MAJORITY STOCKHOLDERS OF RUBY INDUSTRIAL CORPORATION, Petitioners, vs.

MIGUEL
LIM, in his personal capacity as Stockholder of Ruby Industrial Corporation and representing
the MINORITY STOCKHOLDERS OF RUBY INDUSTRIAL CORPORATION and the
MANAGEMENT COMMITTEE OF RUBY INDUSTRIAL CORPORATION, Respondents.
G.R. No. 165887 June 6, 2011

CHINA BANKING CORPORATION, Petitioner, vs. MIGUEL LIM, in his personal capacity as a
stockholder of Ruby Industrial Corporation and representing the MINORITY STOCKHOLDERS
OF RUBY INDUSTRIAL CORPORATION, Respondent. G.R. No. 165929 VILLARAMA, JR., J.:

This case is brought to us on appeal for the fourth time, involving the same parties and interests
litigating on issues arising from rehabilitation proceedings initiated by Ruby Industrial Corporation
wayback in 1983.

Following is the factual backdrop of the present controversy, as culled from the records and facts set
forth in the ponencia of Chief Justice Reynato S. Puno in Ruby Industrial Corporation v. Court of
Appeals.1

The Antecedents

Ruby Industrial Corporation (RUBY) is a domestic corporation engaged in glass manufacturing.

Reeling from severe liquidity problems beginning in 1980, RUBY filed on December 13, 1983 a
petition for suspension of payments with the Securities and Exchange Commission (SEC) docketed
as SEC Case No. 2556. On December 20, 1983, the SEC issued an order declaring RUBY under
suspension of payments and enjoining the disposition of its properties pending hearing of the petition,
except insofar as necessary in its ordinary operations, and making payments outside of the
necessary or legitimate expenses of its business.

On August 10, 1984, the SEC Hearing Panel created the management committee (MANCOM) for
RUBY, composed of representatives from Allied Leasing and Finance Corporation (ALFC), Philippine
Bank of Communications (PBCOM), China Banking Corporation (China Bank), Pilipinas Shell
Petroleum Corporation (Pilipinas Shell), and RUBY represented by Mr. Yu Kim Giang. The MANCOM
was tasked to perform the following functions: (1) undertake the management of RUBY; (2) take
custody and control over all existing assets and liabilities of RUBY; (3) evaluate RUBY’s existing
assets and liabilities, earnings and operations; (4) determine the best way to salvage and protect the
interest of its investors and creditors; and (5) study, review and evaluate the proposed rehabilitation
plan for RUBY.

Subsequently, two (2) rehabilitation plans were submitted to the SEC: the BENHAR/RUBY
Rehabilitation Plan of the majority stockholders led by Yu Kim Giang, and the Alternative Plan of the
minority stockholders represented by Miguel Lim (Lim).

Under the BENHAR/RUBY Plan, Benhar International, Inc. (BENHAR) -- a domestic corporation
engaged in the importation and sale of vehicle spare parts which is wholly owned by the Yu family
and headed by Henry Yu, who is also a director and majority stockholder of RUBY -- shall lend its
₱60 million credit line in China Bank to RUBY, payable within ten (10) years. Moreover, BENHAR
shall purchase the credits of RUBY’s creditors and mortgage RUBY’s properties to obtain credit
facilities for RUBY. Upon approval of the rehabilitation plan, BENHAR shall control and manage
RUBY’s operations. For its service, BENHAR shall receive a management fee equivalent to 7.5% of
RUBY’s net sales.
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The BENHAR/RUBY Plan was opposed by 40% of the stockholders, including Lim, a minority
shareholder of RUBY. ALFC, the biggest unsecured creditor of RUBY and chairman of the
management committee, also objected to the plan as it would transfer RUBY’s assets beyond the
reach and to the prejudice of its unsecured creditors.

On the other hand, the Alternative Plan of RUBY’s minority stockholders proposed to: (1) pay all
RUBY’s creditors without securing any bank loan; (2) run and operate RUBY without charging
management fees; (3) buy-out the majority shares or sell their shares to the majority stockholders; (4)
rehabilitate RUBY’s two plants; and (5) secure a loan at 25% interest, as against the 28% interest
charged in the loan under the BENHAR/RUBY Plan.

Both plans were endorsed by the SEC to the MANCOM for evaluation.

On October 28, 1988, the SEC Hearing Panel approved the BENHAR/RUBY Plan. The minority
stockholders thru Lim appealed to the SEC En Banc which, in its November 15, 1988 Order, enjoined
the implementation of the BENHAR/RUBY Plan. On December 20, 1988 after the expiration of the
temporary restraining order (TRO), the SEC En Banc granted the writ of preliminary injunction
against the enforcement of the BENHAR/RUBY Plan. BENHAR, Henry Yu, RUBY and Yu Kim Giang
questioned the issuance of the writ in their petition filed in the Court of Appeals (CA), docketed as
CA-G.R. SP No. 16798. The CA denied their appeal.2 Upon elevation to this Court (G.R. No. L-
88311), we issued a minute resolution dated February 28, 1990 denying the petition and upholding
the injunction against the implementation of the BENHAR/RUBY Plan.

Meanwhile, BENHAR paid off Far East Bank & Trust Company (FEBTC), one of RUBY’s secured
creditors. By May 30, 1988, FEBTC had already executed a deed of assignment of credit and
mortgage rights in favor of BENHAR. BENHAR likewise paid the other secured creditors who, in turn,
assigned their rights in favor of BENHAR. These acts were done by BENHAR despite the SEC’s TRO
and injunction and even before the SEC Hearing Panel approved the BENHAR/RUBY Plan on
October 28, 1988.

ALFC and Miguel Lim moved to nullify the deeds of assignment executed in favor of BENHAR and
cite the parties thereto in contempt for willful violation of the December 20, 1983 SEC order enjoining
RUBY from disposing its properties and making payments pending the hearing of its petition for
suspension of payments. They also charged that in paying off FEBTC’s credits, FEBTC was given
undue preference over the other creditors of RUBY. Acting on the motions, the SEC Hearing Panel
nullified the deeds of assignment executed by RUBY’s creditors in favor of BENHAR and declared
the parties thereto guilty of indirect contempt. BENHAR and RUBY appealed to the SEC En Banc
which denied their appeal. BENHAR and RUBY joined by Henry Yu and Yu Kim Giang appealed to
the CA (CA-G.R. SP No. 18310). By Decision3 dated August 29, 1990, the CA affirmed the SEC
ruling nullifying the deeds of assignment. The CA also declared its decision final and executory as to
RUBY and Yu Kim Giang for their failure to file their pleadings within the reglementary period. By
Resolution dated August 26, 1991 in G.R. No. 96675,4 this Court affirmed the CA’s decision.

Earlier, on May 29, 1990, after the SEC En Banc enjoined the implementation of BENHAR/RUBY
Plan, RUBY filed with the SEC En Banc an ex parte petition to create a new management committee
and to approve its revised rehabilitation plan (Revised BENHAR/RUBY Plan). Under the revised plan,
BENHAR shall receive ₱34.068 million of the ₱60.437 Million credit facility to be extended to RUBY,
as reimbursement for BENHAR’s payment to some of RUBY’s creditors. The SEC En Banc directed
RUBY to submit its revised rehabilitation plan to its creditors for comment and approval while the
petition for the creation of a new management committee was remanded for further proceedings to
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the SEC Hearing Panel. The Alternative Plan of RUBY’s minority stockholders was also forwarded to
the hearing panel for evaluation.

On April 26, 1991, over ninety percent (90%) of RUBY’s creditors objected to the Revised
BENHAR/RUBY Plan and the creation of a new management committee. Instead, they endorsed the
minority stockholders’ Alternative Plan. At the hearing of the petition for the creation of a new
management committee, three (3) members of the original management committee (Lim, ALFC and
Pilipinas Shell) opposed the Revised BENHAR/RUBY Plan on grounds that: (1) it would legitimize the
entry of BENHAR, a total stranger, to RUBY as BENHAR would become the biggest creditor of
RUBY; (2) it would put RUBY’s assets beyond the reach of the unsecured creditors and the minority
stockholders; and (3) it was not approved by RUBY’s stockholders in a meeting called for the
purpose.

Notwithstanding the objections of 90% of RUBY’s creditors and three members of the MANCOM, the
SEC Hearing Panel approved on September 18, 1991 the Revised BENHAR/RUBY Plan and
dissolved the existing management committee. It also created a new management committee and
appointed BENHAR as one of its members. In addition to the powers originally conferred to the
management committee under Presidential Decree (P.D.) No. 902-A, the new management
committee was tasked to oversee the implementation by the Board of Directors of the revised
rehabilitation plan for RUBY.

The original management committee (MANCOM), Lim and ALFC appealed to the SEC En Banc
which affirmed the approval of the Revised BENHAR/RUBY Plan and the creation of a new
management committee on July 30, 1993. To ensure that the management of RUBY will not be
controlled by any group, the SEC appointed SEC lawyers Ruben C. Ladia and Teresita R. Siao as
additional members of the new management committee. Further, it declared that BENHAR’s
membership in the new management committee is subject to the condition that BENHAR will extend
its credit facilities to RUBY without using the latter’s assets as security or collateral.

Lim, ALFC and MANCOM moved for reconsideration while RUBY and BENHAR asked the SEC to
reconsider the portion of its Order prohibiting BENHAR from utilizing RUBY’s assets as collateral. On
October 15, 1993, the SEC denied the motion of Lim, ALFC and the original management committee
but granted RUBY and BENHAR’s motion and allowed BENHAR to use RUBY’s assets as collateral
for loans, subject to the approval of the majority of all the members of the new management
committee. Lim, ALFC and MANCOM appealed to the CA (CA-G.R. SP Nos. 32404, 32469 & 32483)
which by Decision5 dated March 31, 1995 set aside the SEC’s approval of the Revised
BENHAR/RUBY Plan and remanded the case to the SEC for further proceedings. The CA ruled that
the revised plan circumvented its earlier decision (CA-G.R. SP No. 18310) nullifying the deeds of
assignment executed by RUBY’s creditors in favor of BENHAR. Since under the revised plan,
BENHAR was to receive ₱34.068 Million of the ₱60.437 Million credit facility to be extended to
RUBY, as settlement for its advance payment to RUBY’s seven (7) secured creditors, such payments
made by BENHAR under the void Deeds of Assignment, in effect were recognized as payable to
BENHAR under the revised plan. The motion for reconsideration filed by BENHAR and RUBY was
likewise denied by the CA.6

Undaunted, RUBY and BENHAR filed a petition for review in this Court (G.R. Nos. 124185-87 entitled
Ruby Industrial Corporation v. Court of Appeals) alleging that the CA gravely abused its discretion in
substituting its judgment for that of the SEC, and in allowing Lim, ALFC and MANCOM to file
separate petitions prepared by lawyers representing themselves as belonging to different firms. By
Decision7 dated January 20, 1998, we sustained the CA’s ruling that the Revised BENHAR/RUBY
3
Plan contained provisions which circumvented its final decision in CA-G.R. SP No. 18310, nullifying
the deeds of assignment of credits and mortgages executed by RUBY’s creditors in favor of
BENHAR, as well as this Court’s Resolution in G.R. No. 96675, affirming the said CA’s decision. We
thus held:

…Specifically, the Revised BENHAR/RUBY Plan considered as valid the advance payments made
by BENHAR in favor of some of RUBY’s creditors. The nullity of BENHAR’s unauthorized dealings
with RUBY’s creditors is settled. The deeds of assignment between BENHAR and RUBY’s creditors
had been categorically declared void by the SEC Hearing Panel in two (2) orders issued on January
12, 1989 and March 15, 1989. x x x

These orders were upheld by the SEC en banc and the Court of Appeals. In CA-G.R. SP No. 18310,
the Court of Appeals ruled as follows:

"1) x x x when the Deed of Assignment was executed on May 30, 1988 by and between Ruby
Industrial Corp., Benhar International, Inc., and FEBTC, the Rehabilitation Plan proposed by
petitioner Ruby Industrial Corp. for Benhar International, Inc. to assume all petitioner’s
obligation has not been approved by the SEC. The Rehabilitation Plan was not approved until
October 28, 1988. There was a willful and blatant violation of the SEC order dated December
20, 1983 on the part of petitioner Ruby Industrial Corp., represented by Yu Kim Giang, by
Benhar International, Inc., represented by Henry Yu and by FEBTC….

"2) The magnitude and coverage of the transactions involved were such that Yu Kim Giang
and the other signatories cannot feign ignorance or pretend lack of knowledge thereto in view
of the fact that they were all signatories to the transaction and privy to all the negotiations
leading to the questioned transactions. In executing the Deeds of Assignment, the petitioners
totally disregarded the mandate contained in the SEC order not to dispose the properties of
Ruby Industrial Corp. in any manner whatsoever pending the approval of the Rehabilitation
Plan and rendered illusory the SEC efforts to rehabilitate the petitioner corporation to the best
interests of all the creditors.

"3) The assignments were made without prior approval of the Management Committee created
by the SEC in an Order dated August 10, 1984. Under Sec. 6, par. d, sub. par. (2) of P.D. 902-
A as amended by P.D. 1799, the Management Committee, rehabilitation receiver, board or
body shall have the power to take custody and control over all existing assets of such entities
under management notwithstanding any provision of law, articles of incorporation or by-law to
the contrary. The SEC therefore has the power and authority, through a Management
Committee composed of petitioner’s creditors or through itself directly, to declare all
assignment of assets of the petitioner Corporation declared under suspension of payments,
null and void, and to conserve the same in order to effect a fair, equitable and meaningful
rehabilitation of the insolvent corporation."

"4) x x x. The acts for which petitioners were held in indirect contempt by the SEC arose from
the failure or willful refusal by petitioners to obey the lawful order of the SEC not to dispose of
any of its properties in any manner whatsoever without authority or approval of the SEC. The
execution of the Deeds of Assignment tend to defeat or obstruct the administration of justice.
Such acts are offenses against the SEC because they are calculated to embarrass, hinder and
obstruct the tribunal in the administration of justice or lessen its authority.

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Even the SEC en banc, in its July 30, 1993 Order affirming the approval of the Revised
BENHAR/RUBY Plan, has acknowledged the invalidity of the subject deeds of assignment. However,
to justify it’s approval of the plan and the appointment of BENHAR to the new management
committee, it gave the lame excuse that BENHAR became RUBY’s creditor for having paid RUBY’s
debts. x x x

For its part, the Court of Appeals noted that the approved Revised BENHAR/RUBY Plan gave undue
preference to BENHAR. The records, indeed, show that BENHAR’s offer to lend its credit facility in
favor of RUBY is conditioned upon the payment of the amount it advanced to RUBY’s creditors, x x x

In fact, BENHAR shall receive P34.068 Million out of the P60.437 Million credit facility to be extended
to RUBY for the latter’s rehabilitation.

Rehabilitation contemplates a continuance of corporate life and activities in an effort to restore and
reinstate the corporation to its former position of successful operation and solvency. When a
distressed company is placed under rehabilitation, the appointment of a management committee
follows to avoid collusion between the previous management and creditors it might favor, to the
prejudice of the other creditors. All assets of a corporation under rehabilitation receivership are held
in trust for the equal benefit of all creditors to preclude one from obtaining an advantage or
preference over another by the expediency of attachment, execution or otherwise. As between the
creditors, the key phrase is equality in equity. Once the corporation threatened by bankruptcy is taken
over by a receiver, all the creditors ought to stand on equal footing. Not any one of them should be
paid ahead of the others. This is precisely the reason for suspending all pending claims against the
corporation under receivership.8(Additional emphasis supplied.)

Aside from the undue preference that would have been given to BENHAR under the Revised
BENHAR/RUBY Plan, we also found RUBY’s dealing with BENHAR highly irregular and its proposed
financing scheme more costly and ultimately prejudicial to RUBY. Thus:

Parenthetically, BENHAR is a domestic corporation engaged in importing and selling vehicle spare
parts with an authorized capital stock of thirty million pesos. Yet, it offered to lend its credit facility in
the amount of sixty to eighty million pesos to RUBY. It is to be noted that BENHAR is not a lending or
financing corporation and lending its credit facilities, worth more than double its authorized
capitalization, is not one of the powers granted to it under its Articles of Incorporation. Significantly,
Henry Yu, a director and a majority stockholder of RUBY is, at the same time, a stockholder of
BENHAR, a corporation owned and controlled by his family. These circumstances render the deals
between BENHAR and RUBY highly irregular.

Moreover, when RUBY initiated its petition for suspension of payments with the SEC, BENHAR was
not listed as one of RUBY’s creditors. BENHAR is a total stranger to RUBY. If at all, BENHAR only
served as a conduit of RUBY. As aptly stated in the challenged Court of Appeals decision:

"Benhar’s role in the Revised Benhar/Ruby Plan, as envisioned by the majority stockholders, is to
contract the loan for Ruby and, serving the role of a financier, relend the same to Ruby. Benhar is
merely extending its credit line facility with China Bank, under which the bank agrees to advance
funds to the company should the need arise. This is unlikely a loan in which the entire amount is
made available to the borrower so that it can be used and programmed for the benefit of the
company’s financial and operational needs. Thus, it is actually China Bank which will be the source of
the funds to be relent to Ruby. Benhar will not shell out a single centavo of its own funds. It is the
assets of Ruby which will be mortgaged in favor of Benhar. Benhar’s participation will only make the
5
rehabilitation plan more costly and, because of the mortgage of its (Ruby’s) assets to a new creditor,
will create a situation which is worse than the present. x x x"

We need not say more.9 (Additional emphasis supplied.)

After the finality of the above decision, the SEC set the case for further proceedings.10 On March 14,
2000, Bank of the Philippine Islands (BPI), one of RUBY’s secured creditors, filed a Motion to Vacate
Suspension Order11 on grounds that there is no existing management committee and that no
decision has been rendered in the case for more than 16 years already, which is beyond the period
mandated by Sec. 3-8 of the Rules of Procedure on Corporate Recovery. RUBY filed its
opposition,12 asserting that the MANCOM never relinquished its status as the duly appointed
management committee as it resisted the orders of the second and third management committees
subsequently created, which have been nullified by the CA and later this Court. As to the applicability
of the cited rule under the Rules on Corporate Recovery, RUBY pointed out that this case was filed
long before the effectivity of said rules. It also pointed out that the undue delay in the approval of the
rehabilitation plan being due to the numerous appeals taken by the minority stockholders and
MANCOM to the CA and this Court, from the SEC approval of the BENHAR/RUBY Plan. Since there
have already been steps taken to finally settle RUBY’s obligations with its creditors, it was contended
that the application of the mandatory period under the cited provision would cause prejudice and
injustice to RUBY.

It appears that even earlier during the pendency of the appeals in the CA, BENHAR and RUBY have
performed other acts in pursuance of the BENHAR/RUBY Plan approved by the SEC.

On September 1, 1996, Lim received a Notice of Stockholders’ Meeting scheduled on September 3,

1996 signed by a certain Mr. Edgardo M. Magtalas, the "Designated Secretary" of RUBY and stating
the matters to be taken up in said meeting, which include the extension of RUBY’s corporate term for
another twenty-five (25) years and election of Directors.13 At the scheduled stockholders’ meeting of
September 3, 1996, Lim together with other minority stockholders, appeared in order to put on record
their objections on the validity of holding thereof and the matters to be taken therein. Specifically,
they questioned the percentage of stockholders present in the meeting which the majority claimed
stood at 74.75% of the outstanding capital stock of RUBY.

The aforesaid stockholders meeting was the subject of the Motion to Cite For Contempt14 and
Supplement to Motion to Cite For Contempt15 filed by Lim before the CA where their petitions for
review (CA-G.R. Nos. 32404, 32469 and 32483) were then pending. Lim argued that the majority
stockholders claimed to have increased their shares to 74.75% by subscribing to the unissued shares
of the authorized capital stock (ACS). Lim pointed out that such move of the majority was in
implementation of the BENHAR/RUBY Plan which calls for capital infusion of ₱11.814 Million
representing the unissued and unsubscribed portion of the present ACS of ₱23.7 Million, and the
Revised BENHAR/RUBY Plan which proposed an additional subscription of ₱30 Million. Since the
implementation of both majority plans have been enjoined by the SEC and CA, the calling of the
special stockholders meeting by the majority stockholders clearly violated the said injunction orders.
This circumstance certainly affects the determination of quorum, the voting requirements for
corporate term extension, as well as the election of Directors pursuant to the July 30, 1993 Order and
October 15, 1993 Resolution of the SEC enjoining not only the implementation of the revised plan but
also the doing of any act that may render the appeal from the approval of the said plan moot and
academic.

6
The aforementioned capital infusion was taken up by RUBY’s board of directors in a special
meeting16 held on October 2, 1991 following the issuance by the SEC of its Order dated September
18, 199117 approving the Revised BENHAR/RUBY Plan and creating a new management committee
to oversee its implementation. During the said meeting, the board asserted its authority and resolved
to take over the management of RUBY’s funds, properties and records and to demand an accounting
from the MANCOM which was ordered dissolved by the SEC. The board thus resolved that:

The corporation be authorized to issue out of the unissued portion of the authorized capital stocks of
the corporation in the form of common stocks 11.8134.00 [Million] after comparing this with the
audited financial statement prepared by SGV as of December 31, 1982, to be subscribed and paid in
full by the present stockholders in proportion to their present stockholding in the corporation on
staggered basis starting October 28, December 27 then February 28 and April 28 as the last
installment date at 25% for each period. It was also moved and seconded that should any of the
stockholders fail to exercise their rights to buy the number of shares they are qualified to buy by
making the first installment payment of 25% on or before October 13, 1991, then the other
stockholders may buy the same and that only when none of the present stockholders are interested
in the shares may there be a resort to selling them by public auction.18

As reflected in the Minutes of the special board meeting, a representative of the absent directors (Tan
Chai, Tomas Lim, Miguel Lim and Yok Lim) came to submit their letter addressed to the Chairman
suggesting that said meeting be deferred until the September 18, 1991 SEC Order becomes final and
executory. The directors present nevertheless proceeded with the meeting upon their belief that
neither appeal nor motion for reconsideration can stay the SEC order.19

The resolution to extend RUBY’s corporate term, which was to expire on January 2, 1997, was
approved during the September 3, 1996 stockholders meeting, as recommended by the board of
directors composed of Henry Yu (Chairman), James Yu, David Yukimteng, Harry L. Yu, Yu Kim
Giang, Mary L. Yu and Vivian L. Yu. The board certified that said resolution was approved by
stockholders representing two-thirds (2/3) of RUBY’s outstanding capital stock.20 Per
Certification21 dated August 31, 1995 issued by Yu Kim Giang as Executive Vice-President of RUBY,
the majority stockholders own 74.75% of RUBY’s outstanding capital stock as of October 27, 1991.
The Amended Articles of Incorporation was filed with the SEC on September 24, 1996.22

On March 17, 2000, Lim filed a Motion23 informing the SEC of acts being performed by BENHAR and
RUBY through directors who were illegally elected, despite the pendency of the appeal before this
Court questioning the SEC approval of the BENHAR/RUBY Plan and creation of a new management
committee, and after this Court had denied their motion for reconsideration of the January 20, 1998
decision in G.R. Nos. 124185-87. Lim reiterated that before the matter of extension of corporate life
can be passed upon by the stockholders, it is necessary to determine the percentage ownership of
the outstanding shares of the corporation. The majority stockholders claimed that they have
increased their shareholdings from 59.828% to 74.75% as a result of the illegal and invalid
stockholders’ meeting on September 3, 1996. The additional subscription of shares cannot be done
as it implements the BENHAR/RUBY Plan against which an existing injunction is still effective based
on the SEC Order dated January 6, 1989, and which was struck down under the final decision of this
Court in G.R. Nos. 124185-87. Hence, the implementation of the new percentage stockholdings of
the majority stockholders and the calling of stockholders’ meeting and the subsequent resolution
approving the extension of corporate life of RUBY for another twenty-five (25) years, were all done in
violation of the decisions of the CA and this Court, and without compliance with the legal
requirements under the Corporation Code. There being no valid extension of corporate term, RUBY’s
corporate life had legally ceased. Consequently, Lim moved that the SEC: (1) declare as null and
7
void the infusion of additional capital made by the majority stockholders and restore the capital
structure of RUBY to its original structure prior to the time injunction was issued; and (2) declare as
null and void the resolution of the majority stockholders extending the corporate life of RUBY for
another twenty-five (25) years.

The MANCOM concurred with Lim and made a similar manifestation/comment24 regarding the
irregular and invalid capital infusion and extension of RUBY’s corporate term approved by
stockholders representing only 60% of RUBY’s outstanding capital stock. It further stated that the
foregoing acts were perpetrated by the majority stockholders without even consulting the MANCOM,
which technically stepped into the shoes of RUBY’s board of directors. Since RUBY was still under a
state of suspension of payment at the time the special stockholders’ meeting was called, all corporate
acts should have been made in consultation and close coordination with the MANCOM.

Lim likewise filed an Opposition25 to BPI’s Motion to Vacate Suspension Order, asserting that the
management committee originally created by the SEC continues to control the corporate affairs and
properties of RUBY. He also contended that the SEC Rules of Procedure on Corporate
Recovery cannot apply in this case which was filed long before the effectivity of said rules.

On the other hand, RUBY filed its Opposition26 to the Motion filed by Lim denying the allegation of
Lim that RUBY’s corporate existence had ceased. RUBY claimed that due notice were given to all
stockholders of the October 2, 1991 special meeting in which the infusion of additional capital was
discussed. It further contended that the CA decision setting aside the SEC orders approving the
Revised BENHAR/RUBY Plan, which was subsequently affirmed by this Court on January 20, 1998,
did not nullify the resolution of RUBY’s board of directors to issue the previously unissued shares.
The amendment of its articles of incorporation on the extension of RUBY’s corporate term was duly
submitted with and approved by the SEC as per the Certification dated September 24, 1996.

The MANCOM also filed its Opposition27 to BPI’s Motion to Vacate Suspension Order, stating that it
has continuously performed its primary function of preserving the assets of RUBY and undertaken
the management of RUBY’s day-to-day affairs. It expressed belief that between chaotic foreclosure
proceedings and collection suits that would be triggered by the vacation of the suspension order and
an orderly settlement of creditors’ claims before the SEC, the latter path is the more prudent and
logical course of action. On April 28, 2000, it submitted to the court copies of the minutes of meetings
held from January 18, 1999 to December 1, 1999 in pursuance of its mandate to preserve the assets
and administer the business affairs of RUBY.28

On August 23, 2000, China Bank filed a Manifestation29 echoing the contentions of BPI that as there
is no existing management committee and no rehabilitation plan approved even after the 240-day
period, warrants the application of Sec. 4-9 of the SEC Rules of Procedure on Corporate
Recovery such that the petition is "deemed ipso facto denied and dismissed." China Bank lamented
that the length of time that has lapsed, as well as the parties’ actuations, completely betrays a
genuine attempt to rehabilitate RUBY’s moribund operations – all to the dismay, damage and
prejudice of RUBY’s creditors. It stressed that the proceedings cannot be prolonged nor used as a
ploy to defer indefinitely the payment of long overdue obligations of RUBY to its creditors. With the
case having been ipso facto dismissed, there is no need of further action from the parties or an order
from the SEC. Consequently, RUBY’s creditors may now take whatever legal action they may deem
appropriate to protect their rights including, but not limited to extrajudicial foreclosure.

On September 11, 2000, the SEC granted Lim’s request for the issuance of subpoena duces
tecum/ad testificandum to Ms. Jocelyn Sta. Ana of BPI for the latter to testify and bring all documents
8
and records pertaining to RUBY.30 Earlier, Lim moved for a hearing to verify the information that
China Bank and BPI had separately executed deeds of assignment in favor of Greener Investment
Corporation, a company owned by Yu Kim Giang, one of RUBY’s majority stockholders.31 Said
hearing, however, did not push through in view of RUBY’s proposal for a compromise
agreement.32 Lim submitted his comments on the Proposed Compromise Agreement, but there was
no response from RUBY and the majority stockholders.33 The minority stockholders likewise served a
copy of the revised Compromise Agreement to the majority stockholders.34 Lim moved that the case
be assigned to a new Panel of Hearing Officers and the majority stockholders be made to declare in
a hearing whether they accept the counterproposals of the minority in their draft Amicable Settlement
in order that the case can proceed immediately to liquidation.35

On January 25, 2001, the MANCOM filed with the SEC its Resolution unanimously adopted on
January 19, 2001 affirming that: (1) MANCOM was never informed nor advised of the supposed
capital infusion by the majority stockholders in October 1991 and it never actually received any such
additional subscription nor signed any document attesting to or authorizing the said increase of
RUBY’s capital stock or the extension of its corporate life; (2) MANCOM continuously recognizes the
60%-40% ratio of shareholding profile between the majority and minority stockholders, with the
majority having 59.828% while the minority holds 40.172% shareholding; (3) as there was no valid
increase in the shareholding of the majority and consequently no valid extension of corporate term,
the liquidation of RUBY is thus in order; (4) to date, the majority stockholders or Yu Kim Giang have
not complied with the December 22, 1989 SEC order for them to turn over the cash including bank
deposits, all other financial records and documents of RUBY including transfer certificates of title over
its real properties, and render an accounting of all the money received by RUBY; and (5) pursuant to
this Court’s ruling in G.R. No. 96675 dated August 26, 1991, the previous deeds of assignment made
in favor of BENHAR by Florence Damon, Philippine Bank of Communications, Philippine Commercial
International Bank, Philippine Trust Company, PCI Leasing and Finance, Inc. and FEBTC, having
been earlier declared void by the SEC Hearing Panel, and the CA decision in CA-G.R. SP No. 18310
affirmed by this Court – have no legal effect and are deemed void.36

On the other hand, Lim filed a Supplement (to Manifestation and Motion dated January 18,
2001)37 reiterating his pending motion filed on March 15, 2000 for the SEC to implement this Court’s
January 20, 1998 Decision in G.R. Nos. 124185-87 which states in part that "[t]he SEC therefore has
the power and authority, directly to declare all assignment of assets of the petitioner Corporation
declared under suspension of payments, null and void, and to conserve the same in order to effect a
fair, equitable and meaningful rehabilitation of the insolvent corporation." Lim contended that the SEC
retains jurisdiction over pending suspension of payment/rehabilitation cases filed as of June 30, 2000
until these are finally disposed, pursuant to Sec. 5.2 of the Securities Regulation Code (Republic Act
[R.A.] No. 8799). Considering that the Management Committee is intact, the majority stockholders
cannot act in an illegal manner with regard to RUBY’s assets. He thus concluded that the continued
disobedience of the majority stockholders to the orders and decisions of the SEC and CA, as affirmed
by this Court, have certainly rendered any additional assignments, such as the Deeds of Assignment
executed by BPI and China Bank with BENHAR, Henry Yu or conduits of the majority stockholders,
null and void.

The MANCOM manifested that it is adopting in toto the Manifestation and Motion dated January 18,
2001 filed by Lim. It also moved for the SEC to conduct further proceedings as directed by this Court.
Considering that there is no chance at all for the proposed rehabilitation of RUBY in light of strict
implementation by government authorities of environmental laws particularly on pollution control, and
MANCOM’s assent to effect a liquidation, the MANCOM asserted that a hearing should focus on the
eventual liquidation of RUBY. It added that a dismissal under the circumstances would be tantamount
9
to a perceived shirking by the SEC of its mandate to afford all creditors ample opportunity to recover
on their respective financial exposure with RUBY.38

On May 15, 2001, the MANCOM submitted copies of minutes of meetings held from April 13, 2000 to
December 29, 2000.39

On September 20, 2001, the SEC issued an Order directing the Management Committee to submit a
detailed report – not mere minutes of meetings -- on the status of the rehabilitation process and
financial condition of RUBY, which should contain a statement on the feasibility of the rehabilitation
plan.40 The MANCOM complied with the said order on February 15, 2002.41 The majority
stockholders and RUBY moved to dismiss the petition and strike from the records the
Compliance/Report. MANCOM filed its omnibus opposition to the said motions. There was further
exchange of pleadings by the parties on the matter of whether the SEC should already dismiss the
petition of RUBY as prayed for by the majority stockholders and RUBY, or proceed with supervised
liquidation of RUBY as proposed by the MANCOM and minority stockholders.

The SEC’s Ruling

On September 18, 2002, the SEC issued its Order42 denying the petition for suspension of payments,
as follows:

WHEREFORE, in view of the foregoing, the Commission hereby resolves to terminate the
proceedings and DENY the instant petition.

Accordingly, pursuant to Sec. 5-5 of the SEC’s Rules of Procedure on Corporate Recovery, which
provides:

"Discharge of the Management Committee -- The Management Committee shall be discharged and
dissolved under the following circumstances:

a. Whenever the Commission, on motion or motu prop[r]io, has determined that the necessity
for the Management Committee no longer exists;

b. Upon the appointment of a liquidator under these Rules;

c. By agreement of the parties;

d. Upon termination of the proceedings.

Upon its discharge and dissolution, the Management Committee shall submit its final report and
render an accounting of its management within such reasonable time as the Commission may allow."

the Management Committee is hereby DISSOLVED. It is likewise ordered to:

(1) Make an inventory of the assets, funds and properties of the petitioner;

(2) Turn-over the aforementioned assets, funds and properties to the proper party(ies);

(3) Render an accounting of its management; and

(4) Submit its Final Report to the Commission.

10
The MANCOM is ordered to comply with the foregoing within a non-extendible period of thirty (30)
days from receipt of this Order. Relative to any compensation owing to the MANCOM, it is left to the
determination of the parties concerned. No pronouncement as to costs. SO ORDERED.43

The SEC declared that since its order declaring RUBY under a state of suspension of payments was
issued on December 20, 1983, the 180-day period provided in Sec. 4-9 of the Rules of Procedure on
Corporate Recovery had long lapsed. Being a remedial rule, said provision can be applied
retroactively in this case. The SEC also overruled the objections raised by the minority stockholders
regarding the questionable issuance of shares of stock by the majority stockholders and extension of
RUBY’s corporate term, citing the presumption of regularity in the act of a government entity which
obtains upon the SEC’s approval of RUBY’s amendment of articles of incorporation. It pointed out
that Lim raised the issue only in the year 2000. Moreover, the SEC found that notwithstanding his
allegations of fraud, Lim never proved the illegality of the additional infusion of the capitalization by
RUBY so as to warrant a finding that there was indeed an unlawful act.44

Lim, in his personal capacity and in representation of the minority stockholders of RUBY, filed a
petition for review with prayer for a temporary restraining order and/or writ of preliminary injunction
before the CA (CA-G.R. SP No. 73195) assailing the SEC order dismissing the petition and
dissolving the MANCOM.

Ruling of the CA

On May 26, 2004, the CA rendered its Decision,45 the dispositive portion of which states:

WHEREFORE, the Questioned Order dated 18 September 2002 issued by the Securities and
Exchange Commission in SEC Case No. 2556 entitled "In the Matter of the Petition for Suspension of
Payments, Ruby Industrial Corporation, Petitioner," is hereby SET ASIDE, and consequently:

(1) the infusion of additional capital made by the majority stockholders be declared null and
void and restoring the capital structure of Ruby to its original structure prior to the time the
injunction was issued, that is, majority stockholders – 59.828% and the minority stockholders –
40.172% of the authorized capital stock of Ruby Industrial Corporation.

(2) the resolution of the majority stockholders, who represents only 59.828% of the outstanding
capital stock of Ruby, extending the corporate life of Ruby for another twenty-five (25) years
which was made during the supposed stockholders’ meeting held on 03 September 1996 be
declared null and void;

(3) implementing the invalidation of any and all illegal assignments of credit/purchase of credits
and the cancellation of mortgages connected therewith made by the creditors of Ruby
Industrial Corporation during the effectivity of the suspension of payments order including that
of China Bank and BPI and to deliver to MANCOM or the Liquidator all the original of the
Deeds of Assignments and the registered titles thereto and any other documents related
thereto; and order their unwinding and requiring the majority stockholders to account for all
illegal assignments (amounts, dates, interests, etc. and present the original documents
supporting the same); and

(4) ordering the Securities and Exchange Commission to supervise the liquidation of Ruby
Industrial Corporation after the foregoing steps shall have been undertaken. SO ORDERED.46

11
According to the CA, the SEC erred in not finding that the October 2, 1991 meeting held by RUBY’s
board of directors was illegal because the MANCOM was neither involved nor consulted in the
resolution approving the issuance of additional shares of RUBY.

The CA further noted that the October 2, 1991 board meeting was conducted on the basis of the
September 18, 1991 order of the SEC Hearing Panel approving the Revised BENHAR/RUBY Plan,
which plan was set aside under this Court’s January 20, 1998 Decision in G.R. Nos. 124185-87. The
CA pointed out that records confirmed the proposed infusion of additional capital for RUBY’s
rehabilitation, approved during said meeting, as implementing the Revised BENHAR/RUBY Plan.
Necessarily then, such capital infusion is covered by the final injunction against the implementation of
the revised plan. It must be recalled that this Court affirmed the CA’s ruling that the revised plan not
only recognized the void deeds of assignments entered into with some of RUBY’s creditors in
violation of the CA’s decision in CA-G.R. SP No. 18310, but also maintained a financing scheme
which will just make the rehabilitation plan more costly and create a worse situation for RUBY.

On the supposed delay of the minority stockholders in raising the issue of the validity of the infusion
of additional capital effected by the board of directors, the CA held that laches is inapplicable in this
case. It noted that Lim sought relief while the case is still pending before the SEC. If ever there was
delay, the same is not fatal to the cause of the minority stockholders.

The CA likewise faulted the SEC in relying on the presumption of regularity on the matter of the
extension of RUBY’s corporate term through the filing of amended articles of incorporation. In doing
so, the CA totally disregarded the evidence which rebutted said presumption, as demonstrated by
Lim: (1) it was the board of directors and not the stockholders which conducted the meeting without
the approval of the MANCOM; (2) there was no written waivers of the minority stockholders’ pre-
emptive rights and thus it was irregular to merely notify them of the board of directors’ meeting and
ask them to exercise their option; (3) there was an existing permanent injunction against any
additional capital infusion on the BENHAR/RUBY Plan, while the CA and this Court both rejected the
Revised BENHAR/RUBY Plan; (4) there was no General Information Sheet reports made to the SEC
on the alleged capital infusion, as per certification by the SEC; (5) the Certification stating the present
percentage of majority shareholding, dated December 21, 1993 and signed by Yu Kim Giang -- which
was not sworn to before a Notary Public -- was supposedly filed in 1996 with the SEC but it does not
bear a stamped date of receipt, and was only attached in a 2000 motion long after the October 1991
board meeting; (6) said Certification was contradicted by the SEC list of all stockholders of RUBY, in
which the majority remained at 59.828% and the minority shareholding at 40.172% as of October 27,
1991; (7) certain receipts for the amount of ₱1.7 million was presented by the majority stockholders
only in the year 2000, long after Lim questioned the inclusion of extension of corporate term in the
Notice of Meeting when Lim filed before the CA a motion to cite for contempt (CA-G.R. Nos. 32404,
32469 and 32483); and (8) this Court’s decisions in the cases elevated to it had recognized the 40%
stockholding of the minority. Upon the foregoing grounds, the CA said that the SEC should have
invalidated the resolution extending the corporate term of RUBY for another twenty-five (25) years.

With the expiration of the RUBY’s corporate term, the CA ruled that it was error for the SEC in not
commencing liquidation proceedings. As to the dismissal of RUBY’s petition for suspension of
payments, the CA held that the SEC erred when it retroactively applied Sec. 4-9 of the Rules of
Procedure on Corporate Recovery. Such retroactive application of procedural rules admits of
exceptions, as when it would impair vested rights or cause injustice. In this case, the CA emphasized
that the two decisions of this Court still have to be implemented by the SEC, but to date the SEC has
failed to unwound the illegal assignments and order the assignees to surrender the Deeds of
Assignment to the MANCOM.
12
On the issue of violation of the rule against forum shopping, the CA held that this is not applicable
because the parties in CA-G.R. SP No. 73169 (filed by MANCOM) and CA-G.R. SP No. 73195 (filed
by Lim) are not the same and they do not have the same interest. This issue was in fact already
resolved in G.R. Nos. 124185-87 wherein this Court, citing Ramos, Sr. v. Court of Appeals47 declared
that private respondents Lim, the unsecured creditors (ALFC) and MANCOM cannot be considered to
have engaged in forum shopping in filing separate petitions with the CA as each have distinct rights
to protect.

