of the resort; that after the death of Eufrocino Roxas,
Eriberto Roxas continued as the general manager until his death in 1980; that after the death of Eriberto
Roxas in 1980, the defendants Rebecca B. Roxas and Guillermo Roxas, committed acts that impeded the
plaintiff's expansion and normal operation of the resort; that the plaintiff could not even use its own
pavilions, kitchen and other facilities because of the acts of the defendants which led to the filing of
criminal cases in court; that cases were even filed before the Ministry of Tourism, Bureau of Domestic
Trade and the Office of the President by the parties herein; that the defendants violated the resolution and
orders of the Ministry of Tourism dated July 28, 1983, August 3, 1983 and November 26, 1984 (Exhs.
"G", "H" and "H-l") which ordered them or the corporation they represent to desist from and to turn over
immediately to the plaintiff the management and operation of the restaurant and wine outlets of the said
resort (Exh. "G-l"); that the defendants also violated the decision of the Bureau of Domestic Trade dated
October 23, 1983 (Exh. "C"); that on August 27, 1983, because of the acts of the defendants, the Board of
Directors of the plaintiff adopted Resolution No. 83-12 series of 1983 (Exh. "F") authorizing the
ejectment of the defendants from the premises occupied by them; that on September 1, 1983, demand
letters were sent to Rebecca Boyer-Roxas and Guillermo Roxas (Exhs. "D" and "D-1") demanding that
they vacate the respective premises they occupy; and that the dispute between the plaintiff and the
defendants was brought before the barangay level and the same was not settled (Exhs. "E" and "E-l").
(Original Records, pp. 454-456)

The petitioners appealed the decision to the Court of Appeals. However, as stated earlier, the appellate court affirmed the
lower court's decision. The Petitioners' motion for reconsideration was likewise denied.

Hence, this petition.

In a resolution dated February 5, 1992, we gave due course to the petition.

The petitioners now contend:

I Respondent Court erred when it refused to pierce the veil of corporate fiction over private respondent and maintain the
petitioners in their possession and/or occupancy of the subject premises considering that petitioners are owners of aliquot
part of the properties of private respondent. Besides, private respondent itself discarded the mantle of corporate fiction by
acts and/or omissions of its board of directors and/or stockholders.

II The respondent Court erred in not holding that petitioners were in fact denied due process or their day in court brought
about by the gross negligence of their former counsel.

III The respondent Court misapplied the law when it ordered petitioner Rebecca Boyer-Roxas to remove the unfinished
building in RTC Case No. 802-84-C, when the trial court opined that she spent her own funds for the construction thereof.
(CA Rollo, pp. 17-18)

Were the petitioners denied due process of law in the lower court?

After the cases were re-raffled to the sala of Presiding Judge Odilon Bautista of Branch 37 the following events
transpired:

On July 3, 1986, the lower court issued an Order setting the hearing of the cases on July 21, 1986. Petitioner Rebecca V.
Roxas received a copy of the Order on July 15, 1986, while petitioner Guillermo Roxas received his copy on July 18,
1986. Atty. Conrado Manicad, the petitioners' counsel received another copy of the Order on July 11, 1986. (Original
Records, p. 260)

On motion of the respondent corporation's counsel, the lower court issued an Order dated July 15, 1986 cancelling the
July 21, 1986 hearing and resetting the hearing to August 11, 1986. (Original records, 262-263) Three separate copies of
the order were sent and received by the petitioners and their counsel. (Original Records, pp. 268, 269, 271)

A motion to cancel and re-schedule the August 11, 1986 hearing filed by the respondent corporation's counsel was denied
in an Order dated August 8, 1986. Again separate copies of the Order were sent and received by the petitioners and their
counsel. (Original Records, pp. 276-279)

At the hearing held on August 11, 1986, only Atty. Benito P. Fabie, counsel for the respondent corporation appeared.
Neither the petitioners nor their counsel appeared despite notice of hearing. The lower court then issued an Order on the
same date, to wit:

ORDER

When these cases were called for continuation of trial, Atty. Benito P. Fabie appeared before this Court,
however, the defendants and their lawyer despite receipt of the Order setting the case for hearing today
failed to appear. On Motion of Atty. Fabie, further cross examination of witness Victoria Vallarta is
hereby considered as having been waived.

The plaintiff is hereby given twenty (20) days from today within which to submit formal offer of evidence
and defendants are also given ten (10) days from receipt of such formal offer of evidence to file their
objection thereto.

In the meantime, hearing in these cases is set to September 29, 1986 at 10:00 o'clock in the morning.
(Original Records, p. 286)

Copies of the Order were sent and received by the petitioners and their counsel on the following dates — Rebecca Boyer-
Roxas on August 20, 1986, Guillermo Roxas on August 26, 1986, and Atty. Conrado Manicad on September 19, 1986.
(Original Records, pp. 288-290)

On September 1, 1986, the respondent corporation filed its "Formal Offer of Evidence." In an Order dated September 29,
1986, the lower court issued an Order admitting exhibits "A" to "M-3" submitted by the respondent corporation in its
"Formal Offer of Evidence . . . there being no objection . . ." (Original Records, p. 418) Copies of this Order were sent and
received by the petitioners and their counsel on the following dates: Rebecca Boyer-Roxas on October 9, 1986; Guillermo
Roxas on October 9, 1986 and Atty. Conrado Manicad on October 4, 1986 (Original Records, pp. 420, 421, 428).

The scheduled hearing on September 29, 1986 did not push through as the petitioners and their counsel were not present
prompting Atty. Benito Fabie, the respondent corporation's counsel to move that the cases be submitted for decision. The
lower court denied the motion and set the cases for hearing on October 22, 1986. However, in its Order dated September
29, 1986, the court warned that in the event the petitioners and their counsel failed to appear on the next scheduled
hearing, the court shall consider the cases submitted for decision based on the evidence on record. (Original Records, p.
429, 430 and 431)

Separate copies of this Order were sent and received by the petitioners and their counsel on the following dates: Rebecca
Boyer-Roxas on October 9, 1986, Guillermo Roxas on October 9, 1986; and Atty. Conrado Manicad on October 1, 1986.
(Original Records, pp. 429-430)

Despite notice, the petitioners and their counsel again failed to attend the scheduled October 22, 1986 hearing. Atty. Fabie
representing the respondent corporation was present. Hence, in its Order dated October 22, 1986, on motion of Atty. Fabie
and pursuant to the order dated September 29, 1986, the Court considered the cases submitted for decision. (Original
Records, p. 436)

On November 14, 1986, the respondent corporation, filed a "Manifestation", stating that ". . . it is submitting without
further argument its "Opposition to the Motion for Reconsideration" for the consideration of the Honorable Court in
resolving subject incident." (Original Records, p. 442)

On December 16, 1986, the lower court issued an Order, to wit:

ORDER

Considering that the Court up to this date has not received any Motion for Reconsideration filed by the
defendants in the above-entitled cases, the Court cannot act on the Opposition to Motion for
Reconsideration filed by the plaintiff and received by the Court on November 14, 1986. (Original
Records, p. 446)

On January 15, 1987, the lower court rendered the questioned decision in the two (2) cases. (Original Records, pp. 453-
459)

On January 20, 1987, Atty. Conrado Manicad, the petitioners' counsel filed an Ex-Parte Manifestation and attached
thereto, a motion for reconsideration of the October 22, 1986 Order submitting the cases for decision. He prayed that the
Order be set aside and the cases be re-opened for reception of evidence for the petitioners. He averred that: 1) within the
reglementary period he prepared the motion for reconsideration and among other documents, the draft was sent to his law
office thru his messenger; after signing the final copies, he caused the service of a copy to the respondent corporation's
counsel with the instruction that the copy of the Court be filed; however, there was a miscommunication between his
secretary and messenger in that the secretary mailed the copy for the respondent corporation's counsel and placed the rest
in an envelope for the messenger to file the same in court but the messenger thought that it was the secretary who would
file it; it was only later on when it was discovered that the copy for the Court has not yet been filed and that such failure to
file the motion for reconsideration was due to excusable neglect and/or accident. The motion for reconsideration contained
the following allegations: that on the date set for hearing (October 22, 1986), he was on his way to Calamba to attend the
hearing but his car suffered transmission breakdown; and that despite efforts to repair said transmission, the car remained
inoperative resulting in his absence at the said hearing. (Original Records, pp. 460-469)

On February 3, 1987, Atty. Manicad filed a motion for reconsideration of the January 15, 1987 decision. He explained
that he had to file the motion because the receiving clerk refused to admit the motion for reconsideration attached to
the ex-parte manifestation because there was no proof of service to the other party. Included in the motion for
reconsideration was a notice of hearing of the motion on February 3, 1987. (Original Records, p. 476-A)
On February 4, 1987, the respondent corporation through its counsel filed a Manifestation and Motion manifesting that
they received the copy of the motion for reconsideration only today (February 4, 1987), hence they prayed for the
postponement of the hearing. (Original Records, pp. 478-479)

On the same day, February 4, 1987, the lower court issued an Order setting the hearing on February 13, 1987 on the
ground that it received the motion for reconsideration late. Copies of this Order were sent separately to the petitioners and
their counsel. The records show that Atty. Manicad received his copy on February 11, 1987. As regards the petitioners,
the records reveal that Rebecca Boyer-Roxas did not receive her copy while as regards Guillermo Roxas, somebody
signed for him but did not indicate when the copy was received. (Original Records, pp. 481-483)

At the scheduled February 13, 1987 hearing, the counsels for the parties were present. However, the hearing was reset for
March 6, 1987 in order to allow the respondent corporation to file its opposition to the motion for reconsideration. (Order
dated February 13, 1987, Original Records, p. 486) Copies of the Order were sent and received by the petitioners and their
counsel on the following dates: Rebecca Boyer-Roxas on February 23, 1987; Guillermo Roxas on February 23, 1987 and
Atty. Manicad on February 19, 1987. (Original Records, pp. 487, 489-490)

The records are not clear as to whether or not the scheduled hearing on March 6, 1987 was held. Nevertheless, the records
reveal that on March 13, 1987, the lower court issued an Order denying the motion for reconsideration.

The well-settled doctrine is that the client is bound by the mistakes of his lawyer. (Aguila v. Court of First Instance of
Batangas, Branch I, 160 SCRA 352 [1988]; See also Vivero v. Santos, et al., 98 Phil. 500 [1956]; Isaac v. Mendoza, 89
Phil. 279 [1951]; Montes v. Court of First Instance of Tayabas, 48 Phil. 640 [1926]; People v. Manzanilla, 43 Phil. 167
[1922]; United States v. Dungca, 27 Phil. 274 [1914]; and United States v. Umali, 15 Phil. 33 [1910]) This rule, however,
has its exceptions. Thus, in several cases, we ruled that the party is not bound by the actions of his counsel in case the
gross negligence of the counsel resulted in the client's deprivation of his property without due process of law. In the case
of Legarda v. Court of Appeals (195 SCRA 418 [1991]), we said:

In People's Homesite & Housing Corp. v. Tiongco and Escasa (12 SCRA 471 [1964]), this Court ruled as
follows:

Procedural technicality should not be made a bar to the vindication of a legitimate

grievance. When such technicality deserts from being an aid to Justice, the courts are
justified in excepting from its operation a particular case. Where there was something
fishy and suspicious about the actuations of the former counsel of petitioners in the case
at bar, in that he did not give any significance at all to the processes of the court, which
has proven prejudicial to the rights of said clients, under a lame and flimsy explanation
that the court's processes just escaped his attention, it is held that said lawyer deprived his
clients of their day in court, thus entitling said clients to petition for relief from judgment
despite the lapse of the reglementary period for filing said period for filing said petition.

In Escudero v. Judge Dulay (158 SCRA 69 [1988]), this Court, in holding that the counsel's blunder in
procedure is an exception to the rule that the client is bound by the mistakes of counsel, made the
following disquisition:

Petitioners contend, through their new counsel, that the judgment rendered against them
by the respondent court was null and void, because they were therein deprived of their
day in court and divested of their property without due process of law, through the gross
ignorance, mistake and negligence of their previous counsel. They acknowledge that,
while as a rule, clients are bound by the mistake of their counsel, the rule should not be
applied automatically to their case, as their trial counsel's blunder in procedure and gross
ignorance of existing jurisprudence changed their cause of action and violated their
substantial rights.

We are impressed with petitioner's contentions.

 x x x           x x x          x x x

While this Court is cognizant of the rule that, generally, a client will suffer consequences
of the negligence, mistake or lack of competence of his counsel, in the interest of Justice
and equity, exceptions may be made to such rule, in accordance with the facts and
circumstances of each case. Adherence to the general rule would, in the instant case,
result in the outright deprivation of their property through a technicality.

In its questioned decision dated November 19, 1989 the Court of Appeals found, in no uncertain terms,
the negligence of the then counsel for petitioners when he failed to file the proper motion to dismiss or to
draw a compromise agreement if it was true that they agreed on a settlement of the case; or in simply
filing an answer; and that after having been furnished a copy of the decision by the court he failed to
appeal therefrom or to file a petition for relief from the order declaring petitioners in default. In all these
instances the appellate court found said counsel negligent but his acts were held to bind his client,
petitioners herein, nevertheless.

The Court disagrees and finds that the negligence of counsel in this case appears to be so gross and
inexcusable. This was compounded by the fact, that after petitioner gave said counsel another chance to
make up for his omissions by asking him to file a petition for annulment of the judgment in the appellate
court, again counsel abandoned the case of petitioner in that after he received a copy of the adverse
judgment of the appellate court, he did not do anything to save the situation or inform his client of the
judgment. He allowed the judgment to lapse and become final. Such reckless and gross negligence should
not be allowed to bind the petitioner. Petitioner was thereby effectively deprived of her day in court. (at
pp. 426-427)

The herein petitioners, however, are not similarly situated as the parties mentioned in the abovecited cases. We cannot
rule that they, too, were victims of the gross negligence of their counsel.

The petitioners are to be blamed for the October 22, 1986 order issued by the lower court submitting the cases for
decision. They received notices of the scheduled hearings and yet they did not do anything. More specifically, the parties
received notice of the Order dated September 29, 1986 with the warning that if they fail to attend the October 22, 1986
hearing, the cases would be submitted for decision based on the evidence on record. Earlier, at the scheduled hearing on
September 29, 1986, the counsel for the respondent corporation moved that the cases be submitted for decision for failure
of the petitioners and their counsel to attend despite notice. The lower court denied the motion and gave the petitioners
and their counsel another chance by rescheduling the October 22, 1986 hearing.

Indeed, the petitioners knew all along that their counsel was not attending the scheduled hearings. They did not take steps
to change their counsel or make him attend to their cases until it was too late. On the contrary, they continued to retain the
services of Atty. Manicad knowing fully well his lapses vis-a-vis their cases. They, therefore, cannot raise the alleged
gross negligence of their counsel resulting in their denial of due process to warrant the reversal of the lower court's
decision. In a similar case, Aguila v. Court of First Instance of Batangas, Branch 1 (supra), we ruled:

In the instant case, the petitioner should have noticed the succession of errors committed by his counsel
and taken appropriate steps for his replacement before it was altogether too late. He did not. On the
contrary, he continued to retain his counsel through the series of proceedings that all resulted in the
rejection of his cause, obviously through such counsel's "ineptitude" and, let it be added, the clients'
forbearance. The petitioner's reverses should have cautioned him that his lawyer was mishandling his case
and moved him to seek the help of other counsel, which he did in the end but rather tardily.

Now petitioner wants us to nullify all of the antecedent proceedings and recognize his earlier claims to the
disputed property on the justification that his counsel was grossly inept. Such a reason is hardly plausible
as the petitioner's new counsel should know. Otherwise, all a defeated party would have to do to salvage
his case is claim neglect or mistake on the part of his counsel as a ground for reversing the adverse
judgment. There would be no end to litigation if these were allowed as every shortcoming of counsel
could be the subject of challenge by his client through another counsel who, if he is also found wanting,
would likewise be disowned by the same client through another counsel, and so on ad infinitum. This
 would render court proceedings indefinite, tentative and subject to reopening at any time by the mere
subterfuge of replacing counsel. (at pp. 357-358)

We now discuss the merits of the cases.