The CA also found that the belated submission of the special power of attorney executed by the other
minority stockholders representing 40.172% of RUBY’s ownership has no bearing to the continuation
of the petition filed with the appellate court. Moreover, since the petition is in the nature of a derivative
suit, Lim clearly can file the same not only in representation of the minority stockholders but also in
behalf of the corporation itself which is the real party in interest. Thus, notwithstanding that Lim’s
ownership in RUBY comprises only 1.4% of the outstanding capital stock, as claimed by the majority
stockholders, his petition may not be dismissed on this ground.

The Consolidated Petitions

From the Decision of the CA, China Bank and the Majority Stockholder joined by RUBY, filed
separate petitions before this Court.

In G.R. No. 165887, petitioners Majority Stockholders and RUBY raised the following grounds for the
reversal of the assailed decision and the reinstatement of the SEC’s September 18, 2002 Order:

First Reason

THE COURT OF APPEALS ERRED – AND WHEN IT DID, IT ACTED CONTRARY TO LAW
AND PRECEDENTS – WHEN IT GAVE DUE COURSE TO, AND, THEREAFTER,
SUSTAINED, A FORMALLY AND SUBSTANTIALLY DEFECTIVE PETITION FOR REVIEW.

Second Reason

THE COURT OF APPEALS ERRED – AND WHEN IT DID, IT ACTED IN A MANNER AT WAR
WITH ORDERLY PROCEDURE AND APPLICABLE JURISPRUDENCE – WHEN IT
REVERSED THE ORDER OF DISMISSAL OF THE SECURITIES AND EXCHANGE
COMMISSION AND SUBSTITUTED ITS JUDGMENT FOR THAT OF THE LATTER IN THE
DETERMINATION OF ISSUES WELL WITHIN THE EXPERTISE OF THE COMMISSION.

Third Reason

THE COURT OF APPEALS ERRED – AND WHEN IT DID, IT ACTED IN GRAVE ABUSE OF
ITS DISCRETION AND, IN FACT, IN EXCESS OR LACK OF JURISDICTION -- WHEN IT
SUSTAINED COLLATERAL ATTACKS OF FINAL ADJUDICATIONS OF THE SECURITIES
AND EXCHANGE COMMISSION.48

On the other hand, petitioner China Bank in G.R. No. 165929 puts forth the argument that the
principle of stare decisis cannot be given effect in this case considering the prevailing factual
circumstances, as to do so would result in manifest injustice. It contends that the reason for the
declaration of nullity of the Deed of Assignment pronounced more than a decade ago, has become
legally inefficacious by its obsolescence. The creditors of RUBY have the right to recover their credit.

13
But when the CA ordered the nullification of China Bank’s Deed of Assignment in favor of Greener
Investment Corporation, it practically dashed its last hope for ever recovering its credit.

China Bank is of the view that the CA overstretched the import of this Court’s January 20, 1998
decision in G.R. Nos. 124185-87 when the SEC was ordered to "conduct further proceedings," as to
include the unwinding of the alleged illegal assignment of credits. The rehabilitation of RUBY, if it still
may be capable of, is not made dependent on the unwinding by the SEC of the illegal assignments,
as the same concerns only the issue of who shall now become the creditors of RUBY, and does not
alter the fact that RUBY has hefty loan obligations and it has not enough cash flow to pay for the
same.

Deploring the principal parties’ penchant for prolonged litigation resulting considerably in irreversible
losses to RUBY, China Bank maintains that from the report submitted by the MANCOM to the SEC, it
can be clearly seen that no attempt at rehabilitation whatsoever had been pursued. Given the current
situation, China Bank prays that the CA Decision be reversed and its Deed of Assignment in favor of
Greener Investment Corporation be recognized and given full legal effect.

In fine, main issues to be resolved are: (1) whether private respondents MANCOM and Lim engaged
in forum shopping when they filed separate petitions before the CA assailing the September 18, 2002
SEC Order; (2) whether the defects in the certification of non-forum shopping submitted by Lim
warrant the dismissal of his petition before the CA; (3) whether the CA was correct in reversing the
SEC’s order dismissing the petition for suspension of payment.

Our Ruling

The petitions have no merit.

On the charge of forum shopping, we have already ruled on the matter in G.R. Nos. 124185-87.
Thus:

We hold that private respondents are not guilty of forum-shopping. In Ramos, Sr. v. Court of Appeals,
we ruled:

"The private respondents can be considered to have engaged in forum shopping if all of them, acting
as one group, filed identical special civil actions in the Court of Appeals and in this Court. There must
be identity of parties or interests represented, rights asserted and relief sought in different tribunals.
In the case at bar, two groups of private respondents appear to have acted independently of each
other when they sought relief from the appellate court. Both groups sought relief from the same
tribunal.

"It would not matter even if there are several divisions in the Court of Appeals. The adverse party can
always ask for the consolidation of the two cases. x x x"

In the case at bar, private respondents represent different groups with different interests – the
minority stockholders’ group, represented by private respondent Lim; the unsecured creditors group,
Allied Leasing & Finance Corporation; and the old management group. Each group has distinct rights
to protect. In line with our ruling in Ramos, the cases filed by private respondents should be
consolidated. In fact, BENHAR and RUBY did just that – in their urgent motions filed on December 1,
1993 and December 6, 1993, respectively, they prayed for the consolidation of the cases before the
Court of Appeals.49

14
In the present case, no consolidation of CA-G.R. SP Nos. 73169 (filed by MANCOM) which was
earlier assigned to the Thirteenth Division and CA-G.R. SP No. 73195 (filed by Lim) decided by the
Second Division, took place. In their Comment filed before CA-G.R. SP No. 73169, the Majority
Stockholders and RUBY (private respondents therein) prayed for the dismissal of said case arguing
that MANCOM, of which Lim is a member, circumvented the proscription against forum shopping.
The CA’s Thirteenth Division, however, disagreed with private respondents and granted the motion to
withdraw petition filed by MANCOM which manifested that the Second Division in CA-G.R. SP No.
73195 by Decision dated May 26, 2004 had granted the reliefs similar to those prayed for in their
petition, said decision being binding on MANCOM which was also impleaded in said case (CA-G.R.
SP No. 73195). The Thirteenth Division also cited our pronouncement in G.R. Nos. 124185-87 to the
effect that there was no violation on the rule on forum shopping because MANCOM and Lim or the
minority shareholders of RUBY represent different interests.50

As to the alleged defects in the certificate of non-forum shopping submitted by Lim, we find no error
committed by the CA in holding that the belated submission of a special power of attorney executed
in Lim’s favor by the minority stockholders has no bearing to the continuation of the case as
supported by ample jurisprudence. To appreciate the liberal stance adopted by the CA, one must
take into account the previous history of the petitions for review before the CA involving the SEC
September 18, 2002 Order. It was actually the third time that Lim and/or MANCOM have challenged
certain acts perpetrated by the majority stockholders which are prejudicial to RUBY, such as the
execution of deeds of assignment during the effectivity of the suspension order in pursuit of two
rehabilitation plans submitted by them together with BENHAR. The assignment of RUBY’s credits to
BENHAR gave the secured creditors undue advantage over RUBY’s prime properties and put these
assets beyond the reach of the unsecured creditors. Each time they go to court, Lim and MANCOM
essentially advance the interest of the corporation itself. They have consistently taken the position
that RUBY’s assets should be preserved for the equal benefit of all its creditors, and vigorously
resisted any attempt of the controlling stockholders to favor any or some of its creditors by entering
into questionable deals or financing schemes under two BENHAR/RUBY Plans. Viewed in this light,
the CA was therefore correct in recognizing Lim’s right to institute a stockholder’s action in which the
real party in interest is the corporation itself.

A derivative action is a suit by a shareholder to enforce a corporate cause of action.51 It is a remedy

designed by equity and has been the principal defense of the minority shareholders against abuses
by the majority.52 For this purpose, it is enough that a member or a minority of stockholders file a
derivative suit for and in behalf of a corporation.53 An individual stockholder is permitted to institute a
derivative suit on behalf of the corporation wherein he holds stock in order to protect or vindicate
corporate rights, whenever officials of the corporation refuse to sue or are the ones to be sued or hold
the control of the corporation. In such actions, the suing stockholder is regarded as the nominal party,
with the corporation as the party in interest.54

Now, on the third and substantive issue concerning the SEC’s dismissal of RUBY’s petition for
suspension of payment.

The SEC based its action on Sec. 4-9 of the Rules of Procedure on Corporate Recovery,55 which
provides:

SEC. 4-9. Period of Suspension Order. – The suspension order shall be effective for a period of sixty
(60) days from the date of its issuance. The order shall be automatically vacated upon the lapse of
the sixty-day period unless extended by the Commission. Upon motion, the Commission may grant
an extension thereof for a period of not more than sixty (60) days in each application if the
15
Commission is satisfied that the debtor and its officers have been acting in good faith and with due
diligence, and that the debtor would likely be able to make a viable rehabilitation plan. After the lapse
of one hundred and eighty (180) days from the issuance of the suspension order, no extension of the
said order shall be granted by the Commission if opposed in writing by a majority of any class of
creditors. The Commission may grant an extension beyond one hundred eighty (180) days only if it
appears by convincing evidence that there is a good chance for the successful rehabilitation of the
debtor and the opposition thereto by the creditor appears manifestly unreasonable.

In any event, the petition is deemed ipso facto denied and dismissed if no Rehabilitation Plan was
approved by the Commission upon the lapse of the order or the last extension thereof. In such case,
the debtor shall come under the dissolution and liquidation proceedings of Rule V of these Rules.
(Emphasis supplied.)

According to the SEC, even if the 180 days maximum period of suspension order is counted from the
finality of this Court’s decision in G.R. Nos. 124185-87 in December 1998, still this case had gone
beyond the period mandated in the Rules for a corporation under suspension of payment to have a
rehabilitation plan approved by the Commission.

While it is true that the Rules of Procedure on Corporate Recovery authorizes the dismissal of a
petition for suspension of payment where there is no rehabilitation plan approved within the maximum
period of the suspension order, it must be recalled that there was in fact not one, but two
rehabilitation plans (BENHAR/RUBY Plan and Revised BENHAR/RUBY Plan) submitted by the
majority stockholders which were approved by the SEC. The implementation of the first plan was
enjoined when it was seriously challenged in the courts by the minority stockholders through Lim. The
second revised plan superseded the first plan, but eventually nullified by the CA and the CA decision
declaring it void was affirmed by this Court in G.R. Nos. 124185-87. Given this factual milieu, the
automatic application of the lifting of the suspension order as interpreted by the SEC in its September
18, 2002 Order would be unfair and highly prejudicial to the financially distressed corporation.

Moreover, records reveal that the delay in the proceedings after the case was set for hearing
following this Court’s final judgment in G.R. Nos. 124185-87, was not due to any fault or neglect on
the part of MANCOM or the minority stockholders. The idea propounded by the petitioners majority
stockholders that this case is about a minority in a corporation holding hostage the majority
indefinitely by simple assertion that the former’s rights have been transgressed by the latter is,
downright misleading.

First, the SEC did not even mention in its September 18, 2002 Order that when this Court remanded
to it the case for further proceedings, there remained only the Alternative Plan of RUBY’s minority
stockholders which had earlier been forwarded to the SEC Hearing Panel. With the CA Decision
setting aside the SEC approval of the Revised BENHAR/RUBY Plan, as affirmed by this Court, it
behooves on the SEC to recognize the fact that the Alternative Plan was endorsed by 90% of the
RUBY’s creditors who had objected to the Revised BENHAR/RUBY Plan. Yet, not a single step was
taken by the SEC to address those findings and conclusions made by the CA and this Court on the
highly disadvantageous and onerous provisions of the Revised BENHAR/RUBY Plan.

Moreover, the SEC failed to act on motions filed by Lim and MANCOM to implement this Court’s
January 20, 1998 Decision in G.R. Nos. 124185-87, by declaring all deeds of assignment with
BENHAR and/or the conduits of Henry Yu of no force and legal effect, which of course necessitates
the surrender by the concerned creditors of those void deeds of assignment. Petitioner China Bank
dismisses it as unnecessary and immaterial to the continued inability of RUBY to settle its long
16
overdue debts. However, the CA said that the foregoing acts should have been done by the SEC for
proper documentation and orderly settlement after proper accounting of the assignment transactions.
The appellate court then concluded that dismissal of the petition under Sec. 4-9 of the Rules of
Procedure on Corporate Recovery would impair the vested rights of the minority stockholders under
this Court’s decision invalidating the aforesaid deeds of assignment, thus:

We agree with the observations of the petition that if the illegal assignments not having been
unwound and the mortgages not canceled, the majority, their alter ego, and/or cohorts will claim to be
secured creditors and freely collect extra-judicially the obligations covered by the illegal assignments.
Ruby has very little money compared to the P200 Million probable liability to the illegal assignees as
unilaterally stated by Ruby without audit (previously merely totaled to P34 Million in 1998 as stated in
the revised rehabilitation plan). Foreclosure of the mortgages by the illegal assignees will follow;
Ruby will lose all its prime properties; there will be no assets left for unsecured creditors; and there
will be no residual P600 Million assets to divide.56

Evidently, the minority stockholders and MANCOM had already foreseen the impossibility of
implementing a viable rehabilitation plan if the illegal assignments made by its creditors with
BENHAR and the majority stockholders, and subsequently, with conduits of RUBY or Henry Yu, are
not properly unwound and those directors responsible for the void transactions not required to make
a full accounting. Contrary to petitioner China Bank’s insinuation that the minority stockholders
merely want to prolong the litigation to the great prejudice and damage to RUBY’s creditors,
MANCOM and Lim had determined and moved for SEC-supervised liquidation proceedings as the
more prudent course of action for an orderly and equitable settlement of RUBY’s liabilities.

Records likewise revealed that the SEC chose to keep silent and failed to assist the MANCOM and
minority stockholders in their efforts to demand compliance from the majority stockholders or Yu Kim
Giang (who headed the first MANCOM) with the December 22, 1989 Order directing them to turn
over the cash, financial records and documents of RUBY, including certificates of title over RUBY’s
real properties, and render an accounting of all moneys received and payments made by RUBY. On
January 18, 2002, the MANCOM even filed a Motion57 to require Yu Kim Giang to render
report/accounting of RUBY from 1983 to the 1st quarter of 1990, stating that despite a commitment
from Mr. Giang, he has seemingly delayed his compliance, hence frustrating the desire of MANCOM
to submit a comprehensive and complete report for the whole period of 1983 up to the present. To
underscore the importance of making the said records available for scrutiny of the SEC and
MANCOM, Lim manifested before the SEC that--

Indeed, the majority is actually unwilling (and not merely unable) to submit such records because
these will show, among others:

(1) The majority to minority ratio in the corporate ownership is 59.828% :40.172%;

(2) The actual amounts of the bank loans paid off by Benhar International[,] Inc. and/or Henry
Yu would be very low;

(3) The illegal payment of the bank loans and illegal assignments of the mortgages to
Benhar/Henry Yu are contrary to the Honorable Commission’s Order of 20 December 1983 for
suspension of payments;

(4) The earnings of the corporation from 1983 to 1989 amounted to millions and cannot be
accounted for by the majority and the first Mancom;
17
 (5) The money may have been spent to pay off some of the loans to the bank but Benhar and
Henry Yu fraudulently claim credit therefor.58

It must be noted that MANCOM had rejected the two rehabilitation plans proposed by BENHAR and
the majority stockholders. In shifting the blame to the MANCOM and minority stockholders for the
delay in the approval of a viable rehabilitation plan, the SEC apparently overlooked that from the time
the SEC approved the Revised BENHAR/RUBY Plan and dissolved the MANCOM, the majority
stockholders has denied MANCOM access to corporate papers, documents evidencing the amounts
actually paid to creditor banks/assignors, financial statements and titles over RUBY’s real properties.

Although the SEC granted MANCOM and Lim’s request for a hearing and direct a representative
from BPI to bring all documents relative to the assignment of RUBY’s credit, said hearing did not
materialize after the majority stockholders proposed a compromise agreement with the minority
stockholders. But as it turned out, this development only caused further delay because the majority
stockholders were unwilling to turn over documents, funds and properties in their possession, and
would neither make a full accounting or disclosure of RUBY’s transactions, especially the actual
amounts paid and rates of interest on the loan assignments. In this state of things, the MANCOM and
minority stockholders resolved that the more reasonable and practical option is to move for a SEC-
supervised liquidation proceedings.

The other ground invoked by Lim and MANCOM for the propriety of liquidation is the expiration of
RUBY’s corporate term. The SEC, however, held that the filing of the amendment of articles of
incorporation by RUBY in 1996 complied with all the legal requisites and hence the presumption of
regularity stands. Records show that the validity of the infusion of additional capital which resulted in
the alleged increase in the shareholdings of petitioners majority stockholders in October 1991 was
questioned by MANCOM and Lim even before the majority stockholders filed their motion to dismiss
in the year 2000.

A stock corporation is expressly granted the power to issue or sell stocks.59 The power to issue
shares of stock in a corporation is lodged in the board of directors and no stockholders’ meeting is
required to consider it because additional issuances of shares of stock does not need approval of the
stockholders.60 What is only required is the board resolution approving the additional issuance of
shares. The corporation shall also file the necessary application with the SEC to exempt these from
the registration requirements under the Revised Securities Act (now the Securities Regulation Code).

The new management committee created pursuant to SEC Order dated September 18, 1991
apparently had no participation in the October 2, 1991 board resolution approving the issuance of
additional shares. The move was part of the board’s assertion of control over the management in
RUBY following the approval of the Revised BENHAR/RUBY Plan. The minority stockholders
registered their objection during the said meeting by asking the board to defer action as the SEC
September 18, 1991 Order was still on appeal with the SEC En Banc. When the SEC En Banc
denied their appeal and motion for reconsideration under its July 30, 1993 and October 15, 1993
orders, Lim, MANCOM and ALFC filed petitions for review with the CA which set aside the said
orders. As already mentioned, this Court affirmed the CA ruling in G.R. Nos. 124185-87.

Contrary to the assertion of petitioners majority stockholders, our decision in G.R. Nos. 124185-87
nullified the deeds of assignment not solely on the ground of violation of the injunction orders issued
by the SEC and CA. As earlier mentioned, we affirmed the CA’s finding that the re-lending scheme
under the Revised BENHAR/RUBY Plan will not only make rehabilitation more costly for RUBY, but
also worsen its financial condition because of the mortgage of its assets to a new creditor. To better
18
illumine this point, we quote from the CA decision in CA-G.R. SP Nos. 32404, 32469 and 32483
comparing the provisions of the rehabilitation proposals submitted by the majority stockholders
(Revised BENHAR/RUBY Plan) and the minority stockholders (Alternative Plan):

…there is no need for Benhar to act as financier, as Ruby itself can very well secure such credit
accommodation using its assets as collateral. Verily, Benhar’s pretext at magnanimity is deception of
the highest order considering that: (1) as embodied in the heading Sources and Uses of Funds in the
Revised Benhar/Ruby Plan, the ₱80-Million loan/credit facility to be extended by Benhar will be used
to pay ₱60.437-Million loans of Ruby. Of the ₱60.437-Million, ₱34.068-Million will be paid to Benhar
as payment for the amounts it paid in consideration of the nullified assignments; (2) The Deed of
Assignment of Credit Facility will be executed by Benhar in favor of Ruby only upon payment of Ruby
of such amount already advanced by Benhar, i.e. the ₱34.068-Million credit assigned to Benhar by
the seven (7) secured creditors.

The Revised Benhar/Ruby Plan, in fact, gives Benhar undue preference on the matter of repayment.
Under the said plan, the creditors of Ruby will be paid in accordance with the following schedules:

"Secured Creditors ₱17.022M To be paid in cash with

China Banking 12% interest p.a.
Corp.
BPI
Philippine Orient

Unsecured ₱ 9.347M To be paid in cash interest-

Creditors Allied f[r]ee
Leasing
Filcor Finance

Benhar ₱34.068M To be paid in cash

For having paid with interest charge
Ruby obligations
to 7 creditors

Trade/Other ₱2.871M Totalling ₱8.614M to be

Creditors (p.a. for 3 paid in 3- year installment,
years) interest-free"

(Rollo, CA-G.R. SP No. 32404, p. 727)

Needless to state, the foregoing payment schedules as embodied in the said plan which gives
Benhar undue advantage over the other creditors goes against the very essence of rehabilitation,
which requires that no creditor should be preferred over the other. Indeed, a comparison of the
salient features of the Revised Benhar/Ruby Plan and the Alternative Plan will readily show just how
stacked in favor of Benhar are the provisions of the former plan:

1âwphi1
19
 Benhar/Ruby Plan
1. Benhar plays a major role. It will
be paid ₱34.068M out of ₱60.437
M total amount due to creditors but
not explained as to how arrived at.
2. Benhar will not assign the credit
facility of ₱80M unless the
₱34.068M above stated is paid.
3. The main assets are to be
mortgaged to the creditor- assignor
of Benhar and if the illegal
assignments are recognized, then
Benhar shall have to be
recognized as mortgagee even
when it is a disqualified creditor
and/or mortgagee.
4. Start up cost ₱16,880 and
based on 1988 figures and
projections.
5. Rehabilitation only of Plant B.
6. Recognition of Benhar re-
lender/financier.
7. Because of the SEC Order he
got an MC seat and and the
Pilipinas Shell representative of
trade creditors was retained.
8. Credit facility is being assigned
or re-lent by Benhar.
9. Authorized Benhar to mortgage
20
Alternative Plan
1. The original creditors are the
ones recognized. The amount
payable is lower because interests
are not capitalized.
2. Direct credit of P80M loan and
will be borrowed from the bank(s)
like Allied, UCPB, Metrobank or
Equitable Bank or even China
Bank.
3. Mortgaged to bank(s) directly.
4. Plant B = ₱25,640
Year IV estimated ₱40. M
Plant A = 22.40
Year V estimated ₱30. M
5. Rehabilitation of both plants.
6. None
7. Pilipinas Shell representative be
retained.
8. Credit facility directly to Ruby.
9. None going to the minority but to
assets of Ruby itself. Only actual lenders.
remaining unencumbered asset is
one (1) real property. Two (2)
prime properties already
encumbered to Assignor of
Benhar.

10. Capacity of only one (1) plant 10. Capacity of two (2) plants
stated at 72% (overrated) progressive to 75% or 80% with
purchase of new machines.

11. Projection figures based on 11. Minority RP can be updated at

May, 1990 forex exchange rate. current foreign exchange rate.
Cost of importation and other local
supplier currently cannot be met.

12. Market and economic slow 12. Taken into consideration so will
down not taken into consideration. upgrade to meet competition.

13. Discriminatory to creditors 13. Not discriminatory.

Benhar-capitalized with
undisclosed rates of interest.

14. Original Figures of illegally 14. Original figures will be used

assigned loans from FEBTC, original figures plans 12% interest
PCIB, PTC which totaled to only.
₱11,419,036.87 but now entered
as ₱21,378,002.71. The interest is
undisclosed and may have been
capitalized. Figures for the other
four (4) secured lenders not
available individually. Total of
seven (7) secured lenders given as
₱34.068 M.

15. Interest is 28% with Benhar as 15. Interest is 25% payable to the
conduit. bank. This is still subject to current
market rates to be negotiated by
the minority.

16. Call on unissued shares for 15. Additional subscription of

₱11.814 M and if minority will take ₱16M within 6 months by the
up their pre-emptive rights and minority stockholders.
dilute minority shareholdings.

21
Prior to the September 18, 1991 Order approving the Revised BENHAR/RUBY Plan and dissolving
the MANCOM, majority of RUBY’s creditors (90%) have already withdrawn their support to the
revised plan and manifested that they were only lately informed about another plan submitted by the
minority stockholders. Hence, these creditors wrote individual letters to the SEC Hearing Panel
expressing their agreement with and endorsement of the Alternative Plan of the minority
stockholders.62

The Revised BENHAR/RUBY Plan had proposed the calling for subscription of unissued shares
through a Board Resolution from the ₱11.814 million of the ₱23.7 million ACS "in order to allow the
long overdue program of the REHAB Program." RUBY will offer for subscription 118,140 shares of
stocks at par value of ₱100 each to all stockholders on record, payable within 15 days, or within a
reasonable period from SEC approval of the revised plan.63 This was implemented by the October 2,
1991 meeting of the Board of Directors led by Yu Kim Giang. The minority directors claimed they
were not notified of said board meeting. At any rate, the CA decision nullifying the Revised
BENHAR/RUBY Plan was affirmed by this Court on January 20, 1998. Hence, the legitimate
concerns of the minority stockholders and MANCOM who objected to the capital infusion which
resulted in the dilution of their shareholdings, the expiration of RUBY’s corporate term and the
pending incidents on the void deeds of assignment of credit – all these should have been duly
considered and acted upon by the SEC when the case was remanded to it for further proceedings.
With the final rejection of the courts of the Revised BENHAR/RUBY Plan, it was grave error for the
SEC not to act decisively on the motions filed by the minority stockholders who have maintained that
the issuance of additional shares did not help improve the situation of RUBY except to stifle the
opposition coming from the MANCOM and minority stockholders by diluting the latter’s
shareholdings. Worse, the SEC ignored the evidence adduced by the minority stockholders indicating
that the correct amount of subscription of additional shares was not paid by the majority stockholders
and that SEC official records still reflect the 60%-40% percentage of ownership of RUBY.

The SEC remained indifferent to the reliefs sought by the minority stockholders, saying that the issue
of the validity of the additional capital infusion was belatedly raised. Even assuming the October 2,
1991 board meeting indeed took place, the SEC did nothing to ascertain whether indeed, as the
minority claimed: (1) the minority stockholders were not given notice as required and reasonable time
to exercise their pre-emptive rights; and (2) the capital infusion was not for the purpose of
rehabilitation but a mere ploy to divest the minority stockholders of their 40.172% shareholding and
reduce it to a mere 25.25%.

The foregoing matters, along with the persistent refusal of the majority stockholders, led by Yu Kim
Giang, to give a full accounting of their transactions involving RUBY’s credits and properties, were
extensively argued by the minority stockholders in their opposition to the motions to dismiss/vacate
suspension order filed by the majority stockholders and BPI, as follows:

Their receipts only show supposed payment by the majority of a total of P1,759,150.00 out of the
correct amount of P7,068,079.92.00 (sic) (59.828% of P11.814 million required capital infusion under
the MRP and RRP) which should have been the amount paid by them under the RRP which requires
full payment. Thus, they sought to attain a 74.75% equity from a 59.828% original equity by playing
more tricks and stating that, under the general rule, they are supposedly allowed to pay-up only 25%
of their subscription. Unfortunately for them, in a rehabilitation supervised by the SEC and with an
existing Mancom, the general rule does not apply. What is stated in the rehabilitation plan must be
strictly followed provided the rehabilitation plan has been finally approved.

22
It must be remembered that in October 2 to 17, 1991, the amounts owed by Ruby to the banks who
illegally assigned their loans/credit was stated at P34 Million. Operations needed another P20 Million
plus. A capital infusion of P1,759,150.00 was so miniscule and clearly not for rehabilitation but was
intended to deprive the minority of its blocking position and property rights since distribution after
liquidation is based on the percentage of stockholdings. It is not only unfair, inequitable and not
meaningful – it is clearly dishonest.

xxxx

Assuming arguendo that the Board of Directors could act independently and this did not violate any
injunction, if the capital infusion was actually made, the Board of Directors had the duty to report this
to the Mancom because they would then fall under "existing assets" and would be part of the
evaluation of the proposed RRP, necessary for management and in the overall plan of rehabilitation.
Nothing of this kind happened and the belated proof cannot correct this situation.

xxxx

It is not true that there is benevolence on the part of the majority when they maneuvered the illegal
assignments and paid the banks. The loan obligations remain as accounts payable of Ruby and have
even been bloated to gigantic proportions and yet the SEC does not even ask them to account how
much these obligations are now and the majority should have reported these to the Mancom, but the
majority has not. These anomalous situations have been made to continue long enough and, we
pray, should be addressed by the Honorable Commission.

xxxx

…The SEC must understand that, being head of the first Mancom, YU KIM GIANG had the same
obligation to render a report to the SEC as the present Mancom now. To single out the present
Mancom to do this when a complete report cannot be made without these starting records is
discriminatory, unfair and violates the rules of accountancy. For example, where is the report on the
illegal assignments and mortgages complete with details? Where did the rentals for the period from
1983 to 1989 go? This amounted to millions. There are no reports on these. By not requiring the first
Mancom to Report, the SEC is preventing the complete picture on the liabilities and finances of Ruby
from being seen and is sheltering Ruby and the majority.64 (Additional emphasis supplied.)

Pre-emptive right under Sec. 39 of the Corporation Code refers to the right of a stockholder of a stock
corporation to subscribe to all issues or disposition of shares of any class, in proportion to their
respective shareholdings. The right may be restricted or denied under the articles of incorporation,
and subject to certain exceptions and limitations. The stockholder must be given a reasonable time
within which to exercise their preemptive rights. Upon the expiration of said period, any stockholder
who has not exercised such right will be deemed to have waived it.65

The validity of issuance of additional shares may be questioned if done in breach of trust by the
controlling stockholders. Thus, even if the pre-emptive right does not exist, either because the issue
comes within the exceptions in Section 39 or because it is denied or limited in the articles of
incorporation, an issue of shares may still be objectionable if the directors acted in breach of trust and
their primary purpose is to perpetuate or shift control of the corporation, or to "freeze out" the minority
interest.66 In this case, the following relevant observations should have signaled greater
circumspection on the part of the SEC -- upon the third and last remand to it pursuant to our January
20, 1998 decision -- to demand transparency and accountability from the majority stockholders, in
23
view of the illegal assignments and objectionable features of the Revised BENHAR/RUBY Plan, as
found by the CA and as affirmed by this Court:

There can be no gainsaying the well-established rule in corporate practice and procedure that the will
of the majority shall govern in all matters within the limits of the act of incorporation and lawfully
enacted by-laws not proscribed by law. It is, however, equally true that other stockholders are
afforded the right to intervene especially during critical periods in the life of a corporation like
reorganization, or in this case, suspension of payments, more so, when the majority seek to impose
their will and through fraudulent means, attempt to siphon off Ruby’s valuable assets to the great
prejudice of Ruby itself, as well as the minority stockholders and the unsecured creditors.

Certainly, the minority stockholders and the unsecured creditors are given some measure of
protection by the law from the abuses and impositions of the majority, more so in this case,
considering the give-away signs of private respondents’ perfidy strewn all over the factual landscape.
Indeed, equity cannot deprive the minority of a remedy against the abuses of the majority, and the
present action has been instituted precisely for the purpose of protecting the true and legitimate
interests of Ruby against the Majority Stockholders. On this score, the Supreme Court, has ruled that:

"Generally speaking, the voice of the majority of the stockholders is the law of the corporation, but
there are exceptions to this rule. There must necessarily be a limit upon the power of the majority.
Without such a limit the will of the majority will be absolute and irresistible and might easily
degenerate into absolute tyranny. x x x"67(Additional emphasis supplied.)

Lamentably, the SEC refused to heed the plea of the minority stockholders and MANCOM for the
SEC to order RUBY to commence liquidation proceedings, which is allowed under Sec. 4-9 of the
Rules on Corporate Recovery. Under the circumstances, liquidation was the only hope of the minority
stockholders for effecting an orderly and equitable settlement of RUBY’s obligations, and compelling
the majority stockholders to account for all funds, properties and documents in their possession, and
make full disclosure on the nullified credit assignments. Oblivious to these pending incidents so
crucial to the protection of the interest of the majority of creditors and minority shareholders, the SEC
simply stated that in the interim, RUBY’s corporate term was validly extended, as if such extension
would provide the solution to RUBY’s myriad problems.

Extension of corporate term requires the vote of 2/3 of the outstanding capital stock in a stockholders’
meeting called for the purpose.68 The actual percentage of shareholdings in RUBY as of September
3, 1996 -- when the majority stockholders allegedly ratified the board resolution approving the
extension of RUBY’s corporate life to another 25 years – was seriously disputed by the minority
stockholders, and we find the evidence of compliance with the notice and quorum requirements
submitted by the majority stockholders insufficient and doubtful. Consequently, the SEC had no basis
for its ruling denying the motion of the minority stockholders to declare as without force and effect the
extension of RUBY’s corporate existence.

Liquidation, or the settlement of the affairs of the corporation, consists of adjusting the debts and
claims, that is, of collecting all that is due the corporation, the settlement and adjustment of claims
against it and the payment of its just debts.69 It involves the winding up of the affairs of the
corporation, which means the collection of all assets, the payment of all its creditors, and the
distribution of the remaining assets, if any, among the stockholders thereof in accordance with their
contracts, or if there be no special contract, on the basis of their respective interests.70

Section 122 of the Corporation Code, which is applicable to the present case, provides:
24
SEC. 122. Corporate liquidation. -- Every corporation whose charter expires by its own limitation or is
annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in
any other manner, shall nevertheless be continued as a body corporate for three (3) years after the
time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or
against it and enabling it to settle and close its affairs, to dispose of and convey its property and to
distribute its assets, but not for the purpose of continuing the business for which it was established.

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

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

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

Since the corporate life of RUBY as stated in its articles of incorporation expired, without a valid
extension having been effected, it was deemed dissolved by such expiration without need of further
action on the part of the corporation or the State.71 With greater reason then should liquidation ensue
considering that the last paragraph of Sec. 4-9 of the Rules of Procedure on Corporate
Recovery mandates the SEC to order the dissolution and liquidation proceedings under Rule VI. Sec.
6-1, Rule VI likewise authorizes the SEC on motion or motu proprio, or upon recommendation of the
management committee, to order dissolution of the debtor corporation and the liquidation of its
remaining assets, appointing a Liquidator for the purpose, if "the continuance in business of the
debtor is no longer feasible or profitable or no longer works to the best interest of the stockholders,
parties-litigants, creditors, or the general public."

It cannot be denied that with the current divisiveness, distrust and antagonism between the majority
and minority stockholders, the long agony and extreme prejudice caused by numerous litigations to
the creditors, and the bleak prospects for business recovery in the light of problems with the local
government which are implementing more restrictions and anti-pollution measures that practically
banned the operation of RUBY’s glass plant – liquidation becomes the only viable course for RUBY
to stave off any further losses and dissipation of its assets. Liquidation would also ensure an orderly
and equitable settlement of all creditors of RUBY, both secured and unsecured.

The SEC’s utter disregard of the rights of the minority in applying the provisions of the Rules of
Procedure on Corporate Recovery is inconsistent with the policy of liberal construction of the said
rules "to assist the parties in obtaining a just, expeditious and inexpensive settlement of
cases.72 Petitioners majority stockholders, however, assert that the findings and conclusions of the
SEC on the matter of the dismissal of RUBY’s petition are binding and conclusive upon the CA and
this Court. They contend that reviewing courts are not supposed to substitute their judgment for those
made by administrative bodies specifically clothed with authority to pass upon matters over which
they have acquired expertise.73 Given our foregoing findings clearly showing that the SEC acted

25
arbitrarily and committed patent errors and grave abuse of discretion, this case falls under the
exception to the general rule.

As we held in Ruby Industrial Corporation v. Court of Appeals:

The settled doctrine is that factual findings of an administrative agency are accorded respect and, at
times, finality for they have acquired the expertise inasmuch as their jurisdiction is confined to specific
matters. Nonetheless, these doctrines do not apply when the board or official has gone beyond his
statutory authority, exercised unconstitutional powers or clearly acted arbitrarily and without regard to
his duty or with grave abuse of discretion. In Leongson vs. Court of Appeals, we held: "once the
actuation of the administrative official or administrative board or agency is tainted by a failure to abide
by the command of the law, then it is incumbent on the courts of justice to set matters right, with this
Tribunal having the last say on the matter."74

Petitioners majority stockholders further insist that the minority stockholders were mistaken when
they contended that the rehabilitation of RUBY is dependent on the unwinding by the SEC of the
illegal assignments and mortgages. They assert that aside from the fact that the SEC had nothing to
unwind because the alleged illegal assignments and mortgages were already declared null and void,
the said assignments and mortgages will not affect the rehabilitation of Ruby; the same affecting only
the issue of how, as to who will be its creditors.

Such contention is untenable and contrary to our previous ruling in G.R. Nos. 124185-87. With the
nullification of the deeds of assignments of credit executed by some of Ruby’s secured creditors in
favor of BENHAR, it logically follows that the assignors or the original bank creditors remain as the
creditors on record of RUBY. We have noted that BENHAR, which is controlled by the family of Henry
Yu who is also a director and stockholder of RUBY, was not listed as one of RUBY’s creditors at the
time RUBY filed the petition for suspension of payment. Petitioners majority stockholders’ insinuation
that RUBY’s credits may have been assigned to third parties, if not referring to BENHAR or its
conduits, implies two things: either the assignments declared void by this Court’s January 20, 1998
decision continues to be recognized by the majority stockholders, in violation of the said decision, or
other third parties in connivance with BENHAR and/or the controlling stockholders had subsequently
entered the picture, without approval of the SEC and while the SEC December 20, 1983 Order
enjoining the disposition of RUBY’s properties was in force.

The majority stockholders’ eagerness to have the suspension order lifted or vacated by the SEC
without any order for its liquidation evinces a total disregard of the mandate of Sec. 4-9 of the Rules
of Procedure on Corporate Recovery, and their obvious lack of any intent to render an accounting of
all funds, properties and details of the unlawful assignment transactions to the prejudice of RUBY,
minority stockholders and the majority of RUBY’s creditors. The majority stockholders and BENHAR’s
conduits must not be allowed to evade the duty to make such full disclosure and account any money
due to RUBY to enable the latter to effect a fair, orderly and equitable settlement of all its obligations,
as well as distribution of any remaining assets after paying all its debtors.

In fine, no error was committed by the CA when it set aside the September 18, 2002 Order of the
SEC and declared the nullity of the acts of majority stockholders in implementing capital infusion
through issuance of additional shares in October 1991, the board resolution approving the extension
of RUBY’s corporate term for another 25 years, and any illegal assignment of credit executed by
RUBY’s creditors in favor of third parties and/or conduits of the controlling stockholders. The CA
likewise correctly ordered the delivery of all documents relative to the said assignment of credits to

26
the MANCOM or the Liquidator, the unwinding of these void deeds of assignment, and their full
accounting by the majority stockholders.

The petitioners majority stockholders and China Bank cannot be permitted to raise any issue again
regarding the validity of any assignment of credit made during the effectivity of the suspension order
and before the finality of the September 18, 2002 Order lifting the same. While China Bank is not
precluded from questioning the validity of the December 20, 1983 suspension order on the basis of
res judicata, it is, however, barred from doing so by the principle of law of the case. We have held
that when the validity of an interlocutory order has already been passed upon on appeal, the
Decision of the Court on appeal becomes the law of the case between the same parties. Law of the
case has been defined as "the opinion delivered on a former appeal. More specifically, it means that
whatever is once irrevocably established as the controlling legal rule of decision between the same
parties in the same case continues to be the law of the case, whether correct on general principles or
not, so long as the facts on which such decision was predicated continue to be the facts of the case
before the court."75

The unwinding process of all such illegal assignment of RUBY’s credits is critical and necessary, in
keeping with good faith and as a matter of fairness and justice to all parties affected, particularly the
unsecured creditors who stands to suffer most if left with nothing of the assets of RUBY, and the
minority stockholders who waged legal battles to defend the interest of RUBY and protect the rights
of the minority from the abuses of the controlling stockholders. As correctly stated by the CA:

Liquidation is imperative because the unsecured creditor must negotiate the amount of the imputable
interest rate on its long unpaid credit, the decision on which assets are to be sold to liquidate the
illegally assigned credits must be made, the other secured credits and the trade credits must be
determined, and most importantly, the restoration of the 40.172% minority percentage of ownership
must be done.76

However, we do not agree that it is the SEC which has the authority to supervise RUBY’s liquidation.

In the case of Union Bank of the Philippines v. Concepcion,77 the Court is presented with the issue of
whether the SEC had jurisdiction to proceed with insolvency proceedings after it was shown that the
debtor corporation can no longer be rehabilitated. We held that although jurisdiction over a petition to
declare a corporation in a state of insolvency strictly lies with regular courts, the SEC possessed
ample power under P.D. No. 902-A, as amended, to declare a corporation insolvent as an incident of
and in continuation of its already acquired jurisdiction over the petition to be declared in a state of
suspension of payments in the two instances provided in Sec. 5 (d)78 thereof.