In the first assignment of error, the petitioners maintain that their possession of the questioned properties must be
respected in view of their ownership of an aliquot portion of all the properties of the respondent corporation being
stockholders thereof. They propose that the veil of corporate fiction be pierced, considering the circumstances under
which the respondent corporation was formed.

Originally, the questioned properties belonged to Eugenia V. Roxas. After her death, the heirs of Eugenia V. Roxas,
among them the petitioners herein, decided to form a corporation — Heirs of Eugenia V. Roxas, Incorporated (private
respondent herein) with the inherited properties as capital of the corporation. The corporation was incorporated on
December 4, 1962 with the primary purpose of engaging in agriculture to develop the inherited properties. The Articles of
Incorporation of the respondent corporation were amended in 1971 to allow it to engage in the resort business.
Accordingly, the corporation put up a resort known as Hidden Valley Springs Resort where the questioned properties are
located.

These facts, however, do not justify the position taken by the petitioners.

The respondent is a bona fide corporation. As such, it has a juridical personality of its own separate from the members
composing it. (Western Agro Industrial Corporation v. Court of Appeals, 188 SCRA 709 [1990]; Tan Boon Bee & Co.,
Inc. v. Jarencio, 163 SCRA 205 [1988]; Yutivo Sons Hardware Company v. Court of Tax Appeals, 1 SCRA 160 [1961];
Emilio Cano Enterprises, Inc. v. Court of Industrial Relations, 13 SCRA 290 [1965]) There is no dispute that title over the
questioned land where the Hidden Valley Springs Resort is located is registered in the name of the corporation. The
records also show that the staff house being occupied by petitioner Rebecca Boyer-Roxas and the recreation hall which
was later on converted into a residential house occupied by petitioner Guillermo Roxas are owned by the respondent
corporation. Regarding properties owned by a corporation, we stated in the case of Stockholders of F. Guanzon and Sons,
Inc. v. Register of Deeds of Manila, (6 SCRA 373 [1962]):

xxx xxx xxx

. . . Properties registered in the name of the corporation are owned by it as an entity separate and distinct
from its members. While shares of stock constitute personal property, they do not represent property of
the corporation. The corporation has property of its own which consists chiefly of real estate (Nelson v.
Owen, 113 Ala., 372, 21 So. 75; Morrow v. Gould, 145 Iowa 1, 123 N.W. 743). A share of stock only
typifies an aliquot part of the corporation's property, or the right to share in its proceeds to that extent
when distributed according to law and equity (Hall & Faley v. Alabama Terminal, 173 Ala., 398, 56 So.
235), but its holder is not the owner of any part of the capital of the corporation (Bradley v. Bauder, 36
Ohio St., 28). Nor is he entitled to the possession of any definite portion of its property or assets
(Gottfried V. Miller, 104 U.S., 521; Jones v. Davis, 35 Ohio St., 474). The stockholder is not a co-owner
or tenant in common of the corporate property (Harton v. Johnston, 166 Ala., 317, 51 So. 992). (at pp.
375-376)

The petitioners point out that their occupancy of the staff house which was later used as the residence of Eriberto Roxas,
husband of petitioner Rebecca Boyer-Roxas and the recreation hall which was converted into a residential house were
with the blessings of Eufrocino Roxas, the deceased husband of Eugenia V. Roxas, who was the majority and controlling
stockholder of the corporation. In his lifetime, Eufrocino Roxas together with Eriberto Roxas, the husband of petitioner
Rebecca Boyer-Roxas, and the father of petitioner Guillermo Roxas managed the corporation. The Board of Directors did
not object to such an arrangement. The petitioners argue that . . . the authority thus given by Eufrocino Roxas for the
conversion of the recreation hall into a residential house can no longer be questioned by the stockholders of the private
respondent and/or its board of directors for they impliedly but no leas explicitly delegated such authority to said Eufrocino
Roxas. (Rollo, p. 12)
Again, we must emphasize that the respondent corporation has a distinct personality separate from its members. The
corporation transacts its business only through its officers or agents. (Western Agro Industrial Corporation v. Court of
Appeals, supra). Whatever authority these officers or agents may have is derived from the board of directors or other
governing body unless conferred by the charter of the corporation. An officer's power as an agent of the corporation must
be sought from the statute, charter, the by-laws or in a delegation of authority to such officer, from the acts of the board of
directors, formally expressed or implied from a habit or custom of doing business. (Vicente v. Geraldez, 52 SCRA 210
[1973])

In the present case, the record shows that Eufrocino V. Roxas who then controlled the management of the corporation,
being the majority stockholder, consented to the petitioners' stay within the questioned properties. Specifically, Eufrocino
Roxas gave his consent to the conversion of the recreation hall to a residential house, now occupied by petitioner
Guillermo Roxas. The Board of Directors did not object to the actions of Eufrocino Roxas. The petitioners were allowed
to stay within the questioned properties until August 27, 1983, when the Board of Directors approved a Resolution
ejecting the petitioners, to wit:

R E S O L U T I O N No. 83-12

RESOLVED, That Rebecca B. Roxas and Guillermo Roxas, and all persons claiming under them, be
ejected from their occupancy of the Hidden Valley Springs compound on which their houses have been
constructed and/or are being constructed only on tolerance of the Corporation and without any contract
therefor, in order to give way to the Corporation's expansion and improvement program and obviate
prejudice to the operation of the Hidden Valley Springs Resort by their continued interference.

RESOLVED, Further that the services of Atty. Benito P. Fabie be engaged and that he be authorized as he
is hereby authorized to effect the ejectment, including the filing of the corresponding suits, if necessary to
do so. (Original Records, p. 327)

We find nothing irregular in the adoption of the Resolution by the Board of Directors. The petitioners' stay within the
questioned properties was merely by tolerance of the respondent corporation in deference to the wishes of Eufrocino
Roxas, who during his lifetime, controlled and managed the corporation. Eufrocino Roxas' actions could not have bound
the corporation forever. The petitioners have not cited any provision of the corporation by-laws or any resolution or act of
the Board of Directors which authorized Eufrocino Roxas to allow them to stay within the company premises forever. We
rule that in the absence of any existing contract between the petitioners and the respondent corporation, the corporation
may elect to eject the petitioners at any time it wishes for the benefit and interest of the respondent corporation.

The petitioners' suggestion that the veil of the corporate fiction should be pierced is untenable. The separate personality of
the corporation may be disregarded only when the corporation is used "as a cloak or cover for fraud or illegality, or to
work injustice, or where necessary to achieve equity or when necessary for the protection of the creditors." (Sulong
Bayan, Inc. v. Araneta, Inc., 72 SCRA 347 [1976] cited in Tan Boon Bee & Co., Inc., v. Jarencio, supra and Western
Agro Industrial Corporation v. Court of Appeals, supra) The circumstances in the present cases do not fall under any of
the enumerated categories.

In the third assignment of error, the petitioners insist that as regards the unfinished building, Rebecca Boyer-Roxas is a
builder in good faith.

The construction of the unfinished building started when Eriberto Roxas, husband of Rebecca Boyer-Roxas, was still alive
and was the general manager of the respondent corporation. The couple used their own funds to finance the construction
of the building. The Board of Directors of the corporation, however, did not object to the construction. They allowed the
construction to continue despite the fact that it was within the property of the corporation. Under these circumstances, we
agree with the petitioners that the provision of Article 453 of the Civil Code should have been applied by the lower courts.

Article 453 of the Civil Code provides:

 If there was bad faith, not only on the part of the person who built, planted or sown on the land of another
but also on the part of the owner of such land, the rights of one and the other shall be the same as though
both had acted in good faith.

In such a case, the provisions of Article 448 of the Civil Code govern the relationship between petitioner Rebecca-Boyer-
Roxas and the respondent corporation, to wit:

Art. 448 — The owner of the land on which anything has been built, sown or planted in good faith, shall
have the right to appropriate as his own the works, sowing or planting after payment of the indemnity
provided for in articles 546 and 548, or to oblige the one who built or planted to pay the price of the land,
and the one who sowed, the proper rent. However, the builder or planter cannot be obliged to buy the land
if its value is considerably more than that of the building or trees. In such case, he shall pay reasonable
rent, if the owner of the land does not choose to appropriate the buildings or trees after proper indemnity.
The parties shall agree upon the terms of the lease and in case of disagreement, the court shall fix the
terms thereof.

WHEREFORE, the present petition is partly GRANTED. The questioned decision of the Court of Appeals affirming the
decision of the Regional Trial Court of Laguna, Branch 37, in RTC Civil Case No. 802-84-C is MODIFIED in that
subparagraphs (c) and (d) of Paragraph 1 of the dispositive portion of the decision are deleted. In their stead, the petitioner
Rebecca Boyer-Roxas and the respondent corporation are ordered to follow the provisions of Article 448 of the Civil
Code as regards the questioned unfinished building in RTC Civil Case No. 802-84-C. The questioned decision is affirmed
in all other respects.

SO ORDERED.

Feliciano, Bidin, Davide, Jr. and Romero, JJ., concur.

Doctrine of Piercing the Corporate Veil
 Land Bank of the Philippines vs. CA et. Al, G.R. No. 127181; September 4, 2001

G.R. No. 127181            September 4, 2001

LAND BANK OF THE PHILIPPINES, petitioner,

vs.
THE COURT OF APPEALS, ECO MANAGEMENT CORPORATION and EMMANUEL C.
OÑATE, respondents.

QUISUMBING, J.:

This petition for review on certiorari seeks to reverse and set aside the decision 1 promulgated on June 17, 1996 in CA-GR
No. CV-43239 of public respondent and its resolution2 dated November 29, 1996 denying petitioner’s motion for
reconsideration.3

The facts of this case as found by the Court of Appeals and which we find supported by the records are as follows:

On various dates in September, October, and November, 1980, appellant Land Bank of the Philippines (LBP)
extended a series of credit accommodations to appellee ECO, using the trust funds of the Philippine Virginia
Tobacco Administration (PVTA) in the aggregate amount of P26,109,000.00. The proceeds of the credit
accommodations were received on behalf of ECO by appellee Oñate.

On the respective maturity dates of the loans, ECO failed to pay the same. Oral and written demands were made,
but ECO was unable to pay. ECO claims that the company was in financial difficulty for it was unable to collect
its investments with companies which were affected by the financial crisis brought about by the Dewey Dee
scandal.

xxx

On October 20, 1981, ECO proposed and submitted to LBP a "Plan of Payment" whereby the former would set up
a financing company which would absorb the loan obligations. It was proposed that LBP would participate in the
scheme through the conversion of P9,000,000.00 which was part of the total loan, into equity.

On March 4, 1982, LBP informed ECO of the action taken by the former’s Trust Committee concerning the "Plan
of Payment" which reads in part, as follows:

xxx

Please be informed that the Bank’s Trust Committee has deliberated on the plan of payment during its
meetings on November 6, 1981 and February 23, 1982. The Committee arrived at a decision that you may
proceed with your Plan of Payment provided Land Bank shall not participate in the undertaking in any
manner whatsoever.

In view thereof, may we advise you to make necessary revision in the proposed Plan of Payment and
submit the same to us as soon as possible. (Records, p. 428)

On May 5, 1982, ECO submitted to LBP a "Revised Plan of Payment" deleting the latter’s participation in the
proposed financing company. The Trust Committee deliberated on the "Revised Plan of Payment" and resolved to
reject it. LBP then sent a letter to the PVTA for the latter’s comments. The letter stated that if LBP did not hear
from PVTA within five (5) days from the latter’s receipt of the letter, such silence would be construed to be an
approval of LBP’s intention to file suit against ECO and its corporate officers. PVTA did not respond to the letter.
On June 28, 1982, Landbank filed a complaint for Collection of Sum of Money against ECO and Emmanuel C.
Oñate before the Regional Trial Court of Manila, Branch 50.

After trial on the merits, a judgment was rendered in favor of LBP; however, appellee Oñate was absolved from
personal liability for insufficiency of evidence.

Dissatisfied, both parties filed their respective Motions for Reconsideration. LBP claimed that there was an error
in computation in the amounts to be paid. LBP also questioned the dismissal of the case with regard to Oñate.

On the other hand, ECO questioned its being held liable for the amount of the loan. Upon order of the court, both
parties submitted Supplemental Motions for Reconsideration and their respective Oppositions to each other’s
Motions.

On February 3, 1993, the trial court rendered an Amended Decision, the dispositive portion of which reads as
follows:

ACCORDINGLY, the Decision, dated December 3, 1990, is hereby modified to read as follows:

WHEREFORE, judgment is rendered ordering defendant Eco Management Corporation to pay

plaintiff Land Bank of the Philippines:

A. The sum of P26,109,000.00 representing the total amount of the ten (10) loan accommodations
plus 16% interest per annum computed from the dates of their respective maturities until fully paid,
broken down as follows:

1. the principal amount of P4,000,000.00 with interest at 16% computed from September 18,
1981;

2. the principal amount of P5,000,000.00 with interest at 16% computed from September 21,
1981;

3. the principal amount of P1,000,000.00 with interest rate at 16% computed from September 28,
1981;

4. the principal amount of P1,000,000.00 with interest at 15% computed from October 5, 1981;

5. the principal amount of P2,000,000.00 with interest rate at of 16% computed from October 8,
1981;

6. the principal amount of P2,000,000.00 with interest rate at of 16% from October 23, 1981;

7. the principal amount of P814,000.00 with interest rate at of 16% computed from November 1,
1981;

8. the principal amount of P2,295,000.00 with interest rate at of 16% computed from November
6, 1981;

9. the principal amount of P3,000,000.00 with interest rate at of 16% computed from November
7, 1981;

10. the principal amount of P5,000,000.00 with interest rate at 16% computed from November 9,
1981;

B. The sum of P260,000.00 as attorney’s fees; and

 C. The costs of the suit.

The case as against defendant Emmanuel Oñate is dismissed for insufficiency of evidence.

SO ORDERED. (Records, p. 608)4

The Court of Appeals affirmed in toto the amended decision of the trial court.5

On June 9, 1996, petitioner filed a motion for reconsideration, which was denied in a resolution dated November 29,
1996. Hence, this present petition, assigning the following errors allegedly committed by the Court of Appeals:

THE COURT OF APPEALS GRAVELY ERRED IN NOT RULING THAT BASED ON THE FACTS AS
ESTABLISHED BY EVIDENCE, THERE EXISTS A SUBSTANTIAL AND JUSTIFIABLE GROUND UPON
WHICH THE LEGAL NOTION OF THE CORPORATE FICTION OF RESPONDENT ECO MANAGEMENT
CORPORATION MAY BE PIERCED.
B
THE COURT OF APPEALS GRAVELY ERRED IN NOT A[T]TACHING LIABILITY TO RESPONDENT
EMMANUEL C. OÑATE JOINTLY AND SEVERALLY WITH RESPONDENT ECO MANAGEMENT
CORPORATION FOR THE PRINCIPAL SUM OF P26 M PLUS INTEREST THEREON.
C
THE COURT OF APPEALS GRAVELY ERRED IN AFFIRMING THE RULING OF THE LOWER COURT
THE SAME NOT BEING SUPPORTED BY THE EVIDENCE AND APPLICABLE LAWS AND
JURISPRUDENCE.6
The primary issues for resolution here are (1) whether or not the corporate veil of ECO Management Corporation should
be pierced; and (2) whether or not Emmanuel C. Oñate should be held jointly and severally liable with ECO Management
Corporation for the loans incurred from Land Bank.

Petitioner contends that the personalities of Emmanuel Oñate and of ECO Management Corporation should be treated as
one, for the particular purpose of holding respondent Oñate liable for the loans incurred by corporate respondent ECO
from Land Bank. According to petitioner, the said corporation was formed ostensibly to allow Oñate to acquire loans from
Land Bank which he used for his personal advantage.

Petitioner submits the following arguments to support its stand: (1) Respondent Oñate owns the majority of the interest
holdings in respondent corporation, specifically during the crucial time when appellees applied for and obtained the loan
from LANDBANK, sometime in September to November, 1980. (2) The acronym ECO stands for the initials of
Emmanuel C. Oñate, which is the logical, sensible and concrete explanation for the name ECO, in the absence of evidence
to the contrary. (3) Respondent Oñate has always referred to himself as the debtor, not merely as an officer or a
representative of respondent corporation. (4) Respondent Oñate personally paid P1 Million taken from trust accounts in
his name. (5) Respondent Oñate made a personal offering to pay his personal obligation. (6) Respondent Oñate controlled
respondent corporation by simultaneously holding two (2) corporate positions, viz., as Chairman and as treasurer,
beginning from the time of respondent corporation’s incorporation and continuously thereafter without benefit of election.
(7) Respondent corporation had not held any meeting of the stockholders or of the Board of Directors, as shown by the
fact that no proceeding of such corporate activities was filed with or borne by the record of the Securities and Exchange
Commission (SEC). The only corporate records respondent corporation filed with the SEC were the following: Articles of
Incorporation, Treasurer’s Affidavit, Undertaking to Change Corporate Name, Statement of Assets and Liabilities. 7

Private respondents, in turn, contend that Oñate’s only participation in the transaction between petitioner and respondent
ECO was his execution of the loan agreements and promissory notes as Chairman of the corporation’s Board of Directors.
There was nothing in the loan agreement nor in the promissory notes which would indicate that Oñate was binding
himself jointly and severally with ECO. Respondents likewise deny that ECO stands for Emmanuel C. Oñate.
Respondents also note that Oñate is no longer a majority stockholder of ECO and that the payment by a third person of the
debt of another is allowed under the Civil Code. They also alleged that there was no fraud and/or bad faith in the
transactions between them and Land Bank. Hence, private respondents conclude, there is no legal ground to pierce the veil
of respondent corporation’s personality.8

At the outset, we find the matters raised by petitioner in his argumentation are mainly questions of fact which are not
proper in a petition of this nature.9 Petitioner is basically questioning the evaluation made by the Court of Appeals of the
evidence submitted at the trial. The Court of Appeals had found that petitioner’s evidence was not sufficient to justify the
piercing of ECO’s corporate personality.10 Petitioner contended otherwise. It is basic that where what is being questioned
is the sufficiency of evidence, it is a question of fact. 11 Nevertheless, even if we regard these matters as tendering an issue
of law, we still find no reason to reverse the findings of the Court of Appeals.

A corporation, upon coming into existence, is invested by law with a personality separate and distinct from those persons
composing it as well as from any other legal entity to which it may be related. 12 By this attribute, a stockholder may not,
generally, be made to answer for acts or liabilities of the said corporation, and vice versa. 13 This separate and distinct
personality is, however, merely a fiction created by law for convenience and to promote the ends of justice. 14 For this
reason, it may not be used or invoked for ends subversive to the policy and purpose behind its creation 15 or which could
not have been intended by law to which it owes its being.16 This is particularly true when the fiction is used to defeat
public convenience, justify wrong, protect fraud, defend crime, 17 confuse legitimate legal or judicial issues, 18 perpetrate
deception or otherwise circumvent the law. 19 This is likewise true where the corporate entity is being used as an alter ego,
adjunct, or business conduit for the sole benefit of the stockholders or of another corporate entity. 20 In all these cases, the
notion of corporate entity will be pierced or disregarded with reference to the particular transaction involved. 21

The burden is on petitioner to prove that the corporation and its stockholders are, in fact, using the personality of the
corporation as a means to perpetrate fraud and/or escape a liability and responsibility demanded by law. In order to
disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and convincingly
established.22 In the absence of any malice or bad faith, a stockholder or an officer of a corporation cannot be made
personally liable for corporate liabilities. 23

The mere fact that Oñate owned the majority of the shares of ECO is not a ground to conclude that Oñate and ECO is one
and the same. Mere ownership by a single stockholder of all or nearly all of the capital stock of a corporation is not by
itself sufficient reason for disregarding the fiction of separate corporate personalities. 24 Neither is the fact that the name
"ECO" represents the first three letters of Oñate’s name sufficient reason to pierce the veil. Even if it did, it does not mean
that the said corporation is merely a dummy of Oñate. A corporation may assume any name provided it is lawful. There is
nothing illegal in a corporation acquiring the name or as in this case, the initials of one of its shareholders.

That respondent corporation in this case was being used as a mere alter ego of Oñate to obtain the loans had not been
shown. Bad faith or fraud on the part of ECO and Oñate was not also shown. As the Court of Appeals observed, if
shareholders of ECO meant to defraud petitioner, then they could have just easily absconded instead of going out of their
way to propose "Plans of Payment."25 Likewise, Oñate volunteered to pay a portion of the corporation’s debt. 26 This offer
demonstrated good faith on his part to ease the debt of the corporation of which he was a part. It is understandable that a
shareholder would want to help his corporation and in the process, assure that his stakes in the said corporation are
secured. In this case, it was established that the P1 Million did not come solely from Oñate. It was taken from a trust
account which was owned by Oñate and other investors. 27 It was likewise proved that the P1 Million was a loan granted
by Oñate and his co-depositors to alleviate the plight of ECO. 28 This circumstance should not be construed as an
admission that he was really the debtor and not ECO.

In sum, we agree with the Court of Appeals’ conclusion that the evidence presented by the petitioner does not suffice to
hold respondent Oñate personally liable for the debt of co-respondent ECO. No reversible error could be attributed to
respondent court’s decision and resolution which petitioner assails.

WHEREFORE, the petition is DENIED for lack of merit. The decision and resolution of the Court of Appeals in CA-
G.R. CV No. 43239 are AFFIRMED. Costs against petitioner.

SO ORDERED.

Bellosillo, Mendoza, Buena, and De Leon, Jr., JJ., concur.

  Kukan International Corp. vs. Reyes and Morales, G.R. No. 182729; September. 29, 2010

G.R. No. 182729               September 29, 2010

KUKAN INTERNATIONAL CORPORATION, Petitioner,

vs.
HON. AMOR REYES, in her capacity as Presiding Judge of the Regional Trial Court of Manila, Branch 21, and
ROMEO M. MORALES, doing business under the name and style "RM Morales Trophies and
Plaques," Respondents.

DECISION

VELASCO, JR., J.:

The Case

This Petition for Review on Certiorari under Rule 45 seeks to nullify and reverse the January 23, 2008 Decision 1 and the
April 16, 2008 Resolution2 rendered by the Court of Appeals (CA) in CA-G.R. SP No. 100152.

The assailed CA decision affirmed the March 12, 20073 and June 7, 20074 Orders of the Regional Trial Court (RTC) of
Manila, Branch 21, in Civil Case No. 99-93173, entitled Romeo M. Morales, doing business under the name and style RM
Morales Trophies and Plaques v. Kukan, Inc. In the said orders, the RTC disregarded the separate corporate identities of
Kukan, Inc. and Kukan International Corporation and declared them to be one and the same entity. Accordingly, the RTC
held Kukan International Corporation, albeit not impleaded in the underlying complaint of Romeo M. Morales, liable for
the judgment award decreed in a Decision dated November 28, 2002 5 in favor of Morales and against Kukan, Inc.

The Facts

Sometime in March 1998, Kukan, Inc. conducted a bidding for the supply and installation of signages in a building being
constructed in Makati City. Morales tendered the winning bid and was awarded the PhP 5 million contract. Some of the
items in the project award were later excluded resulting in the corresponding reduction of the contract price to PhP
3,388,502. Despite his compliance with his contractual undertakings, Morales was only paid the amount of PhP
1,976,371.07, leaving a balance of PhP 1,412,130.93, which Kukan, Inc. refused to pay despite demands. Shortchanged,
Morales filed a Complaint6 with the RTC against Kukan, Inc. for a sum of money, the case docketed as Civil Case No. 99-
93173 and eventually raffled to Branch 17 of the court.

Following the joinder of issues after Kukan, Inc. filed an answer with counterclaim, trial ensued. However, starting
November 2000, Kukan, Inc. no longer appeared and participated in the proceedings before the trial court, prompting the
RTC to declare Kukan, Inc. in default and paving the way for Morales to present his evidence ex parte.

On November 28, 2002, the RTC rendered a Decision finding for Morales and against Kukan, Inc., disposing as follows:

WHEREFORE, consistent with Section 5, Rule 18 of the 1997 Rules of Civil Procedure, and by preponderance of
evidence, judgment is hereby rendered in favor of the plaintiff, ordering Kukan, Inc.:

1. to pay the sum of ONE MILLION TWO HUNDRED ONE THOUSAND SEVEN HUNDRED TWENTY
FOUR PESOS (P1,201,724.00) with legal interest at 12% per annum from February 17, 1999 until full payment;

2. to pay the sum of FIFTY THOUSAND PESOS (P50,000.00) as moral damages;

 3. to pay the sum of TWENTY THOUSAND PESOS, (P20,000.00) as reasonable attorney’s fees; and

4. to pay the sum of SEVEN THOUSAND NINE HUNDRED SIXTY PESOS and SIX CENTAVOS (P7,960.06)
as litigation expenses.

For lack of factual foundation, the counterclaim is DISMISSED.

IT IS SO ORDERED.7

After the above decision became final and executory, Morales moved for and secured a writ of execution 8 against Kukan,
Inc. The sheriff then levied upon various personal properties found at what was supposed to be Kukan, Inc.’s office at
Unit 2205, 88 Corporate Center, Salcedo Village, Makati City. Alleging that it owned the properties thus levied and that it
was a different corporation from Kukan, Inc., Kukan International Corporation (KIC) filed an Affidavit of Third-Party
Claim. Notably, KIC was incorporated in August 2000, or shortly after Kukan, Inc. had stopped participating in Civil
Case No. 99-93173.

In reaction to the third party claim, Morales interposed an Omnibus Motion dated April 30, 2003. In it, Morales prayed,
applying the principle of piercing the veil of corporate fiction, that an order be issued for the satisfaction of the judgment
debt of Kukan, Inc. with the properties under the name or in the possession of KIC, it being alleged that both corporations
are but one and the same entity. KIC opposed Morales’ motion. By Order of May 29, 2003 9 as reiterated in a subsequent
order, the court denied the omnibus motion.

In a bid to establish the link between KIC and Kukan, Inc., and thus determine the true relationship between the two,
Morales filed a Motion for Examination of Judgment Debtors dated May 4, 2005. In this motion Morales sought that
subponae be issued against the primary stockholders of Kukan, Inc., among them Michael Chan, a.k.a. Chan Kai Kit. This
too was denied by the trial court in an Order dated May 24, 2005. 10

Morales then sought the inhibition of the presiding judge, Eduardo B. Peralta, Jr., who eventually granted the motion. The
case was re-raffled to Branch 21, presided by public respondent Judge Amor Reyes.

Before the Manila RTC, Branch 21, Morales filed a Motion to Pierce the Veil of Corporate Fiction to declare KIC as
having no existence separate from Kukan, Inc. This time around, the RTC, by Order dated March 12, 2007, granted the
motion, the dispositive portion of which reads:

WHEREFORE, premises considered, the motion is hereby GRANTED. The Court hereby declares as follows:

1. defendant Kukan, Inc. and newly created Kukan International Corp. as one and the same corporation;

2. the levy made on the properties of Kukan International Corp. is hereby valid;

3. Kukan International Corp. and Michael Chan are jointly and severally liable to pay the amount awarded to
plaintiff pursuant to the decision of November [28], 2002 which has long been final and executory.

SO ORDERED.

From the above order, KIC moved but was denied reconsideration in another Order dated June 7, 2007.

KIC went to the CA on a petition for certiorari to nullify the aforesaid March 12 and June 7, 2007 RTC Orders.

On January 23, 2008, the CA rendered the assailed decision, the dispositive portion of which states:

WHEREFORE, premises considered, the petition is hereby DENIED and the assailed Orders dated March 12, 2007 and
June 7, 2007 of the court a quo are both AFFIRMED. No costs.
SO ORDERED.11

The CA later denied KIC’s motion for reconsideration in the assailed resolution.

Hence, the instant petition for review, with the following issues KIC raises for the Court’s consideration:

1. There is no legal basis for the [CA] to resolve and declare that petitioner’s Constitutional Right to Due Process
was not violated by the public respondent in rendering the Orders dated March 12, 2007 and June 7, 2007 and in
declaring petitioner to be liable for the judgment obligations of the corporation "Kukan, Inc." to private
respondent – as petitioner is a stranger to the case and was never made a party in the case before the trial court nor
was it ever served a summons and a copy of the complaint.

2. There is no legal basis for the [CA] to resolve and declare that the Orders dated March 12, 2007 and June 7,
2007 rendered by public respondent declaring the petitioner liable to the judgment obligations of the corporation
"Kukan, Inc." to private respondent are valid as said orders of the public respondent modify and/or amend the trial
court’s final and executory decision rendered on November 28, 2002.

3. There is no legal basis for the [CA] to resolve and declare that the Orders dated March 12, 2007 and June 7,
2007 rendered by public respondent declaring the petitioner [KIC] and the corporation "Kukan, Inc." as one and
the same, and, therefore, the Veil of Corporate Fiction between them be pierced – as the procedure undertaken by
public respondent which the [CA] upheld is not sanctioned by the Rules of Court and/or established jurisprudence
enunciated by this Honorable Supreme Court.12

In gist, the issues to be resolved boil down to the question of, first, whether the trial court can, after the judgment against
Kukan, Inc. has attained finality, execute it against the property of KIC; second, whether the trial court acquired
jurisdiction over KIC; and third, whether the trial and appellate courts correctly applied, under the premises, the principle
of piercing the veil of corporate fiction.

The Ruling of the Court

The petition is meritorious.

First Issue: Against Whom Can a Final and

Executory Judgment Be Executed

The preliminary question that must be answered is whether or not the trial court can, after adjudging Kukan, Inc. liable for
a sum of money in a final and executory judgment, execute such judgment debt against the property of KIC.

The poser must be answered in the negative.

In Carpio v. Doroja,13 the Court ruled that the deciding court has supervisory control over the execution of its judgment:

A case in which an execution has been issued is regarded as still pending so that all proceedings on the execution are
proceedings in the suit. There is no question that the court which rendered the judgment has a general supervisory control
over its process of execution, and this power carries with it the right to determine every question of fact and law which
may be involved in the execution.

We reiterated the above holding in Javier v. Court of Appeals 14 in this wise: "The said branch has a general supervisory
control over its processes in the execution of its judgment with a right to determine every question of fact and law which
may be involved in the execution."

The court’s supervisory control does not, however, extend as to authorize the alteration or amendment of a final and
executory decision, save for certain recognized exceptions, among which is the correction of clerical errors. Else, the court
violates the principle of finality of judgment and its immutability, concepts which the Court, in Tan v. Timbal, 15 defined:
As we held in Industrial Management International Development Corporation vs. NLRC:

It is an elementary principle of procedure that the resolution of the court in a given issue as embodied in the dispositive
part of a decision or order is the controlling factor as to settlement of rights of the parties. Once a decision or order
becomes final and executory, it is removed from the power or jurisdiction of the court which rendered it to further alter or
amend it. It thereby becomes immutable and unalterable and any amendment or alteration which substantially affects a
final and executory judgment is null and void for lack of jurisdiction, including the entire proceedings held for that
purpose. An order of execution which varies the tenor of the judgment or exceeds the terms thereof is a nullity. (Emphasis
supplied.)

Republic v. Tango16 expounded on the same principle and its exceptions:

Deeply ingrained in our jurisprudence is the principle that a decision that has acquired finality becomes immutable
and unalterable. As such, it may no longer be modified in any respect even if the modification is meant to correct
erroneous conclusions of fact or law and whether it will be made by the court that rendered it or by the highest court of the
land. x x x

The doctrine of finality of judgment is grounded on the fundamental principle of public policy and sound practice that, at
the risk of occasional error, the judgment of courts and the award of quasi-judicial agencies must become final on some
definite date fixed by law. The only exceptions to the general rule are the correction of clerical errors, the so-called nunc
pro tunc entries which cause no prejudice to any party, void judgments, and whenever circumstances transpire after the
finality of the decision which render its execution unjust and inequitable. None of the exceptions obtains here to merit the
review sought. (Emphasis added.)

So, did the RTC, in breach of the doctrine of immutability and inalterability of judgment, order the execution of its final
decision in a manner as would amount to its prohibited alteration or modification?