Subsequently, in Consuelo Metal Corporation v. Planters Development Bank 79 the Court was again
confronted with the same issue. The original petition filed by the debtor corporation was for
suspension of payment, rehabilitation and appointment of a rehabilitation receiver or management
committee. Finding the petition sufficient in form and substance, the SEC issued an order suspending
immediately all actions for claims against the petitioner pending before any court, tribunal or body
until further orders from the court. It also created a management committee to undertake petitioner’s
rehabilitation. Four years later, upon the management committee’s recommendation, the SEC issued
an omnibus order directing the dissolution and liquidation of the petitioner, and that the proceedings
on and implementation of the order of liquidation be commenced at the Regional Trial Court to which
the case was transferred. However, the trial court refused to act on the motion filed by the petitioner
who requested for the issuance of a TRO against the extrajudicial foreclosure initiated by one of its
creditors. The trial court ruled that since the SEC had already terminated and decided on the merits
27
the petition for suspension of payment, the trial court no longer had legal basis to act on petitioner’s
motion. It likewise denied the motion for reconsideration stating that petition for suspension of
payment could not be converted into a petition for dissolution and liquidation because they covered
different subject matters and were governed by different rules. Petitioner’s remedy thus was to file a
new petition for dissolution and liquidation either with the SEC or the trial court.

When the case was elevated to the CA, the petition was dismissed affirming that under Sec. 121 of
the Corporation Code, the SEC had jurisdiction to hear the petition for dissolution and liquidation. On
motion for reconsideration, the CA remanded the case to the SEC for proceedings under Sec. 121 of
the Corporation Code. The CA denied the motion for reconsideration filed by the respondent creditor,
who then filed a petition for review with this Court.1âwphi1

We ruled that the SEC observed the correct procedure under the present law, in cases where it
merely retained jurisdiction over pending cases for suspension of payments/rehabilitation, thus:

Republic Act No. 8799 (RA 8799) transferred to the appropriate regional trial courts the SEC’s
jurisdiction defined under Section 5(d) of Presidential Decree No. 902-A. Section 5.2 of RA 8799
provides:

The Commission’s jurisdiction over all cases enumerated under Sec. 5 of Presidential Decree No.
902-A is hereby transferred to the Courts of general jurisdiction or the appropriate Regional Trial
Court: Provided, That the Supreme Court in the exercise of its authority may designate the Regional
Trial Court branches that shall exercise jurisdiction over these cases. The Commission shall retain
jurisdiction over pending cases involving intra-corporate disputes submitted for final resolution which
should be resolved within one (1) year from the enactment of this Code. The Commission shall
retain jurisdiction over pending suspension of payments/rehabilitation cases filed as of 30
June 2000 until finally disposed. (Emphasis supplied)

The SEC assumed jurisdiction over CMC’s petition for suspension of payment and issued a
suspension order on 2 April 1996 after it found CMC’s petition to be sufficient in form and substance.
While CMC’s petition was still pending with the SEC as of 30 June 2000, it was finally disposed of on
29 November 2000 when the SEC issued its Omnibus Order directing the dissolution of CMC and the
transfer of the liquidation proceedings before the appropriate trial court. The SEC finally disposed of
CMC’s petition for suspension of payment when it determined that CMC could no longer be
successfully rehabilitated.

However, the SEC’s jurisdiction does not extend to the liquidation of a corporation. While the SEC
has jurisdiction to order the dissolution of a corporation, jurisdiction over the liquidation of the
corporation now pertains to the appropriate regional trial courts. This is the reason why the SEC, in
its 29 November 2000 Omnibus Order, directed that "the proceedings on and implementation of the
order of liquidation be commenced at the Regional Trial Court to which this case shall be
transferred." This is the correct procedure because the liquidation of a corporation requires the
settlement of claims for and against the corporation, which clearly falls under the jurisdiction of the
regular courts. The trial court is in the best position to convene all the creditors of the corporation,
ascertain their claims, and determine their preferences.80 (Additional emphasis supplied.)

In view of the foregoing, the SEC should now be directed to transfer this case to the proper RTC
which shall supervise the liquidation proceedings under Sec. 122 of the Corporation Code. Under
Sec. 6 (d) of P.D. 902-A, the SEC is empowered, on the basis of the findings and recommendations
of the management committee or rehabilitation receiver, or on its own findings, to determine that the
28
continuance in business of a debtor corporation under suspension of payment or rehabilitation would
not be feasible or profitable nor work to the best interest of the stockholders, parties-litigants,
creditors, or the general public, order the dissolution of such corporation and its remaining assets
liquidated accordingly. As mentioned earlier, the procedure is governed by Rule VI of the SEC Rules
of Procedure on Corporate Recovery.

However, R.A. No. 1014281 otherwise known as the Financial Rehabilitation and Insolvency Act
(FRIA) of 2010, now provides for court proceedings in the rehabilitation or liquidation of debtors, both
juridical and natural persons, in a manner that will "ensure or maintain certainty and predictability in
commercial affairs, preserve and maximize the value of the assets of these debtors, recognize
creditor rights and respect priority of claims, and ensure equitable treatment of creditors who are
similarly situated." Considering that this case was still pending when the new law took effect last
year, the RTC to which this case will be transferred shall be guided by Sec. 146 of said law, which
states:

SEC. 146. Application to Pending Insolvency, Suspension of Payments and Rehabilitation Cases. –
This Act shall govern all petitions filed after it has taken effect. All further proceedings in insolvency,
suspension of payments and rehabilitation cases then pending, except to the extent that in opinion of
the court their application would not be feasible or would work injustice, in which event the
procedures set forth in prior laws and regulations shall apply.

WHEREFORE, the petitions for review on certiorari are DENIED. The Decision dated May 26, 2004
and Resolution dated November 4, 2004 of the Court of Appeals in CA-G.R. SP No. 73195 are
hereby AFFIRMED with MODIFICATION in that the Securities and Exchange Commission is hereby
ordered to TRANSFER SEC Case No. 2556 to the appropriate Regional Trial Court which is
hereby DIRECTED to supervise the liquidation of Ruby Industrial Corporation under the provisions of
R.A. No. 10142. With costs against the petitioners. SO ORDERED.

29
FOREST HILLS GOLF & COUNTRY CLUB, Petitioner, vs. VERTEX SALES AND TRADING,
INC., Respondent. G.R. No. 202205 March 6, 2013 BRION, J.:

Before the Court is a petition for review on certiorari,1 filed under Rule 45 of the Rules of Court,
assailing the decision2 dated February 22, 2012 and the resolution3dated May 31, 2012 of the Court
of Appeals (CA) in CA-G.R. CV No. 89296.

The Facts

Petitioner Forest Hills Golf & Country Club (Forest Hills) is a domestic non-profit stock corporation
that operates and maintains a golf and country club facility in Antipolo City. Forest Hills was created
as a result of a joint venture agreement between Kings Properties Corporation (Kings) and Fil-Estate
Golf and Development, Inc. (FEGDI). Accordingly, Kings and FEGDI owned the shares of stock of
Forest Hills, holding 40% and 60% of the shares, respectively. In August 1997, FEGDI sold to RS
Asuncion Construction Corporation (RSACC) one (1) Class "C" common share of Forest Hills for
₱1.1 million. Prior to the full payment of the purchase price, RSACC transferred its interests over
FEGDI's Class "C" common share to respondent Vertex Sales and Trading, Inc. (Vertex).4 RSACC
advised FEGDI of the transfer and FEGDI, in turn, requested Forest Hills to recognize Vertex as a
shareholder. Forest Hills acceded to the request, and Vertex was able to enjoy membership
privileges in the golf and country club. Despite the sale of FEGDI's Class "C" common share to
Vertex, the share remained in the name of FEGDI, prompting Vertex to demand for the issuance of a
stock certificate in its name.5 As its demand went unheeded, Vertex filed a complaint6 for rescission
with damages against defendants Forest Hills, FEGDI, and Fil-Estate Land, Inc. (FELI) – the
developer of the Forest Hills golf course. Vertex averred that the defendants defaulted in their
obligation as sellers when they failed and refused to issue the stock certificate covering the Class "C"
common share. It prayed for the rescission of the sale and the return of the sums it paid; it also
claimed payment of actual damages for the defendants’ unjustified refusal to issue the stock
certificate. Forest Hills denied transacting business with Vertex and claimed that it was not a party to
the sale of the share; FELI claimed the same defense. While admitting that no stock certificate was
issued, FEGDI alleged that Vertex nonetheless was recognized as a stockholder of Forest Hills and,
as such, it exercised rights and privileges of one. FEGDI added that during the pendency of Vertex's
action for rescission, a stock certificate was issued in Vertex's name,7 but Vertex refused to accept it.

The RTC Ruling

In its March 1, 2007 decision,8 the Regional Trial Court (RTC) dismissed Vertex's complaint after
finding that the failure to issue a stock certificate did not constitute a violation of the essential terms of
the contract of sale that would warrant its rescission. The RTC noted that the sale was already
consummated notwithstanding the non-issuance of the stock certificate. The issuance of a stock
certificate is a collateral matter in the consummated sale of the share; the stock certificate is not
essential to the creation of the relation of a shareholder. Hence, the RTC ruled that the non-issuance
of the stock certificate is a mere casual breach that would not entitle Vertex to rescind the sale.9

The CA Ruling

Vertex appealed the RTC's dismissal of its complaint. In its February 22, 2012 decision,10 the CA
reversed the RTC. It declared that "in the sale of shares of stock, physical delivery of a stock
certificate is one of the essential requisites for the transfer of ownership of the stocks purchased." 11 It
based its ruling on Section 63 of the Corporation Code,12 which requires for a valid transfer of stock –

30
 (1) the delivery of the stock certificate;
(2) the endorsement of the stock certificate by the owner or his attorney-in-fact or other
persons legally authorized to make the transfer; and
(3) to be valid against third parties, the transfer must be recorded in the books of the
corporation.

Without the issuance of the stock certificate and despite Vertex’s full payment of the purchase price,
the share cannot be considered as having been validly transferred. Hence, the CA rescinded the sale
of the share and ordered the defendants to return the amount paid by Vertex by reason of the sale.
The dispositive portion reads:

WHEREFORE, in view of the foregoing premises, the appeal is hereby GRANTED and the March 1,
2007 Decision of the Regional Trial Court, Branch 161, Pasig City in Civil Case No. 68791 is hereby
REVERSED AND SET ASIDE. Accordingly, the sale of x x x one (1) Class "C" Common Share of
Forest Hills Golf and Country Club is hereby rescinded and defendants-appellees are hereby ordered
to return to Vertex Sales and Trading, Inc. the amount it paid by reason of the said sale.13 (emphasis
ours) The CA denied Forest Hills' motion for reconsideration in its resolution of May 31, 2012. 14

The Parties’ Arguments

Forest Hills filed the present petition for review on certiorari to assail the CA rulings. It argues that
rescission should be allowed only for substantial breaches that would defeat the very object of the
parties making the agreement.
The delay in the issuance of the stock certificate could not be considered as a substantial breach,
considering that Vertex was recognized as, and enjoyed the privileges of, a stockholder.
Forest Hills also objects to the CA ruling that required it to return the amount paid by Vertex for the
share of stock. It claims that it was not a party to the contract of sale; hence, it did not receive any
amount from Vertex which it would be obliged to return on account of the rescission of the contract.

In its comment to the petition,15 Vertex disagrees and claims that its compliance with its obligation to
pay the price and the other fees called into action the defendants’ compliance with their reciprocal
obligation to deliver the stock certificate, but the defendants failed to discharge this obligation. The
defendants’ three (3)-year delay in issuing the stock certificate justified the rescission of the sale of
the share of stock. On account of the rescission, Vertex claims that mutual restitution should take
place. It argues that Forest Hills should be held solidarily liable with FEGDI and FELI, since the delay
was caused by Forest Hills’ refusal to issue the share of FEGDI, from whom Vertex acquired its
share.

The Court’s Ruling

The assailed CA rulings (a) declared the rescission of the sale of one (1) Class "C" common share of
Forest Hills to Vertex and (b) ordered the return by Forest Hills, FEGDI, and FELI to Vertex of the
amount the latter paid by reason of the sale. While Forest Hills argues that the ruling rescinding the
sale of the share is erroneous, its ultimate prayer was for the reversal and setting aside of the ruling
holding it liable to return the amount paid by Vertex for the sale.16

The Court finds Forest Hills’ prayer justified.

Ruling on rescission of sale is a settled matter

31
At the outset, we declare that the question of rescission of the sale of the share is a settled matter
that the Court can no longer review in this petition. While Forest Hills questioned and presented its
arguments against the CA ruling rescinding the sale of the share in its petition, it is not the proper
party to appeal this ruling.

As correctly pointed out by Forest Hills, it was not a party to the sale even though the subject of the
sale was its share of stock. The corporation whose shares of stock are the subject of a transfer
transaction (through sale, assignment, donation, or any other mode of conveyance) need not be a
party to the transaction, as may be inferred from the terms of Section 63 of the Corporation Code.
However, to bind the corporation as well as third parties, it is necessary that the transfer is recorded
in the books of the corporation. In the present case, the parties to the sale of the share were FEGDI
as the seller and Vertex as the buyer (after it succeeded RSACC). As party to the sale, FEGDI is the
one who may appeal the ruling rescinding the sale. The remedy of appeal is available to a party who
has "a present interest in the subject matter of the litigation and is aggrieved or prejudiced by the
judgment. A party, in turn, is deemed aggrieved or prejudiced when his interest, recognized by
law in the subject matter of the lawsuit, is injuriously affected by the judgment, order or
decree."17 The rescission of the sale does not in any way prejudice Forest Hills in such a manner
that its interest in the subject matter – the share of stock – is injuriously affected. Thus, Forest Hills is
in no position to appeal the ruling rescinding the sale of the share. Since FEGDI, as party to the sale,
filed no appeal against its rescission, we consider as final the CA’s ruling on this matter.

Ruling on return of amounts paid by reason of the sale modified

The CA’s ruling ordering the "return to [Vertex] the amount it paid by reason of the sale"18 did not
specify in detail what the amount to be returned consists of and it did not also state the extent of
Forest Hills, FEGDI, and FELI’s liability with regard to the amount to be returned. The records,
however, show that the following amounts were paid by Vertex to Forest Hills, FEGDI, and FELI by
reason of the sale:

Payee Date of Payment Purpose Amount Paid

FEGDI February 9, 1999 Purchase price ₱780,000.0019

for one (1) Class
"C" common
share

FEGDI February 9, 1999 Transfer fee P 60,000.0020

Forest Hills February 23, Membership fee P 150,000.0021

1999

FELI September 25, Documentary P 6,300.0022

2000 Stamps

FEGDI September 25, Notarial fees P 200.0023

2000

32
A necessary consequence of rescission is restitution: the parties to a rescinded contract must be
brought back to their original situation prior to the inception of the contract; hence, they must return
what they received pursuant to the contract.24 Not being a party to the rescinded contract, however,
Forest Hills is under no obligation to return the amount paid by Vertex by reason of the sale. Indeed,
Vertex failed to present sufficient evidence showing that Forest Hills received the purchase price for
the share or any other fee paid on account of the sale (other than the membership fee which we will
deal with after) to make Forest Hills jointly or solidarily liable with FEGDI for restitution.

Although Forest Hills received ₱150,000.00 from Vertex as membership fee, it should be allowed to
retain this amount. For three years prior to the rescission of the sale, the nominees of Vertex enjoyed
membership privileges and used the golf course and the amenities of Forest Hills.25 We consider the
amount paid as sufficient consideration for the privileges enjoyed by Vertex's nominees as members
of Forest Hills.

WHEREFORE, in view of the foregoing, the Court PARTIALLY GRANTS the petition for review on
certiorari. The decision dated February 22, 2012 and the resolution dated May 31, 2012 of the Court
of Appeals in CA-G.R. CV No. 89296 are hereby MODIFIED. Petitioner Forest Hills Golf & Country
Club is ABSOLVED from liability for any amount paid by Vertex Sales and Trading, Inc. by reason of
the rescinded sale of one (1) Class "C" common share of Forest Hills Golf & Country Club. SO
ORDERED.

33
LEON J. LAMBERT, plaintiff-appellant, vs. T. J. FOX, defendant-appellee.
G.R. No. L-7991 January 29, 1914 MORELAND, J.:

This is an action brought to recover a penalty prescribed on a contract as punishment for the breach
thereof.

Early in 1911 the firm known as John R. Edgar & Co., engaged in the retail book and stationery
business, found itself in such condition financially that its creditors, including the plaintiff and the
defendant, together with many others, agreed to take over the business, incorporate it and accept
stock therein in payment of their respective credits. This was done, the plaintiff and the defendant
becoming the two largest stockholders in the new corporation called John R. Edgar & Co.,
Incorporated. A few days after the incorporation was completed plaintiff and defendant entered into
the following agreement:

Whereas the undersigned are, respectively, owners of large amounts of stock in John R. Edgar
and Co, Inc; and,

Whereas it is recognized that the success of said corporation depends, now and for at least
one year next following, in the larger stockholders retaining their respective interests in the
business of said corporation:

Therefore, the undersigned mutually and reciprocally agree not to sell, transfer, or otherwise
dispose of any part of their present holdings of stock in said John R. Edgar & Co. Inc., till after
one year from the date hereof.

Either party violating this agreement shall pay to the other the sum of one thousand (P1,000)
pesos as liquidated damages, unless previous consent in writing to such sale, transfer, or other
disposition be obtained.

Notwithstanding this contract the defendant Fox on October 19, 1911, sold his stock in the said
corporation to E. C. McCullough of the firm of E. C. McCullough & Co. of Manila, a strong competitor
of the said John R. Edgar & Co., Inc.

This sale was made by the defendant against the protest of the plaintiff and with the warning that he
would be held liable under the contract hereinabove set forth and in accordance with its terms. In
fact, the defendant Foz offered to sell his shares of stock to the plaintiff for the same sum that
McCullough was paying them less P1,000, the penalty specified in the contract.

The learned trial court decided the case in favor of the defendant upon the ground that the intention
of the parties as it appeared from the contract in question was to the effect that the agreement should
be good and continue only until the corporation reached a sound financial basis, and that that event
having occurred some time before the expiration of the year mentioned in the contract, the purpose
for which the contract was made and had been fulfilled and the defendant accordingly discharged of
his obligation thereunder. The complaint was dismissed upon the merits.

It is argued here that the court erred in its construction of the contract. We are of the opinion that the
contention is sound. The intention of parties to a contract must be determined, in the first instance,
from the words of the contract itself. It is to be presumed that persons mean what they say when they
speak plain English. Interpretation and construction should by the instruments last resorted to by a
court in determining what the parties agreed to. Where the language used by the parties is plain, then

34
construction and interpretation are unnecessary and, if used, result in making a contract for the
parties. (Lizarraga Hermanos vs. Yap Tico, 24 Phil. Rep., 504.)

In the case cited the court said with reference to the construction and interpretation of statutes: "As
for us, we do not construe or interpret this law. It does not need it. We apply it. By applying the law,
we conserve both provisions for the benefit of litigants. The first and fundamental duty of courts, in
our judgment, is to apply the law. Construction and interpretation come only after it has been
demonstrated that application is impossible or inadequate without them. They are the very last
functions which a court should exercise. The majority of the law need no interpretation or
construction. They require only application, and if there were more application and less construction,
there would be more stability in the law, and more people would know what the law is."

What we said in that case is equally applicable to contracts between persons. In the case at bar the
parties expressly stipulated that the contract should last one year. No reason is shown for saying that
it shall last only nine months. Whatever the object was in specifying the year, it was their agreement
that the contract should last a year and it was their judgment and conviction that their purposes would
not be subversed in any less time. What reason can give for refusing to follow the plain words of the
men who made the contract? We see none.

The appellee urges that the plaintiff cannot recover for the reason that he did not prove damages,
and cites numerous American authorities to the effect that because stipulations for liquidated
damages are generally in excess of actual damages and so work a hardship upon the party in
default, courts are strongly inclined to treat all such agreements as imposing a penalty and to allow a
recovery for actual damages only. He also cites authorities holding that a penalty, as such, will not be
enforced and that the party suing, in spite of the penalty assigned, will be put to his proof to
demonstrate the damages actually suffered by reason of defendants wrongful act or omission.

In this jurisdiction penalties provided in contracts of this character are enforced . It is the rule that
parties who are competent to contract may make such agreements within the limitations of the law
and public policy as they desire, and that the courts will enforce them according to their terms. (Civil
Code, articles 1152, 1153, 1154, and 1155; Fornow vs. Hoffmeister, 6 Phil. Rep., 33; Palacios vs.
Municipality of Cavite, 12 Phil. Rep., 140; Gsell vs. Koch, 16 Phil. Rep., 1.) The only case recognized
by the Civil Code in which the court is authorized to intervene for the purpose of reducing a penalty
stipulated in the contract is when the principal obligation has been partly or irregularly fulfilled and the
court can see that the person demanding the penalty has received the benefit of such or irregular
performance. In such case the court is authorized to reduce the penalty to the extent of the benefits
received by the party enforcing the penalty.

In this jurisdiction, there is no difference between a penalty and liquidated damages, so far as legal
results are concerned. Whatever differences exists between them as a matter of language, they are
treated the same legally. In either case the party to whom payment is to be made is entitled to
recover the sum stipulated without the necessity of proving damages. Indeed one of the primary
purposes in fixing a penalty or in liquidating damages, is to avoid such necessity.

It is also urged by the appelle in this case that the stipulation in the contract suspending the power to
sell the stock referred to therein is an illegal stipulation, is in restraint of trade and, therefore, offends
public policy. We do not so regard it. The suspension of the power to sell has a beneficial purpose,
results in the protection of the corporation as well as of the individual parties to the contract, and is
reasonable as to the length of time of the suspension. We do not here undertake to discuss the

35
limitations to the power to suspend the right of alienation of stock, limiting ourselves to the statement
that the suspension in this particular case is legal and valid.

The judgment is reversed, the case remanded with instructions to enter a judgment in favor of the
plaintiff and against the defendant for P1,000, with interest; without costs in this instance. Arellano,
C.J., Trent and Araullo, JJ., concur.

Separate Opinions

CARSON, J., dissenting:

I concur.

I think it proper to observe, however that the doctrine touching the construction and interpretation of
penalties prescribed in ordinary civil contracts as set forth in the opinion is carried to is extreme limits
and that its statement in this form is not necessary to sustain the decision upon the facts in this case.

Without entering upon an extended discussion of the authorities, it is sufficient for my purposes to cite
the opinion of the supreme court of Spain, dated June 13, 1906, construing the provisions of article 6
of Book 4, Title 1 of the Civil Code which treats of "contracts with a penal clause." In that case the
court held:

The rules and prescriptions governing penal matters are fundamentally applicable to the penal
sanctions of civil character.

This as well as other cases which might be cited from American as well as Spanish authorities
indicate that special rules of interpretations are and should be made use of by the courts in
construing penal clauses in civil contracts, and that case may well arise wherein the broad doctrine
laid down in the opinion of the court may not be applicable.

36
HENRY FLEISCHER, plaintiff-appellee, vs. BOTICA NOLASCO CO., INC., defendant-appellant.
G.R. No. L-23241 March 14, 1925 JOHNSON, J.:

This action was commenced in the Court of First Instance of the Province of Oriental Negros on the
14th day of August, 1923, against the board of directors of the Botica Nolasco, Inc., a corporation
duly organized and existing under the laws of the Philippine Islands. The plaintiff prayed that said
board of directors be ordered to register in the books of the corporation five shares of its stock in the
name of Henry Fleischer, the plaintiff, and to pay him the sum of P500 for damages sustained by him
resulting from the refusal of said body to register the shares of stock in question. The defendant filed
a demurrer on the ground that the facts alleged in the complaint did not constitute sufficient cause of
action, and that the action was not brought against the proper party, which was the Botica Nolasco,
Inc. The demurrer was sustained, and the plaintiff was granted five days to amend his complaint.

On November 15, 1923, the plaintiff filed an amended complaint against the Botica Nolasco, Inc.,
alleging that he became the owner of five shares of stock of said corporation, by purchase from their
original owner, one Manuel Gonzalez; that the said shares were fully paid; and that the defendant
refused to register said shares in his name in the books of the corporation in spite of repeated
demands to that effect made by him upon said corporation, which refusal caused him damages
amounting to P500. Plaintiff prayed for a judgment ordering the Botica Nolasco, Inc. to register in his
name in the books of the corporation the five shares of stock recorded in said books in the name of
Manuel Gonzalez, and to indemnify him in the sum of P500 as damages, and to pay the costs. The
defendant again filed a demurrer on the ground that the amended complaint did not state facts
sufficient to constitute a cause of action, and that said amended complaint was ambiguous,
unintelligible, uncertain, which demurrer was overruled by the court.

The defendant answered the amended complaint denying generally and specifically each and every
one of the material allegations thereof, and, as a special defense, alleged that the defendant,
pursuant to article 12 of its by-laws, had preferential right to buy from the plaintiff said shares at the
par value of P100 a share, plus P90 as dividends corresponding to the year 1922, and that said offer
was refused by the plaintiff. The defendant prayed for a judgment absolving it from all liability under
the complaint and directing the plaintiff to deliver to the defendant the five shares of stock in question,
and to pay damages in the sum of P500, and the costs.

Upon the issue presented by the pleadings above stated, the cause was brought on for trial, at the
conclusion of which, and on August 21, 1924, the Honorable N. Capistrano, judge, held that, in his
opinion, article 12 of the by-laws of the corporation which gives it preferential right to buy its shares
from retiring stockholders, is in conflict with Act No. 1459 (Corporation Law), especially with section
35 thereof; and rendered a judgment ordering the defendant corporation, through its board of
directors, to register in the books of said corporation the said five shares of stock in the name of the
plaintiff, Henry Fleischer, as the shareholder or owner thereof, instead of the original owner, Manuel
Gonzalez, with costs against the defendant.

The defendant appealed from said judgment, and now makes several assignment of error, all of
which, in substance, raise the question whether or not article 12 of the by-laws of the corporation is in
conflict with the provisions of the Corporation Law (Act No. 1459).

There is no controversy as to the facts of the present case. They are simple and may be stated as
follows:

37
That Manuel Gonzalez was the original owner of the five shares of stock in question, Nos. 16, 17, 18,
19 and 20 of the Botica Nolasco, Inc.; that on March 11, 1923, he assigned and delivered said five
shares to the plaintiff, Henry Fleischer, by accomplishing the form of endorsement provided on the
back thereof, together with other credits, in consideration of a large sum of money owed by Gonzalez
to Fleischer (Exhibits A, B, B-1, B-2, B-3, B-4); that on March 13, 1923, Dr. Eduardo Miciano, who
was the secretary-treasurer of said corporation, offered to buy from Henry Fleischer, on behalf of the
corporation, said shares of stock, at their par value of P100 a share, for P500; that by virtue of article
12 of the by-laws of Botica Nolasco, Inc., said corporation had the preferential right to buy from
Manuel Gonzalez said shares (Exhibit 2); that the plaintiff refused to sell them to the defendant; that
the plaintiff requested Doctor Miciano to register said shares in his name; that Doctor Miciano refused
to do so, saying that it would be in contravention of the by-laws of the corporation.

It also appears from the record that on the 13th day of March, 1923, two days after the assignment of
the shares to the plaintiff, Manuel Gonzales made a written statement to the Botica Nolasco, Inc.,
requesting that the five shares of stock sold by him to Henry Fleischer be noted transferred to
Fleischer's name. He also acknowledged in said written statement the preferential right of the
corporation to buy said five shares (Exhibit 3). On June 14, 1923, Gonzalez wrote a letter to the
Botica Nolasco, withdrawing and cancelling his written statement of March 13, 1923 (Exhibit C), to
which letter the Botica Nolasco on June 15, 1923, replied, declaring that his written statement was in
conformity with the by-laws of the corporation; that his letter of June 14th was of no effect, and that
the shares in question had been registered in the name of the Botica Nolasco, Inc., (Exhibit X).

As indicated above, the important question raised in this appeal is whether or not article 12 of the by-
laws of the Botica Nolasco, Inc., is in conflict with the provisions of the Corporation Law (Act No.
1459). Appellant invoked said article as its ground for denying the request of the plaintiff that the
shares in question be registered in his (plaintiff's) name, and for claiming that it (Botica Nolasco, Inc.)
had the preferential right to buy said shares from Gonzalez. Appellant now contends that article 12 of
the said by-laws is in conformity with the provisions of Act No. 1459. Said article is as follows:

ART. 12. Las acciones de la Corporacion pueden ser transferidas a otra persona, pero para
que estas transferencias tengan validez legal, deben constar en los registros de la
Corporacion con el debido endoso del accionista a cuyo nombre se ha expedido la accion o
acciones que se transfieran, o un documento de transferencia. Entendiendose que, ningun
accionista transferira accion alguna a otra persona sin participar antes por escrito al
Secretario-Tesorero. En igualdad de condiciones, la sociedad tendra el derecho de adquirir
para si la accion o acciones que se traten de transferir. (Exhibit 2.)

The above-quoted article constitutes a by-law or regulation adopted by the Botica Nolasco, Inc.,
governing the transfer of shares of stock of said corporation. The latter part of said article creates in
favor of the Botica Nolasco, Inc., a preferential right to buy, under the same conditions, the share or
shares of stock of a retiring shareholder. Has said corporation any power, under the Corporation Law
(Act. No. 1459), to adopt such by-law?

The particular provisions of the Corporation Law referring to transfer of shares of stock are as follows:

SEC. 13. Every corporation has the power:

(7) To make by-laws, not inconsistent with any existing law, for the fixing or changing of the
number of its officers and directors within the limits prescribed by law, and for the transferring
of its stock, the administration of its corporate affairs, etc.
38
 SEC. 35. The capital stock of stock corporations shall de divided into shares for which
certificates signed by the president or the vice-president, countersigned by the secretary or
clerk and sealed with the seal of the corporation, shall be issued in accordance with the by-
laws. Shares of stock so issued are personal property and may be transferred by delivery of
the certificate indorsed by the owner or his attorney in fact or other person legally authorized to
make the transfer. No transfer, however, shall be valid, except as between the parties, until the
transfer is entered and noted upon the books of the corporation so as to show the names of the
parties to the transaction, that date of the transfer, the number of the certificate, and the
number of shares transferred.

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

Section 13, paragraph 7, above-quoted, empowers a corporation to make by-laws, not inconsistent
with any existing law, for the transferring of its stock. It follows from said provision, that a by-law
adopted by a corporation relating to transfer of stock should be in harmony with the law on the
subject of transfer of stock. The law on this subject is found in section 35 of Act No. 1459 above
quoted. Said section specifically provides that the shares of stock "are personal property and may be
transferred by delivery of the certificate indorsed by the owner, etc." Said section 35 defines the
nature, character and transferability of shares of stock. Under said section they are personal property
and may be transferred as therein provided. Said section contemplates no restriction as to whom
they may be transferred or sold. It does not suggest that any discrimination may be created by the
corporation in favor or against a certain purchaser. The holder of shares, as owner of personal
property, is at liberty, under said section, to dispose of them in favor of whomsoever he pleases,
without any other limitation in this respect, than the general provisions of law. Therefore, a stock
corporation in adopting a by-law governing transfer of shares of stock should take into consideration
the specific provisions of section 35 of Act No. 1459, and said by-law should be made to harmonize
with said provisions. It should not be inconsistent therewith.

The by-law now in question was adopted under the power conferred upon the corporation by section
13, paragraph 7, above quoted; but in adopting said by-law the corporation has transcended the
limits fixed by law in the same section, and has not taken into consideration the provisions of section
35 of Act No. 1459.

As a general rule, the by-laws of a corporation are valid if they are reasonable and calculated to carry
into effect the objects of the corporation, and are not contradictory to the general policy of the laws of
the land. (Supreme Commandery of the Knights of the Golden Rule vs. Ainsworth, 71 Ala., 436; 46
Am. Rep., 332.)

On the other hand, it is equally well settled that by-laws of a corporation must be reasonable and for
a corporate purpose, and always within the charter limits. They must always be strictly subordinate to
the constitution and the general laws of the land. They must not infringe the policy of the state, nor be
hostile to public welfare. (46 Am. Rep., 332.) They must not disturb vested rights or impair the
obligation of a contract, take away or abridge the substantial rights of stockholder or member, affect
rights of property or create obligations unknown to the law. (People's Home Savings Bank vs.
Superior Court, 104 Cal., 649; 43 Am. St. Rep., 147; Ireland vs. Globe Milling Co., 79 Am. St. Rep.,
769.)

The validity of the by-law of a corporation is purely a question of law. (South Florida Railroad Co. vs.
Rhodes, 25 Fla., 40.)
39
 The power to enact by-laws restraining the sale and transfer of stock must be found in the
governing statute or the charter. Restrictions upon the traffic in stock must have their source in
legislative enactment, as the corporation itself cannot create such impediments. By-law are
intended merely for the protection of the corporation, and prescribe regulation and not
restriction; they are always subject to the charter of the corporation. The corporation, in the
absence of such a power, cannot ordinarily inquire into or pass upon the legality of the
transaction by which its stock passes from one person to another, nor can it question the
consideration upon which a sale is based. A by-law cannot take away or abridge the
substantial rights of stockholder. Under a statute authorizing by- laws for the transfer of stock,
a corporation can do no more than prescribe a general mode of transfer on the corporate
books and cannot justify an unreasonable restriction upon the right of sale. (4 Thompson on
Corporations, sec. 4137, p. 674.

The right of unrestrained transfer of shares inheres in the very nature of a corporation, and
courts will carefully scrutinize any attempt to impose restrictions or limitations upon the right of
stockholders to sell and assign their stock. The right to impose any restraint in this respect
must be conferred upon the corporation either by the governing statute or by the articles of the
corporation. It cannot be done by a by-law without statutory or charter authority. (4 Thompson
on Corporations, sec. 4334, pp. 818, 819.)

The jus disponendi, being an incident of the ownership of property, the general rule (subject to
exceptions hereafter pointed out and discussed) is that every owner of corporate shares has
the same uncontrollable right to alien them which attaches to the ownership of any other
species of property. A shareholder is under no obligation to refrain from selling his shares at
the sacrifice of his personal interest, in order to secure the welfare of the corporation, or to
enable another shareholder to make gains and profits. (10 Cyc., p. 577.)

It follows from the foregoing that a corporation has no power to prevent or to restrain transfers
of its shares, unless such power is expressly conferred in its charter or governing statute. This
conclusion follows from the further consideration that by-laws or other regulations restraining
such transfers, unless derived from authority expressly granted by the legislature, would be
regarded as impositions in restraint of trade. (10 Cyc., p. 578.)

The foregoing authorities go farther than the stand we are taking on this question. They hold that the
power of a corporation to enact by-laws restraining the sale and transfer of shares, should not only be
in harmony with the law or charter of the corporation, but such power should be expressly granted in
said law or charter.

The only restraint imposed by the Corporation Law upon transfer of shares is found in section 35 of
Act No. 1459, quoted above, as follows: "No transfer, however, shall be valid, except as between the
parties, until the transfer is entered and noted upon the books of the corporation so as to show the
names of the parties to the transaction, the date of the transfer, the number of the certificate, and the
number of shares transferred." This restriction is necessary in order that the officers of the
corporation may know who are the stockholders, which is essential in conducting elections of officers,
in calling meeting of stockholders, and for other purposes. but any restriction of the nature of that
imposed in the by-law now in question, is ultra vires, violative of the property rights of shareholders,
and in restraint of trade.

And moreover, the by-laws now in question cannot have any effect on the appellee. He had no
knowledge of such by-law when the shares were assigned to him. He obtained them in good faith
40
and for a valuable consideration. He was not a privy to the contract created by said by-law between
the shareholder Manuel Gonzalez and the Botica Nolasco, Inc. Said by-law cannot operate to defeat
his rights as a purchaser.

An unauthorized by-law forbidding a shareholder to sell his shares without first offering them to
the corporation for a period of thirty days is not binding upon an assignee of the stock as a
personal contract, although his assignor knew of the by-law and took part in its adoption. (10
Cyc., 579; Ireland vs. Globe Milling Co., 21 R.I., 9.)

When no restriction is placed by public law on the transfer of corporate stock, a purchaser is
not affected by any contractual restriction of which he had no notice. (Brinkerhoff-Farris Trust
and Savings Co. vs. Home Lumber Co., 118 Mo., 447.)

The assignment of shares of stock in a corporation by one who has assented to an

unauthorized by-law has only the effect of a contract by, and enforceable against, the assignor;
the assignee is not bound by such by-law by virtue of the assignment alone. (Ireland vs. Globe
Milling Co., 21 R.I., 9.)

A by-law of a corporation which provides that transfers of stock shall not be valid unless
approved by the board of directors, while it may be enforced as a reasonable regulation for the
protection of the corporation against worthless stockholders, cannot be made available to
defeat the rights of third persons. (Farmers' and Merchants' Bank of Lineville vs. Wasson, 48
Iowa, 336.)

Counsel for defendant incidentally argues in his brief, that the plaintiff does not have any right of
action against the defendant corporation, but against the president and secretary thereof, inasmuch
as the signing and registration of shares is incumbent upon said officers pursuant to section 35 of the
Corporation Law. This contention cannot be sustained now. The question should have been raised in
the lower court. It is too late to raise it now in this appeal. Besides, as stated above, the corporation
was made defendant in this action upon the demurrer of the attorney of the original defendant in the
lower court, who contended that the Botica Nolasco, Inc., should be made the party defendant in this
action. Accordingly, upon order of the court, the complaint was amended and the said corporation
was made the party defendant.

Whenever a corporation refuses to transfer and register stock in cases like the present, mandamus
will lie to compel the officers of the corporation to transfer said stock upon the books of the
corporation. (26 Cyc. 347; Hager vs. Bryan, 19 Phil., 138.)

In view of all the foregoing, we are of the opinion, and so hold, that the decision of the lower court is
in accordance with law and should be and is hereby affirmed, with costs. So ordered.

Malcolm, Villamor, Ostrand, Johns, and Romualdez, JJ., concur.

41
VICENTE C. PONCE, petitioner, vs. ALSONS CEMENT CORPORATION, and FRANCISCO M.
GIRON, JR., respondents. G.R. NO. 139802 December 10, 2002 QUISUMBING, J.:

This petition for review seeks to annul the decision1 of the Court of Appeals, in CA-G.R. SP No.
46692, which set aside the decision2 of the Securities and Exchange Commission (SEC) En Banc in
SEC-AC No. 545 and reinstated the order3 of the Hearing Officer dismissing herein petitioner’s
complaint. Also assailed is the CA’s resolution4 of August 10, 1999, denying petitioner’s motion for
reconsideration.

On January 25, 1996, plaintiff (now petitioner) Vicente C. Ponce, filed a complaint5 with the SEC for
mandamus and damages against defendants (now respondents) Alsons Cement Corporation and its
corporate secretary Francisco M. Giron, Jr. In his complaint, petitioner alleged, among others, that:

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

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

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

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

9. From the time of incorporation of VCC up to the present, no certificates of stock

corresponding to the 239,500 subscribed and fully paid shares of Gaid were issued in the
name of Fausto G. Gaid and/or the plaintiff.

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

Attached to the complaint was the Deed of Undertaking and Indorsement7 upon which petitioner
based his petition for mandamus. Said deed and indorsement read as follows:

DEED OF UNDERTAKING

KNOW ALL MEN BY THESE PRESENTS:

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

(SGD.) VICENTE C. PONCE

February 8, 1968
42
CONFORME:

(SGD.) FAUSTO GAID

INDORSEMENT

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

(SGD.) FAUSTO GAID

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

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

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

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

Insofar as the issuance of certificates of stock is concerned, the real party in interest is Fausto G.
Gaid, or his estate or his heirs. Gaid was an incorporator and an original stockholder of the defendant
corporation who subscribed and fully paid for 239,500 shares of stock (Annex "B"). In accordance
with Section 37 of the old Corporation Law (Act No. 1459) obtaining in 1968 when the defendant
corporation was incorporated, as well as Section 64 of the present Corporation Code (Batas
Pambansa Blg. 68), a stockholder who has fully paid for his subscription together with interest and
expenses in case of delinquent shares, is entitled to the issuance of a certificate of stock for his
shares. According to paragraph 9 of the Complaint, no stock certificate was issued to Gaid.

Comes now the plaintiff who seeks to step into the shoes of Gaid and thereby become a stockholder
of the defendant corporation by demanding issuance of the certificates of stock in his name. This he
cannot do, for two reasons: there is no record of any assignment or transfer in the books of the
defendant corporation, and there is no instruction or authority from the transferor (Gaid) for such
assignment or transfer. Indeed, nothing is alleged in the complaint on these two points.

43
In the present case, there is not even any indorsement of any stock certificate to speak of. What the
plaintiff possesses is a document by which Gaid supposedly transferred the shares to him. Assuming
the document has this effect, nevertheless there is neither any allegation nor any showing that it is
recorded in the books of the defendant corporation, such recording being a prerequisite to the
issuance of a stock certificate in favor of the transferee.12

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

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

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

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

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

Their motion for reconsideration having been denied, herein respondents appealed the decision15 of
the SEC En Banc and the resolution16 denying their motion for reconsideration to the Court of
Appeals.