We repair to the dispositive portion of the final and executory RTC decision. Pertinently, it provides:

WHEREFORE, consistent with Section 5, Rule 18 of the 1997 Rules of Civil Procedure, and by preponderance of
evidence, judgment is hereby rendered in favor of the plaintiff, ordering Kukan, Inc.:

1. to pay the sum of ONE MILLION TWO HUNDRED ONE THOUSAND SEVEN HUNDRED TWENTY
FOUR PESOS (P1,201,724.00) with legal interest at 12% per annum from February 17, 1999 until full payment;

2. to pay the sum of FIFTY THOUSAND PESOS (P50,000.00) as moral damages;

3. to pay the sum of TWENTY THOUSAND PESOS (P20,000.00) as reasonable attorney’s fees; and

4. to pay the sum of SEVEN THOUSAND NINE HUNDRED SIXTY PESOS and SIX CENTAVOS (P7,960.06)
as litigation expenses.

x x x x (Emphasis supplied.)

As may be noted, the above decision, in unequivocal terms, directed Kukan, Inc. to pay the aforementioned awards to
Morales. Thus, making KIC, thru the medium of a writ of execution, answerable for the above judgment liability is a clear
case of altering a decision, an instance of granting relief not contemplated in the decision sought to be executed. And the
change does not fall under any of the recognized exceptions to the doctrine of finality and immutability of judgment. It is
a settled rule that a writ of execution must conform to the fallo of the judgment; as an inevitable corollary, a writ beyond
the terms of the judgment is a nullity.17

Thus, on this ground alone, the instant petition can already be granted. Nonetheless, an examination of the other issues
raised by KIC would be proper.
 Second Issue: Propriety of the RTC
Assuming Jurisdiction over KIC

The next issue turns on the validity of the execution the trial court authorized against KIC and its property, given that it
was neither made a party nor impleaded in Civil Case No. 99-93173, let alone served with summons. In other words, did
the trial court acquire jurisdiction over KIC?

In the assailed decision, the appellate court deemed KIC to have voluntarily submitted itself to the jurisdiction of the trial
court owing to its filing of four (4) pleadings adverted to earlier, namely: (a) the Affidavit of Third-Party Claim; 18 (b) the
Comment and Opposition to Plaintiff’s Omnibus Motion;19 (c) the Motion for Reconsideration of the RTC Order dated
March 12, 2007;20 and (d) the Motion for Leave to Admit Reply.21 The CA, citing Section 20, Rule 14 of the Rules of
Court, stated that "the procedural rule on service of summons can be waived by voluntary submission to the court’s
jurisdiction through any form of appearance by the party or its counsel." 22

We cannot give imprimatur to the appellate court’s appreciation of the thrust of Sec. 20, Rule 14 of the Rules in
concluding that the trial court acquired jurisdiction over KIC.

Orion Security Corporation v. Kalfam Enterprises, Inc. 23 explains how courts acquire jurisdiction over the parties in a civil
case:

Courts acquire jurisdiction over the plaintiffs upon the filing of the complaint. On the other hand, jurisdiction over the
defendants in a civil case is acquired either through the service of summons upon them or through their voluntary
appearance in court and their submission to its authority. (Emphasis supplied.)

In the fairly recent Palma v. Galvez,24 the Court reiterated its holding in Orion Security Corporation, stating: "[I]n civil
cases, the trial court acquires jurisdiction over the person of the defendant either by the service of summons or by the
latter’s voluntary appearance and submission to the authority of the former."

The court’s jurisdiction over a party-defendant resulting from his voluntary submission to its authority is provided under
Sec. 20, Rule 14 of the Rules, which states:

Section 20. Voluntary appearance. – The defendant’s voluntary appearance in the actions shall be equivalent to service of
summons. The inclusion in a motion to dismiss of other grounds aside from lack of jurisdiction over the person of the
defendant shall not be deemed a voluntary appearance.

To be sure, the CA’s ruling that any form of appearance by the party or its counsel is deemed as voluntary appearance
finds support in the kindred Republic v. Ker & Co., Ltd. 25 and De Midgely v. Ferandos.26

Republic and De Midgely, however, have already been modified if not altogether superseded 27 by La Naval Drug
Corporation v. Court of Appeals,28 wherein the Court essentially ruled and elucidated on the current view in our
jurisdiction, to wit: "[A] special appearance before the court––challenging its jurisdiction over the person through a
motion to dismiss even if the movant invokes other grounds––is not tantamount to estoppel or a waiver by the movant of
his objection to jurisdiction over his person; and such is not constitutive of a voluntary submission to the jurisdiction of
the court."29

In the instant case, KIC was not made a party-defendant in Civil Case No. 99-93173. Even if it is conceded that it raised
affirmative defenses through its aforementioned pleadings, KIC never abandoned its challenge, however implicit, to the
RTC’s jurisdiction over its person. The challenge was subsumed in KIC’s primary assertion that it was not the same entity
as Kukan, Inc. Pertinently, in its Comment and Opposition to Plaintiff’s Omnibus Motion dated May 20, 2003, KIC
entered its "special but not voluntary appearance" alleging therein that it was a different entity and has a separate legal
personality from Kukan, Inc. And KIC would consistently reiterate this assertion in all its pleadings, thus effectively
resisting all along the RTC’s jurisdiction of its person. It cannot be overemphasized that KIC could not file before the
RTC a motion to dismiss and its attachments in Civil Case No. 99-93173, precisely because KIC was neither impleaded
nor served with summons. Consequently, KIC could only assert and claim through its affidavits, comments, and motions
filed by special appearance before the RTC that it is separate and distinct from Kukan, Inc.
Following La Naval Drug Corporation,30 KIC cannot be deemed to have waived its objection to the court’s lack of
jurisdiction over its person. It would defy logic to say that KIC unequivocally submitted itself to the jurisdiction of the
RTC when it strongly asserted that it and Kukan, Inc. are different entities. In the scheme of things obtaining, KIC had no
other option but to insist on its separate identity and plead for relief consistent with that position.

Third Issue: Piercing the

Veil of Corporate Fiction

The third and main issue in this case is whether or not the trial and appellate courts correctly applied the principle of
piercing the veil of corporate entity––called also as disregarding the fiction of a separate juridical personality of a
corporation––to support a conclusion that Kukan, Inc. and KIC are but one and the same corporation with respect to the
contract award referred to at the outset. This principle finds its context on the postulate that a corporation is an artificial
being invested with a personality separate and distinct from those of the stockholders and from other corporations to
which it may be connected or related.31

In Pantranco Employees Association (PEA-PTGWO) v. National Labor Relations Commission, 32 the Court revisited the
subject principle of piercing the veil of corporate fiction and wrote:

Under the doctrine of "piercing the veil of corporate fiction," the court looks at the corporation as a mere collection of
individuals or an aggregation of persons undertaking business as a group, disregarding the separate juridical personality of
the corporation unifying the group. Another formulation of this doctrine is that when two business enterprises are owned,
conducted and controlled by the same parties, both law and equity will, when necessary to protect the rights of third
parties, disregard the legal fiction that two corporations are distinct entities and treat them as identical or as one and the
same.

Whether the separate personality of the corporation should be pierced hinges on obtaining facts appropriately
pleaded or proved. However, any piercing of the corporate veil has to be done with caution, albeit the Court will not
hesitate to disregard the corporate veil when it is misused or when necessary in the interest of justice. x x x (Emphasis
supplied.)

The same principle was the subject and discussed in Rivera v. United Laboratories, Inc.:

While a corporation may exist for any lawful purpose, the law will regard it as an association of persons or, in case of two
corporations, merge them into one, when its corporate legal entity is used as a cloak for fraud or illegality. This is the
doctrine of piercing the veil of corporate fiction. The doctrine applies only when such corporate fiction is used to defeat
public convenience, justify wrong, protect fraud, or defend crime, or when it is made as a shield to confuse the legitimate
issues, or where a corporation is the mere alter ego or business conduit of a person, or where the corporation is so
organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation.

To disregard the separate juridical personality of a corporation, the wrongdoing must be established clearly and
convincingly. It cannot be presumed.33 (Emphasis supplied.)

Now, as before the appellate court, petitioner KIC maintains that the RTC violated its right to due process when, in the
execution of its November 28, 2002 Decision, the court authorized the issuance of the writ against KIC for Kukan, Inc.’s
judgment debt, albeit KIC has never been a party to the underlying suit. As a counterpoint, Morales argues that KIC’s
specific concern on due process and on the validity of the writ to execute the RTC’s November 28, 2002 Decision would
be mooted if it were established that KIC and Kukan, Inc. are indeed one and the same corporation.

Morales’ contention is untenable.

The principle of piercing the veil of corporate fiction, and the resulting treatment of two related corporations as one and
the same juridical person with respect to a given transaction, is basically applied only to determine established
liability;34 it is not available to confer on the court a jurisdiction it has not acquired, in the first place, over a party not
impleaded in a case. Elsewise put, a corporation not impleaded in a suit cannot be subject to the court’s process of
piercing the veil of its corporate fiction. In that situation, the court has not acquired jurisdiction over the corporation and,
hence, any proceedings taken against that corporation and its property would infringe on its right to due process. Aguedo
Agbayani, a recognized authority on Commercial Law, stated as much:

23. Piercing the veil of corporate entity applies to determination of liability not of jurisdiction. x x x

This is so because the doctrine of piercing the veil of corporate fiction comes to play only during the trial of the case after
the court has already acquired jurisdiction over the corporation. Hence, before this doctrine can be applied, based on the
evidence presented, it is imperative that the court must first have jurisdiction over the corporation. 35 x x x (Emphasis
supplied.)

The implication of the above comment is twofold: (1) the court must first acquire jurisdiction over the corporation or
corporations involved before its or their separate personalities are disregarded; and (2) the doctrine of piercing the veil of
corporate entity can only be raised during a full-blown trial over a cause of action duly commenced involving parties duly
brought under the authority of the court by way of service of summons or what passes as such service.

The issue of jurisdiction or the lack of it over KIC has already been discussed. Anent the matter of the time and manner of
raising the principle in question, it is undisputed that no full-blown trial involving KIC was had when the RTC
disregarded the corporate veil of KIC. The reason for this actuality is simple and undisputed: KIC was not impleaded in
Civil Case No. 99-93173 and that the RTC did not acquire jurisdiction over it. It was dragged to the case after it reacted to
the improper execution of its properties and veritably hauled to court, not thru the usual process of service of summons,
but by mere motion of a party with whom it has no privity of contract and after the decision in the main case had already
become final and executory. As to the propriety of a plea for the application of the principle by mere motion, the
following excerpts are instructive:

Generally, a motion is appropriate only in the absence of remedies by regular pleadings, and is not available to settle
important questions of law, or to dispose of the merits of the case. A motion is usually a proceeding incidental to an
action, but it may be a wholly distinct or independent proceeding. A motion in this sense is not within this discussion even
though the relief demanded is denominated an "order."

A motion generally relates to procedure and is often resorted to in order to correct errors which have crept in along the
line of the principal action’s progress. Generally, where there is a procedural defect in a proceeding and no method under
statute or rule of court by which it may be called to the attention of the court, a motion is an appropriate remedy. In many
jurisdictions, the motion has replaced the common-law pleas testing the sufficiency of the pleadings, and various
common-law writs, such as writ of error coram nobis and audita querela. In some cases, a motion may be one of several
remedies available. For example, in some jurisdictions, a motion to vacate an order is a remedy alternative to an appeal
therefrom.

Statutes governing motions are given a liberal construction. 36 (Emphasis supplied.)

The bottom line issue of whether Morales can proceed against KIC for the judgment debt of Kukan, Inc.––assuming
hypothetically that he can, applying the piercing the corporate veil principle––resolves itself into the question of whether a
mere motion is the appropriate vehicle for such purpose.

Verily, Morales espouses the application of the principle of piercing the corporate veil to hold KIC liable on theory that
Kukan, Inc. was out to defraud him through the use of the separate and distinct personality of another corporation, KIC. In
net effect, Morales’ adverted motion to pierce the veil of corporate fiction dated January 3, 2007 stated a new cause of
action, i.e., for the liability of judgment debtor Kukan, Inc. to be borne by KIC on the alleged identity of the two
corporations. This new cause of action should be properly ventilated in another complaint and subsequent trial where the
doctrine of piercing the corporate veil can, if appropriate, be applied, based on the evidence adduced. Establishing the
claim of Morales and the corresponding liability of KIC for Kukan Inc.’s indebtedness could hardly be the subject, under
the premises, of a mere motion interposed after the principal action against Kukan, Inc. alone had peremptorily been
terminated. After all, a complaint is one where the plaintiff alleges causes of action.

In any event, the principle of piercing the veil of corporate fiction finds no application to the instant case.
As a general rule, courts should be wary of lifting the corporate veil between corporations, however related. Philippine
National Bank v. Andrada Electric Engineering Company37 explains why:

A corporation is an artificial being created by operation of law. x x x 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. This is basic.

Equally well-settled is the principle that the corporate mask may be removed or the corporate veil pierced when the
corporation is just an alter ego of a person or of another corporation. For reasons of public policy and in the interest of
justice, the corporate veil will justifiably be impaled only when it becomes a shield for fraud, illegality or inequity
committed against third persons.

Hence, any application of the doctrine of piercing the corporate veil should be done with caution. A court should be
mindful of the milieu where it is to be applied. It must be certain that the corporate fiction was misused to such an extent
that injustice, fraud, or crime was committed against another, in disregard of its rights. The wrongdoing must be clearly
and convincingly established; it cannot be presumed. Otherwise, an injustice that was never unintended may result from
an erroneous application.

This Court has pierced the corporate veil to ward off a judgment credit, to avoid inclusion of corporate assets as part of the
estate of the decedent, to escape liability arising from a debt, or to perpetuate fraud and/or confuse legitimate issues either
to promote or to shield unfair objectives or to cover up an otherwise blatant violation of the prohibition against forum-
shopping. Only in these and similar instances may the veil be pierced and disregarded. (Emphasis supplied.)

In fine, to justify the piercing of the veil of corporate fiction, it must be shown by clear and convincing proof that the
separate and distinct personality of the corporation was purposefully employed to evade a legitimate and binding
commitment and perpetuate a fraud or like wrongdoings. To be sure, the Court has, on numerous occasions, 38 applied the
principle where a corporation is dissolved and its assets are transferred to another to avoid a financial liability of the first
corporation with the result that the second corporation should be considered a continuation and successor of the first
entity.

In those instances when the Court pierced the veil of corporate fiction of two corporations, there was a confluence of the
following factors:

1. A first corporation is dissolved;

2. The assets of the first corporation is transferred to a second corporation to avoid a financial liability of the first
corporation; and

3. Both corporations are owned and controlled by the same persons such that the second corporation should be
considered as a continuation and successor of the first corporation.

In the instant case, however, the second and third factors are conspicuously absent. There is, therefore, no compelling
justification for disregarding the fiction of corporate entity separating Kukan, Inc. from KIC. In applying the principle,
both the RTC and the CA miserably failed to identify the presence of the abovementioned factors. Consider:

The RTC disregarded the separate corporate personalities of Kukan, Inc. and KIC based on the following premises and
arguments:

While it is true that a corporation has a separate and distinct personality from its stockholder, director and officers, the law
expressly provides for an exception. When Michael Chan, the Managing Director of defendant Kukan, Inc. (majority
stockholder of the newly formed corporation [KIC]) confirmed the award to plaintiff to supply and install interior
signages in the Enterprise Center he (Michael Chan, Managing Director of defendant Kukan, Inc.) knew that there was no
sufficient corporate funds to pay its obligation/account, thus implying bad faith on his part and fraud in contracting the
obligation. Michael Chan neither returned the interior signages nor tendered payment to the plaintiff. This circumstance
may warrant the piercing of the veil of corporation fiction. Having been guilty of bad faith in the management of
corporate matters the corporate trustee, director or officer may be held personally liable. x x x
Since fraud is a state of mind, it need not be proved by direct evidence but may be inferred from the circumstances of the
case. x x x [A]nd the circumstances are: the signature of Michael Chan, Managing Director of Kukan, Inc. appearing in
the confirmation of the award sent to the plaintiff; signature of Chan Kai Kit, a British National appearing in the Articles
of Incorporation and signature of Michael Chan also a British National appearing in the Articles of Incorporation [of]
Kukan International Corp. give the impression that they are one and the same person, that Michael Chan and Chan Kai Kit
are both majority stockholders of Kukan International Corp. and Kukan, Inc. holding 40% of the stocks; that Kukan
International Corp. is practically doing the same kind of business as that of Kukan, Inc. 39 (Emphasis supplied.)