In its decision, the Court of Appeals held that in the absence of any allegation that the transfer of the
shares between Fausto Gaid and Vicente C. Ponce was registered in the stock and transfer book of
ALSONS, Ponce failed to state a cause of action. Thus, said the CA, "the complaint for mandamus
should be dismissed for failure to state a cause of action."17 petitioner’s motion for reconsideration
was likewise denied in a resolution18 dated August 10, 1999.

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

44
 I. … THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE
COMPLAINT FOR ISSUANCE OF A CERTIFICATE OF STOCK FILED BY PETITIONER
FAILED TO STATE A CAUSE OF ACTION BECAUSE IT DID NOT ALLEGE THAT THE
TRANSFER OF THE SHARES (SUBJECT MATTER OF THE COMPLAINT) WAS
REGISTERED IN THE STOCK AND TRANSFER BOOK OF THE CORPORATION, CITING
SECTION 63 OF THE CORPORATION CODE.

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

III. … THE HONORABLE COURT OF APPEALS ERRED IN APPLYING A 1911 CASE,

"HAGER VS. BRYAN", 19 PHIL. 138, TO DISMISS THE COMPLAINT FOR ISSUANCE OF A
CERTIFICATE OF STOCK.19

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

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

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

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

Respondents, in their comment, maintain that the transfer of shares of stock not recorded in the stock
and transfer book of the corporation is non-existent insofar as the corporation is concerned and no
certificate of stock can be issued in the name of the transferee. Until the recording is made, the
transfer cannot be the basis of issuance of a certificate of stock. They add that petitioner is not the
real party in interest, the real party in interest being Fausto Gaid since it is his name that appears in
the records of the corporation. They conclude that petitioner’s cause of action is barred by
prescription and laches since 24 years elapsed before he made any demand upon ALSONS.

45
We find the instant petition without merit. The Court of Appeals did not err in ruling that petitioner had
no cause of action, and that his petition for mandamus was properly dismissed.

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

The Corporation Code states that:

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

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

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

Hence, without such recording, the transferee may not be regarded by the corporation as one among
its stockholders and the corporation may legally refuse the issuance of stock certificates in the name
of the transferee even when there has been compliance with the requirements of Section 6424 of the
Corporation Code. This is the import of Section 63 which states that "No transfer, however, shall be
valid, except between the parties, until the transfer is recorded in the books of the corporation
showing the names of the parties to the transaction, the date of the transfer, the number of the
certificate or certificates and the number of shares transferred." The situation would be different if the
petitioner was himself the registered owner of the stock which he sought to transfer to a third party,
for then he would be entitled to the remedy of mandamus.25

From the corporation’s point of view, the transfer is not effective until it is recorded. Unless and until
such recording is made the demand for the issuance of stock certificates to the alleged transferee
has no legal basis. As between the corporation on the one hand, and its shareholders and third
persons on the other, the corporation looks only to its books for the purpose of determining who its
shareholders are.26 In other words, the stock and transfer book is the basis for ascertaining the
persons entitled to the rights and subject to the liabilities of a stockholder. Where a transferee is not

46
yet recognized as a stockholder, the corporation is under no specific legal duty to issue stock
certificates in the transferee’s name.

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

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

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

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

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

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

It appears, however, from the original as well as the amended petition, that this petitioner is not the
registered owner of the stock which he seeks to have transferred, and except in so far as he alleges
that he is the owner of the stock and that it was "indorsed" to him on February 5 by the Bryan-Landon
Company, in whose name it is registered on the books of the Visayan Electric Company, there is no
allegation that the petitioner holds any power of attorney from the Bryan-Landon Company
authorizing him to make demand on the secretary of the Visayan Electric Company to make the
transfer which petitioner seeks to have made through the medium of the mandamus of this court.
47
Without discussing or deciding the respective rights of the parties which might be properly asserted in
an ordinary action or an action in the nature of an equitable suit, we are all agreed that in a case such
as that at bar, a mandamus should not issue to compel the secretary of a corporation to make a
transfer of the stock on the books of the company, unless it affirmatively appears that he has failed or
refused so to do, upon the demand either of the person in whose name the stock is registered, or of
some person holding a power of attorney for that purpose from the registered owner of the stock.
There is no allegation in the petition that the petitioner or anyone else holds a power of attorney from
the Bryan-Landon Company authorizing a demand for the transfer of the stock, or that the Bryan-
Landon Company has ever itself made such demand upon the Visayan Electric Company, and in the
absence of such allegation we are not able to say that there was such a clear indisputable duty, such
a clear legal obligation upon the respondent, as to justify the issuance of the writ to compel him to
perform it.

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

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

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

48
purchaser’s right to secure the corresponding certificate in his name,"32 was addressed to the issue
of jurisdiction, which is not pertinent to the issue at hand.

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

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

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

No pronouncement as to costs. SO ORDERED.

49
RAMON C. LEE and ANTONIO DM. LACDAO, petitioners, vs. THE HON. COURT OF APPEALS,
SACOBA MANUFACTURING CORP., PABLO GONZALES, JR. and THOMAS
GONZALES, respondents. G.R. No. 93695 February 4, 1992 GUTIERREZ, JR., J.:

What is the nature of the voting trust agreement executed between two parties in this case? Who
owns the stocks of the corporation under the terms of the voting trust agreement? How long can a
voting trust agreement remain valid and effective? Did a director of the corporation cease to be such
upon the creation of the voting trust agreement? These are the questions the answers to which are
necessary in resolving the principal issue in this petition for certiorari — whether or not there was
proper service of summons on Alfa Integrated Textile Mills (ALFA, for short) through the petitioners
as president and vice-president, allegedly, of the subject corporation after the execution of a voting
trust agreement between ALFA and the Development Bank of the Philippines (DBP, for short).

From the records of the instant case, the following antecedent facts appear:

On November 15, 1985, a complaint for a sum of money was filed by the International Corporate
Bank, Inc. against the private respondents who, in turn, filed a third party complaint against ALFA and
the petitioners on March 17, 1986.

On September 17, 1987, the petitioners filed a motion to dismiss the third party complaint which the
Regional Trial Court of Makati, Branch 58 denied in an Order dated June 27, 1988.

On July 18, 1988, the petitioners filed their answer to the third party complaint.

Meanwhile, on July 12, 1988, the trial court issued an order requiring the issuance of
an alias summons upon ALFA through the DBP as a consequence of the petitioner's letter informing
the court that the summons for ALFA was erroneously served upon them considering that the
management of ALFA had been transferred to the DBP.

In a manifestation dated July 22, 1988, the DBP claimed that it was not authorized to receive
summons on behalf of ALFA since the DBP had not taken over the company which has a separate
and distinct corporate personality and existence.

On August 4, 1988, the trial court issued an order advising the private respondents to take the
appropriate steps to serve the summons to ALFA.

On August 16, 1988, the private respondents filed a Manifestation and Motion for the Declaration of
Proper Service of Summons which the trial court granted on August 17, 1988.

On September 12, 1988, the petitioners filed a motion for reconsideration submitting that Rule 14,
section 13 of the Revised Rules of Court is not applicable since they were no longer officers of ALFA
and that the private respondents should have availed of another mode of service under Rule 14,
Section 16 of the said Rules, i.e., through publication to effect proper service upon ALFA.

In their Comment to the Motion for Reconsideration dated September 27, 1988, the private
respondents argued that the voting trust agreement dated March 11, 1981 did not divest the
petitioners of their positions as president and executive vice-president of ALFA so that service of
summons upon ALFA through the petitioners as corporate officers was proper.

50
On January 2, 1989, the trial court upheld the validity of the service of summons on ALFA through the
petitioners, thus, denying the latter's motion for reconsideration and requiring ALFA to filed its answer
through the petitioners as its corporate officers.

On January 19, 1989, a second motion for reconsideration was filed by the petitioners reiterating their
stand that by virtue of the voting trust agreement they ceased to be officers and directors of ALFA,
hence, they could no longer receive summons or any court processes for or on behalf of ALFA. In
support of their second motion for reconsideration, the petitioners attached thereto a copy of the
voting trust agreement between all the stockholders of ALFA (the petitioners included), on the one
hand, and the DBP, on the other hand, whereby the management and control of ALFA became
vested upon the DBP.

On April 25, 1989, the trial court reversed itself by setting aside its previous Order dated January 2,
1989 and declared that service upon the petitioners who were no longer corporate officers of ALFA
cannot be considered as proper service of summons on ALFA.

On May 15, 1989, the private respondents moved for a reconsideration of the above Order which was
affirmed by the court in its Order dated August 14, 1989 denying the private respondent's motion for
reconsideration.

On September 18, 1989, a petition for certiorari was belatedly submitted by the private respondent
before the public respondent which, nonetheless, resolved to give due course thereto on September
21, 1989.

On October 17, 1989, the trial court, not having been notified of the pending petition for certiorari with
public respondent issued an Order declaring as final the Order dated April 25, 1989. The private
respondents in the said Order were required to take positive steps in prosecuting the third party
complaint in order that the court would not be constrained to dismiss the same for failure to
prosecute. Subsequently, on October 25, 1989 the private respondents filed a motion for
reconsideration on which the trial court took no further action.

On March 19, 1990, after the petitioners filed their answer to the private respondents' petition
for certiorari, the public respondent rendered its decision, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing, the orders of respondent judge dated April 25,
1989 and August 14, 1989 are hereby SET ASIDE and respondent corporation is
ordered to file its answer within the reglementary period. (CA Decision, p. 8; Rollo, p. 24)

On April 11, 1990, the petitioners moved for a reconsideration of the decision of the public
respondent which resolved to deny the same on May 10, 1990. Hence, the petitioners filed
this certiorari petition imputing grave abuse of discretion amounting to lack of jurisdiction on the part
of the public respondent in reversing the questioned Orders dated April 25, 1989 and August 14,
1989 of the court a quo, thus, holding that there was proper service of summons on ALFA through
the petitioners.

In the meantime, the public respondent inadvertently made an entry of judgment on July 16, 1990
erroneously applying the rule that the period during which a motion for reconsideration has been
pending must be deducted from the 15-day period to appeal. However, in its Resolution dated
January 3, 1991, the public respondent set aside the aforestated entry of judgment after further
considering that the rule it relied on applies to appeals from decisions of the Regional Trial Courts to
51
the Court of Appeals, not to appeals from its decision to us pursuant to our ruling in the case
of Refractories Corporation of the Philippines v. Intermediate Appellate Court, 176 SCRA 539 [1989].
(CA Rollo, pp. 249-250)

In their memorandum, the petitioners present the following arguments, to wit:

(1) that the execution of the voting trust agreement by a stockholders whereby all his
shares to the corporation have been transferred to the trustee deprives the stockholders
of his position as director of the corporation; to rule otherwise, as the respondent Court
of Appeals did, would be violative of section 23 of the Corporation Code ( Rollo, pp. 270-
3273); and

(2) that the petitioners were no longer acting or holding any of the positions provided
under Rule 14, Section 13 of the Rules of Court authorized to receive service of
summons for and in behalf of the private domestic corporation so that the service of
summons on ALFA effected through the petitioners is not valid and ineffective; to
maintain the respondent Court of Appeals' position that ALFA was properly served its
summons through the petitioners would be contrary to the general principle that a
corporation can only be bound by such acts which are within the scope of its officers' or
agents' authority (Rollo, pp. 273-275)

In resolving the issue of the propriety of the service of summons in the instant case, we dwell first on
the nature of a voting trust agreement and the consequent effects upon its creation in the light of the
provisions of the Corporation Code.

A voting trust is defined in Ballentine's Law Dictionary as follows:

(a) trust created by an agreement between a group of the stockholders of a corporation

and the trustee or by a group of identical agreements between individual stockholders
and a common trustee, whereby it is provided that for a term of years, or for a period
contingent upon a certain event, or until the agreement is terminated, control over the
stock owned by such stockholders, either for certain purposes or for all purposes, is to
be lodged in the trustee, either with or without a reservation to the owners, or persons
designated by them, of the power to direct how such control shall be used. (98 ALR 2d.
379 sec. 1 [d]; 19 Am J 2d Corp. sec. 685).

Under Section 59 of the new Corporation Code which expressly recognizes voting trust agreements,
a more definitive meaning may be gathered. The said provision partly reads:

Sec. 59. Voting Trusts — One or more stockholders of a stock corporation may create a
voting trust for the purpose of conferring upon a trustee or trustees the right to vote and
other rights pertaining to the share for a period rights pertaining to the shares for a
period not exceeding five (5) years at any one time: Provided, that in the case of a voting
trust specifically required as a condition in a loan agreement, said voting trust may be for
a period exceeding (5) years but shall automatically expire upon full payment of the loan.
A voting trust agreement must be in writing and notarized, and shall specify the terms
and conditions thereof. A certified copy of such agreement shall be filed with the
corporation and with the Securities and Exchange Commission; otherwise, said
agreement is ineffective and unenforceable. The certificate or certificates of stock
covered by the voting trust agreement shall be cancelled and new ones shall be issued
52
 in the name of the trustee or trustees stating that they are issued pursuant to said
agreement. In the books of the corporation, it shall be noted that the transfer in the name
of the trustee or trustees is made pursuant to said voting trust agreement.

By its very nature, a voting trust agreement results in the separation of the voting rights of a
stockholder from his other rights such as the right to receive dividends, the right to inspect the books
of the corporation, the right to sell certain interests in the assets of the corporation and other rights to
which a stockholder may be entitled until the liquidation of the corporation. However, in order to
distinguish a voting trust agreement from proxies and other voting pools and agreements, it must
pass three criteria or tests, namely: (1) that the voting rights of the stock are separated from the other
attributes of ownership; (2) that the voting rights granted are intended to be irrevocable for a definite
period of time; and (3) that the principal purpose of the grant of voting rights is to acquire voting
control of the corporation. (5 Fletcher, Cyclopedia of the Law on Private Corporations, section 2075
[1976] p. 331 citing Tankersly v. Albright, 374 F. Supp. 538)

Under section 59 of the Corporation Code, supra, a voting trust agreement may confer upon a trustee
not only the stockholder's voting rights but also other rights pertaining to his shares as long as the
voting trust agreement is not entered "for the purpose of circumventing the law against monopolies
and illegal combinations in restraint of trade or used for purposes of fraud." (section 59, 5th
paragraph of the Corporation Code) Thus, the traditional concept of a voting trust agreement
primarily intended to single out a stockholder's right to vote from his other rights as such and made
irrevocable for a limited duration may in practice become a legal device whereby a transfer of the
stockholder's shares is effected subject to the specific provision of the voting trust agreement.

The execution of a voting trust agreement, therefore, may create a dichotomy between the equitable
or beneficial ownership of the corporate shares of a stockholders, on the one hand, and the legal title
thereto on the other hand.

The law simply provides that a voting trust agreement is an agreement in writing whereby one or
more stockholders of a corporation consent to transfer his or their shares to a trustee in order to vest
in the latter voting or other rights pertaining to said shares for a period not exceeding five years upon
the fulfillment of statutory conditions and such other terms and conditions specified in the agreement.
The five year-period may be extended in cases where the voting trust is executed pursuant to a loan
agreement whereby the period is made contingent upon full payment of the loan.

In the instant case, the point of controversy arises from the effects of the creation of the voting trust
agreement. The petitioners maintain that with the execution of the voting trust agreement between
them and the other stockholders of ALFA, as one party, and the DBP, as the other party, the former
assigned and transferred all their shares in ALFA to DBP, as trustee. They argue that by virtue to of
the voting trust agreement the petitioners can no longer be considered directors of ALFA. In support
of their contention, the petitioners invoke section 23 of the Corporation Code which provides, in part,
that:

Every director must own at least one (1) share of the capital stock of the corporation of
which he is a director which share shall stand in his name on the books of the
corporation. Any director who ceases to be the owner of at least one (1) share of the
capital stock of the corporation of which he is a director shall thereby cease to be
director . . . (Rollo, p. 270)

53
The private respondents, on the contrary, insist that the voting trust agreement between ALFA and
the DBP had all the more safeguarded the petitioners' continuance as officers and directors of ALFA
inasmuch as the general object of voting trust is to insure permanency of the tenure of the directors
of a corporation. They cited the commentaries by Prof. Aguedo Agbayani on the right and status of
the transferring stockholders, to wit:

The "transferring stockholder", also called the "depositing stockholder", is equitable

owner for the stocks represented by the voting trust certificates and the stock reversible
on termination of the trust by surrender. It is said that the voting trust agreement does
not destroy the status of the transferring stockholders as such, and thus render them
ineligible as directors. But a more accurate statement seems to be that for some
purposes the depositing stockholder holding voting trust certificates in lieu of his stock
and being the beneficial owner thereof, remains and is treated as a stockholder. It seems
to be deducible from the case that he may sue as a stockholder if the suit is in equity or
is of an equitable nature, such as, a technical stockholders' suit in right of the
corporation. [Commercial Laws of the Philippines by Agbayani, Vol. 3 pp. 492-
493, citing 5 Fletcher 326, 327] (Rollo, p. 291)

We find the petitioners' position meritorious.

Both under the old and the new Corporation Codes there is no dispute as to the most immediate
effect of a voting trust agreement on the status of a stockholder who is a party to its execution —
from legal titleholder or owner of the shares subject of the voting trust agreement, he becomes the
equitable or beneficial owner. (Salonga, Philippine Law on Private Corporations, 1958 ed., p. 268;
Pineda and Carlos, The Law on Private Corporations and Corporate Practice, 1969 ed., p. 175;
Campos and Lopez-Campos, The Corporation Code; Comments, Notes & Selected Cases, 1981,
ed., p. 386; Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the
Philippines, Vol. 3, 1988 ed., p. 536). The penultimate question, therefore, is whether the change in
his status deprives the stockholder of the right to qualify as a director under section 23 of the present
Corporation Code which deletes the phrase "in his own right." Section 30 of the old Code states that:

Every director must own in his own right at least one share of the capital stock of the
stock corporation of which he is a director, which stock shall stand in his name on the
books of the corporation. A director who ceases to be the owner of at least one share of
the capital stock of a stock corporation of which is a director shall thereby cease to be a
director . . . (Emphasis supplied)

Under the old Corporation Code, the eligibility of a director, strictly speaking, cannot be adversely
affected by the simple act of such director being a party to a voting trust agreement inasmuch as he
remains owner (although beneficial or equitable only) of the shares subject of the voting trust
agreement pursuant to which a transfer of the stockholder's shares in favor of the trustee is required
(section 36 of the old Corporation Code). No disqualification arises by virtue of the phrase "in his own
right" provided under the old Corporation Code.

With the omission of the phrase "in his own right" the election of trustees and other persons who in
fact are not beneficial owners of the shares registered in their names on the books of the corporation
becomes formally legalized (see Campos and Lopez-Campos, supra, p. 296) Hence, this is a clear
indication that in order to be eligible as a director, what is material is the legal title to, not beneficial
ownership of, the stock as appearing on the books of the corporation (2 Fletcher, Cyclopedia of the

54
Law of Private Corporations, section 300, p. 92 [1969] citing People v. Lihme, 269 Ill. 351, 109 N.E.
1051).

The facts of this case show that the petitioners, by virtue of the voting trust agreement executed in
1981 disposed of all their shares through assignment and delivery in favor of the DBP, as trustee.
Consequently, the petitioners ceased to own at least one share standing in their names on the books
of ALFA as required under Section 23 of the new Corporation Code. They also ceased to have
anything to do with the management of the enterprise. The petitioners ceased to be directors. Hence,
the transfer of the petitioners' shares to the DBP created vacancies in their respective positions as
directors of ALFA. The transfer of shares from the stockholder of ALFA to the DBP is the essence of
the subject voting trust agreement as evident from the following stipulations:

1. The TRUSTORS hereby assign and deliver to the TRUSTEE the certificate of the
shares of the stocks owned by them respectively and shall do all things necessary for
the transfer of their respective shares to the TRUSTEE on the books of ALFA.

2. The TRUSTEE shall issue to each of the TRUSTORS a trust certificate for the number
of shares transferred, which shall be transferrable in the same manner and with the
same effect as certificates of stock subject to the provisions of this agreement;

3. The TRUSTEE shall vote upon the shares of stock at all meetings of ALFA, annual or
special, upon any resolution, matter or business that may be submitted to any such
meeting, and shall possess in that respect the same powers as owners of the equitable
as well as the legal title to the stock;

4. The TRUSTEE may cause to be transferred to any person one share of stock for the
purpose of qualifying such person as director of ALFA, and cause a certificate of stock
evidencing the share so transferred to be issued in the name of such person;

9. Any stockholder not entering into this agreement may transfer his shares to the same
trustees without the need of revising this agreement, and this agreement shall have the
same force and effect upon that said stockholder. (CA Rollo, pp. 137-138; Emphasis
supplied)

Considering that the voting trust agreement between ALFA and the DBP transferred legal ownership
of the stock covered by the agreement to the DBP as trustee, the latter became the stockholder of
record with respect to the said shares of stocks. In the absence of a showing that the DBP had
caused to be transferred in their names one share of stock for the purpose of qualifying as directors
of ALFA, the petitioners can no longer be deemed to have retained their status as officers of ALFA
which was the case before the execution of the subject voting trust agreement. There appears to be
no dispute from the records that DBP has taken over full control and management of the firm.

Moreover, in the Certification dated January 24, 1989 issued by the DBP through one Elsa A.
Guevarra, Vice-President of its Special Accounts Department II, Remedial Management Group, the
petitioners were no longer included in the list of officers of ALFA "as of April 1982." (CA Rollo, pp.
140-142)

Inasmuch as the private respondents in this case failed to substantiate their claim that the subject
voting trust agreement did not deprive the petitioners of their position as directors of ALFA, the public
respondent committed a reversible error when it ruled that:
55
 . . . while the individual respondents (petitioners Lee and Lacdao) may have ceased to
be president and vice-president, respectively, of the corporation at the time of service of
summons on them on August 21, 1987, they were at least up to that time, still directors .
..

The aforequoted statement is quite inaccurate in the light of the express terms of Stipulation No. 4 of
the subject voting trust agreement. Both parties, ALFA and the DBP, were aware at the time of the
execution of the agreement that by virtue of the transfer of shares of ALFA to the DBP, all the
directors of ALFA were stripped of their positions as such.

There can be no reliance on the inference that the five-year period of the voting trust agreement in
question had lapsed in 1986 so that the legal title to the stocks covered by the said voting trust
agreement ipso facto reverted to the petitioners as beneficial owners pursuant to the 6th paragraph of
section 59 of the new Corporation Code which reads:

Unless expressly renewed, all rights granted in a voting trust agreement shall
automatically expire at the end of the agreed period, and the voting trust certificate as
well as the certificates of stock in the name of the trustee or trustees shall thereby be
deemed cancelled and new certificates of stock shall be reissued in the name of the
transferors.

On the contrary, it is manifestly clear from the terms of the voting trust agreement between ALFA and
the DBP that the duration of the agreement is contingent upon the fulfillment of certain obligations of
ALFA with the DBP. This is shown by the following portions of the agreement.

WHEREAS, the TRUSTEE is one of the creditors of ALFA, and its credit is secured by a
first mortgage on the manufacturing plant of said company;

WHEREAS, ALFA is also indebted to other creditors for various financial accomodations
and because of the burden of these obligations is encountering very serious difficulties in
continuing with its operations.

WHEREAS, in consideration of additional accommodations from the TRUSTEE, ALFA

had offered and the TRUSTEE has accepted participation in the management and
control of the company and to assure the aforesaid participation by the TRUSTEE, the
TRUSTORS have agreed to execute a voting trust covering their shareholding in ALFA
in favor of the TRUSTEE;

AND WHEREAS, DBP is willing to accept the trust for the purpose aforementioned.

NOW, THEREFORE, it is hereby agreed as follows:

6. This Agreement shall last for a period of Five (5) years, and is renewable for as long
as the obligations of ALFA with DBP, or any portion thereof, remains outstanding;
(CA Rollo, pp. 137-138)

Had the five-year period of the voting trust agreement expired in 1986, the DBP would not have
transferred all its rights, titles and interests in ALFA "effective June 30, 1986" to the national
government through the Asset Privatization Trust (APT) as attested to in a Certification dated
January 24, 1989 of the Vice President of the DBP's Special Accounts Department II. In the same

56
certification, it is stated that the DBP, from 1987 until 1989, had handled APT's account which
included ALFA's assets pursuant to a management agreement by and between the DBP and APT
(CA Rollo, p. 142) Hence, there is evidence on record that at the time of the service of summons on
ALFA through the petitioners on August 21, 1987, the voting trust agreement in question was not yet
terminated so that the legal title to the stocks of ALFA, then, still belonged to the DBP.

In view of the foregoing, the ultimate issue of whether or not there was proper service of summons on
ALFA through the petitioners is readily answered in the negative.

Under section 13, Rule 14 of the Revised Rules of Court, it is provided that:

Sec. 13. Service upon private domestic corporation or partnership. — If the defendant is
a corporation organized under the laws of the Philippines or a partnership duly
registered, service may be made on the president, manager, secretary, cashier, agent or
any of its directors.

It is a basic principle in Corporation Law that a corporation has a personality separate and distinct
from the officers or members who compose it. (See Sulo ng Bayan Inc. v. Araneta, Inc., 72 SCRA
347 [1976]; Osias Academy v. Department of Labor and Employment, et al., G.R. Nos. 83257-58,
December 21, 1990). Thus, the above rule on service of processes of a corporation enumerates the
representatives of a corporation who can validly receive court processes on its behalf. Not every
stockholder or officer can bind the corporation considering the existence of a corporate entity
separate from those who compose it.

The rationale of the aforecited rule is that service must be made on a representative so integrated
with the corporation sued as to make it a priori supposable that he will realize his responsibilities and
know what he should do with any legal papers served on him. (Far Corporation v. Francisco, 146
SCRA 197 [1986] citing Villa Rey Transit, Inc. v. Far East Motor Corp. 81 SCRA 303 [1978]).

The petitioners in this case do not fall under any of the enumerated officers. The service of summons
upon ALFA, through the petitioners, therefore, is not valid. To rule otherwise, as correctly argued by
the petitioners, will contravene the general principle that a corporation can only be bound by such
acts which are within the scope of the officer's or agent's authority. (see Vicente v. Geraldez, 52
SCRA 210 [1973]).

WHEREFORE, premises considered, the petition is hereby GRANTED. The appealed decision dated
March 19, 1990 and the Court of Appeals' resolution of May 10, 1990 are SET ASIDE and the Orders
dated April 25, 1989 and October 17, 1989 issued by the Regional Trial Court of Makati, Branch 58
are REINSTATED.

SO ORDERED.

57
RAMON A. GONZALES, petitioner, vs. THE PHILIPPINE NATIONAL BANK, respondent.
G.R. No. L-33320 May 30, 1983 VASQUEZ, J.:

Petitioner Ramon A. Gonzales instituted in the erstwhile Court of First Instance of Manila a special
civil action for mandamus against the herein respondent praying that the latter be ordered to allow
him to look into the books and records of the respondent bank in order to satisfy himself as to the
truth of the published reports that the respondent has guaranteed the obligation of Southern Negros
Development Corporation in the purchase of a US$ 23 million sugar-mill to be financed by Japanese
suppliers and financiers; that the respondent is financing the construction of the P 21 million Cebu-
Mactan Bridge to be constructed by V.C. Ponce, Inc., and the construction of Passi Sugar Mill at Iloilo
by the Honiron Philippines, Inc., as well as to inquire into the validity of Id transactions. The petitioner
has alleged hat his written request for such examination was denied by the respondent. The trial
court having dismissed the petition for mandamus, the instant appeal to review the said dismissal
was filed.

The facts that gave rise to the subject controversy have been set forth by the trial court in the
decision herein sought to be reviewed, as follows:

Briefly stated, the following facts gathered from the stipulation of the parties served as
the backdrop of this proceeding.

Previous to the present action, the petitioner instituted several cases in this Court
questioning different transactions entered into by the Bark with other parties. First among
them is Civil Case No. 69345 filed on April 27, 1967, by petitioner as a taxpayer versus
Sec. Antonio Raquiza of Public Works and Communications, the Commissioner of Public
Highways, the Bank, Continental Ore Phil., Inc., Continental Ore, Huber Corporation,
Allis Chalmers and General Motors Corporation In the course of the hearing of said case
on August 3, 1967, the personality of herein petitioner to sue the bank and question the
letters of credit it has extended for the importation by the Republic of the Philippines of
public works equipment intended for the massive development program of the President
was raised. In view thereof, he expressed and made known his intention to acquire one
share of stock from Congressman Justiniano Montano which, on the following day,
August 30, 1967, was transferred in his name in the books of the Bank.

Subsequent to his aforementioned acquisition of one share of stock of the Bank,

petitioner, in his dual capacity as a taxpayer and stockholder, filed the following cases
involving the bank or the members of its Board of Directors to wit:

l. On October l8,1967, Civil Case No. 71044 versus the Board of Directors of the Bank;
the National Investment and Development Corp., Marubeni Iida Co., Ltd., and Agro-Inc.
Dev. Co. or Saravia;

2. On May 11, 1968, Civil Case No. 72936 versus Roberto Benedicto and other Directors
of the Bank, Passi (Iloilo) Sugar Central, Inc., Calinog-Lambunao Sugar Mill Integrated
Farming, Inc., Talog sugar Milling Co., Inc., Safary Central, Inc., and Batangas Sugar
Central Inc.;

3. On May 8, 1969, Civil Case No. 76427 versus Alfredo Montelibano and the Directors
of both the PNB and DBP;

58
 On January 11, 1969, however, petitioner addressed a letter to the President of the Bank
(Annex A, Pet.), requesting submission to look into the records of its transactions
covering the purchase of a sugar central by the Southern Negros Development Corp. to
be financed by Japanese suppliers and financiers; its financing of the Cebu-Mactan
Bridge to be constructed by V.C. Ponce, Inc. and the construction of the Passi Sugar
Mills in Iloilo. On January 23, 1969, the Asst. Vice-President and Legal Counsel of the
Bank answered petitioner's letter denying his request for being not germane to his
interest as a one-share stockholder and for the cloud of doubt as to his real intention and
purpose in acquiring said share. (Annex B, Pet.) In view of the Bank's refusal the
petitioner instituted this action.' (Rollo, pp. 16-18.)

The petitioner has adopted the above finding of facts made by the trial court in its brief which he
characterized as having been "correctly stated." (Petitioner-Appellant"s Brief, pp. 57.)

The court a quo denied the prayer of the petitioner that he be allowed to examine and inspect the
books and records of the respondent bank regarding the transactions mentioned on the grounds that
the right of a stockholder to inspect the record of the business transactions of a corporation granted
under Section 51 of the former Corporation Law (Act No. 1459, as amended) is not absolute, but is
limited to purposes reasonably related to the interest of the stockholder, must be asked for in good
faith for a specific and honest purpose and not gratify curiosity or for speculative or vicious purposes;
that such examination would violate the confidentiality of the records of the respondent bank as
provided in Section 16 of its charter, Republic Act No. 1300, as amended; and that the petitioner has
not exhausted his administrative remedies.

Assailing the conclusions of the lower court, the petitioner has assigned the single error to the lower
court of having ruled that his alleged improper motive in asking for an examination of the books and
records of the respondent bank disqualifies him to exercise the right of a stockholder to such
inspection under Section 51 of Act No. 1459, as amended. Said provision reads in part as follows:

Sec. 51. ... The record of all business transactions of the corporation and the minutes of
any meeting shall be open to the inspection of any director, member or stockholder of
the corporation at reasonable hours.

Petitioner maintains that the above-quoted provision does not justify the qualification made by the
lower court that the inspection of corporate records may be denied on the ground that it is intended
for an improper motive or purpose, the law having granted such right to a stockholder in clear and
unconditional terms. He further argues that, assuming that a proper motive or purpose for the desired
examination is necessary for its exercise, there is nothing improper in his purpose for asking for the
examination and inspection herein involved.

Petitioner may no longer insist on his interpretation of Section 51 of Act No. 1459, as amended,
regarding the right of a stockholder to inspect and examine the books and records of a corporation.
The former Corporation Law (Act No. 1459, as amended) has been replaced by Batas Pambansa
Blg. 68, otherwise known as the "Corporation Code of the Philippines."

The right of inspection granted to a stockholder under Section 51 of Act No. 1459 has been retained,
but with some modifications. The second and third paragraphs of Section 74 of Batas Pambansa Blg.
68 provide the following:

59
 The records of all business transactions of the corporation and the minutes of any
meeting shag be open to inspection by any director, trustee, stockholder or member of
the corporation at reasonable hours on business days and he may demand, in writing,
for a copy of excerpts from said records or minutes, at his expense.

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

As may be noted from the above-quoted provisions, among the changes introduced in the new Code
with respect to the right of inspection granted to a stockholder are the following the records must be
kept at the principal office of the corporation; the inspection must be made on business days; the
stockholder may demand a copy of the excerpts of the records or minutes; and the refusal to allow
such inspection shall subject the erring officer or agent of the corporation to civil and criminal
liabilities. However, while seemingly enlarging the right of inspection, the new Code has prescribed
limitations to the same. It is now expressly required as a condition for such examination that the one
requesting it must not have been guilty of using improperly any information through a prior
examination, and that the person asking for such examination must be "acting in good faith and for a
legitimate purpose in making his demand."

The unqualified provision on the right of inspection previously contained in Section 51, Act No. 1459,
as amended, no longer holds true under the provisions of the present law. The argument of the
petitioner that the right granted to him under Section 51 of the former Corporation Law should not be
dependent on the propriety of his motive or purpose in asking for the inspection of the books of the
respondent bank loses whatever validity it might have had before the amendment of the law. If there
is any doubt in the correctness of the ruling of the trial court that the right of inspection granted under
Section 51 of the old Corporation Law must be dependent on a showing of proper motive on the part
of the stockholder demanding the same, it is now dissipated by the clear language of the pertinent
provision contained in Section 74 of Batas Pambansa Blg. 68.

Although the petitioner has claimed that he has justifiable motives in seeking the inspection of the
books of the respondent bank, he has not set forth the reasons and the purposes for which he
desires such inspection, except to satisfy himself as to the truth of published reports regarding certain
transactions entered into by the respondent bank and to inquire into their validity. The circumstances
under which he acquired one share of stock in the respondent bank purposely to exercise the right of
inspection do not argue in favor of his good faith and proper motivation. Admittedly he sought to be a
stockholder in order to pry into transactions entered into by the respondent bank even before he
became a stockholder. His obvious purpose was to arm himself with materials which he can use
against the respondent bank for acts done by the latter when the petitioner was a total stranger to the

60
same. He could have been impelled by a laudable sense of civic consciousness, but it could not be
said that his purpose is germane to his interest as a stockholder.

We also find merit in the contention of the respondent bank that the inspection sought to be exercised
by the petitioner would be violative of the provisions of its charter. (Republic Act No. 1300, as
amended.) Sections 15, 16 and 30 of the said charter provide respectively as follows:

Sec. 15. Inspection by Department of Supervision and Examination of the Central Bank.
— The National Bank shall be subject to inspection by the Department of Supervision
and Examination of the Central Bank'

Sec. 16. Confidential information. —The Superintendent of Banks and the Auditor
General, or other officers designated by law to inspect or investigate the condition of the
National Bank, shall not reveal to any person other than the President of the Philippines,
the Secretary of Finance, and the Board of Directors the details of the inspection or
investigation, nor shall they give any information relative to the funds in its custody, its
current accounts or deposits belonging to private individuals, corporations, or any other
entity, except by order of a Court of competent jurisdiction,'

Sec. 30. Penalties for violation of the provisions of this Act.— Any director, officer,
employee, or agent of the Bank, who violates or permits the violation of any of the
provisions of this Act, or any person aiding or abetting the violations of any of the
provisions of this Act, shall be punished by a fine not to exceed ten thousand pesos or
by imprisonment of not more than five years, or both such fine and imprisonment.

The Philippine National Bank is not an ordinary corporation. Having a charter of its own, it is not
governed, as a rule, by the Corporation Code of the Philippines. Section 4 of the said Code provides:

SEC. 4. Corporations created by special laws or charters. — Corporations created by

special laws or charters shall be governed primarily by the provisions of the special law
or charter creating them or applicable to them. supplemented by the provisions of this
Code, insofar as they are applicable.

The provision of Section 74 of Batas Pambansa Blg. 68 of the new Corporation Code with respect to
the right of a stockholder to demand an inspection or examination of the books of the corporation
may not be reconciled with the abovequoted provisions of the charter of the respondent bank. It is not
correct to claim, therefore, that the right of inspection under Section 74 of the new Corporation Code
may apply in a supplementary capacity to the charter of the respondent bank.

WHEREFORE, the petition is hereby DISMISSED, without costs.

61
MA. BELEN FLORDELIZA C. ANG-ABAYA, FRANCIS JASON A. ANG, HANNAH ZORAYDA A.
ANG, and VICENTE G. GENATO, petitioners, vs. EDUARDO G. ANG, respondent.
G.R. No. 178511 December 4, 2008 YNARES-SANTIAGO, J.:

This Petition for Review on Certiorari1 under Rule 45 of the Rules of Court assails the March 6, 2007
Decision2 of the Court of Appeals in CA-G.R. SP No. 94708, which nullified and set aside the July 26,
2005 and March 29, 2006 Resolutions3 of the Secretary of Justice in I.S. No. MAL-2004-1167
directing the withdrawal of the information filed against petitioners for violation of Section 74 of the
Corporation Code. Also assailed is the June 19, 2007 Resolution4 denying the Motion for
Reconsideration.

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

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

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

Because of petitioners’ refusal to grant his request to inspect the corporate books of VMC and
Genato, Eduardo filed an Affidavit-Complaint8 against petitioners Flordeliza and Jason, charging
them with violation (two counts) of Section 74, in relation to Section 144, of the Corporation Code of
the Philippines.9 Ma. Belinda G. Sandejas (Belinda), Vincent, and Hanna were subsequently
impleaded for likewise denying respondent’s request to inspect the corporate books.
62
Petitioners filed a Joint Counter-Affidavit praying for the dismissal of the complaint for lack of factual
and legal basis, or for the suspension of the same while Civil Case No. 4257-MC is still pending
resolution.10 They denied violating Section 74 of the Corporation Code and reiterated the allegations
contained in their complaint in Civil Case No. 4257-MC. Petitioners blamed Eduardo’s lavish lifestyle,
which is funded by personal loans and cash advances from the family corporations. They alleged that
Eduardo consistently pressured petitioner Flordeliza, his daughter, to improperly transfer ownership
of the corporations’ V.A.G. Building to him;11 to disregard the company policy prohibiting advances by
shareholders; to unduly increase his corporate monthly allowance; and to sell her Wack-Wack Golf
proprietary share and use the proceeds thereof to pay his personal financial obligations. When the
proposed transfer of the V.A.G. Building did not materialize, petitioners claim that Eduardo instituted
an action to compel the donation of said property to him.12 Furthermore, they claim that Eduardo
attempted to forcibly evict petitioner Jason from his office at VMC so he can occupy the same; that
Eduardo and his cohorts constantly created trouble by intervening in the daily operations of the
corporations without the knowledge or consent of the board of directors.

Meanwhile, in Civil Case No. 4257-MC, the trial court rendered a Decision granting the permanent
injunction applied for by the corporations.13 However, the Court of Appeals subsequently rendered a
Decision14 declaring that Eduardo, his son Michael, and the other persons impleaded in Civil Case
No. 4257-MC, were imprudently declared in default by the trial court. The appellate court thus
annulled the permanent injunction issued by the trial court and remanded the case for further
proceedings. VMC, Genato, and Oriana corporations filed a Petition for Review on Certiorari before
this Court, but the same was denied for failure to sufficiently show any reversible error in the Decision
of the Court of Appeals.15 The three corporations filed a Motion for Reconsideration, but the same
was denied with finality on June 25, 2008.

Meanwhile, on February 3, 2005, the City Prosecutor’s Office of Malabon City issued a
Resolution16recommending that petitioners be charged with two counts of violation of Section 74 of
the Corporation Code, but dismissed the complaint against Belinda for lack of evidence.17 Petitioners
filed a Petition for Review18 before the Department of Justice (DOJ), which reversed the
recommendation of the City Prosecutor of Malabon City.19 The dispositive portion of the DOJ
Resolution dated July 26, 2005, reads:

Wherefore, premises considered, the assailed resolution is REVERSED and SET ASIDE. The
City Prosecutor of Malabon City is hereby directed to cause the withdrawal of the
corresponding information filed against respondents [herein petitioners] for violation of Section
74 of the Corporation Code of the Philippines and to report the action taken thereon within ten
(10) days from the receipt hereof. SO ORDERED.20

The DOJ denied Eduardo’s Motion for Reconsideration21 in a Resolution22 dated March 29, 2006. On
appeal, the Court of Appeals rendered the assailed Decision, the dispositive portion of which states:

WHEREFORE, the instant petition is partially GRANTED. The assailed Resolutions of public
respondent dated July 26, 2005 and March 29, 2006 are hereby NULLIFIED and SET ASIDE.
However, due to the present existence of a prejudicial question, the criminal case docketed I.S.
No. MAL-2004-1167 is hereby SUSPENDED until Civil Case No. 4257-MC is decided on the
merits with finality. 23

The appellate court ruled that the Secretary of Justice committed grave abuse of discretion
amounting to lack or excess of jurisdiction in reversing the Resolutions of the Malabon City
Prosecutor and in finding that Eduardo did not act in good faith when he demanded for the
63
examination of VMC and Genato’s corporate books. It further held that Eduardo can demand said
examination as a stockholder of both corporations; that Eduardo raised legitimate questions that
necessitated inspection of the corporate books and records; and that petitioners’ refusal to allow
inspection created probable cause to believe that they have committed a violation of Section 74 of
the Corporation Code.

On June 19, 2007, the Court of Appeals denied the Motions for Reconsideration filed by petitioners
and the Secretary of Justice.24 Hence, this petition raising the following issues:

WHETHER OR NOT THE HONORABLE COURT OF APPEALS WAS CORRECT IN ITS

FINDING THAT THE HONORABLE JUSTICE SECRETARY’S REVERSAL OF THE
MALABON CITY PROSECUTOR’S RESOLUTION FINDING PROBABLE CAUSE AGAINST
HEREIN PETITIONERS WAS DONE CONTRARY TO THE APPLICABLE LAW AND
JURISPRUDENCE TANTAMOUNT TO GRAVE ABUSE OF DISCRETION.

WHETHER OR NOT THE HONORABLE JUSTICE SECRETARY COMMITTED GRAVE

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

WHETHER OR NOT THE HONORABLE JUSTICE SECRETARY COMMITTED GRAVE

ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN
FINDING THAT PETITIONERS ACTED IN GOOD FAITH WHEN THEY DENIED PRIVATE
RESPONDENT’S DEMAND FOR INSPECTION OF CORPORATE BOOKS.25

We grant the petition.

Probable cause, for purposes of filing a criminal information, has been defined as such facts as are
sufficient to engender a well-founded belief that a crime has been committed and that respondent is
probably guilty thereof. It is such a state of facts in the mind of the prosecutor as would lead a person
of ordinary caution and prudence to believe or entertain an honest or strong suspicion that a thing is
so. The term does not mean "actual or positive cause;" nor does it import absolute certainty. It is
merely based on opinion and reasonable belief. Thus, a finding of probable cause does not require
an inquiry into whether there is sufficient evidence to procure a conviction. It is enough that it is
believed that the act or omission complained of constitutes the offense charged. Precisely, there is a
trial for the reception of prosecution’s evidence in support of the charge."26

The determination of the existence of probable cause lies within the discretion of the prosecuting
officers after conducting a preliminary investigation upon complaint of an offended party. Their
decisions are reviewable by the Secretary of Justice who may direct the filing of the corresponding
information or to move for the dismissal of the case.27

In reversing the Resolutions of the Secretary of Justice directing the withdrawal of the information
filed against petitioners for lack of probable cause, the Court of Appeals held that it was beyond the
Secretary of Justice’s authority to determine the motives of Eduardo in seeking an inspection of the
corporations’ books and papers.

In order that probable cause to file a criminal case may be arrived at, or in order to engender the well-
founded belief that a crime has been committed, the elements of the crime charged should be
64
present.28 This is based on the principle that every crime is defined by its elements, without which
there should be – at the most – no criminal offense.

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

The stockholder's right of inspection of the corporation's books and records is based upon their
ownership of the assets and property of the corporation. It is, therefore, an incident of
ownership of the corporate property, whether this ownership or interest be termed an equitable
ownership, a beneficial ownership, or a quasi-ownership. This right is predicated upon the
necessity of self-protection. It is generally held by majority of the courts that where the right is
granted by statute to the stockholder, it is given to him as such and must be exercised by him
with respect to his interest as a stockholder and for some purpose germane thereto or in the
interest of the corporation. In other words, the inspection has to be germane to the
petitioner's interest as a stockholder, and has to be proper and lawful in character and
not inimical to the interest of the corporation.30

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

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

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

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

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

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

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

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

65
Fourth. Where the officer or agent of the corporation sets up the defense that the person demanding
to examine and copy excerpts from the corporation’s records and minutes has improperly used any
information secured through any prior examination of the records or minutes of such corporation or of
any other corporation, or was not acting in good faith or for a legitimate purpose in making his
demand, the contrary must be shown or proved.

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

A preliminary investigation is in effect a realistic judicial appraisal of the merits of the case; sufficient
proof of the guilt of the criminal respondent must be adduced so that when the case is tried, the trial
court may not be bound, as a matter of law, to order an acquittal.35 Although a preliminary
investigation is not a trial and is not intended to usurp the function of the trial court, it is not a casual
affair; the officer conducting the same investigates or inquires into the facts concerning the
commission of the crime with the end in view of determining whether or not an information may be
prepared against the accused.36 After all, the purpose of preliminary investigation is not only to
determine whether there is sufficient ground to engender a well-founded belief that a crime has been
committed and the respondent therein is probably guilty thereof and should be held for trial; it is just
as well for the purpose of securing the innocent against hasty, malicious and oppressive prosecution,
and to protect him from an open and public accusation of a crime, from the trouble, expense and
anxiety of a public trial.37 More importantly, in the appraisal of the case presented to him for
resolution, the duty of a prosecutor is more to do justice and less to prosecute.38

If the prosecutor is convinced during preliminary investigation of the validity of the respondent’s claim
of a justifying circumstance, then he must dismiss the complaint; if not, then he must file the requisite
information. This is his discretion, the exercise of which we grant sufficient latitude.39

In the instant case, the Court finds that the Court of Appeals erred in declaring that the Secretary of
Justice exceeded his authority when he conducted an inquiry on the petitioners’ defense of improper
use and motive on Eduardo’s part. As a necessary element in the offense of refusal to honor a
stockholder/member’s right to inspect the corporate books/records, it was incumbent upon the
Secretary of Justice to determine that all the elements which constitute said offense are present, in
line with our ruling in Duterte v. Sandiganbayan.

A preliminary investigation is the crucial sieve in the criminal justice system which spells for an
individual the difference between months if not years of agonizing trial and possibly jail term, on the
one hand, and peace of mind and liberty, on the other. Thus, we have characterized the right to a
preliminary investigation as not a mere formal or technical right but a substantive one, forming part of
due process in criminal justice.40 Due process, in the instant case, requires that an inquiry into the
motive behind Eduardo’s attempt at inspection should have been made even during the preliminary
investigation stage, just as soon as petitioners set up the defense of improper use and motive.

66
Petitioners argue that Eduardo’s demand for an inspection of the corporations’ books is based on the
latter’s attempt in bad faith at having his more than P165 million advances from the corporations
written off; that Eduardo is unjustly demanding that he be given the office of Jason, or the Vice
Presidency for Finance and Corporate Secretary; that Eduardo is usurping rights belonging
exclusively to the corporations; and Eduardo’s attempts at coercing the corporations, their directors
and officers into giving in to his baseless demands involving specific corporate assets. Specifically,
petitioners accuse Eduardo of the following:

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

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

2. He is exercising undue pressure upon petitioners in order to acquire ownership, through the
forced execution of a deed of donation, over the VAG Building in San Juan, which building
belongs to Genato;

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

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

5. In May 2003, without the requisite authority, he called a "stockholders’ meeting" to demand
an increase in his P140,000.00 monthly allowance from the corporation to P250,000.00;
demand a cash advance of US$10,000; and to demand that the corporations shoulder the
medical and educational expenses of his family as well as those of the other stockholders;

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

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

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

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

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

WHEREFORE, the Petition for Review on Certiorari is GRANTED. The March 6, 2007 Decision and
June 19, 2007 Resolution of the Court of Appeals in CA-G.R. SP No. 94708 are REVERSED and
SET ASIDE. The July 26, 2005 and March 29, 2006 Resolutions of the Secretary of Justice directing
the withdrawal of the information filed against petitioners for violation of Section 74 of the Corporation
Code are accordingly REINSTATED and AFFIRMED. SO ORDERED.

68
ADERITO Z. YUJUICO and BONIFACIO C. SUMBILLA, Petitioners, vs. CEZAR T. QUIAMBAO
and ERIC C. PILAPIL, Respondents. G.R. No. 180416 June 2, 2014 PEREZ, J.:

This case is a Petition for Review on Certiorari1 from the Orders2 dated 4 June 2007 and 5 November
2007 of the Regional Trial Court (RTC), Branch 154, of Pasig City in S.C.A. No. 3047.

The facts:

Background

Strategic Alliance Development Corporation (STRADEC) is a domestic corporation operating as a

business development and investment company.

On 1 March 2004, during the annual stockholder's meeting of STRADEC, petitioner Aderito Z.
Yujuico (Yujuico) was elected as president and chairman of the company.3 Yujuico replaced
respondent Cezar T. Quiambao (Quiambao), who had been the president and chairman of
STRADEC since 1994.4

With Yujuico at the helm, STRADEC appointed petitioner Bonifacio C. Sumbilla (Sumbilla) as
treasurer and one Joselito John G. Blando (Blando) as corporate secretary.5 Blando replaced
respondent Eric C. Pilapil (Pilapil), the previous corporate secretary of STRADEC. 6

The Criminal Complaint

On 12 August 2005, petitioners filed a criminal complaint7 against respondents and one Giovanni T.
Casanova (Casanova) before the Office of the City Prosecutor (OCP) of Pasig City. The complaint
was docketed in the OCP as LS. No. PSG 05-08-07465.

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

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

2. As it turns out, the corporate records of STRADEC were in the possession of Casanova-the
accountant of STRADEC. Casanova was keeping custody of the said records on behalf of
Quiambao, who allegedly needed the same as part of his defense in a pending case in court.

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

4. Upon his appointment as corporate secretary on 21 June 2004, Blando likewise demanded
Pilapil for the turnover of the stock and transfer book of STRADEC. Pilapil refused.

5. Instead, on 25 June 2004, Pilapil proposed to Blando to have the stock and transfer book
deposited in a safety deposit box with Equitable PCI Bank, Kamias Road, Quezon City. Blando
acceded to the proposal and the stock and transfer book was deposited in a safety deposit box

69
 with the bank identified. It was agreed that the safety deposit box may only be opened in the
presence of both Quiambao and Blando.

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

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

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

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

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

Preliminary investigation thereafter ensued.

Resolution of the OCP and the Informations

After receiving the counter-affidavits of the respondents and Casanova, as well as the other
documentary submissions9 by the parties, the OCP issued a Resolution10 dated 6 January 2006 in
I.S. No. PSG 05-08-07465. In the said resolution, the OCP absolved Casanova but found probable
cause to hail respondents to court on two (2) offenses: (1) for removing the stock and transfer book of
STRADEC from its principal office, and (2) for refusing access to, and examination of, the corporate
records and the stock and transfer book of STRADEC at its principal office.

Pursuant to the resolution, two (2) informations11 were filed against the respondents before the
Metropolitan Trial Court (MeTC) of Pasig City. The informations were docketed as Criminal Case No.
89723 and Criminal Case No. 89724 and were raffled to Branch 69.

Criminal Case No. 89723 is for the offense of removing the stock and transfer book of STRADEC
from its principal office. The information reads:12

70
On and/or about the period between March 1 and June 25, 2004, inclusive, in Pasig City and within
the jurisdiction of this Honorable Court, the above accused, being then members of the Board of
Directors and/or officers, as the case maybe, of Strategic Alliance Development Corporation
(STRADEC, for short), conspiring and confederating together and mutually helping and aiding one
another, did then and there willfully, unlawfully and feloniously, remove the stock and transfer book of
the said STRADEC at its principal office at the 24th Floor, One Magnificent Mile-CITRA City Bldg.,
San Miguel A venue, Ortigas Center, Pasig City, where they should all be kept, in violation of the
aforesaid law, and to the prejudice of the said complainants.

Criminal Case No. 89724, on the other hand, covers the offense of refusing access to, and
examination of, the corporate records and the stock and transfer book of STRADEC at its principal
office. The information reads:13

On and/or about the period between March 1 and June 25, 2004, inclusive, in Pasig City, and within
the jurisdiction of this Honorable Court, the above accused, being then members of the Board of
Directors and/or officers, as the case maybe, of Strategic Alliance Development Corporation
(STRADEC, for short), conspiring and confederating together and mutually helping and aiding one
another, did then and there willfully, unlawfully and feloniously, refuse to allow complainants
Bonifacio C. Sumbilla and Aderito Z. Yujuico, being then stockholders and/or directors of STRADEC,
access to, and examination of, the corporate records, including the stock and transfer book, of
STRADEC at its principal office at the 24th Floor, One Magnificent Mile-CITRA Bldg., San Miguel
Avenue, Ortigas Center, Pasig City, where they should all be kept, in violation of the aforesaid law,
and to the prejudice of the said complainants.

Urgent Omnibus Motion and the Dismissal of Criminal Case No. 89723

On 18 January 2006, respondents filed before the MeTC an Urgent Omnibus Motion for Judicial
Determination of Probable Cause and To Defer Issuance of Warrants of Arrest (Urgent Omnibus
Motion).14

On 8 May 2006, the MeTC issued an order15 partially granting the Urgent Omnibus Motion. The
MeTC dismissed Criminal Case No. 89723 but ordered the issuance of a warrant of arrest against
respondents in Criminal Case No. 89724.

In dismissing Criminal Case No. 89723, the MeTC held that Section 74, in relation to Section 144, of
the Corporation Code only penalizes the act of "refus[ing] to allow any director, trustee, stockholder
or member of the corporation to examine and copy excerpts from the records or minutes of the
corporation"16 and that act is already the subject matter of Criminal Case No. 89724. Hence, the
MeTC opined, Criminal Case No. 89723-which seeks to try respondents for merely removing the
stock and transfer book of STRADEC from its principal office-actually charges no offense and,
therefore, cannot be sustained.17

Anent directing the issuance of a warrant of arrest in Criminal Case No. 89724, the MeTC found
probable cause to do so; given the failure of the respondents to present any evidence during the
preliminary investigation showing that they do not have possession of the corporate records of
STRADEC or that they allowed petitioners to inspect the corporate records and the stock and transfer
book of STRADEC.18

71
Unsatisfied, the respondents filed a motion for partial Reconsideration19 of the 8 May 2006 order of
the MeTC insofar as the disposition in Criminal Case No. 89724 is concerned. The MeTC, however,
denied such motion on 16 August 2006.20

Certiorari Petition and the Dismissal of Criminal Case No. 89724 After their motion for partial
reconsideration was denied, respondents filed a certiorari petition,21 with prayer for the issuance of a
temporary restraining order (TRO), before the RTC of Pasig City on 27 September 2006. The petition
was docketed as S.C.A. No. 3047.

On 16 November 2006, the RTC issued a TRO enjoining the MeTC from conducting further
proceedings in Criminal Case No. 89724 for twenty (20) days.22

On 4 June 2007, the R TC issued an Order23 granting respondents' certiorari petition and directing
the dismissal of Criminal Case No. 89724. According to the RTC, the MeTC committed grave abuse
of discretion in issuing a warrant of arrest against respondents in Criminal Case No. 89724.

The RTC found that the finding of probable cause against the respondents in Criminal Case No.
89724 was not supported by the evidence presented during the preliminary investigation but was, in
fact, contradicted by them:24

1. The R TC noted that, aside from the complaint itself, no evidence was ever submitted by
petitioners to prove that they demanded and was refused access to the corporate records of
STRADEC between 1 March to 25 June 2004. What petitioners merely submitted is their letter
dated 6 September 2004 demanding from respondents access to the corporate records of
STRADEC.

2. The allegations of petitioners in their complaint, as well as 6 September 2004 letter above-
mentioned, however, are contradicted by the sworn statement dated 1 July 2004 of
Blando25 wherein he attested that as early as 25 June 2004, Pilapil already turned over to him
"two binders containing the minutes, board resolutions, articles of incorporation, copies of
contracts, correspondences and other papers of the corporation, except the stock certificate
book and the stock and transfer book."

3. The RTC also took exception to the reason provided by the MeTC in supporting its finding of
probable cause against the respondents. The R TC held that it was not incumbent upon the
respondents to provide evidence proving their innocence. Hence, the failure of the respondents
to submit evidence showing that they do not have possession of the corporate records of
STRADEC or that they have allowed inspection of the same cannot be taken against them
much less support a finding of probable cause against them.

The RTC further pointed out that, at most, the evidence on record only supports probable cause that
the respondents were withholding the stock and transfer book of STRADEC. The RTC, however,
opined that refusing to allow inspection of the stock and transfer book, as opposed to refusing
examination of other corporate records, is not punishable as an offense under the Corporation
Code.26 Hence, the directive of the RTC dismissing Criminal Case No. 89724.

The petitioners moved for reconsideration,27 but the R TC remained steadfast.28

Hence, this petition by petitioners.

72
 The Instant Petition

In their petition, petitioners claim that Criminal Case No. 89724 may still be sustained against the
respondents insofar as the charge of refusing to allow access to the stock and transfer book of
STRADEC is concerned. They argue that the R TC made a legal blunder when it held that the refusal
to allow inspection of the stock and transfer book of a corporation is not a punishable offense under
the Corporation Code. Petitioners contend that such a refusal still amounts to a violation of Section
74 of the Corporation Code, for which Section 144 of the same code prescribes a penalty.

OUR RULING

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

The foregoing gaffe nonetheless, We still sustain the dismissal of Criminal Case No. 89724 as
against the respondents.

A criminal action based on the violation of a stockholder's right to examine or inspect the corporate
records and the stock and transfer book of a corporation under the second and fourth paragraphs of
Section 74 of the Corporation Code-such as Criminal Case No. 89724--can only be maintained
against corporate officers or any other persons acting on behalf of such corporation. The submissions
of the petitioners during the preliminary investigation, however, clearly suggest that respondents are
neither in relation to STRADEC.

Hence, we deny the petition.

The act of ref using to allow inspection of the

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

We first address the inaccurate pronouncement of the RTC.

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

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

73
The records of all business transactions of the corporation and the minutes of any meetings shall be
open to inspection by any director, trustee, stockholder or member of the corporation at reasonable
hours on business days and he may demand, in writing, for a copy of excerpts from said records or
minutes, at his expense.

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

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

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

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

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

In the assailed Orders, the RTC expressed its opinion that the act of refusing to allow inspection of
the stock and transfer book, even though it may be a violation of Section 74(4), is not punishable as
74
an offense under the Corporation Code.29 In justifying this conclusion, the RTC seemingly relied on
the fact that, under Section 7 4 of the Corporation Code, the application of Section 144 is expressly
mentioned only in relation to the act of "refus[ing] to allow any director, trustees, stockholder or
member of the corporation to examine and copy excerpts from [the corporation's] records or minutes"
that excludes its stock and transfer book.

We do not agree.

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

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

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

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

A criminal action based on the violation of a

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

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

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

75
A perusal of the second and fourth paragraphs of Section 74, as well as the first paragraph of the
same section, reveal that they are provisions that obligates a corporation: they prescribe what books
or records a corporation is required to keep; where the corporation shall keep them;

and what are the other obligations of the corporation to its stockholders or members in relation to
such books and records.1âwphi1 Hence, by parity of reasoning, the second and fourth paragraphs of
Section 74, including the first paragraph of the same section, can only be violated by a corporation.

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

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

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

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

WHEREFORE, premises considered, the petlt10n is hereby DENIED. The Orders dated 4 June 2007
and 5 November 2007 of the Regional Trial Court, Branch 154, of Pasig City in S.C.A. No. 3047,
insofar as said orders effectively dismissed Criminal Case No. 89724 pending before Metropolitan
Trial Court, Branch 69, of Pasig City, are hereby AFFIRMED. SO ORDERED.

76
FRANCIS CHUA, petitioner, vs. HON. COURT OF APPEALS and LYDIA C. HAO, respondents.
G.R. No. 150793 November 19, 2004 QUISUMBING, J.:

Petitioner assails the Decision,1 dated June 14, 2001, of the Court of Appeals in CA-G.R. SP No.
57070, affirming the Order, dated October 5, 1999, of the Regional Trial Court (RTC) of Manila,
Branch 19. The RTC reversed the Order, dated April 26, 1999, of the Metropolitan Trial Court (MeTC)
of Manila, Branch 22. Also challenged by herein petitioner is the CA Resolution,2 dated November 20,
2001, denying his Motion for Reconsideration.

The facts, as culled from the records, are as follows:

On February 28, 1996, private respondent Lydia Hao, treasurer of Siena Realty Corporation, filed a
complaint-affidavit with the City Prosecutor of Manila charging Francis Chua and his wife, Elsa Chua,
of four counts of falsification of public documents pursuant to Article 1723 in relation to Article 1714 of
the Revised Penal Code. The charge reads:

That on or about May 13, 1994, in the City of Manila, Philippines, the said accused, being then
a private individual, did then and there willfully, unlawfully and feloniously commit acts of
falsification upon a public document, to wit: the said accused prepared, certified, and falsified
the Minutes of the Annual Stockholders meeting of the Board of Directors of the Siena Realty
Corporation, duly notarized before a Notary Public, Atty. Juanito G. Garcia and entered in his
Notarial Registry as Doc No. 109, Page 22, Book No. IV and Series of 1994, and therefore, a
public document, by making or causing it to appear in said Minutes of the Annual Stockholders
Meeting that one LYDIA HAO CHUA was present and has participated in said proceedings,
when in truth and in fact, as the said accused fully well knew that said Lydia C. Hao was never
present during the Annual Stockholders Meeting held on April 30, 1994 and neither has
participated in the proceedings thereof to the prejudice of public interest and in violation of
public faith and destruction of truth as therein proclaimed.

CONTRARY TO LAW.5

Thereafter, the City Prosecutor filed the Information docketed as Criminal Case No. 2857216 for
falsification of public document, before the Metropolitan Trial Court (MeTC) of Manila, Branch 22,
against Francis Chua but dismissed the accusation against Elsa Chua.

Herein petitioner, Francis Chua, was arraigned and trial ensued thereafter.

During the trial in the MeTC, private prosecutors Atty. Evelyn Sua-Kho and Atty. Ariel Bruno Rivera
appeared as private prosecutors and presented Hao as their first witness.

After Hao's testimony, Chua moved to exclude complainant's counsels as private prosecutors in the
case on the ground that Hao failed to allege and prove any civil liability in the case.

In an Order, dated April 26, 1999, the MeTC granted Chua's motion and ordered the complainant's
counsels to be excluded from actively prosecuting Criminal Case No. 285721. Hao moved for
reconsideration but it was denied.

Hence, Hao filed a petition for certiorari docketed as SCA No. 99-94846,7 entitled Lydia C. Hao, in her
own behalf and for the benefit of Siena Realty Corporation v. Francis Chua, and the Honorable

77
Hipolito dela Vega, Presiding Judge, Branch 22, Metropolitan Trial Court of Manila, before the
Regional Trial Court (RTC) of Manila, Branch 19.

The RTC gave due course to the petition and on October 5, 1999, the RTC in an order reversed the
MeTC Order. The dispositive portion reads:

WHEREFORE, the petition is GRANTED. The respondent Court is ordered to allow the
intervention of the private prosecutors in behalf of petitioner Lydia C. Hao in the prosecution of
the civil aspect of Crim. Case No. 285721, before Br. 22 [MeTC], Manila, allowing Attys. Evelyn
Sua-Kho and Ariel Bruno Rivera to actively participate in the proceedings. SO ORDERED.8

Chua moved for reconsideration which was denied.

Dissatisfied, Chua filed before the Court of Appeals a petition for certiorari. The petition alleged that
the lower court acted with grave abuse of discretion in: (1) refusing to consider material facts; (2)
allowing Siena Realty Corporation to be impleaded as co-petitioner in SCA No. 99-94846 although it
was not a party to the criminal complaint in Criminal Case No. 285721; and (3) effectively amending
the information against the accused in violation of his constitutional rights.

On June 14, 2001, the appellate court promulgated its assailed Decision denying the petition, thus:

WHEREFORE, premises considered, the petition is hereby DENIED DUE COURSE and
DISMISSED. The Order, dated October 5, 1999 as well as the Order, dated December 3,
1999, are hereby AFFIRMED in toto. SO ORDERED.9

Petitioner had argued before the Court of Appeals that respondent had no authority whatsoever to
bring a suit in behalf of the Corporation since there was no Board Resolution authorizing her to file
the suit.

For her part, respondent Hao claimed that the suit was brought under the concept of a derivative suit.
Respondent maintained that when the directors or trustees refused to file a suit even when there was
a demand from stockholders, a derivative suit was allowed.

The Court of Appeals held that the action was indeed a derivative suit, for it alleged that petitioner
falsified documents pertaining to projects of the corporation and made it appear that the petitioner
was a stockholder and a director of the corporation. According to the appellate court, the corporation
was a necessary party to the petition filed with the RTC and even if private respondent filed the
criminal case, her act should not divest the Corporation of its right to be a party and present its own
claim for damages.

Petitioner moved for reconsideration but it was denied in a Resolution dated November 20, 2001.

Hence, this petition alleging that the Court of Appeals committed reversible errors:

I. … IN RULING THAT LYDIA HAO'S FILING OF CRIMINAL CASE NO. 285721 WAS IN THE
NATURE OF A DERIVATIVE SUIT

II. … IN UPHOLDING THE RULING OF JUDGE DAGUNA THAT SIENA REALTY WAS A
PROPER PETITIONER IN SCA NO. [99-94846]

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 III. … IN UPHOLDING JUDGE DAGUNA'S DECISION ALLOWING LYDIA HAO'S COUNSEL
TO CONTINUE AS PRIVATE PROSECUTORS IN CRIMINAL CASE NO. 285721

IV. … IN [OMITTING] TO CONSIDER AND RULE UPON THE ISSUE THAT JUDGE DAGUNA
ACTED IN GRAVE ABUSE OF DISCRETION IN NOT DISMISSING THE PETITION IN SCA
NO. [99-94846] FOR BEING A SHAM PLEADING.10

The pertinent issues in this petition are the following: (1) Is the criminal complaint in the nature of a
derivative suit? (2) Is Siena Realty Corporation a proper petitioner in SCA No. 99-94846? and (3)
Should private prosecutors be allowed to actively participate in the trial of Criminal Case No. 285721.

On the first issue, petitioner claims that the Court of Appeals erred when (1) it sustained the lower
court in giving due course to respondent's petition in SCA No. 99-94846 despite the fact that the
Corporation was not the private complainant in Criminal Case No. 285721, and (2) when it ruled that
Criminal Case No. 285721 was in the nature of a derivative suit.

Petitioner avers that a derivative suit is by nature peculiar only to intra-corporate proceedings and
cannot be made part of a criminal action. He cites the case of Western Institute of Technology, Inc. v.
Salas,11 where the court said that an appeal on the civil aspect of a criminal case cannot be treated
as a derivative suit. Petitioner asserts that in this case, the civil aspect of a criminal case cannot be
treated as a derivative suit, considering that Siena Realty Corporation was not the private
complainant.

Petitioner misapprehends our ruling in Western Institute. In that case, we said:

Here, however, the case is not a derivative suit but is merely an appeal on the civil aspect of
Criminal Cases Nos. 37097 and 37098 filed with the RTC of Iloilo for estafa and falsification of
public document. Among the basic requirements for a derivative suit to prosper is that the
minority shareholder who is suing for and on behalf of the corporation must allege in his
complaint before the proper forum that he is suing on a derivative cause of action on behalf of
the corporation and all other shareholders similarly situated who wish to join. . . .This was not
complied with by the petitioners either in their complaint before the court a quo nor in the
instant petition which, in part, merely states that "this is a petition for review on certiorari on
pure questions of law to set aside a portion of the RTC decision in Criminal Cases Nos. 37097
and 37098" since the trial court's judgment of acquittal failed to impose civil liability against the
private respondents. By no amount of equity considerations, if at all deserved, can a mere
appeal on the civil aspect of a criminal case be treated as a derivative suit.12

Moreover, in Western Institute, we said that a mere appeal in the civil aspect cannot be treated as a
derivative suit because the appeal lacked the basic requirement that it must be alleged in the
complaint that the shareholder is suing on a derivative cause of action for and in behalf of the
corporation and other shareholders who wish to join.

Under Section 3613 of the Corporation Code, read in relation to Section 23,14 where a corporation is
an injured party, its power to sue is lodged with its board of directors or trustees.15 An individual
stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds
stocks in order to protect or vindicate corporate rights, whenever the officials of the corporation refuse
to sue, or are the ones to be sued, or hold the control of the corporation. In such actions, the suing
stockholder is regarded as a nominal party, with the corporation as the real party in interest.16

79
A derivative action is a suit by a shareholder to enforce a corporate cause of action. The corporation
is a necessary party to the suit. And the relief which is granted is a judgment against a third person in
favor of the corporation. Similarly, if a corporation has a defense to an action against it and is not
asserting it, a stockholder may intervene and defend on behalf of the corporation.17

Under the Revised Penal Code, every person criminally liable for a felony is also civilly liable. 18 When
a criminal action is instituted, the civil action for the recovery of civil liability arising from the offense
charged shall be deemed instituted with the criminal action, unless the offended party waives the civil
action, reserves the right to institute it separately or institutes the civil action prior to the criminal
action.19

In Criminal Case No. 285721, the complaint was instituted by respondent against petitioner for
falsifying corporate documents whose subject concerns corporate projects of Siena Realty
Corporation. Clearly, Siena Realty Corporation is an offended party. Hence, Siena Realty Corporation
has a cause of action. And the civil case for the corporate cause of action is deemed instituted in the
criminal action.

However, the board of directors of the corporation in this case did not institute the action against
petitioner. Private respondent was the one who instituted the action. Private respondent asserts that
she filed a derivative suit in behalf of the corporation. This assertion is inaccurate. Not every suit filed
in behalf of the corporation is a derivative suit. For a derivative suit to prosper, it is required that the
minority stockholder suing for and on behalf of the corporation must allege in his complaint that he is
suing on a derivative cause of action on behalf of the corporation and all other stockholders similarly
situated who may wish to join him in the suit.20 It is a condition sine qua non that the corporation be
impleaded as a party because not only is the corporation an indispensable party, but it is also the
present rule that it must be served with process. The judgment must be made binding upon the
corporation in order that the corporation may get the benefit of the suit and may not bring subsequent
suit against the same defendants for the same cause of action. In other words, the corporation must
be joined as party because it is its cause of action that is being litigated and because judgment must
be a res adjudicata against it.21

In the criminal complaint filed by herein respondent, nowhere is it stated that she is filing the same in
behalf and for the benefit of the corporation. Thus, the criminal complaint including the civil aspect
thereof could not be deemed in the nature of a derivative suit.

We turn now to the second issue, is the corporation a proper party in the petition for certiorari under
Rule 65 before the RTC? Note that the case was titled "Lydia C. Hao, in her own behalf and for the
benefit of Siena Realty Corporation v. Francis Chua, and the Honorable Hipolito dela Vega, Presiding
Judge, Branch 22, Metropolitan Trial Court of Manila." Petitioner before us now claims that the
corporation is not a private complainant in Criminal Case No. 285721, and thus cannot be included
as appellant in SCA No. 99-94846.

Petitioner invokes the case of Ciudad Real & Dev't. Corporation v. Court of Appeals.22 In Ciudad
Real, it was ruled that the Court of Appeals committed grave abuse of discretion when it upheld the
standing of Magdiwang Realty Corporation as a party to the petition for certiorari, even though it was
not a party-in-interest in the civil case before the lower court.

In the present case, respondent claims that the complaint was filed by her not only in her personal
capacity, but likewise for the benefit of the corporation. Additionally, she avers that she has

80
exhausted all remedies available to her before she instituted the case, not only to claim damages for
herself but also to recover the damages caused to the company.

Under Rule 65 of the Rules of Civil Procedure,23 when a trial court commits a grave abuse of
discretion amounting to lack or excess of jurisdiction, the person aggrieved can file a special civil
action for certiorari. The aggrieved parties in such a case are the State and the private offended party
or complainant.24

In a string of cases, we consistently ruled that only a party-in-interest or those aggrieved may file
certiorari cases. It is settled that the offended parties in criminal cases have sufficient interest and
personality as "person(s) aggrieved" to file special civil action of prohibition and certiorari. 25

In Ciudad Real, cited by petitioner, we held that the appellate court committed grave abuse of
discretion when it sanctioned the standing of a corporation to join said petition for certiorari, despite
the finality of the trial court's denial of its Motion for Intervention and the subsequent Motion to
Substitute and/or Join as Party/Plaintiff.

Note, however, that in Pastor, Jr. v. Court of Appeals26 we held that if aggrieved, even a non-party
may institute a petition for certiorari. In that case, petitioner was the holder in her own right of three
mining claims and could file a petition for certiorari, the fastest and most feasible remedy since she
could not intervene in the probate of her father-in-law's estate.27

In the instant case, we find that the recourse of the complainant to the respondent Court of Appeals
was proper. The petition was brought in her own name and in behalf of the Corporation. Although, the
corporation was not a complainant in the criminal action, the subject of the falsification was the
corporation's project and the falsified documents were corporate documents. Therefore, the
corporation is a proper party in the petition for certiorari because the proceedings in the criminal case
directly and adversely affected the corporation.

We turn now to the third issue. Did the Court of Appeals and the lower court err in allowing private
prosecutors to actively participate in the trial of Criminal Case No. 285721?

Petitioner cites the case of Tan, Jr. v. Gallardo,28 holding that where from the nature of the offense or
where the law defining and punishing the offense charged does not provide for an indemnity, the
offended party may not intervene in the prosecution of the offense.

Petitioner's contention lacks merit. Generally, the basis of civil liability arising from crime is the
fundamental postulate that every man criminally liable is also civilly liable. When a person commits a
crime he offends two entities namely (1) the society in which he lives in or the political entity called
the State whose law he has violated; and (2) the individual member of the society whose person,
right, honor, chastity or property has been actually or directly injured or damaged by the same
punishable act or omission. An act or omission is felonious because it is punishable by law, it gives
rise to civil liability not so much because it is a crime but because it caused damage to another.
Additionally, what gives rise to the civil liability is really the obligation and the moral duty of everyone
to repair or make whole the damage caused to another by reason of his own act or omission, whether
done intentionally or negligently. The indemnity which a person is sentenced to pay forms an integral
part of the penalty imposed by law for the commission of the crime.29 The civil action involves the civil
liability arising from the offense charged which includes restitution, reparation of the damage caused,
and indemnification for consequential damages.30

81
Under the Rules, where the civil action for recovery of civil liability is instituted in the criminal action
pursuant to Rule 111, the offended party may intervene by counsel in the prosecution of the
offense.31 Rule 111(a) of the Rules of Criminal Procedure provides that, "[w]hen a criminal action is
instituted, the civil action arising from the offense charged shall be deemed instituted with the criminal
action unless the offended party waives the civil action, reserves the right to institute it separately, or
institutes the civil action prior to the criminal action."

Private respondent did not waive the civil action, nor did she reserve the right to institute it separately,
nor institute the civil action for damages arising from the offense charged. Thus, we find that the
private prosecutors can intervene in the trial of the criminal action.

Petitioner avers, however, that respondent's testimony in the inferior court did not establish nor prove
any damages personally sustained by her as a result of petitioner's alleged acts of falsification.
Petitioner adds that since no personal damages were proven therein, then the participation of her
counsel as private prosecutors, who were supposed to pursue the civil aspect of a criminal case, is
not necessary and is without basis.

When the civil action is instituted with the criminal action, evidence should be taken of the damages
claimed and the court should determine who are the persons entitled to such indemnity. The civil
liability arising from the crime may be determined in the criminal proceedings if the offended party
does not waive to have it adjudged or does not reserve the right to institute a separate civil action
against the defendant. Accordingly, if there is no waiver or reservation of civil liability, evidence
should be allowed to establish the extent of injuries suffered.32

In the case before us, there was neither a waiver nor a reservation made; nor did the offended party
institute a separate civil action. It follows that evidence should be allowed in the criminal proceedings
to establish the civil liability arising from the offense committed, and the private offended party has
the right to intervene through the private prosecutors.

WHEREFORE, the instant petition is DENIED. The Decision, dated June 14, 2001, and the
Resolution, dated November 20, 2001, of the Court of Appeals in CA-G.R. SP No. 57070, affirming
the Order, dated October 5, 1999, of the Regional Trial Court (RTC) of Manila, Branch 19, are
AFFIRMED. Accordingly, the private prosecutors are hereby allowed to intervene in behalf of private
respondent Lydia Hao in the prosecution of the civil aspect of Criminal Case No. 285721 before
Branch 22, of Metropolitan Trial Court (MeTC) of Manila. Costs against petitioner. SO ORDERED.

82
LOPEZ REALTY, INC. and ASUNCION LOPEZ-GONZALES, Petitioners, vs. SPOUSES
REYNALDO TANJANGCO and MARIA LUISA ARGUELLES-TANJANGCO, Respondents.
G.R. No. 154291 November 12, 2014 REYES, J.:

This is a Petition for Review1 under Rule 45 of the Rules of Court from the Decision2 dated February
22, 2002 of the Court of Appeals (CA) in CA-G.R. CV No. 63519 which reversed and set aside the
Decision3 dated June 25, 1997 of the Regional Trial Court (RTC) of Manila, Branch 25, in Civil Case
No. 144667. Lopez Realty, Inc. (LRI) and Dr. Jose Tanjangco (Jose) were the registered co-owners
of three parcels of land and the building erected thereon known as the "Trade Center Building", which
were covered by Transfer Certificates of Title (TCT) Nos. 127778, 127779 and 127780 (subject
properties) of the Register ofDeeds of Manila. Jose’s one-half share in the subject properties were
later transferred and registered in the name of his son Reynaldo Tanjangco and daughter-in-law,
Maria Luisa Arguelles (spouses Tanjangco). At the time material to this case,the stockholders of
record of LRI were the following:

a. Asuncion Lopez-Gonzalez (Asuncion) – 7,831 shares;

b. Arturo F. Lopez (Arturo) – 7,830 shares;
c. Teresita Lopez-Marquez (Teresita) – 7,830 shares;
d. Rosendo de Leon (Rosendo) – 5 shares
e. Benjamin Bernardino (Benjamin) – 1 share
f. Augusto de Leon (Augusto) – 1 share; and
g. Leo Rivera (Leo) – 1 share4

Except for Arturo and Teresita, the rest of the stockholders were members of the Board of
Directors.5 Asuncion was LRI’s Corporate Secretary.In a special meeting of the stockholders held on
July 27, 1981, the sale of the one-half share of LRI in the Trade Center Building was discussed:
MINUTES OF SPECIAL MEETING OF STOCKHOLDERS OF LOPEZ REALTY[,] INCORPORATED
ON JULY 27, 1981 AT 3:00 P.M.

STOCKHOLDERS PRESENT:

TERESITA L. MARQUEZ - 7,830 shares

ASUNCION F. LOPEZ - 7,831 shares

ARTURO F. LOPEZ - 7,830 shares

ROSENDO DE LEON - 5 share[s]

BENJAMIN B. BERNARDINO - 1 share

LEO R. RIVERA - 1 share

TOTAL 23,498 Shares

83
II. Sale of One-Half (1/2) Share of Lopez Realty, Inc. in Trade Center Building

The matter of the sale of ½ share of Lopez Realty, Inc., in the Trade Center Building was taken up.
Atty. Benjamin B. Bernardino informed the body that the selling price is pegged at 4 Million Pesos,
and the Tanjangcos are offering 3.6 Million Pesos plus 50% of the receivablesor a total of 3.8 Million
Pesos payable under the following terms:

1) 50% - upon registration 50% - 30 days thereafter

2) All expenses and documentary stamp tax to be born[e] by the Tanjangcos.

3) Transfer Tax and Reserve Fund to be borne by Lopez Realty, Inc.

ASUNCION F. LOPEZ countered for a selling price of 5 Million Pesos, LOPEZ REALTY, INC., clean
and of everything. At this point, TERESITA L. MARQUEZ and BENJAMIN B. BERNARDINO offered
to ASUNCION F. LOPEZ that they (she) accept (equal) the TANJANGCO’s offer as stated above. At
this juncture, ASUNCION F. LOPEZ x x x called and talked with TANJANGCO over the phone three
(3) times and offered the selling price at 5 Million Pesos but the latter did not move from their original
offer as above-stated.