As is apparent from its disquisition, the RTC brushed aside the separate corporate existence of Kukan, Inc. and KIC on the
main argument that Michael Chan owns 40% of the common shares of both corporations, obviously oblivious that
overlapping stock ownership is a common business phenomenon. It must be remembered, however, that KIC’s properties
were the ones seized upon levy on execution and not that of Kukan, Inc. or of Michael Chan for that matter. Mere
ownership by a single stockholder or by another corporation of a substantial block of shares of a corporation does not,
standing alone, provide sufficient justification for disregarding the separate corporate personality. 40 For this ground to
hold sway in this case, there must be proof that Chan had control or complete dominion of Kukan and KIC’s finances,
policies, and business practices; he used such control to commit fraud; and the control was the proximate cause of the
financial loss complained of by Morales. The absence of any of the elements prevents the piercing of the corporate
veil.41 And indeed, the records do not show the presence of these elements.

On the other hand, the CA held:

In the present case, the facts disclose that Kukan, Inc. entered into a contractual obligation x x x worth more than three
million pesos although it had only Php5,000.00 paid-up capital; [KIC] was incorporated shortly before Kukan, Inc.
suddenly ceased to appear and participate in the trial; [KIC’s] purpose is related and somewhat akin to that of Kukan, Inc.;
and in [KIC] Michael Chan, a.k.a., Chan Kai Kit, holds forty percent of the outstanding stocks, while he formerly held the
same amount of stocks in Kukan Inc. These would lead to the inescapable conclusion that Kukan, Inc. committed
fraudulent representation by awarding to the private respondent the contract with full knowledge that it was not in a
position to comply with the obligation it had assumed because of inadequate paid-up capital. It bears stressing that
shareholders should in good faith put at the risk of the business, unencumbered capital reasonably adequate for its
prospective liabilities. The capital should not be illusory or trifling compared with the business to be done and the risk of
loss.

Further, it is clear that [KIC] is a continuation and successor of Kukan, Inc. Michael Chan, a.k.a. Chan Kai Kit has the
largest block of shares in both business enterprises. The emergence of the former was cleverly timed with the hasty
withdrawal of the latter during the trial to avoid the financial liability that was eventually suffered by the latter. The two
companies have a related business purpose. Considering these circumstances, the obvious conclusion is that the creation
of Kukan International Corporation served as a device to evade the obligation incurred by Kukan, Inc. and yet profit from
the goodwill attained by the name "Kukan" by continuing to engage in the same line of business with the same list of
clients.42 (Emphasis supplied.)

Evidently, the CA found the meager paid-up capitalization of Kukan, Inc. and the similarity of the business activities in
which both corporations are engaged as a jumping board to its conclusion that the creation of KIC "served as a device to
evade the obligation incurred by Kukan, Inc." The appellate court, however, left a gaping hole by failing to demonstrate
that Kukan, Inc. and its stockholders defrauded Morales. In fine, there is no showing that the incorporation, and the
separate and distinct personality, of KIC was used to defeat Morales’ right to recover from Kukan, Inc. Judging from the
records, no serious attempt was made to levy on the properties of Kukan, Inc. Morales could not, thus, validly argue that
Kukan, Inc. tried to avoid liability or had no property against which to proceed.

Morales further contends that Kukan, Inc.’s closure is evidenced by its failure to file its 2001 General Information Sheet
(GIS) with the Securities and Exchange Commission. However, such fact does not necessarily mean that Kukan, Inc. had
altogether ceased operations, as Morales would have this Court believe, for it is stated on the face of the GIS that it is only
upon a failure to file the corporate GIS for five (5) consecutive years that non-operation shall be presumed.

The fact that Kukan, Inc. entered into a PhP 3.3 million contract when it only had a paid-up capital of PhP 5,000 is not an
indication of the intent on the part of its management to defraud creditors. Paid-up capital is merely seed money to start a
corporation or a business entity. As in this case, it merely represented the capitalization upon incorporation in 1997 of
Kukan, Inc. Paid-up capitalization of PhP 5,000 is not and should not be taken as a reflection of the firm’s capacity to
meet its recurrent and long-term obligations. It must be borne in mind that the equity portion cannot be equated to the
viability of a business concern, for the best test is the working capital which consists of the liquid assets of a given
business relating to the nature of the business concern.lawphil

Neither should the level of paid-up capital of Kukan, Inc. upon its incorporation be viewed as a badge of fraud, for it is in
compliance with Sec. 13 of the Corporation Code,43 which only requires a minimum paid-up capital of PhP
5,000.1avvphi1

The suggestion that KIC is but a continuation and successor of Kukan, Inc., owned and controlled as they are by the same
stockholders, stands without factual basis. It is true that Michael Chan, a.k.a. Chan Kai Kit, owns 40% of the outstanding
capital stock of both corporations. But such circumstance, standing alone, is insufficient to establish identity. There must
be at least a substantial identity of stockholders for both corporations in order to consider this factor to be constitutive of
corporate identity.

It would not avail Morales any to rely44 on General Credit Corporation v. Alsons Development and Investment
Corporation.45 General Credit Corporation is factually not on all fours with the instant case. There, the common
stockholders of the corporations represented 90% of the outstanding capital stock of the companies, unlike here where
Michael Chan merely represents 40% of the outstanding capital stock of both KIC and Kukan, Inc., not even a majority of
it. In that case, moreover, evidence was adduced to support the finding that the funds of the second corporation came from
the first. Finally, there was proof in General Credit Corporation of complete control, such that one corporation was a mere
dummy or alter ego of the other, which is absent in the instant case.

Evidently, the aforementioned case relied upon by Morales cannot justify the application of the principle of piercing the
veil of corporate fiction to the instant case. As shown by the records, the name Michael Chan, the similarity of business
activities engaged in, and incidentally the word "Kukan" appearing in the corporate names provide the nexus between
Kukan, Inc. and KIC. As illustrated, these circumstances are insufficient to establish the identity of KIC as the alter ego or
successor of Kukan, Inc.

It bears reiterating that piercing the veil of corporate fiction is frowned upon. Accordingly, those who seek to pierce the
veil must clearly establish that the separate and distinct personalities of the corporations are set up to justify a wrong,
protect fraud, or perpetrate a deception. In the concrete and on the assumption that the RTC has validly acquired
jurisdiction over the party concerned, Morales ought to have proved by convincing evidence that Kukan, Inc. was
collapsed and thereafter KIC purposely formed and operated to defraud him. Morales has not to us discharged his burden.

WHEREFORE, the petition is hereby GRANTED. The CA’s January 23, 2008 Decision and April 16, 2008 Resolution in
CA-G.R. SP No. 100152 are hereby REVERSED and SET ASIDE. The levy placed upon the personal properties of
Kukan International Corporation is hereby ordered lifted and the personal properties ordered returned to Kukan
International Corporation. The RTC of Manila, Branch 21 is hereby directed to execute the RTC Decision dated
November 28, 2002 against Kukan, Inc. with reasonable dispatch.

No costs.

SO ORDERED.

PRESBITERO J. VELASCO, JR.

Associate Justice

WE CONCUR:

RENATO C. CORONA
Chief Justice
Chairperson

ANTONIO T. CARPIO* TERESITA J. LEONARDO-DE CASTRO

 Associate Justice Associate Justice

JOSE PORTUGAL PEREZ

Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in the above Decision had been
reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

RENATO C. CORONA
Chief Justice

 Jose Guillermo vs. Crisanto Uson, G.R. No. 198967; March 7, 2016
 G.R. No. 198967, March 07, 2016

JOSE EMMANUEL P. GUILLERMO, Petitioner, v. CRISANTO P. USON, Respondent.

DECISION

PERALTA, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to annul and set aside
the Court of Appeals Decision1 dated June 8, 2011 and Resolution2 dated October 7, 2011 in CA G.R. SP No. 115485,
which affirmed in toto the decision of the National Labor Relations Commission (NLRC).

The facts of the case follow.

On March 11, 1996, respondent Crisanto P. Uson (Uson) began his employment with Royal Class Venture Phils., Inc.
(Royal Class Venture) as an accounting clerk.3 Eventually, he was promoted to the position of accounting supervisor, with
a salary of Php13,000.00 a month, until he was allegedly dismissed from employment on December 20, 2000. 4

On March 2, 2001, Uson filed with the Sub-Regional Arbitration . Branch No. 1, Dagupan City, of the NLRC a Complaint
for Illegal Dismissal, with prayers for backwages, reinstatement, salaries and 13 th month pay, moral and exemplary
damages and attorney's fees against Royal Class Venture. 5

Royal Class Venture did not make an appearance in the case despite its receipt of summons. 6

On May 15, 2001, Uson filed his Position Paper7 as complainant.

On October 22, 2001, Labor Arbiter Jose G. De Vera rendered a Decision 8 in favor of the complainant Uson and ordering
therein respondent Royal Class Venture to reinstate him to his former position and pay his backwages, 13 th month pay as
well as moral and exemplary damages and attorney's fees.

Royal Class Venture, as the losing party, did not file an appeal of the decision. 9 Consequently, upon Uson's motion, a Writ
of Execution10 dated February 15, 2002 was issued to implement the Labor Arbiter's decision.

On May 17, 2002, an Alias Writ of Execution11 was issued. But with the judgment still unsatisfied, a Second Alias Writ of
Execution12 was issued on September 11, 2002.

Again, it was reported in the Sheriff's Return that the Second Alias Writ of Execution dated September 11, 2002 remained
"unsatisfied." Thus, on November 14, 2002, Uson filed a Motion for Alias Writ of Execution and to Hold Directors and
Officers of Respondent Liable for Satisfaction of the Decision. 13 The motion quoted from a portion of the Sheriffs Return,
which states:
chanRoblesvirtualLawlibrary

On September 12, 2002, the undersigned proceeded at the stated present business office address of the respondent which
is at Minien East, Sta. Barbara, Pangasinan to serve the writ of execution. Upon arrival, I found out that the establishment
erected thereat is not [in] the respondent's name but JOEL and SONS CORPORATION, a family corporation owned by
the Guillermos of which, Jose Emmanuel F. Guillermo the General Manager of the respondent, is one of the stockholders
who received the writ using his nickname "Joey," [and who] concealed his real identity and pretended that he [was] the
brother of Jose, which [was] contrary to the statement of the guard-on-duty that Jose and Joey [were] one and the same
person. The former also informed the undersigned that the respondent's (sic) corporation has been dissolved.

On the succeeding day, as per [advice] by the [complainant's] counsel that the respondent has an account at the Bank of
Philippine Islands Magsaysay Branch, A.B. Fernandez Ave., Dagupan City, the undersigned immediately served a notice
of garnishment, thus, the bank replied on the same day stating that the respondent [does] not have an account with the
branch.14ChanRoblesVirtualawlibrary
On December 26, 2002, Labor Arbiter Irenarco R. Rimando issued an Order 15 granting the motion filed by Uson. The
order held that officers of a corporation are jointly and severally liable for the obligations of the corporation to the
employees and there is no denial of due process in holding them so even if the said officers were not parties to the case
when the judgment in favor of the employees was rendered. 16 Thus, the Labor Arbiter pierced the veil of corporate fiction
of Royal Class Venture and held herein petitioner Jose Emmanuel Guillermo (Guillermo), in his personal capacity, jointly
and severally liable with the corporation for the enforcement of the claims of Uson. 17

Guillermo filed, by way of special appearance, a Motion for Reconsideration/To Set Aside the Order of December 26,
2002.18 The same, however, was not granted as, this time, in an Order dated November 24, 2003, Labor Arbiter Niña Fe S.
Lazaga-Rafols sustained the findings of the labor arbiters before her and even castigated Guillenno for his unexplained
absence in the prior proceedings despite notice, effectively putting responsibility on Guillermo for the case's outcome
against him.19

On January 5, 2004, Guillermo filed a Motion for Reconsideration of the above Order, 20 but the same was promptly
denied by the Labor Arbiter in an Order dated January 7, 2004. 21

On January 26, 2004, Uson filed a Motion for Alias Writ of Execution, 22 to which Guillermo filed a Comment and
Opposition on April 2, 2004.23

On May 18, 2004, the Labor Arbiter issued an Order24 granting Uson's Motion for the Issuance of an Alias Writ of
Execution and rejecting Guillermo's arguments posed in his Comment and Opposition.

Guillermo elevated the matter to the NLRC by filing a Memorandum of Appeal with Prayer for a (Writ of) Preliminary
Injunction dated June 10, 2004.25cralawred

In a Decision26 dated May 11, 2010, the NLRC dismissed Guillermo's appeal and denied his prayers for injunction.

On August 20, 2010, Guillermo filed a Petition for Certiorari27 before the Court of Appeals, assailing the NLRC decision.

On June 8, 2011, the Court of Appeals rendered its assailed Decision 28 which denied Guillermo's petition and upheld all
the findings of the NLRC.

The appellate court found that summons was in fact served on Guillermo as President and General Manager of Royal
Class Venture, which was how the Labor Arbiter acquired jurisdiction over the company. 29 But Guillermo subsequently
refused to receive all notices of hearings and conferences as well as the order to file Royal Class Venture's position
paper.30 Then, it was learned during execution that Royal Class Venture had been dissolved. 31 However, the Court of
Appeals held that although the judgment had become final and executory, it may be modified or altered "as when its
execution becomes impossible or unjust."32 It also noted that the motion to hold officers and directors like Guillermo
personally liable, as well as the notices to hear the same, was sent to them by registered mail, but no pleadings were
submitted and no appearances were made by anyone of them during the said motion's pendency. 33 Thus, the court held
Guillermo liable, citing jurisprudence that hold the president of the corporation liable for the latter's obligation to illegally
dismissed employees.34 Finally, the court dismissed Guillermo's allegation that the case is an intra-corporate controversy,
stating that jurisdiction is determined by the allegations in the complaint and the character of the relief sought. 35

From the above decision of the appellate court, Guillermo filed a Motion for Reconsideration 36 but the same was again
denied by the said court in the assailed Resolution37 dated October 7, 2011.

Hence, the instant petition.

Guillermo asserts that he was impleaded in the case only more than a year after its Decision had become final and
executory, an act which he claims to be unsupported in law and jurisprudence. 38 He contends that the decision had become
final, immutable and unalterable and that any amendment thereto is null and void. 39 Guillermo assails the so-called
"piercing the veil" of corporate fiction which allegedly discriminated against him when he alone was belatedly impleaded
despite the existence of other directors and officers in Royal Class Venture. 40 He also claims that the Labor Arbiter has no
jurisdiction because the case is one of an intra-corporate controversy, with the complainant Uson also claiming to be a
stockholder and director of Royal Class Venture. 41
In his Comment,42 Uson did not introduce any new arguments but merely cited verbatim the disquisitions of the Court of
Appeals to counter Guillermo's assertions in his petition.

To resolve the case, the Court must confront the issue of whether an officer of a corporation may be included as judgment
obligor in a labor case for the first time only after the decision of the Labor Arbiter had become final and executory, and
whether the twin doctrines of "piercing the veil of corporate fiction" and personal liability of company officers in labor
cases apply.

The petition is denied.

In the earlier labor cases of Claparols v. Court of Industrial Relations43 and A.C. Ransom Labor Union-CCLU v.
NLRC,44 persons who were not originally impleaded in the case were, even during execution, held to be solidarity liable
with the employer corporation for the latter's unpaid obligations to complainant-employees. These included a newly-
formed corporation which was considered a mere conduit or alter ego of the originally impleaded corporation, and/or the
officers or stockholders of the latter corporation. 45 Liability attached, especially to the responsible officers, even after final
judgment and during execution, when there was a failure to collect from the employer corporation the judgment debt
awarded to its workers.46 In Naguiat v. NLRC,47 the president of the corporation was found, for the first time on appeal, to
be solidarily liable to the dismissed employees. Then, in Reynoso v. Court of Appeals,48 the veil of corporate fiction was
pierced at the stage of execution, against a corporation not previously impleaded, when it was established that such
corporation had dominant control of the original party corporation, which was a smaller company, in such a manner that
the latter's closure was done by the former in order to defraud its creditors, including a former worker.