It was finally agreed by the body that ASUNCION F. LOPEZ x x x be given the priority to accept
[equal] the TANJANGCO offer and the same to be exercised within ten (10 accept) days. Failure on
her part to act on the offer, the said offer will be deemed accepted.6 (Emphasis in the original)

On July 28, 1981, Teresita died.7

Asuncion failed to exercise her option to purchase the subject properties within the stated period.
Thus, on August 17, 1981, while Asuncion was abroad, the remaining directors: Rosendo, Benjamin
and Leo convened in a special meeting, where the following resolution was passed and approved:8

III. Upon motion duly seconded, Mr. ARTURO F. LOPEZ had been authorized by the Board to
immediately negotiate with the Tanjangcos on the matter of the latter’s offer to purchase ½ of the
Trade Center Building and in connection there with he is given full power and authority by the
Boardto carry out the complete termination of the sale terms and conditions as embodied in the
Resolution of July 27, 1981 and in connection therewith is likewise authorized to sign for and in
behalf of Lopez Realty Incorporated.

RESOLUTION
Series of 1981

RESOLVED, as it is hereby resolved that ARTURO F. LOPEZ negotiate with the Tanjangcos on the
matter of the sale of 1/2 of Trade Center Bldg., in accordance with the terms and conditions
embodied in the Minutes of the Special Meeting of July 27, 1981.9 (Emphasis in the original) On
August 25, 1981, on the strength ofthe foregoing board resolution, Arturo executed a Deed of Sale
selling LRI’s one-half interest in the subject properties to Jose, who was represented by his son,
Manuel Tanjangco (Manuel). The price was fixed at ₱3,600,000.00, payable in the following manner:
50% or ₱1,800,000.00 upon registration of the Deed of Sale and the other 50% within 30 days from
such registration.10

84
Upon learning of the above developments, Asuncion sent cablegrams to Rosendo and Jose on
August 25, 1981,requesting them not to proceed with the sale.11 Consequently, on September 1,
1981, the Board had a special meeting where the following resolution was passed and approved:

RESOLUTION
Series of 1981

"In view of the cable of Ms. Asuncion Lopez, the [B]oard decided to postpone [the] final action on the
sale of Lopez Realty, Inc. share in Trade Center Building to the Tanjangcosso that she can be
enlightened on all proceedings of the Board during her absence.

UNANIMOUSLY APPROVED."12

Upon Asuncion’s arrival, the Board had a meeting on September 16, 1981, where she moved for the
repeal and/or amendment of the August 17, 1981 and August 24, 1981 Board Resolutions. While
Benjamin opposed Asuncion’s motion, the members of the Board agreed to defer action on the
matter until such time when Arturo and Asuncion have conferred or settled the matter.13

As Jose’s one-half interest in the subject properties had already been transferred to the spouses
Tanjangco,it was requested that LRI execute another deed of sale, where the spouses Tanjangco
shall be designated as buyers. Thus, on October 5, 1981, Arturoexecuted a Deed ofSale similar to
that which was executed on August 25,1981 in favor of the spouses Tanjangco.14

The spouses Tanjangco paid LRI the amount of ₱1,800,000.00, which the latter accepted by issuing
Official Receipt No. 723.15 The spouses Tanjangco then registered the Deed of Sale with the
Register of Deeds of Manila, causing the cancellation of TCT Nos. 127778,127779 and 127780 and
the issuance of TCT Nos. 145983, 145984 and 145985 in their name.16 Consequently, on November
4, 1981, LRI and Asuncion (herein petitioners) filed with the then Court of First Instance of Manila, a
Complaint17 for annulment of sale, cancellation of title, reconveyance and damages with prayer for
the issuance of temporary restraining order (TRO) and/or writ of preliminary injunction against the
spouses Tanjangco, Arturo and the Registrar of Deeds of Manila. The complaint was docketed as
Civil Case No. 144667 and raffled to Branch 25.Essentially, it was alleged that the sale is not binding
on LRI as the August 17, 1981 Board Resolution, authorizing Arturo to sell the corporation’s one-half
interest in the subject properties, is invalid for lack of notice to Asuncion. It was also alleged that the
said board resolution had already been revoked by the Board of Directors in their September 1, 1981
and September 16, 1981 Resolutions.

On November 11, 1981, the trial court issued a TRO, enjoining the spouses Tanjangco from paying
the balance of the purchase price and Arturo from accepting payment.18

On November 13, 1981, Manuel, in representation of the spouses Tanjangco, wrote LRI, enclosing a
manager’s check for ₱1,743,000.00 covering the balance of the purchase price less the transfer tax,
LRI’s share in the common fund and payables to the Bureau of Internal Revenue (BIR). Rosendo,
however, deferred acceptance in view of the pendency of the cases filed by the directors of LRI
against eachother and the order of the Security and Exchange Commission (SEC), restraining him
from acting on LRI matters.19 Apparently, several cases were pending with the SEC involving the
directors and shareholders of LRI, one of which is Asuncion’s complaint for the nullification of the
August 17, 1981 Board Resolution.

85
On November 21, 1981, the spouses Tanjangco filed a motion for the production of a copy of the
board resolution authorizing Asuncion to file the complaint on LRI’s behalf. In her Comment,
Asuncion claimed that the action is a derivative suit she initiated as LRI’s minority stockholder, for
which no authorization from LRI’s Board of Directors is necessary.20

On December 7, 1981, Arturo moved to dismiss the complaint on the grounds of lack of jurisdiction
and litis pendentia. With regard to the first ground, Arturo alleged that the case essentially involves an
intra-corporate dispute, which falls within the exclusive jurisdiction of the SEC. As to the second
ground, Arturo alleged that Asuncion filed a complaint with the SEC, which was docketed as SEC
Case No. 2164, against him and Benjamin, seeking to annul the August 17, 1981 Board Resolution.21

On July 30, 1982, the stockholders of LRI had a meeting where they voted on whether to ratify and
confirm the sale of the subject properties to the spouses Tanjangco. The minutes of such meeting
state:

At this juncture, Juanito Santos moved for the ratification and confirmation of the sale of Trade Center
Building to the [spouses Tanjangco] and thereby ratifying and confirming all minutes relative to the
sale made to the [spouses Tanjangco], and the same being seconded, it was placed to a vote
amongst the stockholders and Directors present and the votes were as follows:

Leo Rivera - yes

Rosendo de Leon - yes

Juanito Santos - yes

Benjamin Bernardino - yes

After the ratification and confirmation of the sale of Trade Center Building, Asuncion Lopez stated
that she is not preparing the minutes of today’s meeting as well as that of June 29, 1982 and prior
ones, but she was reminded that if she refuses to do what is incumbent upon her as Secretary, the
same would be prepared and if she refuses to sign, that’s up to her, for the corporation is governed
by the Board of Directors coupled by the majority of the stockholders who ratify the acts of the Board.

That the sale of Trade Center Building in point of stockholders and in point of the Board of Directors
had been duly ratified and confirmed and likewise it was moved and seconded that the votes will be
submitted to the Securities and Exchange Commission (SEC) in order that the said office may be
properly apprised of the situation of Lopez Realty, Inc.

There being no further business to take up, upon motion and duly seconded, the meeting [is]
adjourned.22

On November 11, 1982, the executor of Teresita’s estate, Juanito L. Santos (Juanito), moved to
intervene, stating among others that the case is "basically an intra-corporate contest among the
stockholders of LRI in respect to the sale or disposition of corporate property and the distribution of
the proceeds thereof."23

On February 6, 1984, the trial court issued an order, denying the spouses Tanjangco’s, Juanito’s and
Arturo’s respective motions.24

86
On March 1, 1985, Asuncion and Arturo filed a Joint Motion to Dismiss in SEC Case No. 2164 on the
ground that a "final settlement has been arrived at and that they hereby waive and renounce any
further claim or counterclaim that they may have against each other x x x." This was granted by the
SEC.25

The petitioners then filed a supplemental complaint, claiming that the negotiations between the
parties to settle the case resulted in an agreement where the spouses Tanjangco would sell to the
petitioners their interest in the subject properties for ₱6,000,000.00 on the condition that the
petitioners would return the ₱1,800,000.00 the spouses Tanjangco paid to LRI. According to the
petitioners, in order for Asuncion to meet her obligations under the agreement, she borrowed
₱4,000,000.00 from a bank at a high interest, sold her house at Magallanes for less than its market
value and disposed several pieces of her jewelry. However, during the formal signing of the
agreement, the spouses Tanjangco refused to sign for no apparent reason. The petitioners thus
prayedthat the spouses Tanjangco be compelled to sign and indemnify Asuncion for the damages
she incurred.26

During the trial, the petitioners, among others, attempted to establish that the subject sale had not
been validly ratified during the July 30, 1982 stockholders’ meeting in view of the failure to meet the
required number of votes. Asuncion testified that Juanito was not qualified to sit as a director during
the said meeting there being no evidence that he owned at least one share. Asuncion likewise
testified that Leo actually voted against the ratification of the sale, contrary to what is stated in the
minutes, which she and Leo did not sign.27

After trial on the merits, the trial court issued a Decision28 on June 25, 1997, the dispositive portion of
which reads:

WHEREFORE, premises considered, judgment is hereby rendered, thus:

1. Declaring null and void the Deed of Sale, dated 5 October 1981, signed by defendant Arturo
Lopez, in behalf of Lopez Realty[,] Inc., and defendants Spouses Reynaldo and Maria Luisa
Tanjangco, involving the interest of Lopez Realty, Inc. in the Trade Center Building;

2. Directing the Register of Deeds of Manila to cancel Transfer Certificate of Title Nos. 145983,
145984 and 145985 in the name of Maria Luisa Arguelles married to Reynaldo Tanjangco and
to reinstate Transfer Certificates of Title Nos. 127778, 127779 and 127780 in the names of
Lopez Realty, Inc. and Maria Luisa Arguelles married to Reynaldo Tanjangco;

3. Directing defendants Spouses Reynaldo and Maria Luisa Tanjangco to make an accounting
of all the rentals they collected from the Trade Center Building from 5 October 1981 and,
thereafter, to remit to plaintiff, Lopez Realty, Inc., one-half (1/2) of the net amount (after
deducting reasonable expenses), plus yearly interest in the amount of 12% until fully paid, all
within 90 days from the finality of this decision;

4. Directing plaintiff Lopez Realty, Inc. to return to defendants spouses Reynaldo and Maria
Luisa Tanjangco the amount of ₱1,800,000.00; and,

5. Directing defendants, SpousesReynaldo and Maria Luisa Tanjangco to pay plaintiff the
amount of ₱150,000.00 as attorney’s fees. SO ORDERED.29

87
Finding the sale null and void, the trial court ruled that Arturo lacked the authority to sell LRI’s interest
on the subject properties to the spouses Tanjangco on LRI’s behalf in view of the procedural
infirmities which attended the meeting held on August 17, 1981. Specifically:

On this issue, the Court rules in favor of the plaintiff. There is merit in plaintiff’s contention that the 17
August 1981 meeting of the Board of Directors of Lopez Realty was illegal. Section 53 of the
Corporation Code of the Philippines categorically provides:

"Sec. 53. Regular and Special Meeting[s] of Directors [or] Trustees — Regular meeting of the board
of directors or trustees of every corporation [shall be] held monthly[,] unless the by-lawsprovides [sic]
otherwise.

Meeting[s] of directors or trustees of corporations may be held [anywhere] in or outside [of] the
Philippines, unless the by-laws provides [sic] otherwise. Notice of the regular or special meeting[s]
stating the date, time and place of the meeting must be sent to every director or trustee, at least, one
(1) day prior to the scheduled meeting[,] unless otherwise provided by the by-laws. A director or
trustee may waive this requirement, either expressly or impliedly."

Plaintiff alleged that no notice was sent to her prior to the 17 August 1981 meeting. The Court is
inclined to give credit to this allegation considering that defendants never contested the same.
Hence, the said meeting was illegal and the resolution adopted during the meeting would not produce
the effect of binding the corporation, Lopez Realty.30

The trial court likewise ruled thatthe sale between LRI and the spouses Tanjangco was not validly
ratified in the absence of the required number of votes. Thus: Notwithstanding the assertions of the
defendants, the Court gives credit to plaintiff[’s] claim. The claim, which was made under oath, has
not been contested by defendants. Besides, the copy of the minutes itself x x x corroborates it. From
a physical examination of said minutes, it appears that among the five alleged directors present[,]only
de Leon, Bernardino and Santos signed over their names at the bottom of the minutes. Gonzalez and
Rivera, whose names are also written thereon do not have their signatures on. Since the vote of
Santos does not count, he not being qualified to sit as director, only the two votes de Leon and
Bernardino count for ratification. But that did not constitute a majority vote. Consequently, there was
no validratification of the sale of Lopez Realty’s interest in the Trade Center Building. The sale has
remained invalid and not binding upon the corporation.31

Nonetheless, the trial court denied Asuncion’s claim for damages as there is no legal compulsion for
the spouses Tanjangco to honor a compromise agreement that was not perfected prior to its
reduction into writing. Thus: Concerning the third issue, the Court finds no valid reason to compel
defendants to sign the alleged compromise agreement.1âwphi1 Granting that defendants
Tanjangcos did signify initially their conformity with the terms and conditions of the compromise
agreement as alleged by plaintiff, the same did not reach maturity prior to its execution in writing.
Hence, defendants did not commit breach of contract when, afterwards, they refused to sign the
compromise agreement.32

On both parties’ appeal to the CA, the trial court’s Decision dated June 25, 1997 was reversed. In its
Decision dated February 22, 2002, the CA recognized Arturo’s authority tosell LRI’s interest on the
subject properties, holding that this Court had earlier declared the August 17, 1981 Board Resolution
as valid in Lopez Realty, Inc. v. Fontecha.33 Thus: It is to be recalled that the validity of the board
meeting of August 17, 1981 has already been challenged before the high court, albeit, on another
matter. In Lopez Realty, Inc. vs. Fontecha, 247 SCRA 183 [1995], the same plaintiffs-appellants
88
challenged the validity of the board resolution granting gratuity pay and other benefits to some of the
company’s employees on the ground that the meeting was allegedly convened without prior notice to
the directors. The high court, citing American jurisprudence, ruled that the [sic] "an action of the
board of directors during a meeting, which was illegal for lack of notice, may be ratified either
expressly, by the action of the directors in subsequent legal meeting, or impliedly, by the
corporation’s subsequent course of conduct." x x x In holding the meeting to have been valid, the
same Court, among others, considered the following circumstances: petitioner corporation did not
issue any resolution revoking or nullifying the board resolutions granting gratuity pay; and, petitioner
therein Asuncion Lopez-Gonzales was aware of the said obligations and even acquiesced thereto by
signing two of the checks for gratuity pay. In the case at bench, it was duly established that the
matter of the sale of the property to the Tanjangcos has been taken up in the subsequent meetings of
the corporation culminating in the meeting of July 30, 1982, where the stockholders ratified and
confirmed not only the sale of Trade Center Building to the appellants Tanjan[g]cos but also all
minutes relative to the said sale. It likewise appears that in the aforesaid July 30, 1982 meeting,
appellant Gonzales was present and was clearly outvoted by the other stockholders.34

The CA likewise ruled that whatever infirmity attended the August 17, 1981 Board Resolution was
cured by ratification of the majority of the directors in the joint stockholders and directors meeting
held on July 30, 1982. Furthermore, the CA figured that even if Juanito’s vote is disregarded, the
ratification was approved by the majority of the board, including Leo, whose signatureis nowhere on
the minutes: Based on a perusal of the title ofthe minutes, "MINUTES OF THE MEETING OF THE
STOCKHOLDERS AND BOARD OF DIRECTORS OF LOPEZ REALTY, INCORPORATED HELD AT
ITS PRINCIPAL OFFICE AT RM. 404 DON. PAQUITO BUILDING, 99 DASMARINAS STREET,
BINONDO, MANILA ON FRIDAY, JULY 30, 1982 AT 2:00 P.M.," x x x it is immediately apparent that
the meeting was a joint board and stockholders’ meeting. The manner of taking the roll of attendance
likewise confirms the participation of the attendees as stockholders,-

"PRESENT:

Ms. SONY LOPEZ 7,831 shares

Mr. BENJAMIN B. BERNARDINO 1 share

and representing Arturo F.Lopez 7,831 shares

Mr. JUANITO L. SANTOS (representing the Estate 7,830 shares

of Teresita Lopez Marquez)

Mr. LEO RIVERA 1 share

Mr. ROSENDO DE LEON 5 shares

TOTAL SHARES REPRESENTED 23,499 shares

89
while the minutes of the meeting shows that there were instances when the attendees were asked to
vote as directors x x x.

Under Section 40 of the Corporation Code-

Section 40. Sale or other disposition of assets.– Subject to the provisions of existing laws on illegal
combinations and monopolies, a corporation may, by a majority vote of its board of directors or
trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its
property and assets, including its goodwill, upon such terms and conditions and for such
consideration, which may be money, stocks, bonds or other instruments for the payment of money or
other property or consideration, as its board of directors or trustees may deem expedient, when
authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding
capital stock, or in case of non-stock corporation, by the vote of at least to two-thirds (2/3) of the
members, in a stockholders’ or members’ meeting duly called for the purpose. Written notice of the
proposed action and of the time and place of the meeting shall be addressed to each stockholder or
member at his place of residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally: Provided, That any
dissenting stockholder may exercise his appraisal right under the conditions provided in this Code.

A sale or other disposition shall be deemed to cover substantially all the corporate property and
assets if thereby the corporation would be rendered incapable of continuing the business or
accomplishing the purpose for which it was incorporated.

After such authorization or approval by the stockholders or members, the board of directors or
trustees may, nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage, pledge
or other disposition of property and assets, subject tothe rights of third parties under any contract
relating thereto, without further action or approval by the stockholders or members.

the sale of the company assets requires the majority vote of the board of directors and vote of the
stockholders representing at least two-thirds (2/3) of the outstanding capital stock. In the minutes of
the July 30, 1982 meeting, the matter of the sale of the subject property was put to a vote "among
stockholders and Directors present" x x x jointly assembled, hence, a joint vote. Going back to the
board of directors, even excluding the affirmative vote of Juanito Santos whose qualification as
director was questioned by appellant Gonzales, the votes of Leo Rivera, Benjamin Bernardino and
Rosendo de Leon, as directors, forms the majority required for the ratification of the sale, as
contemplated in the abovequoted provision of the Corporation Code. Although the tally of votes did
not indicate the capacity under which the votes were taken[.] We follow the high court’s ruling in
Zamboanga Transportation Co. vs. Bachrach Motor Co.,52 Phil. 244, 259-[2]60 [1928], thus:

"We therefore conclude that when the president of the corporation, who is one ofthe principal
stockholders and at the same time its general manager, auditor, attorney or legal adviser, is
empowered by its by-laws to enter into chattel mortgage contracts, subject to the approval of the
board of directors, and enters into such contracts with the tacit approval of two other members of the
board of directors, one of whom is alsoa principal shareholder, both of whom, together with the
president, form a majority, and said corporation takes advantage of the benefits afforded by said
contract, such acts are equivalent to an implied ratification of said contract by the board of directors
and binds the corporation even if not formally approved by said board of directors as required by the
by-laws of the aforesaid corporation."

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When therefore the aforementioned three directors voted in favor of the ratification, their votes are, at
the very least, tacit approval sufficient for the application of the aforequoted ruling. It is of no moment
that the signature of only two directors appears at the bottom of the minutes, for it does not refer to
the results of the voting.

On the part of the stockholders, it appears that Leo Rivera, Rosendo De Leon, Juanito Santos and
Benjamin Bernardino, two of them representing two principal stockholders, voted to ratify the sale of
the property to the appellants Tanjangcos. The cumulation of their votes constitute sixty-seven per
cent [sic] or two-thirds of the capital stock of the appellant company. The contract has thus, been
validly ratified.35

The CA nonetheless upheld the trial court’s jurisdiction over the petitioners’ complaint and Asuncion’s
right to bring an action on LRI’s behalf in this wise:

Assailing the trial court’s jurisdiction over the complaint filed in the court below, the following grounds
were adduced to assail it, to wit: first, it involves an intra-corporate controversy falling under the
original and exclusive jurisdiction of the Securities and Exchange Commission under Section 5(b) of
P.D. No. 902-A; and, second, appellant Gonzales has no legal personality to institute the case.

In the determination of whether the Securities and Exchange Commission ("SEC") shall have
jurisdiction over the complaint, there must be a concurrence of [the] following elements, to wit: "(1)
the status or relationship of the parties; and (2) the nature of the question that is the subject of their
controversy." x x x The Court further explained it in this wise:

"The first element requires that the controversy must arise out of intracorporate or partnership
relations between and among stockholders, members, or associates; between any or all of them and
the corporation, partnership or association of which they are stockholders, members or associates,
respectively; and between such corporation, partnership or association and the State insofar as it
concerns their individual franchises. The second element requires that the dispute among the parties
be intrinsically connected with the regulation of the corporation, partnership or association or dealwith
the internal affairs of the corporation, partnership or association. After all, the principal function of the
SEC is the supervision and control of corporations, partnerships and associations with the end in
view that investments in these entities may be encouraged and protected, and their activities pursued
for the promotion of economic development." x x x Reading the title of the Complaint, dated October
31, 1981, designated as one for annulment ofsale, cancellation of title, reconveyance and damages
with prayer for the issuance of a writ of preliminary prohibitory injunction x x x, it is immediately
apparent that the principal defendants being sued are not "stockholders, members of associates" of
the appellant Lopez Realty, Inc., but rather vendees of the subject property. x x x In Dee vs.
Securities and Exchange Commission, 199 SCRA 238, 250 [1991], the Supreme Court summarized
Section 5 of

P.D. No. 902-A in the following manner:

"In other words, in order that the SEC can take cognizance of a case, the controversy must pertain to
any of the following relationships: (a) between corporation, partnership or association and the public;
(b) between the corporation, partnership or association and its stockholders, partners, members, or
officers;(c) between the corporation, partnership or association and the state insofar as its franchise,
permit or license to operate is concerned; and (d) among the stockholders, partners or associates
themselves.["] x x x

91
Since the principal defendants-appellants, the Spouses Tanjangcos, are not connected, in the above
described manner,to appellant Lopez Realty, Inc., then the SEC has no jurisdiction overthe case.
Moreover, upon a further reading of the body of the complaint, it appears that the annulment of the
sale to the appellants Tanjangcos was being sought on the ground of the lack of valid consent on the
part of Lopez Realty, Inc., the vendor. The internal affairs of the corporation were being brought into
the controversy merely to prove that it never authorized appellant Arturo Lopez to execute the deed
of sale. Hence, the controversy is not intrinsically connected to the regulation or operation of the
corporation, negating the existence of the second element as required in Lozano vs. delos Santos, x
x x.

As to the alleged legal personality of appellant Asuncion Lopez- Gonzalez, to file the action in the
court below, although the Corporation Code does not contain any provision granting such right, the
Supreme Court has recognized derivative suits, as valid, provided the following requisites are
complied with, to wit:

"a) the party bringing suit be a shareholder as of the time of the act or transaction complained of; b)
he has exhausted intra-corporate remedies, i.e., has made a demand on the board of directors for the
appropriate relief butthe latter has failed or refused to heed his plea; and

c) the cause of action actually devolves on the corporation, the wrongdoing or harm having been
caused to the corporation and not to the particular stockholder bringing the suit[.]" x x x Appellant
Gonzales has been duly established to be a major stockholder in appellant company and she
registeredher opposition to the sale, by cable sent on August 25, 1981, as reflected in the Minutes of
the Meeting of the Board of Directors on September 16, 1981 x x x on the ground that the corporation
would be prejudiced by the extremely low price.

The rationale for vesting the appellant Gonzales with the legal personality to file the suit may be
found in the following summary of the two leading cases on derivative suits, Atwol vs. Merriwether,
1867, and Dodge vs. Woolsey, 1855, respectively promulgated in England and America: "that where
corporate directors have committed a breach of trust either by their frauds, [ultra] viresacts, or
negligence, and the corporation is unable or unwilling to institute suit to remedy the wrong, a single
stockholder may institute that suit, suing on behalf of himself and other stockholders and for the
benefit of the corporation, to bring about a redress for the wrong done directly to the corporation and
indirectly to the stockholders." x x x36

The CA also concurred with the trial court’s finding that the parties never arrived at a perfected
compromise agreement. Thus:

We are persuaded that the trial court did not commit any error in determining that there was no
perfected compromise agreement between the appellants. It is noted that based on the aforequoted
testimony, appellant Gonzales was herself aware of the negotiation stage of the proceedings when
she allowed the appellants Tanjangcos to add conditions to the option she has chosen. The counsel
of appellant Gonzales was likewise of the same opinion when he took the liberty of suggesting the
additional provision on tax clearance, although [t]he latter removed it upon conferring with the
counsel of appellants Tanjangcos. The aforesaid proceedings are consistent with the process of
making reciprocal concessions, characteristic of entering into a compromise. x x x Hence, in Sanchez
vs. Court of Appeals, 279 SCRA 647, 676 [1997], the High Court acknowledged the long and tedious
process of negotiations undergone by the parties and declared, to wit: "Since this compromise
agreement was the result of a long drawn out process, with all the parties ably striving to protect their
respective interests and to come out with the best they could, there can beno doubt that the parties
92
entered into it freely and voluntarily. Accordingly, they should be bound thereby. To be valid, it is
merely required under the law to be based on real claims and actually agreed upon in good faith by
the parties thereto." x x x Unfortunately, in the case at bench, the parties never came to an
agreement due to the fact that the appellants Tanjangcos backedout. x x x When the appellants
Tanjangcos "backed out" or refused tosign the final draft, there was no meeting of the minds or actual
agreement between the parties. x x x.

Resolving the claim of damages allegedly sustained when appellant Gonzales sold some of her
assets and contracted a sizable loan to cover the consideration of the compromise agreement[.] We
find no legal basis for its award. She acted based on an optimistic expectation that the final draft of
the compromise agreement would be acceptable to the appellants Tanjangcos. Hence, she testified
that she sold her house and lot, as far back as December 1, 1987, orlong before the alleged meeting
at the chambers of Judge Paguio x x x. Upon further questioning, she revealed that she sold it:
"because even prior to March 1, 1988, we have been already negotiating about the compromise and
knew beforehand that I have to be ready, and I even thought that the price was a good one reason
why I sold it because I knew then thatit was a sacrifice price. I would say, that it was a sacrifice price
because after a few days someone who live nearby, at the corner, came to me and was even buying
the property [at] a higher price." x x x She thus, acted based on the expectation of a settlement and
not on the alleged belief that there was already a perfected compromise agreement between her and
the appellants Tanjangcos. She even admitted that the negotiations took some time because the
parties could not come up with agreeable terms and she herself had to do study the matter. x x x It
follows then that the sale of her properties and the loans obtained from the banks were merely
tactical errors on her part for which she has no recourse under the law.37

The Petitioner’s Case

Arguing for the nullity of the sale and the existence of a perfected compromise agreement, the
petitionersclaim that: (a) the August 17, 1981 meeting, where the Resolution authorizing Arturo to
negotiate for the sale of the subject properties was approved, is illegal for lack of notice to Asuncion
as required under Section 50 of the Corporation Code; (b) Fontecha does not constitute res judicata
insofar as the issue on the validity of the August 17, 1981 meeting and all the resolutions passed
therein, including the grant of authority to Arturo, are concerned; (c) in Fontecha, what was ruled as
having been ratified was the resolution granting gratuity pay to its retiring employees and there was
nothing mentioned about the resolution on the sale of the subject properties and Arturo’s authority to
act on LRI’s behalf; (d) it cannot be rightfully claimed that the August 17, 1981 Board Resolution had
been ratified as Asuncion immediately registered her objections to its validity. The Board of Directors
responded to this by issuing the September 1, 1981 and September 16, 1981 Board Resolutions that
held the subject sale on abeyance; (e) the August 17, 1981 Board Resolution merely authorized
Arturo to "negotiate" for the sale of the subject properties and the way it was worded does not
indicate that this include the authority to conclude a sale with the spouses Tanjangco; (f) even if the
July 27, 1981 and August 17, 1981 Board Resolution are read together to support the claim of the
spouses Tanjangco that Arturo had been duly authorized to sell the subject properties, the latter
acted beyond the authority granted to him when he entered into a sale with the former the terms of
which substantially depart from those provided in the July 27, 1981 Resolutions; (g) there was not
enough votes to ratify the subject salesince Juanito’s qualification as director had been effectively
challenged and Leo actually voted against such ratification; (h) there was a perfected compromise
agreement between the parties and there is no need for the same to be in writing for it to be
considered as such; and (i) even assuming that there was no perfected compromise agreement, the
spouses Tanjangco abused their right for having backed out and withdrawn their offer without reason
resulting in damage to Asuncion.
93
The Spouses Tanjangco’s Case

On the other hand, the spouses Tanjangco assert the validity of the subject sale, Arturo’s authority to
represent LRI in such a sale and the absence of a perfected compromise agreement, alleging that:
(a) as clearly stated in the July 27, 1981 Board Resolution, the sale was perfected when Asuncion
failed to match or outdo the offer of the spouses Tanjangco within the provided period; (b) reading the
August 17, 1981 Board Resolution in conjunction with the July 27, 1981 Board Resolution, Arturo’s
mandate was to carry out or implement the July27, 1981 Board Resolution and his authority was not
limited to negotiating with the sale of the subject properties; (c) the petitioners do not dispute the
validity of the July 27, 1981 Board Resolution and Asuncion’s failure to match the offer of the
spouses Tanjangco; (d) the spouses Tanjangco are buyers in good faith and they cannot be
prejudiced by the corporate squabbles among the directors and stockholders of LRI; (e) the
provisions ofthe Deed of Sale are in accordance with the July 27, 1981 Board Resolution;(f) under
the doctrine of apparent authority, the petitioners are barred from questioning LRI’s consent to the
subject sale and Arturo’s authority to represent LRI in such transaction; (g) the spouses Tanjangco
have the right torely on the minutes of the July 27, 1981 and August 17, 1981 Board Resolutions
which appear to be regular on their face; (h) SEC Case No. 2164, a case filed by Asuncion against
Arturo questioning the validity of August 17, 1981 Board Resolution, was dismissed on joint motion of
Arturo and Asuncion on the ground that "a final settlement has been arrived at"; (i) contrary to the
petitioner’s claim, the August 17, 1981 Board Resolution had not been revoked; (j) the sale had been
ratified during July 30, 1982 meeting of the stockholders and by LRI’s acceptance of the spouses
Tanjangco’s payment; and (k) withrespect to the compromise agreement, the evidence on record
shows that the parties never went beyond the negotiation phase.

Ruling of the Court

Ratification of the August 17, 1981

Board Resolution

The Court agrees with the petitioners that the August 17, 1981 Board Resolution did not give Arturo
the authority to act as LRI’s representative in the subject sale, as the meeting of the board of
directors where such was passed was conducted without giving any notice to Asuncion. Section 53 of
the Corporation Code provides for the following:

SEC. 53. Regular and special meetings of directors or trustees.—Regular meetings of the board of
directors or trustees of every corporation shall be held monthly, unless the by-laws provide otherwise.

Special meetings of the board of directors or trustees may be held at any time upon call of the
president oras provided in the by-laws.

Meetings of directors or trustees of corporations may be held anywhere in or outside of the

Philippines, unless the by-laws provide otherwise. Notice of regular or special meetings stating the
date, time and place of the meeting must be sent to every director or trustee at least one (1) day prior
to the scheduled meeting, unless otherwise provided by the by-laws. A director or trustee may waive
this requirement, either expressly or impliedly. (Emphasis ours)

The Court took this matter up in Fontecha, involving herein parties, where it was held that a meeting
of the board of directors is legally infirm if there is failure to comply with the requirements or

94
formalities of the law or the corporation’s by laws and any action taken on such meeting may be
challenged as a consequence:

The general rule is that a corporation, through its board of directors, should act in the manner and
within the formalities, if any, prescribed by its charter or by the general law. Thus, directors must act
as a body in a meeting called pursuant tothe law or the corporation’s bylaws, otherwise, any action
taken therein may be questioned by any objecting director or shareholder.38 However, the actions
taken in such a meeting by the directors or trustees may be ratified expressly or impliedly.
"Ratification means that the principal voluntarily adopts, confirms and gives sanction to some
unauthorized act of its agent on its behalf. It is this voluntary choice, knowingly made, which amounts
to a ratification of what was theretofore unauthorized and becomes the authorized act of the party so
making the ratification. The substance of the doctrine is confirmation after conduct, amounting to a
substitute for a prior authority. Ratification can be made either expressly or impliedly. Implied
ratification may take various forms — like silence or acquiescence, acts showing approval or
adoption of the act, or acceptance and retention of benefits flowing therefrom."39

The Court's decision in Fontecha concerns the implied ratification of one of the resolutions passed on
August 17, 1981 by the board of directors of LRI despite of the lack of notice of meeting to Asuncion.
This was owing to the subsequent actions taken therein by the stockholders, including Asuncion
herself, as cited by the CA in its decision. On the other hand, the sale of the property to the spouses
Tanjangco was ratified, not because of implied ratification as was the case in Fontecha but through
the passage of the July 30, 1982 Board Resolution.

In the present case, the ratification was expressed through the July 30, 1982 Board Resolution.
Asuncion claims that the July 30, 1982 Board Resolution did not ratify the Board Resolution dated
August 17, 1981 for lack of the required number of votes because Juanito is not entitled to vote while
Leo voted "no" to the ratification ofthe sale even if the minutes stated otherwise. Asuncion assails the
authority of Juanito to vote because he was not a director and he did not own any share of stock
which would qualify him to be one. On the contrary, Juanito defends his right to vote as the
representative of Teresita’s estate. Upon examination of the July 30, 1982 minutes of the meeting, it
can be deduced that the meeting is a joint stockholders and directors’ meeting. The Court takes into
account that majority of the board of directors except for Asuncion, had already approved of the sale
to the spouses Tanjangco prior to this meeting. As a consequence, the power to ratify the previous
resolutions and actions of the board of directors in this case lies inthe stockholders, not in the board
of directors. It would be absurd to require the board of directors to ratify their own acts—acts which
the same directors already approved of beforehand. Hence, Juanito, as the administrator of
Teresita’s estate even though not a director, is entitled to vote on behalf of Teresita’s estate as the
administrator thereof. The Court reiterates its ruling in Tan v. Sycip,40 viz:

In stock corporations, shareholders may generally transfer their shares. Thus, on the death of a
shareholder, the executor or administrator duly appointed by the Court is vested with the legal title to
the stock and entitled to vote it. Until a settlement and division of the estate is effected, the stocks of
the decedent are held by the administrator or executor.41 (Citation omitted and emphasis ours)

On the issue that Leo votedagainst the ratification of sale, the Court notes that only Juanito, Benjamin
and Rosendo signed the minutes of the meeting. It was also not stated who prepared the minutes,
given that Asuncion as the corporate secretary refused to record the same. Also, it was not explained
why Leo was not able to affix his signature on the said minutes if he really voted in favor ofthe
ratification of the sale. What’s more, Leo was not presented to testify onthe witness stand. Hence,
contrary to the position adopted by the CA, only those whose signatures appear on the minutes of the
95
meeting can be said to have voted in favor of the ratification. This case must be differentiated from
the Court’s ruling in People v. Dumlao, et al.42

In Dumlao, the Court ruled that the signing of the minutes by all the directors is not a requisite and
that the lack of signatures on the minutes does not mean that the resolution was not passed by the
board. However, there is a notable disparity between the facts in Dumlaoand the instant case. In
Dumlao, the corporate secretary therein recorded, prepared and certified the correctness of the
minutes of the meeting despite the fact that not all directors signed the minutes. In this case, it could
not even be established who recorded the minutes in view of Asuncion’s refusal to do so, as
demonstrated during the cross examination of Benjamin by the petitioners’ counsel:

Q: I am showing to you Exhibit 14, I noticed that Exhibit 14 which is the minutes of the meeting of the
stockholders on July 30, 1982 was not prepared by a secretary but was prepared by some members
of the board.
A: I cannot recall anymore. I cannot give you an opinion on that, because I will be guessing.
Q: From the minutes itself?
A: That is why I told you I cannot be certain if it was prepared by the secretary or members of the
board. This came into existence. Eleven years ago is not a very short period.
Q: So you cannot remember now who prepared the minutes of the meeting on July 17, 1982? A: I
cannot be accurate - - I said that.43

It is the signature of the corporate secretary, as the one who is tasked to prepare and record the
minutes, that gives the minutes of the meeting probative value and credibility, as the Court explained
in Dumlao, to wit:

The non-signing by the majority of the members of the GSIS Board of Trustees of the said minutes
does not necessarily mean that the supposed resolution was not approved by the board. The signing
of the minutes by all the members of the board is not required. There is no provision in the
Corporation Code of the Philippines that requires that the minutes of the meeting should be signed by
all the members of the board.

The proper custodian of the books, minutes and official records of a corporation is usually the
corporate secretary. Being the custodian of corporate records, the corporate secretary has the duty to
record and prepare the minutes of the meeting. The signature of the corporate secretary gives the
minutes of the meeting probative value and credibility. In this case, Antonio Eduardo B. Nachura,
Deputy Corporate Secretary, recorded, prepared and certified the correctness of the minutes of the
meeting of 23 April 1982; and the same was confirmed by Leonilo M. Ocampo, Chairman of the GSIS
Board of Trustees. Said minutes contained the statement that the board approved the sale of the
properties, subject matter of this case, to respondent La’o.44 (Citations omitted and emphasis ours)

Thus, without the certification of the corporate secretary, it is incumbent upon the other directors or
stockholders as the case may be, to submit proof that the minutes of the meeting is accurate and
reflective of what transpired during the meeting. Conformably to the foregoing, in the absence of
Asuncion’s certification, only Juanito, Benjamin and Rosendo, whose signatures appeared on the
minutes, could be considered as to have ratified the sale to the spouses Tanjangco.

Yet, notwithstanding the lack of Leo’s signature to prove that he indeed voted in favor of the
ratification,the results are just the same for he owns one share of stock only. Pitted against the
shares of the other stockholders who voted in favor of ratification, Asuncion and Leo were clearly
outvoted:
96
 Ms. [ASUNCION] LOPEZ 7, 831 shares

Mr. BENJAMIN B. BERNARDINO 1 share

and representing Arturo F. Lopez 7, 831 shares

Mr. JUANITO L. SANTOS

(representing the Estate of Teresita Lopez Marquez) 7, 830 shares

Mr. LEO RIVERA 1 share

Mr. ROSENDO DE LEON 5 shares

TOTAL SHARES REPRESENTED 23, 499 shares45

In sum, whatever defect there was on the sale to the spouses Tanjangco pursuant to the August 17,
1981 Board Resolution, the same was cured through its ratification in the July 30, 1982 Board
Resolution. It is of no moment whether Arturo was authorized to merely negotiate or to enter into a
contract of sale on behalf of LRI as all his actions in connection to the sale were expressly ratified by
the stockholders holding 67% of the outstanding capital stock.1âwphi1 In Cua, Jr. et al. v. Tan, et
al.,46 the Court held that by virtue of ratification, the acts of the board of directors become the acts of
the stockholders themselves, even if those acts were, at the outset, unauthorized:

Clearly, the acquisition by PRCI of JTH and the constitution of the JTH Board of Directors are no
longer just the acts of the majority of the PRCI Board of Directors, but also of the majority of the PRCI
stockholders. By ratification, even an unauthorized act of an agent becomes the authorized act of the
principal. To declare the Resolution dated 26 September 2006 of the PRCI Board of Directors null
and void will serve no practical use or value, or affect any of the rights of the parties, because the
Resolution dated 7 November 2006 of the PRCI stockholders - approving and ratifying said
acquisition and the manner in which PRCI shall constitute the JTH Board of Directors – will still
remain valid and binding.47 (Citation omitted and emphasis ours) Compromise agreement

The remaining issue is whether the spouses Tanjangco could be held liable for damages for reneging
on an alleged verbal compromise agreement. There is no reason for the Court to disturb the
unanimous findings of the CA and the trial court that no compromise agreement was perfected
between the parties. The existence of a perfected contract is a finding of fact that the Court will not
disturb if there is substantial evidence supporting it. "Basic is the rule that factual findings of trial
courts, including their assessment of the witnesses' credibility, are entitled to great weight and
respect by this Court, particularly when the [CA] affirms the findings."48 For this reason, the spouses
Tanjangco may not be compelled to honor a compromise agreement that never left the negotiation
phase and be held liable for the alleged damages Asuncion incurred as a result of her attempts to
comply to the provisions thereof. WHEREFORE, the instant petition is DENIED. The Decision dated
February 22, 2002 of the Court of Appeals in CA-G.R. CV No. 63519 is hereby AFFIRMED. SO
ORDERED.
97
NESTOR CHING and ANDREW WELLINGTON, Petitioners, vs. SUBIC BAY GOLF AND
COUNTRY CLUB, INC., HU HO HSIU LIEN alias SUSAN HU, HU TSUNG CHIEH alias JACK HU,
HU TSUNG HUI, HU TSUNG TZU and REYNALD R. SUAREZ, Respondents.
G.R. No. 174353 September 10, 2014 LEONARDO-DE CASTRO, J.:

This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking the review of
the Decision1dated October 27, 2005 of the Court of Appeals in CA-G.R. CV No. 81441, which
affirmed the Order2 dated July 8, 2003 of the Regional Trial Court (RTC), Branch 72 of Olongapo City
in Civil Case No. 03-001 dismissing the Complaint filed by herein petitioners.