The rulings of this Court in A.C. Ransom, Naguiat, and Reynoso, however, have since been tempered, at least in the
aspects of the lifting of the corporate veil and the assignment of personal liability to directors, trustees and officers in
labor cases. The subsequent cases of McLeod v. NLRC,49Spouses Santos v. NLRC50 and Carag v. NLRC,51 have all
established, save for certain exceptions, the primacy of Section 31 52 of the Corporation Code in the matter of assigning
such liability for a corporation's debts, including judgment obligations in labor cases. According to these cases, a
corporation is still an artificial being invested by law with a personality separate and distinct from that of its stockholders
and from that of other corporations to which it may be connected. 53 It is not in every instance of inability to collect from a
corporation that the veil of corporate fiction is pierced, and the responsible officials are made liable. Personal liability
attaches only when, as enumerated by the said Section 31 of the Corporation Code, there is a wilfull and knowing assent
to patently unlawful acts of the corporation, there is gross negligence or bad faith in directing the affairs of the
corporation, or there is a conflict of interest resulting in damages to the corporation. 54 Further, in another labor
case, Pantranco Employees Association (PEA-PTGWO), et al. v. NLRC, et al.,55 the doctrine of piercing the corporate veil
is held to apply only in three (3) basic areas, namely: ( 1) defeat of public convenience as when the corporate fiction is
used as a vehicle for the evasion of an existing obligation; (2) fraud cases or when the corporate entity is used to justify a
wrong, protect fraud, or defend a crime; or (3) alter ego cases, where a corporation is merely a farce since it is a mere alter
ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so
conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation. In the absence of
malice, bad faith, or a specific provision of law making a corporate officer liable, such corporate officer cannot be made
personally liable for corporate liabilities. 56 Indeed, in Reahs Corporation v. NLRC,57 the conferment of liability on officers
for a corporation's obligations to labor is held to be an exception to the general doctrine of separate personality of a
corporation.

It also bears emphasis that in cases where personal liability attaches, not even all officers are made accountable. Rather,
only the "responsible officer," i.e., the person directly responsible for and who "acted in bad faith" in committing the
illegal dismissal or any act violative of the Labor Code, is held solidarily liable, in cases wherein the corporate veil is
pierced.58 In other instances, such as cases of so-called corporate tort of a close corporation, it is the person "actively
engaged" in the management of the corporation who is held liable. 59 In the absence of a clearly identifiable officer(s)
directly responsible for the legal infraction, the Court considers the president of the corporation as such officer. 60

The common thread running among the aforementioned cases, however, is that the veil of corporate fiction can be pierced,
and responsible corporate directors and officers or even a separate but related corporation, may be impleaded and held
answerable solidarily in a labor case, even after final judgment and on execution, so long as it is established that such
persons have deliberately used the corporate vehicle to unjustly evade the judgment obligation, or have resorted to fraud,
bad faith or malice in doing so. When the shield of a separate corporate identity is used to commit wrongdoing and
opprobriously elude responsibility, the courts and the legal authorities in a labor case have not hesitated to step in and
shatter the said shield and deny the usual protections to the offending party, even after final judgment. The key element is
the presence of fraud, malice or bad faith. Bad faith, in this instance, does not connote bad judgment or negligence but
imports a dishonest purpose or some moral obliquity and conscious doing of wrong; it means breach of a known duty
through some motive or interest or ill will; it partakes of the nature of fraud. 61

As the foregoing implies, there is no hard and fast rule on when corporate fiction may be disregarded; instead, each case
must be evaluated according to its peculiar circumstances. 62 For the case at bar, applying the above criteria, a finding of
personal and solidary liability against a corporate officer like Guillermo must be rooted on a satisfactory showing of fraud,
bad

faith or malice, or the presence of any of the justifications for disregarding the corporate fiction. As stated
in McLeod,63 bad faith is a question of fact and is evidentiary, so that the records must first bear evidence of malice before
a finding of such may be made.

It is our finding that such evidence exists in the record. Like the A. C. Ransom, and Naguiat cases, the case at bar involves
an apparent family corporation. As in those two cases, the records of the present case bear allegations and evidence that
Guillermo, the officer being held liable, is the person responsible in the actual running of the company and for the
malicious and illegal dismissal of the complainant; he, likewise, was shown to have a role in dissolving the original
obligor company in an obvious "scheme to avoid liability" which jurisprudence has always looked upon with a suspicious
eye in order to protect the rights of labor.64

Part of the evidence on record is the second page of the verified Position Paper of complainant (herein respondent)
Crisanto P. Uson, where it was clearly alleged that Uson was "illegally dismissed by the President/General Manager of
respondent corporation (herein petitioner) Jose Emmanuel P. Guillermo when Uson exposed the practice of the said
President/General Manager of dictating and undervaluing the shares of stock of the corporation." 65 The statement is proof
that Guillermo was the responsible officer in charge of running the company as well as the one who dismissed Uson from
employment. As this sworn allegation is uncontroverted - as neither the company nor Guillermo appeared before the
Labor Arbiter despite the service of summons and notices - such stands as a fact of the case, and now functions as clear
evidence of Guillermo's bad faith in his dismissal of Uson from employment, with the motive apparently being anger at
the latter's reporting of unlawful activities.

Then, it is also clearly reflected in the records that it was Guillermo himself, as President and General Manager of the
company, who received the summons to the case, and who also subsequently and without justifiable cause refused to
receive all notices and orders of the Labor Arbiter that followed. 66 This makes Guillermo responsible for his and his
company's failure to participate in the entire proceedings before the said office. The fact is clearly narrated in the Decision
and Orders of the Labor Arbiter, Uson's Motions for the Issuance of Alias Writs of Execution, as well as in the Decision
of the NLRC and the assailed Decision of the Court of Appeals, 67 which Guillermo did not dispute in any of his belated
motions or pleadings, including in his petition for certiorari before the Court of Appeals and even in the petition currently
before this Court.68 Thus, again, the same now stands as a finding of fact of the said lower tribunals which binds this Court
and which it has no power to alter or revisit.69 Guillermo's knowledge of the case's filing and existence and his
unexplained refusal to participate in it as the responsible official of his company, again is an indicia of his bad faith and
malicious intent to evade the judgment of the labor tribunals.

Finally, the records likewise bear that Guillermo dissolved Royal Class Venture and helped incorporate a new firm,
located in the same address as the former, wherein he is again a stockl1older. This is borne by the Sherif11s Return which
reported: that at Royal Class Venture's business address at Minien East, Sta. Barbara, Pangasinan, there is a new
establishment named "Joel and Sons Corporation," a family corporation owned by the Guillermos in which Jose
Emmanuel F. Guillermo is again one of the stockholders; that Guillermo received the writ of execution but used the
nickname "Joey" and denied being Jose Emmanuel F. Guillermo and, instead, pretended to be Jose's brother; that the
guard on duty confirmed that Jose and Joey are one and the same person; and that the respondent corporation Royal Class
Venture had been dissolved.70 Again, the facts contained in the Sheriffs Return were not disputed nor controverted by
Guillermo, either in the hearings of Uson's Motions for Issuance of Alias Writs of Execution, in subsequent motions or
pleadings, or even in the petition before this Court. Essentially, then, the facts form part of the records and now stand as
further proof of Guillermo's bad faith and malicious intent to evade the judgment obligation.
The foregoing clearly indicate a pattern or scheme to avoid the obligations to Uson and frustrate the execution of the
judgment award, which this Court, in the interest of justice, will not countenance.

As for Guillermo's assertion that the case is an intra-corporate controversy, the Court sustains the finding of the appellate
court that the nature of an action and the jurisdiction of a tribunal are determined by the allegations of the complaint at the
time of its filing, irrespective of whether or not the plaintiff is entitled to recover upon all or some of the claims asserted
therein.71 Although Uson is also a stockholder and director of Royal Class Venture, it is settled in jurisprudence that not
all conflicts between a stockholder and the corporation are intra-corporate; an examination of the complaint must be made
on whether the complainant is involved in his capacity as a stockholder or director, or as an employee. 72 If the latter is
found and the dispute does not meet the test of what qualities as an intra-corporate controversy, then the case is a labor
case cognizable by the NLRC and is not within the jurisdiction of any other tribunal. 73 In the case at bar, Uson's allegation
was that he was maliciously and illegally dismissed as an Accounting Supervisor by Guillermo, the Company President
and General Manager, an allegation that was not even disputed by the latter nor by Royal Class Venture. It raised no intra-
corporate relationship issues between him and the corporation or Guillermo; neither did it raise any issue regarding the
regulation of the corporation. As correctly found by the appellate court, Uson's complaint and redress sought were
centered alone on his dismissal as an employee, and not upon any other relationship he had with the company or with
Guillermo. Thus, the matter is clearly a labor dispute cognizable by the labor tribunals.chanrobleslaw

WHEREFORE, the petition is DENIED. The Court of Appeals Decision dated June 8, 2011 and Resolution dated
October 7, 2011 in CA G.R. SP No. 115485 are AFFIRMED.

SO ORDERED.cralawlawlibrary

Velasco, Jr., (Chairperson), Perez, Reyes, and Jardeleza, JJ., concur.chanroblesvirtuallawlibrary

 Yamamoto vs. Nishino Leather Industries, G.R. No. 150283, April 16, 2008
G.R. No. 150283             April 16, 2008

RYUICHI YAMAMOTO, petitioner,
vs.
NISHINO LEATHER INDUSTRIES, INC. and IKUO NISHINO, respondents.

DECISION

CARPIO MORALES, J.:

In 1983, petitioner, Ryuichi Yamamoto (Yamamoto), a Japanese national, organized under Philippine laws Wako
Enterprises Manila, Incorporated (WAKO), a corporation engaged principally in leather tanning, now known as Nishino
Leather Industries, Inc. (NLII), one of herein respondents.

In 1987, Yamamoto and the other respondent, Ikuo Nishino (Nishino), also a Japanese national, forged a Memorandum of
Agreement under which they agreed to enter into a joint venture wherein Nishino would acquire such number of shares of
stock equivalent to 70% of the authorized capital stock of WAKO.

Eventually, Nishino and his brother1 Yoshinobu Nishino (Yoshinobu) acquired more than 70% of the authorized capital
stock of WAKO, reducing Yamamoto’s investment therein to, by his claim, 10%, 2 less than 10% according to Nishino.3

The corporate name of WAKO was later changed to, as reflected earlier, its current name NLII.

Negotiations subsequently ensued in light of a planned takeover of NLII by Nishino who would buy-out the shares of
stock of Yamamoto. In the course of the negotiations, Yoshinobu and Nishino’s counsel Atty. Emmanuel G. Doce (Atty.
Doce) advised Yamamoto by letter dated October 30, 1991, the pertinent portions of which follow:

Hereunder is a simple memorandum of the subject matters discussed with me by Mr. Yoshinobu Nishino
yesterday, October 29th, based on the letter of Mr. Ikuo Nishino from Japan, and which I am now transmitting to
you.4

xxxx

12. Machinery and Equipment:

The following machinery/equipment have been contributed by you to the company:

Splitting machine - 1 unit

Samming machine - 1 unit

Forklift - 1 unit

Drums - 4 units

Toggling machine - 2 units

Regarding the above machines, you may take them out with you (for your own use and sale) if you
want, provided, the value of such machines is deducted from your and Wako’s capital contributions, which will
be paid to you.

Kindly let me know of your comments on all the above, soonest.

x x x x5 (Emphasis and underscoring supplied)

On the basis of such letter, Yamamoto attempted to recover the machineries and equipment which were, by Yamamoto’s
admission, part of his investment in the corporation, 6 but he was frustrated by respondents, drawing Yamamoto to file on
January 15, 1992 before the Regional Trial Court (RTC) of Makati a complaint 7 against them for replevin.

Branch 45 of the Makati RTC issued a writ of replevin after Yamamoto filed a bond. 8

In their Answer with Counterclaim,9 respondents claimed that the machineries and equipment subject of replevin form
part of Yamamoto’s capital contributions in consideration of his equity in NLII and should thus be treated as corporate
property; and that the above-said letter of Atty. Doce to Yamamoto was merely a proposal, "conditioned on
[Yamamoto’s] sell-out to . . . Nishino of his entire equity,"10 which proposal was yet to be authorized by the stockholders
and Board of Directors of NLII.

By way of Counterclaim, respondents, alleging that they suffered damage due to the seizure via the implementation of the
writ of replevin over the machineries and equipment, prayed for the award to them of moral and exemplary damages,
attorney’s fees and litigation expenses, and costs of suit.

The trial court, by Decision of June 9, 1995, decided the case in favor of Yamamoto, 11 disposing thus:

WHEREFORE, judgment is hereby rendered: (1) declaring plaintiff as the rightful owner and possessor of the
machineries in question, and making the writ of seizure permanent; (2) ordering defendants to pay plaintiff
attorney’s fees and expenses of litigation in the amount of Fifty Thousand Pesos (P50,000.00), Philippine
Currency; (3) dismissing defendants’ counterclaims for lack of merit; and (4) ordering defendants to pay the costs
of suit.

SO ORDERED.12 (Underscoring supplied)

On appeal,13 the Court of Appeals held in favor of herein respondents and accordingly reversed the RTC decision and
dismissed the complaint.14 In so holding, the appellate court found that the machineries and equipment claimed by
Yamamoto are corporate property of NLII and may not thus be retrieved without the authority of the NLII Board of
Directors;15 and that petitioner’s argument that Nishino and Yamamoto cannot hide behind the shield of corporate fiction
does not lie,16 nor does petitioner’s invocation of the doctrine of promissory estoppel. 17 At the same time, the Court of
Appeals found no ground to support respondents’ Counterclaim. 18

The Court of Appeals having denied19 his Motion for Reconsideration,20 Yamamoto filed the present petition,21 faulting
the Court of Appeals

A.

x x x IN HOLDING THAT THE VEIL OF CORPORATE FICTION SHOULD NOT BE PIERCED IN THE
CASE AT BAR.

B.

x x x IN HOLDING THAT THE DOCTRINE OF PROMISSORY ESTOPPEL DOES NOT APPLY TO THE
CASE AT BAR.

C.

x x x IN HOLDING THAT RESPONDENTS ARE NOT LIABLE FOR ATTORNEY’S FEES.22

The resolution of the petition hinges, in the main, on whether the advice in the letter of Atty. Doce that Yamamoto may
retrieve the machineries and equipment, which admittedly were part of his investment, bound the corporation. The Court
holds in the negative.
Indeed, without a Board Resolution authorizing respondent Nishino to act for and in behalf of the corporation, he cannot
bind the latter. Under the Corporation Law, unless otherwise provided, corporate powers are exercised by the Board of
Directors.23

Urging this Court to pierce the veil of corporate fiction, Yamamoto argues, viz:

During the negotiations, the issue as to the ownership of the Machiner[ies] never came up. Neither did the issue
on the proper procedure to be taken to execute the complete take-over of the Company come up since Ikuo,
Yoshinobu, and Yamamoto were the owners thereof, the presence of other stockholders being only for the
purpose of complying with the minimum requirements of the law.

What course of action the Company decides to do or not to do depends not on the "other members of the Board of
Directors". It depends on what Ikuo and Yoshinobu decide. The Company is but a mere instrumentality of
Ikuo [and] Yoshinobu.24

xxxx

x x x The Company hardly holds board meetings. It has an inactive board, the directors are directors in name only
and are there to do the bidding of the Nish[i]nos, nothing more. Its minutes are paper minutes. x x x 25

xxxx

The fact that the parties started at a 70-30 ratio and Yamamoto’s percentage declined to 10% does not mean the
20% went to others. x x x The 20% went to no one else but Ikuo himself. x x x Yoshinobu is the younger
brother of Ikuo and has no say at all in the business. Only Ikuo makes the decisions. There were, therefore,
no other members of the Board who have not given their approval.26 (Emphasis and underscoring supplied)

While the veil of separate corporate personality may be pierced when the corporation is merely an adjunct, a business
conduit, or alter ego of a person,27 the mere ownership by a single stockholder of even all or nearly all of the capital stocks
of a corporation is not by itself a sufficient ground to disregard the separate corporate personality. 28

The elements determinative of the applicability of the doctrine of piercing the veil of corporate fiction follow:

"1. Control, not mere majority or complete stock control, but complete domination, not only of finances but of
policy and business practice in respect to the transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its own;

2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty, or dishonest and unjust act in contravention of the plaintiff’s legal rights;
and

3. The aforesaid control and breach of duty must proximately cause the injury  or unjust loss complained of.

The absence of any one of these elements prevents "piercing the corporate veil ."  In applying the
‘instrumentality’ or ‘alter ego’ doctrine, the courts are concerned with reality and not form, with how the
corporation operated and the individual defendant’s relationship to that operation." 29 (Italics in the original;
emphasis and underscoring supplied)

In relation to the second element, to disregard the separate juridical personality of a corporation, the wrongdoing or unjust
act in contravention of a plaintiff’s legal rights must be clearly and convincingly established; it cannot be
presumed.30 Without a demonstration that any of the evils sought to be prevented by the doctrine is present, it does not
apply.31

In the case at bar, there is no showing that Nishino used the separate personality of NLII to unjustly act or do wrong to
Yamamoto in contravention of his legal rights.
Yamamoto argues, in another vein, that promissory estoppel lies against respondents, thus:

Under the doctrine of promissory estoppel, x x x estoppel may arise from the making of a promise, even though
without consideration, if it was intended that the promise should be relied upon and in fact it was relied upon, and
if a refusal to enforce it would be virtually to sanction the perpetration of fraud or would result in other injustice.

x x x Ikuo and Yoshinobu wanted Yamamoto out of the Company. For this purpose negotiations were had
between the parties. Having expressly given Yamamoto, through the Letter and through a subsequent meeting at
the Manila Peninsula where Ikuo himself confirmed that Yamamoto may take out the Machinery from the
Company anytime, respondents should not be allowed to turn around and do the exact opposite of what they have
represented they will do.