On February 26, 2003, petitioners Nestor Ching and Andrew Wellington filed a Complaint3 with the
RTC of Olongapo City on behalf of the members of Subic Bay Golf and Country Club, Inc. (SBGCCI)
against the said country club and its Board of Directors and officers under the provisions of
Presidential Decree No. 902-A in relation to Section 5.2 of the Securities Regulation Code. The Subic
Bay Golfers and Shareholders Incorporated (SBGSI), a corporation composed of shareholders of the
defendant corporation, was also named as plaintiff. The officers impleaded as defendants were the
following: (1) itsPresident, Hu Ho Hsiu Lien alias Susan Hu; (2) its treasurer, Hu Tsung Chieh alias
Jack Hu; (3) corporate secretary Reynald Suarez; and (4) directors Hu Tsung Hui and Hu Tsung Tzu.
The case was docketed as Civil Case No. 03-001. The complaint alleged that the defendant
corporation sold shares to plaintiffs at US$22,000.00 per share, presenting to them the Articles of
Incorporation which contained the following provision:

No profit shall inure to the exclusive benefit of any of its shareholders, hence, no dividends shall be
declared in their favor. Shareholders shall be entitled only to a pro-rata share of the assets of the
Club at the time of its dissolution or liquidation.4

However, on June 27, 1996, an amendment to the Articles of Incorporation was approved by the
Securities and Exchange Commission (SEC), wherein the above provision was changed as follows:

No profit shall inure to the exclusive benefit of any of its shareholders, hence, no dividends shall be
declared in their favor. In accordance with the Lease and Development Agreement by and between
Subic Bay Metropolitan Authority and The Universal International Group of Taiwan, where the golf
courseand clubhouse component thereof was assigned to the Club, the shareholders shall not have
proprietary rights or interests over the properties of the Club.5 x x x. (Emphasis supplied.)

Petitioners claimed in the Complaint that defendant corporation did not disclose to them the above
amendment which allegedly makes the shares non-proprietary, as it takes away the rightof the
shareholders to participate in the pro-rata distribution of the assets of the corporation after its
dissolution. According to petitioners, this is in fraud of the stockholders who only discovered the
amendment when they filed a case for injunction to restrain the corporation from suspending their
rights to use all the facilities of the club. Furthermore, petitioners alleged that the Board of Directors
and officers of the corporation did not call any stockholders’ meeting from the time of the
incorporation, in violation of Section 50 of the Corporation Code and the By-Laws of the corporation.
Neither did the defendant directors and officers furnish the stockholders with the financial statements
of the corporation nor the financial report of the operation of the corporation in violation of Section 75
of the Corporation Code. Petitioners also claim that on August 15, 1997, SBGCCI presented to the
SEC an amendment to the By-Laws of the corporation suspending the voting rights of the
shareholders except for the five founders’ shares. Said amendment was allegedly passed without any
stockholders’ meeting or notices to the stockholders in violation of Section 48 of the Corporation
Code.
98
The Complaint furthermore enumerated several instances of fraud in the management of the
corporation allegedly committed by the Board of Directors and officers of the corporation, particularly:

a. The Board of Directors and the officers of the corporation did not indicate in its financial
report for the year 1999 the amount of ₱235,584,000.00 collected from the subscription of 409
shareholders who paid U.S.$22,000.00 for one (1) share of stock at the then prevailing rate of
₱26.18 to a dollar. The stockholders were not informed how these funds were spent or its
whereabouts.

b. The Corporation has been collecting green fees from the patrons of the golf course at an
average sum of ₱1,600.00 per eighteen (18) holes but the income is not reported in their yearly
report. The yearly report for the year 1999 contains the report of the Independent Public
Accountant who stated that the company was incorporated on April 1, 1996 but has not yet
started its regular business operation. The golf course has been in operation since 1997 and
as such has collected green fees from non-members and foreigners who played golf in the
club. There is no financial report as to the income derived from these sources.

c. There is reliable information that the Defendant Corporation has not paid its rentals to the
Subic Bay Metropolitan Authority which up to the present is estimated to be not less than one
(1) million U.S. Dollars. Furthermore, the electric billings of the corporation [have] not been
paid which amounts also to several millions of pesos.

d. That the Supreme Court sustained the pre-termination of its contract with the SBMA and
presently the club is operating without any valid contract with SBMA. The defendant was
ordered by the Supreme Court to yield the possession, the operation and the management of
the golf course to SBMA. Up to now the defendants [have] defied this Order.

e. That the value of the shares of stock of the corporation has drastically declined from its
issued value of U.S.$22,000.00 to only Two Hundred Thousand Pesos, (₱200,000.00)
Philippine Currency. The shareholders [have] lost in terms ofinvestment the sum estimated to
be more than two hundred thousand pesos.This loss is due to the fact that the Club is
mismanaged and the golf course is poorly maintained. Other amenities of the Club has (sic)
not yet been constructed and are not existing despite the lapse of morethan five (5) years from
the time the stocks were offered for sale to the public. The cause of the decrease in value of
the sharesof stocks is the fraudulent mismanagement of the club.6

Alleging that the stockholders suffered damages as a result of the fraudulent mismanagement of the
corporation, petitioners prayed in their Complaint for the following:

WHEREFORE, it is most respectfully prayed that upon the filing of this case a temporary restraining
order be issued enjoining the defendants from acting as Officers and Board of Directors of the
Corporation. After hearing[,] a writ of preliminary injunction be issued enjoining defendants to act as
Board of Directors and Officers of the Corporation. In the meantime a Receiver be appointed by the
Court to act as such until a duly constituted Board of Directors and Officers of the Corporation be
elected and qualified.

That defendants be ordered to pay the stockholders damages in the sum of Two Hundred Thousand
Pesos each representing the decrease in value of their shares of stocks plus the sum of ₱100,000.00
as legal expense and attorney’s fees, as well as appearance fee of ₱4,000.00 per hearing.7

99
In their Answer, respondents specifically denied the allegations of the Complaint and essentially
averred that:

(a) The subscriptions of the 409 shareholders were paid to Universal International Group
Development Corporation (UIGDC), the majority shareholder of SBGCCI, from whom plaintiffs
and other shareholders bought their shares;8

(b) Contrary to the allegations in the Complaint, said subscriptions were reflected inSBGCCI’s
balance sheets for the fiscal years 1998 and 1999;9

(c) Plaintiffs were never presented the original Articles of Incorporation of SBGCCI since their
shares were purchased after the amendment of the Articles of Incorporation and such
amendment was publicly known to all members prior and subsequent to the said amendment;10

(d) Shareholders’ meetingshad been held and the corporate acts complained of were approved
at shareholders’ meetings;11

(e) Financial statements of SBGCCI had always been presented to shareholders justifiably
requesting copies;12

(f) Green fees collected were reported in SBGCCI’s audited financial statements;13

(g) Any unpaid rentals are the obligation of UIGDC with SBMA and SBGCCI continued to
operate under a valid contract with the SBMA;14 and

(h) SBGCCI’s Board of Directors was not guilty of any mismanagement and in fact the value of
members’ shares have increased.15

Respondents further claimed by way ofdefense that petitioners failed (a) to show that it was
authorized by SBGSI to file the Complaint on the said corporation’s behalf; (b) to comply with the
requisites for filing a derivative suit and an action for receivership; and (c) to justify their prayer for
injunctive relief since the Complaint may be considered a nuisance or harassment suit under Section
1(b), Rule1 of the Interim Rules of Procedure for Intra-Corporate Controversies.16 Thus, they prayed
for the dismissal of the Complaint.

On July 8, 2003, the RTC issued an Order dismissing the Complaint. The RTC held that the action is
a derivative suit, explaining thus:

The Court finds that this case is intended not only for the benefit of the two petitioners. This is
apparentfrom the caption of the case which reads Nestor Ching, Andrew Wellington and the Subic
Bay Golfers and Shareholders, Inc., for and in behalf of all its members as petitioners. This is also
shown in the allegations of the petition[.] x x x.

On the bases of these allegations of the petition, the Court finds that the case is a derivative suit.
Being a derivative suit in accordance with Rule 8 of the Interim Rules, the stockholders and members
may bring an action in the name of the corporation or association provided that he (the minority
stockholder) exerted all reasonable efforts and allege[d] the same with particularity in the complaint to
exhaust of (sic) all remedies available under the articles of incorporation, by-laws or rules governing
the corporation or partnership to obtain the reliefs he desires. An examination of the petition does not
show any allegation that the petitioners applied for redress to the Board of Directors of respondent

100
corporation there being no demand, oralor written on the respondents to address their complaints.
Neither did the petitioners appl[y] for redress to the stockholders of the respondent corporation and
ma[k]e an effort to obtain action by the stockholders as a whole. Petitioners should have asked the
Board of Directors of the respondent corporation and/or its stockholders to hold a meeting for the
taking up of the petitioners’ rights in this petition.17

The RTC held that petitioners failed to exhaust their remedies within the respondent corporation
itself. The RTC further observed that petitioners Ching and Wellington were not authorized by their
co-petitioner Subic Bay Golfers and Shareholders Inc. to filethe Complaint, and therefore had no
personality to file the same on behalf ofthe said shareholders’ corporation. According to the RTC, the
shareholdings of petitioners comprised of two shares out of the 409 alleged outstanding shares or
0.24% is an indication that the action is a nuisance or harassment suit which may be dismissed either
motu proprio or upon motion in accordance with Section 1(b) of the Interim Rules of Procedure for
Intra-Corporate Controversies.18

Petitioners Ching and Wellington elevated the case to the Court of Appeals, where it was docketed
as CA-G.R. CV No. 81441. On October 27, 2005, the Court of Appeals rendered the assailed
Decision affirming that of the RTC. Hence, petitioners resort to the present Petition for Review,
wherein they argue that the Complaint they filed with the RTC was not a derivative suit. They claim
that they filed the suit in their own right as stockholders against the officers and Board of Directors of
the corporation under Section 5(a) of Presidential DecreeNo. 902-A, which provides:

Sec. 5. In addition tothe regulatory and adjudicative functions of the Securities and Exchange
Commission over corporations, partnerships and other forms of associations registered with it as
expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction to
hear and decide cases involving:

(a) Devices or schemes employed by or any acts of the board of directors, business
associates, its officers or partners, amounting to fraud and misrepresentation which may be
detrimental to the interest of the public and/or of the stockholders, partners, members of
associations or organizations registered with the Commission.

According to petitioners, the above provision (which should be read in relation to Section 5.2 of the
Securities Regulation Code which transfers jurisdiction over such cases to the RTC) allows any
stockholder to file a complaint against the Board of Directors for employing devices or schemes
amounting to fraud and misrepresentation which is detrimental to the interest of the public and/or the
stockholders.

In the alternative, petitioners allege that if this Court rules that the Complaint is a derivative suit, it
should nevertheless reverse the RTC’s dismissal thereof on the ground of failure to exhaust remedies
within the corporation. Petitioners cite Republic Bank v. Cuaderno19 wherein the Court allowed the
derivative suit even without the exhaustion of said remedies as it was futile to do so since the Board
ofDirectors were all members of the same family. Petitioners also point out that in Cuadernothis Court
held that the fact that therein petitioners had only one share of stock does not justify the denial of the
relief prayed for.

To refute the lower courts’ ruling that there had been non-exhaustion of intra-corporate remedies on
petitioners’ part, they claim that they filed in Court a case for Injunction docketed as Civil Case No.
103-0-01, to restrain the corporation from suspending their rights to use all the facilities of the club,
on the ground that the club cannot collect membership fees until they have completed the amenities
101
as advertised when the shares of stock were sold to them. They allegedly asked the Club to produce
the minutes of the meeting of the Board of Directors allowing the amendments of the Articles of
Incorporation and By-Laws. Petitioners likewise assail the dismissal of the Complaint for being a
harassment ornuisance suit before the presentation of evidence. They claim that the evidence they
were supposed to present will show that the members of the Board of Directors are not qualified
managers of a golf course.

We find the petition unmeritorious.

At the outset, it should be noted thatthe Complaint in question appears to have been filed only by the
two petitioners, namely Nestor Ching and Andrew Wellington, who each own one stock in the
respondent corporation SBGCCI. While the caption of the Complaint also names the "Subic Bay
Golfers and Shareholders Inc. for and in behalf of all its members," petitioners did not attach any
authorization from said alleged corporation or its members to file the Complaint. Thus, the Complaint
is deemed filed only by petitioners and not by SBGSI. On the issue of whether the Complaint is
indeed a derivative suit, we are mindful of the doctrine that the nature of an action, as well as which
court or body has jurisdiction over it, isdetermined based on the allegations contained in the
complaint of the plaintiff, irrespective of whether or not the plaintiff is entitled to recover upon all or
some of the claims asserted therein.20 We have also held that the body rather than the title of the
complaint determines the nature of an action.21

In Cua, Jr. v. Tan,22 the Court previously elaborated on the distinctions among a derivative suit,
anindividual suit, and a representative or class suit: A derivative suit must be differentiated from
individual and representative or class suits, thus:

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

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

However, in cases of mismanagement where the wrongful acts are committed by the directors or
trustees themselves, a stockholder or member may find that he has no redress because the former
are vested by law with the right to decide whether or notthe corporation should sue, and they will
never be willing to sue themselves. The corporation would thus be helpless to seek remedy. Because
of the frequent occurrence of such a situation, the common law gradually recognized the right of a
stockholder to sue on behalf of a corporation in what eventually became known as a "derivative suit."
It has been proven to be an effective remedy of the minority against the abuses of management.
Thus, an individual stockholder is permitted to institute a derivative suit on behalf of the corporation
wherein he holds stock in order to protect or vindicate corporate rights, whenever officials of the
102
corporation refuse to sue orare the ones to be sued or hold the control of the corporation. In such
actions, the suing stockholder is regarded as the nominal party, with the corporation as the party in
interest."

Indeed, the Court notes American jurisprudence to the effect that a derivative suit, on one hand, and
individual and class suits, on the other, are mutually exclusive, viz.:

"As the Supreme Court has explained: "A shareholder’s derivative suit seeks to recover for the
benefit of the corporation and its whole body of shareholders when injury is caused to the corporation
that may not otherwise be redressed because of failureof the corporation to act. Thus, ‘the action is
derivative, i.e., in the corporate right, if the gravamen of the complaint is injury to the corporation, or
to the whole body of its stock and property without any severance or distribution among individual
holders, or it seeks to recover assets for the corporation or to prevent the dissipation of its assets.’ x x
x. In contrast, "a directaction [is one] filed by the shareholder individually (or on behalf of a classof
shareholders to which he or she belongs) for injury to his or her interestas a shareholder. x x x. [T]he
two actions are mutually exclusive: i.e., the right of action and recovery belongs to either the
shareholders (direct action) *651 or the corporation(derivative action)." x x x.

Thus, in Nelson v. Anderson(1999), x x x, the **289 minority shareholder alleged that the other
shareholder of the corporation negligently managed the business, resulting in its total failure. x x x.
The appellate court concluded that the plaintiff could not maintain the suit as a direct action:
"Because the gravamen of the complaint is injury to the whole body of its stockholders, it was for the
corporation to institute and maintain a remedial action. x x x. A derivative action would have been
appropriate if its responsible officials had refused or failed to act." x x x. The court wenton to note that
the damages shown at trial were the loss of corporate profits. x x x. Since "[s]hareholders own neither
the property nor the earnings of the corporation," any damages that the plaintiff alleged that resulted
from such loss of corporate profits "were incidental to the injury to the corporation." (Citations
omitted.)

The reliefs sought in the Complaint, namely that of enjoining defendants from acting as officers and
Board of Directors of the corporation, the appointment of a receiver, and the prayer for damages in
the amount of the decrease in the value of the sharesof stock, clearly show that the Complaint was
filed to curb the alleged mismanagement of SBGCCI. The causes of action pleaded by petitioners do
not accrue to a single shareholder or a class of shareholders but to the corporation itself.

However, as minority stockholders, petitioners do not have any statutory right to override the
business judgments of SBGCCI’s officers and Board of Directors on the ground of the latter’s alleged
lackof qualification to manage a golf course. Contraryto the arguments of petitioners, Presidential
Decree No. 902-A, which is entitled REORGANIZATION OF THE SECURITIES AND EXCHANGE
COMMISSION WITH ADDITIONAL POWERS AND PLACING THE SAID AGENCY UNDER THE
ADMINISTRATIVE SUPERVISION OF THE OFFICE OF THE PRESIDENT, does not grant minority
stockholders a cause of action against waste and diversion by the Board of Directors, but merely
identifies the jurisdiction of the SEC over actionsalready authorized by law or jurisprudence. It is
settled that a stockholder’s right to institute a derivative suit is not based on any express provisionof
the Corporation Code, or even the Securities Regulation Code, but is impliedly recognized when the
said laws make corporate directors or officers liable for damages suffered by the corporation and its
stockholders for violation of their fiduciary duties.23

At this point, we should take note that while there were allegations in the Complaint of fraud in their
subscription agreements, such as the misrepresentation of the Articles of Incorporation, petitioners
103
do not pray for the rescission of their subscription or seekto avail of their appraisal rights. Instead,
they ask that defendants be enjoined from managing the corporation and to pay damages for their
mismanagement. Petitioners’ only possible cause of action as minority stockholders against the
actions of the Board of Directors is the common law right to file a derivative suit. The legal standing of
minority stockholders to bring derivative suits is not a statutory right, there being no provision in the
Corporation Code or related statutes authorizing the same, but is instead a product of jurisprudence
based on equity. However, a derivative suit cannot prosper without first complying with the legal
requisites for its institution.24

Section 1, Rule 8 of the Interim Rules of Procedure Governing IntraCorporate Controversies imposes
the following requirements for derivative suits:

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

The RTC dismissed the Complaint for failure to comply with the second and fourth requisites above.

Upon a careful examination of the Complaint, this Court finds that the same should not have been
dismissed on the ground that it is a nuisance or harassment suit. Although the shareholdings of
petitioners are indeed only two out of the 409 alleged outstanding shares or 0.24%, the Court has
held that it is enough that a member or a minority of stockholders file a derivative suit for and in
behalf of a corporation.25

With regard, however, to the second requisite, we find that petitioners failed to state with particularity
in the Complaint that they had exerted all reasonable efforts to exhaust all remedies available under
the articles of incorporation, by-laws, and laws or rules governing the corporation to obtain the relief
they desire. The Complaint contained no allegation whatsoever of any effort to avail of intra-corporate
remedies. Indeed, even if petitioners thought it was futile to exhaust intra-corporate remedies, they
should have stated the same in the Complaint and specified the reasons for such opinion. Failure to
do so allows the RTC to dismiss the Complaint, even motu proprio, in accordance with the Interim
Rules. The requirement of this allegation in the Complaint is not a useless formality which may be
disregarded at will.1âwphi1 We ruled in Yu v. Yukayguan26:

The wordings of Section 1, Rule8 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies are simple and do not leave room for statutory construction. The second paragraph
thereof requires that the stockholder filing a derivative suit should have exerted all reasonable efforts
to exhaust all remedies availableunder the articles of incorporation, by-laws, laws or rules governing
the corporation or partnership to obtain the relief he desires; and to allege such fact with
particularityin the complaint. The obvious intent behind the rule is to make the derivative suit the final
recourse of the stockholder, after all other remedies to obtain the relief sought had failed.
WHEREFORE, the Petition for Review is hereby DENIED. The Decision of the Court of Appeals in
CA-G.R. CV No. 81441 which affirmed the Order of the Regional Trial Court (RTC) of Olongapo City
dismissing the Complaint filed thereon by herein petitioners is AFFIRMED. SO ORDERED.

104
SAN MIGUEL CORPORATION, represented by EDUARDO DE LOS ANGELES, petitioners, vs.
ERNEST KAHN, ANDRES SORIANO III, BENIGNO TODA, JR., ANTONIO ROXAS, ANTONIO
PRIETO, FRANCISCO EIZMENDI, JR., EDUARDO SORIANO, RALPH KAHN and RAMON DEL
ROSARIO, JR., respondents. G.R. No. 85339 August 11, 1989 NARVASA, J.:

On December 15, 1983, 33,133,266 shares of the outstanding capital stock of the San Miguel
Corporation were acquired 1 by fourteen (14) other corporations, 2 and were placed under a Voting
Trust Agreement in favor of the late Andres Soriano, Jr. When the latter died, Eduardo M. Cojuangco,
Jr. was elected Substitute Trustee on April 9, 1984 with power to delegate the trusteeship in writing to
Andres Soriano III. 3 Shortly after the Revolution of February, 1986, Cojuangco left the country amid
"persistent reports" that "huge and unusual cash disbursements from the funds of SMC" had been
irregularly made, and the resources of the firm extensively used in support of the candidacy of
Ferdinand Marcos during the snap elections in February, 1986 .4

On March 26, 1986, an "Agreement" was executed between Andres Soriano III, as "Buyer," and the
14 corporations, as "Sellers," for the purchase by Soriano, "for himself and as agent of several
persons," of the 33,133,266 shares of stock at the price of P100.00 per share, or "an aggregate sum
of Three Billion Three Hundred Thirteen Million Three Hundred Twenty Six Thousand Six Hundred
(P3,313,326,600.00) Pesos payable in specified installments. 5 The Agreement revoked the voting
trust above mentioned, and expressed the desire of the 14 corporations to sell the shares of stock "to
pay certain outstanding and unpaid debts," and Soriano's own wish to purchase the same "in order to
institutionalize and stabilize the management of the COMPANY in .. (himself) and the professional
officer corps, mandated by the COMPANY's By- laws, and to direct the COMPANY towards giving
the highest priority to its principal products and extensive support to agriculture programme of' the
Government ... 6 Actually, according to Soriano and the other private respondents, the buyer of the
shares was a foreign company, Neptunia Corporation Limited (of Hongkong, a wholly owned
subsidiary of San Miguel International which is, in turn, a wholly owned subsidiary of San Miguel
Corporation; 7 and it was Neptunia which on or about April 1, 1986 had made the down payment of
P500,000,000.00, "from the proceeds of certain loans". 8

At this point the 33,133,266 SMC shares were sequestered by the Presidential Commission on Good
Government (PCGG), on the ground that the stock belonged to Eduardo Cojuangco, Jr., allegedly a
close associate and dummy of former President Marcos, and the sale thereof was "in direct
contravention of .. Executive Orders Numbered 1 and 2 (.. dated February 28, 1986 and March 12,
1986, respectively) which prohibit .. the transfer, conveyance, encumbrance, concealment or
liquidation of assets and properties acquired by former President Ferdinand Marcos and/or his wife,
Mrs. Imelda Romualdez Marcos, their close relatives, subordinates, business associates. 9 The
sequestration was subsequently lifted, and the sale allowed to proceed, on representations by San
Miguel Corporation x x that the shares were 'owned by 1.3 million coconut farmers;' the seller
corporations were 'fully owned' by said farmers and Cojuangco owned only 2 shares in one of the
companies, etc. However, the sequestration was soon re-imposed by Order of the PCGG dated May
19, 1986 .. The same order forbade the SMC corporate Secretary to register any transfer or
encumbrance of any of the stock without the PCGG's prior written authority. 10

San Miguel promptly suspended payment of the other installments of the price to the fourteen (14)
seller corporations. The latter as promptly sued for rescission and damages.11

On June 4,1986, the PCGG directed San Miguel Corporation"to issue qualifying shares" in the
corporation to seven (7) individuals, including Eduardo de los Angeles, "from the sequestered shares
registered as street certificates under the control of Anscor- Hagedorn Securities, Inc.," to "be held in
105
trust by .. (said seven [7] persons) for the benefit of Anscor-Hagedom Securities, Inc. and/or whoever
shall finally be determined to be the owner/owners of said shares. 12

In December, 1986, the SMC Board, by Resolution No. 86-122, "decided to assume the loans
incurred by Neptunia for the down payment ((P500M)) on the 33,133,266 shares." The Board opined
that there was "nothing illegal in this assumption (of liability for the loans)," since Neptunia was "an
indirectly wholly owned subsidiary of SMC," there "was no additional expense or exposure for the
SMC Group, and there were tax and other benefits which would redound to the SMC group of
companies. 13

However, at the meeting of the SMC Board on January 30, 1987, Eduardo de los Angeles, one of the
PCGG representatives in the SMC board, impugned said Resolution No. 86-12-2, denying that it was
ever adopted, and stating that what in truth was agreed upon at the meeting of December 4, 1986
was merely a "further study" by Director Ramon del Rosario of a plan presented by him for the
assumption of the loan. De los Angeles also pointed out certain "deleterious effects" thereof. He was
however overruled by private respondents. 14 When his efforts to obtain relief within the corporation
and later the PCGG proved futile, he repaired to the Securities and Exchange Commission
(SEC).lâwphî1.ñèt

He filed with the SEC in April, 1987, what he describes as a derivative suit in behalf of San Miguel
Corporation, against ten (10) of the fifteen-member Board of Directors who had "either voted to
approve and/or refused to reconsider and revoke Board Resolution No. 86-12-2." 15 His Amended
Petition in the SEC recited substantially the foregoing antecedents and the following additional facts,
to wit:

a) On April 1, 1986 Soriano, Kahn and Roxas, as directors of' Neptunia Corporation,
Ltd., had met and passed a resolution authorizing the company to borrow up to US
$26,500,000.00 from the Hongkong & Shanghai Banking Corporation, Hongkong "to
enable the Soriano family to initiate steps and sign an agreement for the purchase of
some 33,133,266 shares of San ,Miguel Corporation. 16

b) The loan of $26,500,000.00 was obtained on the same day, the corresponding loan
agreement having been signed for Neptunia by Ralph Kahn and Carl Ottiger. At the
latter's request, the proceeds of the loan were deposited in different banks 17 for the
account of "Eduardo J. Soriano".

c) Three (3) days later, on April 4, 1986, Soriano III sent identical letters to the
stockholders of San Miguel Corporation, 18 inter alia soliciting their proxies and
announcing that "the Soriano family, friends and affiliates acquired a considerable block
of San Miguel Corporation shares only a few days ago .., the transaction .. (having been)
made through the facilities of the Manila Stock Exchange, and 33,133,266 shares ..
(having thereby been) purchased for the aggregate price of' P3,313,326,600.00." The
letters also stated that the purchase was "an exercise of the Sorianos' right to buy back
the same number of shares purchased in 1983 by the .. (14 seller corporations)."

d) In implementing the assumption of the Neptunia loan and the purchase agreement for
which said loan was obtained, which assumption constituted an improper use of
corporate funds to pay personal obligations of Andres Soriano III, enabling him; to
purchase stock of the corporation using funds of' the corporation itself, the respondents,
through various subsequent machinations and manipulations, for interior motives and in
106
 breach of fiduciary duty, compound the damages caused San Miguel Corporation by,
among other things: (1) agreeing to pay a higher price for the shares than was originally
covenanted in order to prevent a rescission of the purchase agreement by the sellers; (2)
urging UCPB to accept San Miguel Corporation and Neptunia as buyers of the shares,
thereby committing the former to the purchase of its own shares for at least 25% higher
than the price at which they were fairly traded in the stock exchanges, and shifting to
said corporations the personal obligations of Soriano III under the purchase agreement;
and (3) causing to be applied to the part payment of P1,800,000.00 on said purchase,
various assets and receivables of San Miguel Corporation.

The complaint closed with a prayer for injunction against the execution or consummation of any
agreement causing San Miguel Corporation to purchase the shares in question or entailing the use of
its corporate funds or assets for said purchase, and against Andres Soriano III from further using or
disposing of the funds or assets of the corporation for his obligations; for the nullification of the SMC
Board's resolution of April 2, 1987 making San Miguel Corporation a party to the purchase
agreement; and for damages.

Ernest Kahn moved to dismiss de los Angeles' derivative suit on two grounds, to wit:

1 De los Angeles has no legal capacity to sue because —

a) having been merely imposed by the PCGG as a director on

San Miguel, he has no standing to bring a minority derivative
suit;

b) he personally holds only 20 shares and hence cannotfairly

and adequately represent the minority stockholders of the
corporation;

c) he has not come to court with clean hands; and

2. The Securities & Exchange Commission has no jurisdiction over the controversy
because the matters involved are exclusively within the business judgment of the Board
of Directors. 19

Kahn's motion to dismiss was subsequently adopted by his correspondents .20

The motion to dismiss was denied by SEC Healing Officer Josefina L. Pasay Paz, by order dated
September 4, 1987. 21 In her view —

1) the fact that de los Angeles was a PCGG nominee was irrelevant because in law,
ownership of even one share only, sufficed to qualify a person to bring a derivative suit;

2) it is indisputable that the action had been brought by de los Angeles for the benefit of
the corporation and all the other stockholders;

3) he was a stockholder at the time of the commission of the acts complained of, the
number of shares owned by him being to repeat, immaterial;

4) there is no merit in the assertion that he had come to Court with unclean hands, it not
having been shown that he participated in the act complained of or ratified the same; and
107
 5) where business judgment transgresses the law, the securities and Exchange
Commission always has competence to inquire thereinto.

Kahn filed a petition for certiorari and prohibition with the Court of Appeals, seeking the annulment of
this adverse resolution of the SEC Hearing Officer and her perpetual inhibition from proceeding with
SEC Case No. 3152.

A Special Division of that Court sustained him, upon a vote of three-to-two. The majority 22 ruled that
de los Angeles had no egal capacity to institute the derivative suit, a conclusion founded on the
following propositions:

1) a party "who files a derivative suit should adequately represent the interests of the
minority stockholders;" since "De los Angeles holds 20 shares of stock out of
121,645,860 or 0.00001644% (appearing to be undisputed), (he) cannot even be
remotely said to adequately represent the interests of the minority stockholders,
(e)specially so when .. de los Angeles was put by the PCGG to vote the majority stock,"
a situation generating "a genuine conflict of interest;"

2) de los Angeles has not met this conflict-of-interest argument, i.e., that his position as
PCGG-nominated director is inconsistent with his assumed role of representative of
minority stockholders; not having been elected by the minority, his voting would
expectedly consider the interest of the entity which placed him in the board of directors;

3) Baseco v. PCGG, May 27,1987, 23 has laid down the principle that the (a) PCGG
cannot exercise acts of dominion over sequestered property, (b) it has only powers of
administration, and (c) its voting of sequestered stock must be done only pursuant to its
power of administration; and

4) de los Angeles' suit is not a derivative suit, a derivative suit being one brought for the
benefit of the corporation.

The dissenting Justices, 24 on the other hand, were of the opinion that the suit had been properly
brought by de los Angeles because —

1) the number of shares owned by him was immaterial, he being a stockholder in his
own right;

2) he had not voted in favor of the resolution authorizing the purchase of the shares; and

3) even if PCGG was not the owner of the sequestered shares, it had the right to seek
the protection of the interest of the corporation, it having been held that even an
unregistered shareholder or an equitable owner of shares and pledgees of shares may
be deemed a shareholder for purposes of instituting a derivative suit.

De los Angeles has appealed to this Court. He prays for reversal of the judgment of the Court of
Appeals, imputing to the latter the following errors:

1) having granted the writ of certiorari despite the fact that Kahn had not first resorted to
the plain remedy available to him, i.e., appeal to the SEC en banc and despite the fact
that no question of jurisdiction was involved;

108
 2) having ruled on Kahn's petition on the basis merely of his factual allegations, although
he (de los Angeles) had disputed them and there had been no trial in the SEC; and

3) having held that he (de los Angeles) could not file a derivative suit as stockholder
and/or director of the San Miguel Corporation.

For their part, and in this Court, the respondents make the following assertions:

1) SEC has no jurisdiction over the dispute at bar which involves the ownership of the
33,133,266 shares of SMC stock, in light of this Court's Resolution in G.R. Nos. 74910,
5075, 75094, 76397, 79459 and 79520, promulgated on August 10, 1988; 25

2) de los Angeles was beholden to the controlling stockholder in the corporation

(PCGG), which had "imposed" him on the corporation; since the PCGG had a clear
conflict of interest with the minority, de los Angeles, as director of the former, had no
legal capacity to sue on behalf of the latter;

3) even assuming absence of conflict of interest, de los Angeles does not fairly and
adequately represent the interest of the minority stockholders;

4) the respondents had properly applied for certiorari with the Court of Appeals because
—

a) that Court had, by law, exclusive appellate jurisdiction over officers and agencies
exercising quasi-judicial functions, and hence file competence to issue the writ
of certiorari;

b) the principle of exhaustion of administrative remedies does not apply since the issue
involved is one of law;

c) said respondents had no plain, speedy and adequate remedy within SEC;

d) the Order of the SEC Investigating Officer — denying the motion to dismiss — was
issued without or in excess of jurisdiction, hence was correctly nullified by the Court of
Appeals; and

e) de los Angeles had not raised the issue of absence of a motion for reconsideration by
respondents in the SEC case; in any event, such a motion was unnecessary in the
premises.

De los Angeles' Reply seeks to make the following points:

1) since the law lays down three (3) requisites for a derivative suit, viz:

a) the party bringing suit should be a shareholder as of the time of the act or
transaction complained of,

b) he has exhausted intra-corporate remedies, i.e., has made a demand on

the board of directors for the appropriate relief but the latter has failed or
refused to heed his plea; and

109
 c) c)the cause of action actually devolves on the corporation, the
,wrongdoing or harm having been caused to the corporation and not to .the
particular stockholder bringing the suit;

and since (1) he is admittedly the owner of 20 shares of SMC stock in his own right, having acquired
those shares as early as 1977, (2) he had sought without success to have the board of' directors
remedy with wrong, and (3) that wrong was in truth a 'wrong against the stockholders of the
corporation, generally, ,and not against him individually — and it was the corporation, and not he,
particularly, that would be entitled to the appropriate' relief — the propriety of his suit cannot be
gainsaid;

2) Kahn had not limited himself to questions of law in the proceedings in the Court of
Appeals and hence could not claim exclusion from the scope of the doctrine of
exhaustion of remedies; moreover, Rule 65, invoked by him, bars a resort to certiorari.
where a plain, speedy and accurate remedy was available to him in this case, to wit, a
motion for reconsideration before the Sec en banc and, contrary to the respondent's
claim, De Los Angeles had in fact asserted to this propositions before the Appellate
Tribunal; and

3) the respondent had not raised the issue of jurisdiction before the Court of Appeals;
indeed, they admit to their Comment that that

issue has not yet been resolved by the SEC," be this as it may, the derivative suit does
not fall within the BASECO doctrine since it does not involve any question of ownership
of the 33,133,266 sequestered SMC shares but rather, the validity of the resolution of
the board of directors for the assumption by the corporation, for the benefit of certain of
its officers and stockholders, of liability for loans contracted by another corporation,
which is an intra-corporate dispute within the exclusive jurisdiction of the SEC.

1. De los Angeles is not opposed to the asserted position of the PCGG that the
sequestered SMC shares of stock belong to Ferdinand Marcos and/or his dummies
and/or cronies. His consent to sit in the board as nominee of PCGG unquestionably
indicates his advocacy of the PCGG position. He does not here seek, and his complaint
in the SEC does not pray for, the annulment of the purchase by SMC of the stock in
question, or even the subsequent purchase of the same stock by others 26which
proposition was challenged by (1) one Evio, in SEC Case No. 3000; (2) by the 14
corporations which sold the stock to SMC, in Civil Case No. 13865 of the Manila RTC,
said cases having later become subject of G.R. No. 74910 of this Court; (3) by Neptunia,
SMC, and others, in G.R. No. 79520 of this Court; and (4) by Eduardo Cojuangco and
others in Civil Case No. 16371 of the RTC, Makati, [on the theory that the sequestered
stock in fact belonged to coconut planters and oil millers], said case later having become
subject of G.R. No. 79459 of this court .27 Neither does de los Angeles impugn,
obviously, the right of the PCGG to vote the sequestered stock thru its nominee directors
— as was done by United Coconut Planters Bank and the 14 seller corporations (in SEC
Case No. 3005, later consolidated with SEC Case No. 3000 above mentioned, these two
(2) cases later having become subject of G.R.No. 76397) as well as by one Clifton
Ganay, a UCPB stockholder (in G.R. No. 75094 of this Court).lâwphî1.ñèt 28

The subject matter of his complaint in the SEC does not therefore fall within the ambit of this Court's
Resolution of August 10, 1988 on the cases just mentioned, to the effect that, citing PCGG v. Pena,
110
et al 29 an cases of the Commission regarding 'the funds, moneys, assets, and properties illegally
acquired or misappropriated by former President Ferdinand Marcos, Mrs. Imelda Romualdez Marcos,
their close relatives, Subordinates, Business Associates, Dummies, Agents, or Nominees, whether
civil or criminal, are lodged within the exclusive and original jurisdiction of the Sandiganbayan,' and
all incidents arising from, incidental to, or related to, such cases necessarily fall likewise under the
Sandiganbayan's exclusive and original jurisdiction, subject to review on certiorari exclusively by the
Supreme Court." His complaint does not involve any property illegally acquired or misappropriated by
Marcos, et al., or "any incidents arising from, incidental to, or related to" any case involving such
property, but assets indisputably belonging to San Miguel Corporation which were, in his (de los
Angeles') view, being illicitly committed by a majority of its board of directors to answer for loans
assumed by a sister corporation, Neptunia Co., Ltd.

De los Angeles' complaint, in fine, is confined to the issue of the validity of the assumption by the
corporation of the indebtedness of Neptunia Co., Ltd., allegedly for the benefit of certain of its officers
and stockholders, an issue evidently distinct from, and not even remotely requiring inquiry into the
matter of whether or not the 33,133,266 SMC shares sequestered by the PCGG belong to Marcos
and his cronies or dummies (on which- issue, as already pointed out, de los Angeles, in common with
the PCGG, had in fact espoused the affirmative). De los Angeles' dispute, as stockholder and director
of SMC, with other SMC directors, an intra-corporate one, to be sure, is of no concern to the
Sandiganbayan, having no relevance whatever to the ownership- of the sequestered stock. The
contention, therefore, that in view of this Court's ruling as regards the sequestered SMC stock above
adverted to, the SEC has no jurisdiction over the de los Angeles complaint, cannot be sustained and
must be rejected. The dispute concerns acts of the board of directors claimed to amount to fraud and
misrepresentation which may be detrimental to the interest of the stockholders, or is one arising out
of intra-corporate relations between and among stockholders, or between any or all of them and the
corporation of which they are stockholders .30

2. The theory that de los Angeles has no personality to bring suit in behalf of the
corporation — because his stockholding is minuscule, and there is a "conflict of interest"
between him and the PCGG — cannot be sustained, either.

It is claimed that since de los Angeles 20 shares (owned by him since 1977) represent only.
00001644% of the total number of outstanding shares (1 21,645,860), he cannot be deemed to fairly
and adequately represent the interests of the minority stockholders. The implicit argument — that a
stockholder, to be considered as qualified to bring a derivative suit, must hold a substantial or
significant block of stock — finds no support whatever in the law. The requisites for a derivative
suit 31 are as follows:

a) the party bringing suit should be a shareholder as of the time of the act or transaction
complained of, the number of his shares not being material; 32
b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the
board of directors for the appropriate relief but the latter has failed or refused to heed his
plea; 33 and
c) the cause of action actually devolves on the corporation, the wrongdoing or harm
having been, or being caused to the corporation and not to the particular stockholder
bringing the suit. 34

The bona fide ownership by a stockholder of stock in his own right suffices to invest him with standing
to bring a derivative action for the benefit of the corporation. The number of his shares is immaterial
since he is not suing in his own behalf, or for the protection or vindication of his own particular right,
111
or the redress of a wrong committed against him, individually, but in behalf and for the benefit of the
corporation.