In paragraph twelve (12) of the Letter, Yamamoto was expressly advised that he could take out the Machinery if
he wanted to so, provided that the value of said machines would be deducted from his capital contribution  x x x.

xxxx

Respondents cannot now argue that they did not intend for Yamamoto to rely upon the Letter. That was the
purpose of the Letter to begin with. Petitioner[s] in fact, relied upon said Letter and such reliance was further
strengthened during their meeting at the Manila Peninsula.

To sanction respondents’ attempt to evade their obligation would be to sanction the perpetration of fraud and
injustice against petitioner.32 (Underscoring supplied)

It bears noting, however, that the aforementioned paragraph 12 of the letter is followed by a request for Yamamoto to give
his "comments on all the above, soonest."33

What was thus proffered to Yamamoto was not a promise, but a mere offer, subject to his acceptance. Without acceptance,
a mere offer produces no obligation.34

Thus, under Article 1181 of the Civil Code, "[i]n conditional obligations, the acquisition of rights, as well as the
extinguishment or loss of those already acquired, shall depend upon the happening of the event which constitutes the
condition." In the case at bar, there is no showing of compliance with the condition for allowing Yamamoto to take the
machineries and equipment, namely, his agreement to the deduction of their value from his capital contribution due him in
the buy-out of his interests in NLII. Yamamoto’s allegation that he agreed to the condition 35 remained just that, no proof
thereof having been presented.

The machineries and equipment, which comprised Yamamoto’s investment in NLII, 36 thus remained part of the capital
property of the corporation.37

It is settled that the property of a corporation is not the property of its stockholders or members. 38 Under the trust fund
doctrine, the capital stock, property, and other assets of a corporation are regarded as equity in trust for the payment of
corporate creditors which are preferred over the stockholders in the distribution of corporate assets. 39 The distribution of
corporate assets and property cannot be made to depend on the whims and caprices of the stockholders, officers, or
directors of the corporation unless the indispensable conditions and procedures for the protection of corporate creditors
are followed.40

WHEREFORE, the petition is DENIED.

Costs against petitioner.

SO ORDERED.

CONCHITA CARPIO MORALES

Associate Justice
WE CONCUR:

*LEONARDO A. QUISUMBING
Associate Justice
Chairperson

DANTE O. TINGA PRESBITERO J. VELASCO, JR.

Associate Justice Associate Justice

ARTURO D. BRION
Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned to the
writer of the opinion of the Court’s Division.

**CONCHITA CARPIO MORALES

Associate Justice
Acting Chairperson

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairperson’s Attestation, it is hereby certified
that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the
opinion of the Court’s Division.

REYNATO S. PUNO
Chief Justice

 Lanuza and Olbes, G.R. No. 174938, October 1, 2014

G.R. No. 174938               October 1, 2014

GERARDO LANUZA, JR. AND ANTONIO O. OLBES, Petitioners,
vs.
BF CORPORATION, SHANGRI-LA PROPERTIES, INC., ALFREDO C. RAMOS, RUFO B. COLAYCO,
MAXIMO G. LICAUCO III, AND BENJAMIN C. RAMOS, Respondents.

DECISION

LEONEN, J.:

Corporate representatives may be compelled to submit to arbitration proceedings pursuant to a contract entered into by the
corporation they represent if there are allegations of bad faith or malice in their acts representing the corporation.

This is a Rule 45 petition, assailing the Court of Appeals' May 11, 2006 decision and October 5, 2006 resolution. The
Court of Appeals affirmed the trial court's decision holding that petitioners, as director, should submit themselves as
parties tothe arbitration proceedings between BF Corporation and Shangri-La Properties, Inc. (Shangri-La).

In 1993, BF Corporation filed a collection complaint with the Regional Trial Court against Shangri-Laand the members of
its board of directors: Alfredo C. Ramos, Rufo B.Colayco, Antonio O. Olbes, Gerardo Lanuza, Jr., Maximo G. Licauco
III, and Benjamin C. Ramos.1

BF Corporation alleged in its complaint that on December 11, 1989 and May 30, 1991, it entered into agreements with
Shangri-La wherein it undertook to construct for Shangri-La a mall and a multilevel parking structure along EDSA. 2

Shangri-La had been consistent in paying BF Corporation in accordance with its progress billing statements. 3 However, by
October 1991, Shangri-La started defaulting in payment. 4

BF Corporation alleged that Shangri-La induced BF Corporation to continue with the construction of the buildings using
its own funds and credit despite Shangri-La’s default. 5 According to BF Corporation, ShangriLa misrepresented that it had
funds to pay for its obligations with BF Corporation, and the delay in payment was simply a matter of delayed processing
of BF Corporation’s progress billing statements.6

BF Corporation eventually completed the construction of the buildings. 7 Shangri-La allegedly took possession of the
buildings while still owing BF Corporation an outstanding balance. 8

BF Corporation alleged that despite repeated demands, Shangri-La refused to pay the balance owed to it. 9 It also alleged
that the Shangri-La’s directors were in bad faith in directing Shangri-La’s affairs. Therefore, they should be held jointly
and severally liable with Shangri-La for its obligations as well as for the damages that BF Corporation incurred as a result
of Shangri-La’s default.10

On August 3, 1993, Shangri-La, Alfredo C. Ramos, Rufo B. Colayco, Maximo G. Licauco III, and Benjamin C. Ramos
filed a motion to suspend the proceedings in view of BF Corporation’s failure to submit its dispute to arbitration, in
accordance with the arbitration clauseprovided in its contract, quoted in the motion as follows: 11

35. Arbitration

(1) Provided always that in case any dispute or difference shall arise between the Owner or the Project Manager on his
behalf and the Contractor, either during the progress or after the completion or abandonment of the Works as to the
construction of this Contract or as to any matter or thing of whatsoever nature arising there under or inconnection
therewith (including any matter or thing left by this Contract to the discretion of the Project Manager or the withholding
by the Project Manager of any certificate to which the Contractor may claim to be entitled or the measurement and
valuation mentioned in clause 30(5)(a) of these Conditions or the rights and liabilities of the parties under clauses 25, 26,
32 or 33 of these Conditions), the owner and the Contractor hereby agree to exert all efforts to settle their differences or
dispute amicably. Failing these efforts then such dispute or difference shall be referred to arbitration in accordance with
the rules and procedures of the Philippine Arbitration Law.
 x x x           x x x          x x x

(6) The award of such Arbitrators shall be final and binding on the parties. The decision of the Arbitrators shall be a
condition precedent to any right of legal action that either party may have against the other. . . . 12 (Underscoring in the
original)

On August 19, 1993, BF Corporation opposed the motion to suspend proceedings. 13

In the November 18, 1993 order, the Regional Trial Court denied the motion to suspend proceedings. 14

On December 8, 1993, petitioners filed an answer to BF Corporation’s complaint, with compulsory counter claim against
BF Corporation and crossclaim against Shangri-La.15 They alleged that they had resigned as members of Shangri-La’s
board of directors as of July 15, 1991.16

After the Regional Trial Court denied on February 11, 1994 the motion for reconsideration of its November 18, 1993
order, Shangri-La, Alfredo C. Ramos, Rufo B. Colayco,Maximo G. Licauco III, and Benjamin Ramos filed a petition for
certiorari with the Court of Appeals.17

On April 28, 1995, the Court of Appeals granted the petition for certiorari and ordered the submission of the dispute to
arbitration.18

Aggrieved by the Court of Appeals’ decision, BF Corporation filed a petition for review on certiorari with this court. 19 On
March 27, 1998, this court affirmed the Court of Appeals’ decision, directing that the dispute be submitted for
arbitration.20

Another issue arose after BF Corporation had initiated arbitration proceedings. BF Corporation and Shangri-La failed to
agree as to the law that should govern the arbitration proceedings. 21 On October 27, 1998, the trial court issued the order
directing the parties to conduct the proceedings in accordance with Republic Act No. 876. 22

Shangri-La filed an omnibus motion and BF Corporation an urgent motion for clarification, both seeking to clarify the
term, "parties," and whether Shangri-La’s directors should be included in the arbitration proceedings and served with
separate demands for arbitration.23

Petitioners filed their comment on Shangri-La’s and BF Corporation’s motions, praying that they be excluded from the
arbitration proceedings for being non-parties to Shangri-La’s and BF Corporation’s agreement. 24

On July 28, 2003, the trial court issued the order directing service of demands for arbitration upon all defendants in BF
Corporation’s complaint.25 According to the trial court, Shangri-La’s directors were interested parties who "must also be
served with a demand for arbitration to give them the opportunity to ventilate their side of the controversy, safeguard their
interest and fend off their respective positions."26 Petitioners’ motion for reconsideration ofthis order was denied by the
trial court on January 19, 2005.27

Petitioners filed a petition for certiorari with the Court of Appeals, alleging grave abuse of discretion in the issuance of
orders compelling them to submit to arbitration proceedings despite being third parties to the contract between Shangri-La
and BF Corporation.28

In its May 11, 2006 decision,29 the Court of Appeals dismissed petitioners’ petition for certiorari. The Court of Appeals
ruled that ShangriLa’s directors were necessary parties in the arbitration proceedings. 30 According to the Court of
Appeals:

[They were] deemed not third-parties tothe contract as they [were] sued for their acts in representation of the party to the
contract pursuant to Art. 31 of the Corporation Code, and that as directors of the defendant corporation, [they], in
accordance with Art. 1217 of the Civil Code, stand to be benefited or injured by the result of the arbitration proceedings,
hence, being necessary parties, they must be joined in order to have complete adjudication of the controversy.
Consequently, if [they were] excluded as parties in the arbitration proceedings and an arbitral award is rendered, holding
[Shangri-La] and its board of directors jointly and solidarily liable to private respondent BF Corporation, a problem will
arise, i.e., whether petitioners will be bound bysuch arbitral award, and this will prevent complete determination of the
issues and resolution of the controversy.31

The Court of Appeals further ruled that "excluding petitioners in the arbitration proceedings . . . would be contrary to the
policy against multiplicity of suits."32

The dispositive portion of the Court of Appeals’ decision reads:

WHEREFORE, the petition is DISMISSED. The assailed orders dated July 28, 2003 and January 19, 2005 of public
respondent RTC, Branch 157, Pasig City, in Civil Case No. 63400, are AFFIRMED. 33

The Court of Appeals denied petitioners’ motion for reconsideration in the October 5, 2006 resolution. 34

On November 24, 2006, petitioners filed a petition for review of the May 11, 2006 Court of Appeals decision and the
October 5, 2006 Court of Appeals resolution.35

The issue in this case is whether petitioners should be made parties to the arbitration proceedings, pursuant to the
arbitration clause provided in the contract between BF Corporation and Shangri-La.

Petitioners argue that they cannot be held personally liable for corporate acts or obligations. 36 The corporation is a
separate being, and nothing justifies BF Corporation’s allegation that they are solidarily liable with Shangri-La. 37 Neither
did they bind themselves personally nor did they undertake to shoulder Shangri-La’s obligations should it fail in its
obligations.38 BF Corporation also failed to establish fraud or bad faith on their part. 39

Petitioners also argue that they are third parties to the contract between BF Corporation and Shangri-La. 40 Provisions
including arbitration stipulations should bind only the parties. 41 Based on our arbitration laws, parties who are strangers to
an agreement cannot be compelled to arbitrate. 42

Petitioners point out thatour arbitration laws were enacted to promote the autonomy of parties in resolving their
disputes.43 Compelling them to submit to arbitration is against this purpose and may be tantamount to stipulating for the
parties.44

Separate comments on the petition werefiled by BF Corporation, and Maximo G. Licauco III, Alfredo C.Ramos and
Benjamin C. Ramos.45

Maximo G. Licauco III Alfredo C. Ramos, and Benjamin C. Ramos agreed with petitioners that Shangri-La’sdirectors,
being non-parties to the contract, should not be made personally liable for Shangri-La’s acts. 46 Since the contract was
executed only by BF Corporation and Shangri-La, only they should be affected by the contract’s stipulation. 47 BF
Corporation also failed to specifically allege the unlawful acts of the directors that should make them solidarily liable with
Shangri-La for its obligations.48

Meanwhile, in its comment, BF Corporation argued that the courts’ ruling that the parties should undergo arbitration
"clearly contemplated the inclusion of the directors of the corporation[.]" 49 BF Corporation also argued that while
petitioners were not parties to the agreement, they were still impleaded under Section 31 of the Corporation
Code.50 Section 31 makes directors solidarily liable for fraud, gross negligence, and bad faith. 51 Petitioners are not really
third parties to the agreement because they are being sued as Shangri-La’s representatives, under Section 31 of the
Corporation Code.52

BF Corporation further argued that because petitioners were impleaded for their solidary liability, they are necessary
parties to the arbitration proceedings.53 The full resolution of all disputes in the arbitration proceedings should also be
done in the interest of justice.54

In the manifestation dated September 6, 2007, petitioners informed the court that the Arbitral Tribunal had already
promulgated its decision on July 31, 2007.55 The Arbitral Tribunal denied BF Corporation’s claims against
them.56 Petitioners stated that "[they] were included by the Arbitral Tribunal in the proceedings conducted . . .
notwithstanding [their] continuing objection thereto. . . ."57 They also stated that "[their] unwilling participation in the
arbitration case was done ex abundante ad cautela, as manifested therein on several occasions." 58 Petitioners informed the
court that they already manifested with the trial court that "any action taken on [the Arbitral Tribunal’s decision] should
be without prejudice to the resolution of [this] case." 59

Upon the court’s order, petitioners and Shangri-La filed their respective memoranda. Petitioners and Maximo G. Licauco
III, Alfredo C. Ramos, and Benjamin C. Ramos reiterated their arguments that they should not be held liable for Shangri-
La’s default and made parties to the arbitration proceedings because only BF Corporation and Shangri-La were parties to
the contract.

In its memorandum, Shangri-La argued that petitioners were impleaded for their solidary liability under Section 31 of the
Corporation Code. Shangri-La added that their exclusion from the arbitration proceedings will result in multiplicity of
suits, which "is not favored in this jurisdiction."60 It pointed out that the case had already been mooted by the termination
of the arbitration proceedings, which petitioners actively participated in. 61 Moreover, BF Corporation assailed only the
correctness of the Arbitral Tribunal’s award and not the part absolving Shangri-La’s directors from liability. 62

BF Corporation filed a counter-manifestation with motion to dismiss 63 in lieu of the required memorandum.

In its counter-manifestation, BF Corporation pointed out that since "petitioners’ counterclaims were already dismissed
with finality, and the claims against them were likewise dismissed with finality, they no longer have any interest
orpersonality in the arbitration case. Thus, there is no longer any need to resolve the present Petition, which mainly
questions the inclusion of petitioners in the arbitration proceedings." 64 The court’s decision in this case will no longer have
any effect on the issue of petitioners’ inclusion in the arbitration proceedings. 65

The petition must fail.

The Arbitral Tribunal’s decision, absolving petitioners from liability, and its binding effect on BF Corporation, have
rendered this case moot and academic.

The mootness of the case, however, had not precluded us from resolving issues so that principles may be established for
the guidance of the bench, bar, and the public. In De la Camara v. Hon. Enage, 66 this court disregarded the fact that
petitioner in that case already escaped from prison and ruled on the issue of excessive bails:

While under the circumstances a ruling on the merits of the petition for certiorari is notwarranted, still, as set forth at the
opening of this opinion, the fact that this case is moot and academic should not preclude this Tribunal from setting forth in
language clear and unmistakable, the obligation of fidelity on the part of lower court judges to the unequivocal command
of the Constitution that excessive bail shall not be required. 67

This principle was repeated in subsequent cases when this court deemed it proper to clarify important matters for
guidance.68

Thus, we rule that petitioners may be compelled to submit to the arbitration proceedings in accordance with Shangri-
Laand BF Corporation’s agreement, in order to determine if the distinction between Shangri-La’s personality and their
personalities should be disregarded.

This jurisdiction adopts a policy in favor of arbitration. Arbitration allows the parties to avoid litigation and settle disputes
amicably and more expeditiously by themselves and through their choice of arbitrators.

The policy in favor of arbitration has been affirmed in our Civil Code, 69 which was approved as early as 1949. It was later
institutionalized by the approval of Republic Act No. 876, 70 which expressly authorized, made valid, enforceable, and
irrevocable parties’ decision to submit their controversies, including incidental issues, to arbitration. This court recognized
this policy in Eastboard Navigation, Ltd. v. Ysmael and Company, Inc.: 71
As a corollary to the question regarding the existence of an arbitration agreement, defendant raises the issue that, even if it
be granted that it agreed to submit its dispute with plaintiff to arbitration, said agreement is void and without effect for it
amounts to removing said dispute from the jurisdiction of the courts in which the parties are domiciled or where the
dispute occurred. It is true that there are authorities which hold that "a clause in a contract providing that all matters in
dispute between the parties shall be referred to arbitrators and to them alone, is contrary to public policy and cannot oust
the courts of jurisdiction" (Manila Electric Co. vs. Pasay Transportation Co., 57 Phil., 600, 603), however, there are
authorities which favor "the more intelligent view that arbitration, as an inexpensive, speedy and amicable method of
settling disputes, and as a means of avoiding litigation, should receive every encouragement from the courts which may be
extended without contravening sound public policy or settled law" (3 Am. Jur., p. 835). Congress has officially adopted
the modern view when it reproduced in the new Civil Code the provisions of the old Code on Arbitration. And only
recently it approved Republic Act No. 876 expressly authorizing arbitration of future disputes. 72 (Emphasis supplied)

In view of our policy to adopt arbitration as a manner of settling disputes, arbitration clauses are liberally construed to
favor arbitration. Thus, in LM Power Engineering Corporation v. Capitol Industrial Construction Groups, Inc., 73 this court
said:

Being an inexpensive, speedy and amicable method of settling disputes, arbitration — along with mediation, conciliation
and negotiation — is encouraged by the Supreme Court. Aside from unclogging judicial dockets, arbitration also hastens
the resolution of disputes, especially of the commercial kind. It is thus regarded as the "wave of the future" in
international civil and commercial disputes. Brushing aside a contractual agreement calling for arbitration between the
parties would be a step backward.

Consistent with the above-mentioned policy of encouraging alternative dispute resolution methods, courts should liberally
construe arbitration clauses. Provided such clause is susceptible of an interpretation that covers the asserted dispute, an
order to arbitrate should be granted. Any doubt should be resolved in favor of arbitration. 74 (Emphasis supplied)

A more clear-cut statement of the state policy to encourage arbitration and to favor interpretations that would render
effective an arbitration clause was later expressed in Republic Act No. 9285: 75

SEC. 2. Declaration of Policy.- It is hereby declared the policy of the State to actively promote party autonomy in the
resolution of disputes or the freedom of the party to make their own arrangements to resolve their disputes. Towards this
end, the State shall encourage and actively promote the use of Alternative Dispute Resolution (ADR) as an important
means to achieve speedy and impartial justice and declog court dockets. As such, the State shall provide means for the use
of ADR as an efficient tool and an alternative procedure for the resolution of appropriate cases. Likewise, the State shall
enlist active private sector participation in the settlement of disputes through ADR. This Act shall be without prejudice to
the adoption by the Supreme Court of any ADR system, such as mediation, conciliation, arbitration, or any combination
thereof as a means of achieving speedy and efficient means of resolving cases pending before all courts in the Philippines
which shall be governed by such rules as the Supreme Court may approve from time to time.

....

SEC. 25. Interpretation of the Act.- In interpreting the Act, the court shall have due regard to the policy of the law in favor
of arbitration.Where action is commenced by or against multiple parties, one or more of whomare parties who are bound
by the arbitration agreement although the civil action may continue as to those who are not bound by such arbitration
agreement. (Emphasis supplied)

Thus, if there is an interpretation that would render effective an arbitration clause for purposes ofavoiding litigation and
expediting resolution of the dispute, that interpretation shall be adopted. Petitioners’ main argument arises from the
separate personality given to juridical persons vis-à-vis their directors, officers, stockholders, and agents. Since they did
not sign the arbitration agreement in any capacity, they cannot be forced to submit to the jurisdiction of the Arbitration
Tribunal in accordance with the arbitration agreement. Moreover, they had already resigned as directors of Shangri-Laat
the time of the alleged default.

Indeed, as petitioners point out, their personalities as directors of Shangri-La are separate and distinct from Shangri-La.
A corporation is an artificial entity created by fiction of law. 76 This means that while it is not a person, naturally, the law
gives it a distinct personality and treats it as such. A corporation, in the legal sense, is an individual with a personality that
is distinct and separate from other persons including its stockholders, officers, directors, representatives, 77 and other
juridical entities. The law vests in corporations rights,powers, and attributes as if they were natural persons with physical
existence and capabilities to act on their own. 78 For instance, they have the power to sue and enter into transactions or
contracts. Section 36 of the Corporation Code enumerates some of a corporation’s powers, thus:

Section 36. Corporate powers and capacity.– Every corporation incorporated under this Code has the power and capacity:

1. To sue and be sued in its corporate name;

2. Of succession by its corporate name for the period of time stated in the articles of incorporation and the
certificate ofincorporation;

3. To adopt and use a corporate seal;

4. To amend its articles of incorporation in accordance with the provisions of this Code;

5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in accordance
with this Code;

6. In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury stocks in accordance with
the provisions of this Code; and to admit members to the corporation if it be a non-stock corporation;

7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage 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, subject to the limitations prescribed by law
and the Constitution;

8. To enter into merger or consolidation with other corporations as provided in this Code;

9. To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural,
scientific, civic, or similar purposes: Provided, That no corporation, domestic or foreign, shall give donations in
aid of any political party or candidate or for purposes of partisan political activity;

10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and
employees; and

11. To exercise such other powers asmay be essential or necessary to carry out its purpose or purposes as stated in
its articles of incorporation. (13a)

Because a corporation’s existence is only by fiction of law, it can only exercise its rights and powers through itsdirectors,
officers, or agents, who are all natural persons. A corporation cannot sue or enter into contracts without them.

A consequence of a corporation’s separate personality is that consent by a corporation through its representatives is not
consent of the representative, personally. Its obligations, incurred through official acts of its representatives, are its own.
A stockholder, director, or representative does not become a party to a contract just because a corporation executed a
contract through that stockholder, director or representative.

Hence, a corporation’s representatives are generally not bound by the terms of the contract executed by the corporation.
They are not personally liable for obligations and liabilities incurred on or in behalf of the corporation.

Petitioners are also correct that arbitration promotes the parties’ autonomy in resolving their disputes. This court
recognized in Heirs of Augusto Salas, Jr. v. Laperal Realty Corporation 79 that an arbitration clause shall not apply to
persons who were neither parties to the contract nor assignees of previous parties, thus:
A submission to arbitration is a contract. As such, the Agreement, containing the stipulation on arbitration, binds the
parties thereto, as well as their assigns and heirs. But only they. 80 (Citations omitted)

Similarly, in Del Monte Corporation-USA v. Court of Appeals, 81 this court ruled:

The provision to submit to arbitration any dispute arising therefrom and the relationship of the parties is part of that
contract and is itself a contract. As a rule, contracts are respected as the law between the contracting parties and produce
effect as between them, their assigns and heirs. Clearly, only parties to the Agreement . . . are bound by the Agreement
and its arbitration clause as they are the only signatories thereto. 82 (Citation omitted)

This court incorporated these rulings in Agan, Jr. v. Philippine International Air Terminals Co., Inc. 83 and Stanfilco
Employees v. DOLE Philippines, Inc., et al.84

As a general rule, therefore, a corporation’s representative who did not personally bind himself or herself to an arbitration
agreement cannot be forced to participate in arbitration proceedings made pursuant to an agreement entered into by the
corporation. He or she is generally not considered a party to that agreement.

However, there are instances when the distinction between personalities of directors, officers,and representatives, and of
the corporation, are disregarded. We call this piercing the veil of corporate fiction.

Piercing the corporate veil is warranted when "[the separate personality of a corporation] is used as a means to perpetrate
fraud or an illegal act, or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, or to confuse
legitimate issues."85 It is also warranted in alter ego cases "where a corporation is merely a farce since it is a mere alter
ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so
conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation." 86

When corporate veil is pierced, the corporation and persons who are normally treated as distinct from the corporation are
treated as one person, such that when the corporation is adjudged liable, these persons, too, become liable as if they were
the corporation.

Among the persons who may be treatedas the corporation itself under certain circumstances are its directors and officers.
Section 31 of the Corporation Code provides the instances when directors, trustees, or officers may become liable for
corporate acts:

Sec. 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and knowingly vote for or assent to
patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the
corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be
liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members
and other persons.

When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the
corporation in respect of any matter which has been reposed inhim in confidence, as to which equity imposes a disability
upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits
which otherwise would have accrued to the corporation. (n)

Based on the above provision, a director, trustee, or officer of a corporation may be made solidarily liable with it for all
damages suffered by the corporation, its stockholders or members, and other persons in any of the following cases:

a) The director or trustee willfully and knowingly voted for or assented to a patently unlawful corporate act;

b) The director or trustee was guilty of gross negligence or bad faith in directing corporate affairs; and

c) The director or trustee acquired personal or pecuniary interest in conflict with his or her duties as director or
trustee.
Solidary liability with the corporation will also attach in the following instances:

a) "When a director or officer has consented to the issuance of watered stocks or who, having knowledge thereof,
did not forthwith file with the corporate secretary his written objection thereto"; 87

b) "When a director, trustee or officer has contractually agreed or stipulated to hold himself personally and
solidarily liable with the corporation";88 and

c) "When a director, trustee or officer is made, by specific provision of law, personally liable for his corporate
action."89

When there are allegations of bad faith or malice against corporate directors or representatives, it becomes the duty of
courts or tribunals to determine if these persons and the corporation should be treated as one. Without a trial, courts and
tribunals have no basis for determining whether the veil of corporate fiction should be pierced. Courts or tribunals do not
have such prior knowledge. Thus, the courts or tribunals must first determine whether circumstances exist towarrant the
courts or tribunals to disregard the distinction between the corporation and the persons representing it. The determination
of these circumstances must be made by one tribunal or court in a proceeding participated in by all parties involved,
including current representatives of the corporation, and those persons whose personalities are impliedly the sameas the
corporation. This is because when the court or tribunal finds that circumstances exist warranting the piercing of the
corporate veil, the corporate representatives are treated as the corporation itself and should be held liable for corporate
acts. The corporation’s distinct personality is disregarded, and the corporation is seen as a mere aggregation of persons
undertaking a business under the collective name of the corporation.

Hence, when the directors, as in this case, are impleaded in a case against a corporation, alleging malice orbad faith on
their part in directing the affairs of the corporation, complainants are effectively alleging that the directors and the
corporation are not acting as separate entities. They are alleging that the acts or omissions by the corporation that violated
their rights are also the directors’ acts or omissions. 90 They are alleging that contracts executed by the corporation are
contracts executed by the directors. Complainants effectively pray that the corporate veilbe pierced because the cause of
action between the corporation and the directors is the same.

In that case, complainants have no choice but to institute only one proceeding against the parties.1âwphi1 Under the Rules
of Court, filing of multiple suits for a single cause of action is prohibited. Institution of more than one suit for the same
cause of action constitutes splitting the cause of action, which is a ground for the dismissal ofthe others. Thus, in Rule 2:

Section 3. One suit for a single cause of action. — A party may not institute more than one suit for a single cause of
action. (3a)

Section 4. Splitting a single cause of action;effect of. — If two or more suits are instituted on the basis of the same cause
of action, the filing of one or a judgment upon the merits in any one is available as a ground for the dismissal of the
others. (4a)

It is because the personalities of petitioners and the corporation may later be found to be indistinct that we rule that
petitioners may be compelled to submit to arbitration.

However, in ruling that petitioners may be compelled to submit to the arbitration proceedings, we are not overturning
Heirs of Augusto Salas wherein this court affirmed the basic arbitration principle that only parties to an arbitration
agreement may be compelled to submit to arbitration. In that case, this court recognizedthat persons other than the main
party may be compelled to submit to arbitration, e.g., assignees and heirs. Assignees and heirs may be considered parties
to an arbitration agreement entered into by their assignor because the assignor’s rights and obligations are transferred to
them upon assignment. In other words, the assignor’s rights and obligations become their own rights and obligations. In
the same way, the corporation’s obligations are treated as the representative’s obligations when the corporate veil is
pierced. Moreover, in Heirs of Augusto Salas, this court affirmed its policy against multiplicity of suits and unnecessary
delay. This court said that "to split the proceeding into arbitration for some parties and trial for other parties would "result
in multiplicity of suits, duplicitous procedure and unnecessary delay." 91 This court also intimated that the interest of
justice would be best observed if it adjudicated rights in a single proceeding. 92 While the facts of that case prompted this
court to direct the trial court to proceed to determine the issues of thatcase, it did not prohibit courts from allowing the
case to proceed to arbitration, when circumstances warrant.

Hence, the issue of whether the corporation’s acts in violation of complainant’s rights, and the incidental issue of whether
piercing of the corporate veil is warranted, should be determined in a single proceeding. Such finding would determine if
the corporation is merely an aggregation of persons whose liabilities must be treated as one with the corporation.

However, when the courts disregard the corporation’s distinct and separate personality from its directors or officers, the
courts do not say that the corporation, in all instances and for all purposes, is the same as its directors, stockholders,
officers, and agents. It does not result in an absolute confusion of personalities of the corporation and the persons
composing or representing it. Courts merely discount the distinction and treat them as one, in relation to a specific act, in
order to extend the terms of the contract and the liabilities for all damages to erring corporate officials who participated in
the corporation’s illegal acts. This is done so that the legal fiction cannot be used to perpetrate illegalities and injustices.

Thus, in cases alleging solidary liability with the corporation or praying for the piercing of the corporate veil, parties who
are normally treated as distinct individuals should be made to participate in the arbitration proceedings in order to
determine ifsuch distinction should indeed be disregarded and, if so, to determine the extent of their liabilities.

In this case, the Arbitral Tribunal rendered a decision, finding that BF Corporation failed to prove the existence of
circumstances that render petitioners and the other directors solidarily liable. It ruled that petitioners and Shangri-La’s
other directors were not liable for the contractual obligations of Shangri-La to BF Corporation. The Arbitral Tribunal’s
decision was made with the participation of petitioners, albeit with their continuing objection. In view of our discussion
above, we rule that petitioners are bound by such decision.

WHEREFORE, the petition is DENIED. The Court of Appeals' decision of May 11, 2006 and resolution of October 5,
2006 are AFFIRMED.

SO ORDERED.

MARVIC M.V.F. LEONEN

Associate Justice

WE CONCUR:

PRESBITERO J. VELASCO, JR.*

Associate Justice

ARTURO D. BRION
DIOSDADO M.PERALTA**
Associate Justice
Associate Justice
Chairperson

JOSE CATRAL MENDOZA

Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned to the
writer of the opinion of the Court's Division.

ARTURO D. BRION
Associate Justice
ActingChairperson, Second Division

CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution and the Division Acting Chairperson's Attestation, I certify that
the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the
opinion of the Court's Division.

ANTONIO T. CARPIO
Acting Chief Justice