3. Neither can the "conflict-of-interest" theory be upheld. From the conceded premise
that de los Angeles now sits in the SMC Board of Directors by the grace of the PCGG, it
does not follow that he is legally obliged to vote as the PCGG would have him do, that
he cannot legitimately take a position inconsistent with that of the PCGG, or that, not
having been elected by the minority stockholders, his vote would necessarily never
consider the latter's interests. The proposition is not only logically indefensible, non
sequitur, but also constitutes an erroneous conception of a director's role and function, it
being plainly a director's duty to vote according to his own independent judgment and his
own conscience as to what is in the best interests of the company. Moreover, it is
undisputed that apart from the qualifying shares given to him by the PCGG, he owns 20
shares in his own right, as regards which he cannot from any aspect be deemed to be
"beholden" to the PCGG, his ownership of these shares being precisely what he invokes
as the source of his authority to bring the derivative suit.

4. It is also theorized, on the authority of the BASECO decision, that the PCGG has no
power to vote sequestered shares of stock as an act of dominion but only in pursuance
— to its power of administration. The inference is that the PCGG's act of voting the stock
to elect de los Angeles to the SMC Board of Directors was unauthorized and void;
hence, the latter could not bring suit in the corporation's behalf. The argument is strained
and obviously of no merit. As already more than plainly indicated, it was not necessary
for de los Angeles to be a director in order to bring a derivative action; all he had to be
was a stockholder, and that he was owning in his own right 20 shares of stock, a fact not
disputed by the respondents.

Nor is there anything in the Baseco decision which can be interpreted as ruling that sequestered
stock may not under any circumstances be voted by the PCGG to elect a director in the company in
which such stock is held. On the contrary, that it held such act permissible is evident from the context
of its reference to the Presidential Memorandum of June 26, 1986 authorizing the PCGG, "pending
the outcome of proceedings to determine the ownership of .. sequestered shares of stock,"'to vote
such shares .. at all stockholders' meetings called for the election of directors ..," the
only caveat being that the stock is not to be voted simply because the power to do so exists, whether
it be to oust and replace directors or to effect substantial changes in corporate policy, programs or
practice, but only "for demonstrably weighty and defensible grounds" or "when essential to prevent
disappearance or wastage of corporate property."

The issues raised here do not peremptorily call for a determination of whether or not in voting
petitioner de los Angeles to the San Miguel Board, the PCGG kept within the parameters announced
in Baseco; and absent any showing to the contrary, consistently with the presumption that official
duty is regularly performed, it must be assumed to have done so.

WHEREFORE, the petition is GRANTED. The appealed decision of the Court of Appeals in CA- G.R.
SP No. 12857 — setting aside the order of September 4, 1987 issued in SEC Case No. 3153 and
dismissing said case — is REVERSED AND SET ASIDE. The further disposition in the appealed
decision for the issuance of a writ of preliminary injunction upon the filing and approval of a bond of
P500,000.00 by respondent Ernest Kahn (petitioner in the Appellate Court) is also SET ASIDE, and
any writ of injunction issued pursuant thereto is lifted. Costs against private respondents. SO
ORDERED.
112
ALFREDO L. VILLAMOR, JR., Petitioner, vs. JOHN S. UMALE, in substitution of HERNANDO F.
BALMORES, Respondent. G.R. No. 172843 September 24, 2014

ODIVAL E. REYES, HANS M. PALMA and DOROTEO M. PANGILINAN, Petitioners, vs.

HERNANDO F. BALMORES, Respondent. G.R. No. 172881 LEONEN, J.:

Before us is a petition for review on certiorari1 under Rule 45 of the Rules of Court, assailing the
decision2 of the Court of Appeals dated March 2, 2006 and its resolution3 dated May 29, 2006,
denying petitioners’ motions for reconsideration. The Court of Appeals placed Pasig Printing
Corporation (PPC) under receivership and appointed an interim management committee for the
corporation.4

MC Home Depot occupied a prime property (Rockland area) in Pasig. The property was part of the
area owned by Mid-Pasig Development Corporation (Mid-Pasig).5

On March 1, 2004, PPC obtained an option to lease portions of MidPasig’s property, including the
Rockland area.6

On November 11, 2004, PPC’s board of directors issued a resolution7 waiving all its rights, interests,
and participation in the option to lease contract in favor of the law firm of Atty. Alfredo Villamor, Jr.
(Villamor), petitioner in G.R. No. 172843. PPC received no consideration for this waiver in favor of
Villamor’s law firm.8

On November 22, 2004, PPC, represented by Villamor, entered into a memorandum of agreement
(MOA) with MC Home Depot.9 Under the MOA, MC Home Depot would continue to occupy the area
as PPC’s sublessee for four (4) years, renewable for another four (4) years, at a monthly rental of
₱4,500,000.00 plus goodwill of ₱18,000,000.00.10

In compliance with the terms of the MOA, MC Home Depot issued 20 post-dated checks representing
rentalpayments for one year and the goodwill money. The checks were given to Villamor who did not
turn these or the equivalent amount over to PPC, upon encashment.11

Hernando Balmores, respondent inG.R. No. 172843 and G.R. No. 172881 and a stockholder and
director of PPC,12 wrote a letter addressed to PPC’s directors, petitioners inG.R. No. 172881, on April
4, 2005.13 He informed them that Villamor should bemade to deliver to PPC and account for MC
Home Depot’s checks or their equivalent value.14

Due to the alleged inaction of the directors, respondent Balmores filed with the Regional Trial Court
an intra-corporate controversy complaint under Rule 1, Section 1(a)(1) of the Interim Rules for Intra-
Corporate Controversies15 (Interim Rules) against petitioners for their alleged devices or schemes
amounting to fraud or misrepresentation "detrimental to the interest of the corporation and its
stockholders."16

Respondent Balmores alleged in his complaint that because of petitioners’ actions, PPC’s assets
were ". . . not only in imminent danger, but have actually been dissipated,lost, wasted and
destroyed."17

Respondent Balmores prayed that a receiver be appointed from his list of nominees.18 He also
prayed for petitioners’ prohibition from "selling, encumbering, transferring or disposing in any manner
any of [PPC’s] properties, including the MC Home [Depot] checks and/or their proceeds."19 He

113
prayed for the accounting and remittance to PPC of the MC Home Depot checks or their proceeds
and for the annulment of the board’s resolution waiving PPC’s rights in favor of Villamor’s law firm. 20

Ruling of the Regional Trial Court

In its resolution21 dated June 15, 2005, the Regional Trial Court denied respondent Balmores’ prayer
for the appointment of a receiver or the creation of a management committee.The dispositive portion
reads:

WHEREFORE, premises considered the appointment of a Receiver and the creation of a

Management Committee applied for by plaintiff Hernando F. Balmores are, as they are hereby,
DENIED.22 (Emphasis in the original)

According to the trial court, PPC’s entitlement to the checks was doubtful. The resolution issued by
PPC’s board of directors, waiving its rights to the option to lease contract infavor of Villamor’s law
firm, must be accorded prima facie validity.23

The trial court also noted that there was a pending case filed by one Leonardo Umale against
Villamor, involving the same checks. Umale was also claiming ownership of the checks.24 This,
according to the trial court, weakened respondent Balmores’ claim that the checks were properties of
PPC.25

The trial court also found that there was "no clear and positive showing of dissipation, loss, wastage,
or destruction of [PPC’s] assets . . . [that was] prejudicial to the interestof the minority stockholders,
partieslitigants or the general public."26 The board’s failure to recover the disputed amounts was not
an indication of mismanagement resulting in the dissipation of assets.27

The trial court noted that PPC was earning substantial rental income from its other sub-lessees.28

The trial court added that the failure to implead PPCwas fatal. PPC should have been impleaded as
an indispensable party, without which, there would be no final determination of the action.29

Ruling of the Court of Appeals

Respondent Balmores filed with the Court of Appeals a petition for certiorari under Rule 65 of the
Rules of Court.30He assailed the decision of the trial court, which denied his "application for the
appointment of a [r]eceiver and the creation ofa [m]anagement [c]ommittee."31

In the decision promulgated on March 2, 2006, the Court of Appeals gave due course to respondent
Balmores’ petition. It reversed the trial court’s decision, and issued a new order placing PPC under
receivership and creating an interim management committee.32 The dispositive portion reads:

WHEREFORE, premises considered, the instant petition is hereby GRANTED and GIVEN DUE
COURSE and the June 15, 2005 Order/Resolution of the commercial court, the Regional Trial Court
of Pasig City, Branch 167, in S.E.C. Case No. 05-62, is hereby REVERSED and SET ASIDE and a
NEW ORDER is ISSUED that, during the pendency of the derivative suit, untiljudgment on the merits
is rendered by the commercial court, in order toprevent dissipation, loss, wastage or destruction of
the assets, in order to prevent paralization of business operations which may be prejudicial to the
interest of stockholders, parties-litigants or the general public, and in order to prevent violations of the
corporation laws: (1) Pasig Printing Corporation (PPC) is hereby placed under receivership pursuant

114
to the Rules Governing Intra-Corporate Controversies under R.A. No. 8799;(2) an Interim
Management Committee is hereby created for Pasig Printing Corporation (PPC) composed of Andres
Narvasa, Jr., Atty. Francis Gustilo and Ms Rosemarie Salvio-Leonida; (3) the interim management
committee is hereby directed to forthwith, during the pendency of the derivative suit until judgment on
the merits is rendered by the commercial court, to: (a) take over the business of Pasig Printing
Corporation (PPC), (b) take custody and control of all assets and properties owned and possessed
by Pasig Printing Corporation (PPC), (c) take the place of the management and the board of directors
of Pasig Printing Corporation (PPC), (d) preserve Pasig Printing Corporation’s assets and properties,
(e) stop and prevent any disposal, in any manner, of any of the properties of Pasig Printing
Corporation (PPC) including the MC Home Depot checks and/or their proceeds; and (3) [sic] restore
the status quo ante prevailing by directing respondents their associates and agents to account and
return to the Interim Management Committee for Pasig Printing Corporation (PPC) all the money
proceeds of the 20 MC Home Depot checks taken by them and to account and surrender to the
Interim Management Committee all subsequent MC Home Depot checks or proceeds.33 (Citation
omitted)

The Court of Appeals characterizedthe assailed order/resolution of the trial court as an interlocutory
order that is not appealable.34 In reversing the trial court order/resolution, the Court of Appeals
considered the danger of dissipation, wastage, and loss of PPC’s assets if the review of the trial
court’s judgment would be delayed.35

The Court of Appeals ruled that the case filed by respondent Balmores with the trial court "[was] a
derivative suit because there were allegations of fraud or ultra vires acts . . . by [PPC’s directors]." 36

According to the Court of Appeals,the trial court abandoned its duty to the stockholders in a derivative
suit when it refused to appoint a receiver or create a management committee, all during the
pendency of the proceedings. The assailed order ofthe trial court removed from the stockholders their
right, in an intra-corporate controversy, to be allowed the remedy of appointment of a receiverduring
the pendency of a derivative suit, leaving the corporation under the control of an outsider and its
assets prone to dissipation.37 The Court of Appeals also ruled that this amounts to "despotic,
capricious, or whimsicalexercise of judicial power"38 on the part of the trial court.

In justifying its decision to place PPCunder receivership and to create a management committee, the
Court of Appeals stated that the board’s waiver of PPC’s rights in favor ofVillamor’s law firm without
any consideration and its inaction on Villamor’s failure to turn over the proceeds of rental payments to
PPC warrant the creation of a management committee.39 The circumstances resulted in the imminent
danger of loss, waste, or dissipation of PPC’s assets.40

Petitioners filed separatemotions for reconsideration. Both motions were denied by the Court of
Appeals on May 29, 2006. The dispositive portion of the Court of Appeals’ resolution reads:

WHEREFORE, for lack of merit, respondents’ March 10, 2006 and March 20, 2006 Motions for
Reconsideration are hereby DENIED.41

Petitioners filed separatepetitions for review under Rule 45, raising the following threshold issues:

I. Whether the Court of Appeals correctly characterized respondent Balmores’ action as a

derivative suit

115
 II. Whether the Court of Appeals properly placed PPC under receivership and created a
receiver or management committee

PPC’s directors argued that the Court of Appeals erred in characterizing respondent Balmores’ suit
as a derivative suit because of his failure to implead PPC as party in the case. Hence, the appellate
court did not acquire jurisdiction over the corporation, and the appointment of a receiver or
management committee is not valid.42

The directors further argued that the requirements for the appointment of a receiver or management
committee under Rule 943 of the Interim Rules were not satisfied. The directors pointed out that
respondent Balmores failed to prove that the assets of the corporation were in imminent danger of
being dissipated.44

According to the directors, assuming that a receiver or management committee may be appointed in
the case, it is the Regional Trial Court only and not the Court of Appeals that must appoint them.45

Meanwhile, Villamor argued that PPC’s entitlement to the checks or their proceeds was still in
dispute. In a separate civil case against Villamor, a certain Leonardo Umale was claiming ownership
of the checks.46

Villamor also argued that the Court of Appeals’ order to place PPC under receivership and to appoint
a management committee does not endanger PPC’s assets because the MC Home Depot checks
were not the only assets of PPC.47 Therefore, it would not affect the operation of PPC or result in its
paralysation.48

In his comment, respondent Balmores argued that Villamor’s and the directors’ petitions raise
questions of facts, which cannot be allowed in a petition for review under Rule 45.49

On the appointment of a receiver or management committee, respondent Balmores stated that the ".
. . very practice of waiving assets and income for no consideration can in factlead, not only to the
paralyzation of business, but to the complete loss or cessation of business of PPC[.] It is

precisely because of this fraudulent practice that a receiver/management committee must be

appointed to protect the assets of PPC from further fraudulent acts, devices and schemes."50

The petitions have merit.

Petition for review on certiorari under Rule 45 was proper

First, we rule on the issue of whether petitioners properly filed a petition for review on certiorari under
Rule 45.

Respondent Balmores argued that the petition raises questions of fact.

Under Rule 45, only questionsof law may be raised.51 There is a question of law "when there is doubt
or controversy as to what the law is on a certain [set] of facts."52 The test is "whether the appellate
court can determine the issue raised without reviewing or evaluating the evidence."53 Meanwhile,
there is a question of fact when there is "doubt . . . as to the truth or falsehood of facts."54 The
question must involve the examination of probative value of the evidence presented.
116
In this case, petitioners raise issues on the correctness of the Court of Appeals’ conclusions.
Specifically, petitioners ask (1) whether respondent Balmores’ failure to implead PPC in his action
with the trial court was fatal; (2) whether the Court of Appeals correctly characterized respondent
Balmores’ action as a derivative suit; (3) whether the Court of Appeals’ appointment of a
management committee was proper; and (4) whether the Court of Appeals may exercise the power to
appoint a management committee.

These are questions of law that may be determined without looking into the evidence presented. The
question of whether the conclusion drawn by the Court of Appeals from a set of facts is correct is a
question of law, cognizable by this court.55

Petitioners, therefore, properly filed a petition for review under Rule 45.

II

Respondent Balmores’ action in the trial court is not a derivative suit

A derivative suit is an action filed by stockholders to enforce a corporate action.56 It is an exception to

the general rule that the corporation’s power to sue57 is exercised only by the board of directors or
trustees.58

Individual stockholders may be allowed to sue on behalf of the corporation whenever the directors or
officers of the corporation refuse to sue to vindicate the rights of the corporation or are the ones to be
sued and are in control of the corporation.59 It is allowed when the "directors [or officers] are guilty of
breach of . . . trust, [and] not of mere error of judgment."60

In derivative suits, the real party in interest is the corporation, and the suing stockholder is a mere
nominal party.61

Thus, this court noted:

The Court has recognized that a stockholder’s right to institute a derivative suit is not based on any
express provision of the Corporation Code, or even the Securities Regulation Code, but is impliedly
recognized when the said laws make corporate directors or officers liable for damages suffered by
the corporation and its stockholders for violation of their fiduciary duties. In effect, the suit isan action
for specific performance of an obligation, owed by the corporation to the stockholders, to assist its
rights of action when the corporation has been put in default by the wrongful refusal of the directors
or management to adopt suitable measures for its protection.62

Rule 8, Section 1 of the Interim Rules of Procedure for Intra Corporate Controversies (Interim Rules)
provides the five (5) requisites63 for filing derivative suits:

SECTION 1. Derivative action. – A stockholder or member may bring an action in the name of a
corporation or association, as the case may be, provided, that:

(1) He was a stockholder or member at the time the acts or transactions subject of the action
occurred and at the time the action was filed;

(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint,
toexhaust all remedies available under the articles of incorporation, by-laws, laws or rules
governing the corporation or partnership to obtain the relief he desires;
117
 (3) No appraisal rights are available for the act or acts complained of; and

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

In case of nuisance or harassment suit, the court shall forthwith dismiss the case.

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

Thus, in Western Institute of Technology, Inc., et al. v. Salas, et al.,64 this court said that "[a]mong the
basic requirements for a derivative suit to prosper is that the minority shareholder who is suing for
and on behalf of the corporation must allege in his complaint before the proper forum that he is suing
on a derivative cause of action on behalf of the corporation and all other shareholders similarly
situated who wish to join [him]."65 This principle on derivative suits has been repeated in, among
other cases, Tam Wing Tak v. Hon. Makasiar and De Guia66 and in Chua v. Court of
Appeals,67 which was cited in Hi-Yield Realty, Incorporated v. Court of

Appeals.68

Moreover, it is important that the corporation be made a party to the case.69

This court explained in Asset Privatization Trust v. Court of Appeals 70 why it is a condition sine qua
nonthat the corporation be impleaded as party in derivative suits. Thus:

Not only is the corporation an indispensible party, but it is also the present rule that it must be served
with process. The reason given is that the judgment must be made binding upon the corporation
inorder that the corporation may get the benefit of the suit and may not bring a subsequent suit
against the same defendants for the same cause of action. In other words the corporation must be
joined as party because it is its cause of action that is being litigated and because judgment must be
a res judicata against it.71

In the same case, this court enumerated the reasons for disallowing a direct individual suit.

The reasons given for not allowing direct individual suit are:

(1) . . . "the universally recognized doctrine that a stockholder in a corporation has no title legal
or equitable to the corporate property; that both of these are in the corporation itself for the
benefit of the stockholders." Inother words, to allow shareholders to sue separately would
conflict with the separate corporate entity principle;

(2) . . . that the prior rights of the creditors may be prejudiced. Thus, our Supreme Court held in
the case of Evangelista v. Santos, that ‘the stockholders may not directly claim those damages
for themselves for that would result in the appropriation by, and the distribution among them of
part of the corporate assets before the dissolution of the corporation and the liquidation of its
debts and liabilities, something which cannot be legally donein view of Section 16 of the
Corporation Law. . .";

(3) the filing of such suits would conflict with the duty of the management to sue for the
protection of all concerned;
118
 (4) it would produce wasteful multiplicity of suits; and

(5) it would involve confusion in ascertaining the effect of partial recovery by an individual on
the damages recoverable by the corporation for the same act.72

While it is true that the basis for allowing stockholders to file derivative suits on behalf of corporations
is based on equity, the above legal requisites for its filing must necessarily be complied with for its
institution.73

Respondent Balmores’ action in the trial court failed to satisfy all the requisites of a derivative suit.

Respondent Balmores failed to exhaust all available remedies to obtain the reliefs he prayed for.
Though he tried to communicate with PPC’s directors about the checks in Villamor’s possession
before he filed an action with the trial court, respondent Balmores was not able to show that this
comprised all the remedies available under the articles of incorporation, bylaws, laws, or rules
governing PPC.

An allegation that appraisal rights were not available for the acts complained of is another requisite
for filing derivative suits under Rule 8, Section 1(3) of the Interim Rules.

Section 81 of the Corporation Code provides the instances of appraisal right:

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

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

2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
substantially all of the corporate property and assets as provided in this Code; and

3. In case of merger or consolidation.

Section 82 of the Corporation Codeprovides that the stockholder may exercise the right if he or she
voted against the proposed corporate action and if he made a written demand for payment on the
corporation within thirty (30) days after the date of voting.

Respondent Balmores complained aboutthe alleged inaction of PPC’s directors in his letter informing
themthat Villamor should be made to deliver to PPC and accountfor MC Home Depot’s checks or
their equivalent value. He alleged that these are devices or schemes amounting to fraud or
misrepresentation detrimental to the corporation’s and the stockholders’ interests. He also alleged
that the directors’ inaction placed PPC’s assets in imminent and/or actual dissipation, loss, wastage,
and destruction.

Granting that (a) respondent Balmores’ attempt to communicate with the other PPC directors already
comprised all the available remedies that he could have exhausted and (b) the corporation was under
full control of petitioners that exhaustion of remedies became impossible or futile,74 respondent
Balmores failed toallege that appraisal rights were not available for the acts complained of here.

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Neither did respondent Balmores implead PPC as party in the case nor did he allege that he was
filing on behalf of the corporation.

The non-derivative character of respondent Balmores’ action may also be gleaned from his
allegations in the trial court complaint. In the complaint, he described the nature ofhis action as an
action under Rule 1, Section 1(a)(1) of the Interim Rules, and not an action under Rule 1, Section
1(a)(4) of the Interim Rules, which refers to derivative suits. Thus, respondent Balmores said:

1.1 This is an action under Section 1 (a) (1), Rule 1 of the Interim Rules of Procedure for Intra-
corporate Controversies, involving devices or schemes employed by, or acts of, the defendants as
board of directors, business associates and officers of Pasig Printing Corporation (PPC), amounting
to fraud or misrepresentation, which are detrimental to the interest of the plaintiff as stockholder of
PPC.75 (Emphasis supplied)

Rule 1, Section 1(a)(1) of the Interim Rules refers to acts of the board, associates, and officers,
amounting to fraud or misrepresentation, which may be detrimental to the interest of the
stockholders. This is different from a derivative suit.

While devices and schemes of the board of directors, business associates, or officers amounting to
fraud under Rule 1, Section 1(a)(1) of the Interim Rules are causes of a derivative suit, it is not
always the case that derivative suits are limited to such causes or that they are necessarily derivative
suits. Hence, they are separately enumerated in Rule 1, Section 1(a) of the Interim Rules:

SECTION 1. (a) Cases covered. – These Rules shall govern the procedure to be observed in civil
cases involving the following:

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

(2) Controversies arising out of intra-corporate, partnership, or association relations, between

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

(3) Controversies in the election orappointment of directors, trustees, officers, or managers

ofcorporations, partnerships, or associations;

(4) Derivative suits;and

(5) Inspection of corporate books. (Emphasis supplied)

Stockholder/s’ suits based on fraudulent or wrongful acts of directors, associates, or officers may also
beindividual suits or class suits.

Individual suits are filed when the cause of action belongs to the individual stockholder personally,
and notto the stockholders as a group or to the corporation, e.g., denial of right to inspection and
denial of dividends to a stockholder.76 If the cause of action belongs to a group of stockholders, such

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as when the rights violated belong to preferred stockholders, a class or representative suit may be
filed to protect the stockholders in the group.77

In this case, respondent Balmores filed an individual suit. His intent was very clear from his manner
of describing the nature of his action:

1.1 This is an action under Section 1 (a) (1), Rule 1 of the Interim Rules of Procedure for Intra-
corporate Controversies, involving devices or schemes employed by, or acts of, the defendants as
board of directors, business associates and officers of Pasig Printing Corporation (PPC),amounting to
fraud or misrepresentation, which are detrimental to the interest of the plaintiff as stockholder of
PPC.78

His intent was also explicit from his prayer:

WHEREFORE, plaintiff respectfully prays that the Honorable Court –

2. After notice and due proceedings –

Declare that the acts of defendant Directorsin allowing defendant VILLAMOR to retain custody of the
MC Home checks and encash them upon maturity, as well as their refusal or failure to take any
action against defendant VILLAMOR to make him account and deliver the MC Home checks and/or
their proceeds to Pasig Printing Corporation are devices, schemes or acts amounting to fraud that
are detrimental to plaintiff’s interest as a stockholder of PPC;79 (Emphasis supplied)

Respondent Balmores did not bring the action for the benefit of the corporation. Instead, hewas
alleging that the acts of PPC’s directors, specifically the waiver of rights in favor of Villamor’s law firm
and their failure to take back the MC Home Depot checks from Villamor, were detrimental to his
individual interest as a stockholder. In filing an action, therefore, his intention was to vindicate his
individual interest and not PPC’s or a group of stockholders’.

The essence of a derivative suit is thatit must be filed on behalf of the corporation. This is because
the cause of action belongs, primarily, to the corporation. The stockholder who sues on behalf of a
corporation is merely a nominal party.

Respondent Balmores’ intent to file an individual suit removes it from the coverage of derivative suits.

III

Respondent Balmores has no cause of action that would entitle him to the reliefs sought

Corporations have a personality that is separate and distinct from their stockholders and directors. A
wrong tothe corporation does not necessarily create an individual cause of action. "A cause of action
is the act or omission by which a party violates the right of another."80 A cause of action must pertain
to complainant if he or she is to be entitled to the reliefs sought. Thus, in Cua v. Tan,81 this court
emphasized:

. . . where the acts complainedof constitute a wrong to the corporation itself, the cause of action
belongs to the corporation and not to the individual stockholder or member. Although in most every
case of wrong to the corporation, each stockholder is necessarily affected because the value of his
interest therein would beimpaired, this fact of itself is not sufficient to give him an individual cause of
action since the corporation is a person distinct and separate from him, and can and should itself sue
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the wrongdoer. Otherwise, not only would the theory of separate entity be violated, but there would
be multiplicity of suits as well as a violation of the priority rights of creditors. Furthermore, there is the
difficulty of determining the amount of damages that should be paid to each individual stockholder.82

In this case, respondent Balmores did not allege any cause of action that is personal to him. His
allegations are limited to the facts that PPC’s directors waived their rights to rental income in favor of
Villamor’s law firm without consideration and that they failed to take action when Villamor refused to
turn over the amounts to PPC. These are wrongsthat pertain to PPC. Therefore, the cause of action
belongs to PPC — not to respondent Balmores or any stockholders as individuals.

For this reason, respondent Balmoresis not entitled to the reliefs sought in the complaint. Only the
corporation, or arguably the stockholders as a group, is entitled to these reliefs, which should have
been sought in a proper derivative suit filed on behalf of the corporation.

PPC will not be bound by a decision granting the application for the appointment of a receiver or
management committee. Since it was not impleaded in the complaint, the courtsdid not acquire
jurisdiction over it. On this matter, it is an indispensable party, without which, no final determination
can be had.

Hence, it is not only respondent Balmores’ failure to implead PPC that is fatal to his action, as
petitioners point out. It is the fact that he alleged no cause of action that pertains personally to him
that disqualifies him from the reliefs he sought in his complaint.

On this basis alone, the Court of Appeals erred in giving due course to respondent Balmores’ petition
for certiorari, reversing the trial court’s decision, and issuing a new order placing PPC under
receivership and creating an interim management committee.

IV

Appointment of a management committee was not proper

Assuming that respondent Balmores has an individual cause of action, the Court of Appeals still erred
in placing PPC under receivership and in creating and appointing a management committee.

A corporation may be placed under receivership, or management committees may be created to

preserveproperties involved in a suit and to protect the rights of the parties under the control and
supervision of the court.83 Management committees and receivers are appointed when the
corporation is in imminent danger of "(1) [d]issipation, loss, wastage or destruction of assets or other
properties; and (2) [p]aralysation of its business operations that may be prejudicial to the interest of
the minority stockholders, parties-litigants, or the general public."84

Applicants for the appointment of a receiver or management committee need to establish the
confluence of these two requisites.1âwphi1 This is because appointed receivers and management
committees will immediately take over the management of the corporation and will have the
management powers specified in law.85 This may have a negative effect on the operations and affairs
of the corporation with third parties,86 as persons who are more familiar with its operations are
necessarily dislodged from their positions in favor of appointees who are strangers to the
corporation’s operations and affairs.

Thus, in Sy Chim v. Sy Siy Ho & Sons, Inc.,87 this court said:

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. . . the creation and appointment of a management committee and a receiver is an extra ordinary
and drastic remedy to be exercised with care and caution; and only when the requirements under the
Interim Rules are shown. It is a drastic course for the benefit of the minority stockholders, the parties-
litigants or the general public are allowed only under pressing circumstances and, when there is
inadequacy, ineffectual or exhaustion of legal or other remedies . . . The powerof the court to
continue a business of a corporation . . . must be exercised with the greatest care and caution. There
should be a full consideration ofall the attendant facts, including the interest of all the parties
concerned.88

PPC waived its rights, without any consideration in favor of Villamor. The checks were already in
Villamor’s possession. Some of the checks may have already been encashed. This court takes
judicial notice that the goodwill money of ₱18,000,000.00 and the rental payments of ₱4,500,000.00
every month are not meager amounts only to be waived without any consideration. It is, therefore,
enough to constitute loss or dissipation of assets under the Interim Rules.

Respondent Balmores, however, failed to show that there was an imminent danger of paralysis of
PPC’s business operations. Apparently, PPC was earning substantial amounts from its other sub-
lessees. Respondent Balmores did not prove otherwise. He, therefore, failed to show at least one of
the requisites for appointment of a receiver or management committee.

The Court of Appeals had no jurisdiction to appoint the receiver or management committee

The Court of Appeals has no power to appoint a receiver or management committee. The Regional
Trial Court has original and exclusive jurisdiction89 to hear and decide intra-corporate
controversies,90 including incidents of such controversies.91 These incidents include applications for
the appointment of receivers or management committees.

"The receiver and members of the management committee . . . are considered officers of the court
and shall be under its control and supervision."92 They are required to report tothe court on the status
of the corporation within sixty (60) days from their appointment and every three (3) months after.93

When respondent Balmores filed his petition for certiorari with the Court of Appeals, there was still a
pending action in the trial court. No less than the Court of Appeals stated that it allowed respondent
Balmores’ petition under Rule 65 because the order or resolution in question was an interlocutory
one. This means that jurisdiction over the main case was still lodged with the trial court.

The court making the appointment controls and supervises the appointed receiver or management
committee.1âwphi1 Thus, the Court of Appeals’ appointment of a management committee would
result in an absurd scenario wherein while the main case is still pending before the trial court, the
receiver or management committee reports to the Court of Appeals.

WHEREFORE, the petitions are GRANTED. The decision of the Court of Appeals dated March 2,
2006 and its resolution dated May 29, 2006 are SET ASIDE. SO ORDERED.

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JUANITO ANG, for and in behalf of SUNRISE MARKETING (BACOLOD), INC.,* Petitioner, vs.
SPOUSES ROBERTO and RACHEL ANG, Respondents. G.R. No. 201675 June 19, 2013
CARPIO, J.:

The Case

This petition for review1 assails the Decision2 of the Court of Appeals-Cebu (CA-Cebu) dated 20
September 2011 in CA-G.R. SP No. 05546. The CA-Cebu reversed and set aside the Order3 of the
Regional Trial Court, Branch 53, Bacolod City (RTC Bacolod) dated 27 September 2010 in
Commercial Court Case No. 09-070 entitled Sunrise Marketing (Bacolod), Inc., represented by
Juanita Ang -v: Spouses Roberto and Rachel Ang.

The Facts

Sunrise Marketing (Bacolod), Inc. (SMBI) is a duly registered corporation owned by the Ang
family.4 Its current stockholders and their respective stockholdings are as follows:5

Stockholder Number of Shares

Juanito Ang 8,750

Anecita Ang 1,250

Jeannevie Ang 2,500

Roberto Ang 8,750

Rachel Ang 3,750

Total 25,000

Juanito Ang (Juanito) and Roberto Ang (Roberto) are siblings. Anecita Limoco-Ang (Anecita) is
Juanito’s wife and Jeannevie is their daughter. Roberto was elected President of SMBI, while Juanito
was elected as its Vice President. Rachel Lu-Ang (Rachel) and Anecita are SMBI’s Corporate
Secretary and Treasurer, respectively.

On 31 July 1995, Nancy Ang (Nancy), the sister of Juanito and Roberto, and her husband, Theodore
Ang (Theodore), agreed to extend a loan to settle the obligations of SMBI and other corporations
owned by the Ang family, specifically Bayshore Aqua Culture Corporation, Oceanside Marine
Resources and JR Aqua Venture.6Nancy and Theodore issued a check in the amount of
$1,000,000.00 payable to "Juanito Ang and/or Anecita Ang and/or Roberto Ang and/or Rachel Ang."
Nancy was a former stockholder of SMBI, but she no longer appears in SMBI’s General Information
Sheets as early as 1996.7 Nancy and Theodore are now currently residing in the United States.
There was no written loan agreement, in view of the close relationship between the parties. Part of
the loan was also used to purchase real properties for SMBI, for Juanito, and for Roberto.8

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On 22 December 2005, SMBI increased its authorized capital stock to ₱10,000,000.00. The
Certificate of Increase of Capital Stock was signed by Juanito, Anecita, Roberto, and Rachel as
directors of SMBI.9 Juanito claimed, however, that the increase of SMBI’s capital stock was done in
contravention of the Corporation Code.10According to Juanito, when he and Anecita left for Canada:

x x x Sps. Roberto and Rachel Ang took over the active management of [SMBI]. Through the
employment of sugar coated words, they were able to successfully manipulate the stocks sharings
between themselves at 50-50 under the condition that the procedures mandated by the Corporation
Code on increase of capital stock be strictly observed (valid Board Meeting). No such meeting of the
Board to increase capital stock materialized. It was more of an accommodation to buy peace x x x.11

Juanito claimed that payments to Nancy and Theodore ceased sometime after 2006. On 24
November 2008, Nancy and Theodore, through their counsel here in the Philippines, sent a demand
letter to "Spouses Juanito L. Ang/Anecita L. Ang and Spouses Roberto L. Ang/Rachel L. Ang" for
payment of the principal amounting to $1,000,000.00 plus interest at ten percent (10%) per annum,
for a total of $2,585,577.37 within ten days from receipt of the letter. 12 Roberto and Rachel then sent
a letter to Nancy and Theodore’s counsel on 5 January 2009, saying that they are not complying with
the demand letter because they have not personally contracted a loan from Nancy and Theodore.

On 8 January 2009, Juanito and Anecita executed a Deed of Acknowledgment and Settlement
Agreement (Settlement Agreement) and an Extra-Judicial Real Estate Mortgage (Mortgage). Under
the foregoing instruments, Juanito and Anecita admitted that they, together with Roberto and Rachel,
obtained a loan from Nancy and Theodore for $1,000,000.00 on 31 July 1995 and such loan shall be
secured by:

a) Juanito and Anecita’s fifty percent share over a parcel of land registered in the name of
SMBI;

b) a parcel of land registered in the name of Juanito Ang;

c) Juanito’s fifty percent share in 7 parcels of land registered in his and Roberto’s name;

d) a parcel of land registered in the name of Roberto;

e) a parcel of land registered in the name of Rachel; and

f) Roberto and Rachel’s fifty percent share in 2 parcels of land registered in the name of their
son, Livingstone L. Ang (Livingstone), and in another lot registered in the name of Livingstone
and Alvin Limoco Ang.13

A certain Kenneth C. Locsin (Locsin) signed on behalf of Nancy and Theodore, under a Special
Power of Attorney which was not attached as part of the Settlement Agreement or the Mortgage, nor
included in the records of this case.

Thereafter, Juanito filed a "Stockholder Derivative Suit with prayer for an ex-parte Writ of
Attachment/Receivership" (Complaint) before the RTC Bacolod on 29 January 2009. He alleged that
"the intentional and malicious refusal of defendant Sps. Roberto and Rachel Ang to settle their 50%
share x x x of the total obligation x x x will definitely affect the financial viability of plaintiff
SMBI."14 Juanito also claimed that he has been "illegally excluded from the management and

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participation in the business of [SMBI through] force, violence and intimidation" and that Rachel and
Roberto have seized and carted away SMBI’s records from its office.15

The Complaint sought the following reliefs:

a) Issuance of an ex-parte Writ of Attachment and/or Garnishment, with a Break Open Order
covering the assets of the spouses Roberto and Rachel Ang, or any interest they may have
against third parties;

b) Placement of SMBI under Receivership pending resolution of the case;

c) Enforcement of Juanito’s right to actively participate in the management of SMBI;

d) Issuance of an Order compelling the Spouses Roberto and Rachel Ang to:

i. Render an accounting of the utilization of the loan amounting to $2,585,577.37 or

₱120,229,347.26;

ii. Pay fifty percent of the aforementioned loan, amounting to ₱60,114,673.62;

iii. Explain why Nancy was removed as a stockholder as far as SMBI’s reportorial
requirements with the SEC are concerned;

iv. Restore Juanito’s right to actively manage the affairs of the corporation; and

v. Pay attorney’s fees amounting to ₱20,000.00.

On 29 January 2009, the RTC Bacolod issued an Order16 granting the application for an ex-parte writ
of attachment and break open order. Atty. Jerry Basiao, who filed an application for appointment as
Receiver of SMBI, was directed by the RTC Bacolod to furnish the required Receivership Bond.17 On
the same date, Roberto and Rachel moved to quash the writ of attachment and set aside the break
open order and appointment of receiver.18 They claimed that these were issued in violation of their
right to due process:

Records of this case would show that the complaint was filed before the RTC Bacolod at 2:50 p.m. of
January 29, 2009. x x x Counsel for the defendant-spouses went to the RTC Bacolod at around 3:00
p.m. on January 29, 2009 to inquire on the status of the case and was informed that the last pleading
on record is his entry of appearance with the conformity of the defendant Rachel Ang. Counsel was
however informed by the clerk of court that the Honorable Judge has already issued an order
directing the issuance of the writ of preliminary attachment, receivership and break open order but
said order was not officially released yet x x x. Due to the undersigned counsel’s insistence, however,
said clerk of court of this Honorable Court furnished him a copy of said order x x x. The clerk of court
and the clerk in charge of civil cases assured counsel that no writ of preliminary attachment was
prepared or issued x x x. Despite such assurance x x x [and counsel’s advice that they shall move to
quash the order the following morning], that afternoon, the clerk of court x x x clandestinely, hurriedly
and surreptitiously, for reasons known only to her, x x x prepared the writ of attachment x x x.19

In her Verified Answer Ad Cautelam which was filed on 10 February 2009, Rachel prayed that the
Complaint be dismissed as it was not a bona fide derivative suit as defined under the Interim Rules of
Procedure for Intra-Corporate Controversies20 (Interim Rules). According to Rachel, the Complaint,

126
although labelled as a derivative suit, is actually a collection suit since the real party in interest is not
SMBI, but Nancy and Theodore:

The cause of action does not devolve on the corporation as the alleged harm or wrong pertains to the
right of the Sps. Theodore and Nancy Ang, as creditors, to collect the amount allegedly owed to
them. x x x

That the instant suit is for the benefit of a non-stockholder and not the corporation is obvious when
the primary relief prayed for in the Complaint which is for the defendants "to pay the amount of Php
60,114,673.62 plus interest which is 50% of the loan obligations of plaintff [SMBI] to its creditor Sps.
Theodore and Nancy Ang." Otherwise stated, the instant suit is nothing but a complaint for sum of
money shamelessly masked as a derivative suit.21

Rachel also argued that the Complaint failed to allege that Juanito "exerted all reasonable efforts to
exhaust all intra-corporate remedies available under the articles of incorporation, by-laws, laws or
rules governing the corporation to obtain the relief he desires," as required by the Interim Rules.

During cross-examination, Juanito admitted that there was no prior demand for accounting or
liquidation nor any written objection to SMBI’s increase of capital stock. He also conceded that the
loan was extended by persons who are not stockholders of SMBI. Thus, Rachel filed a Motion for
Preliminary Hearing on Affirmative Defenses on 27 November 2009, arguing that in view of Juanito’s
admissions, the Complaint should be dismissed pursuant to Section 1 of the Interim Rules. Juanito
filed his Opposition thereto on 8 January 2010,22 arguing that applying this Court’s ruling in Hi-Yield
Realty, Inc. v. Court of Appeals,23 the requirement for exhaustion of intra-corporate remedies is no
longer needed when the corporation itself is "under the complete control of the persons against
whom the suit is filed." Juanito also alleged that he and Anecita were deceived into signing checks to
pay off bogus loans purportedly extended by Rachel’s relatives in favor of SMBI. Some of the checks
were payable to cash, and were allegedly deposited in Rachel’s personal account.24 He also claimed
that Rachel’s Motion is disallowed under the Interim Rules.

On 9 February 2009, Juanito moved that Rachel and her daughter, Em Ang (Em), as well as their
counsel, Atty. Filomeno Tan, Jr. (Atty. Tan) be held in contempt. Juanito claimed that on the date the
writ of attachment and break open order were issued, Atty. Tan, accompanied by Rachel and Em,
"arrogantly demanded from the Clerk in charge of Civil Cases that he be furnished a copy of the [said
orders] x x x otherwise he will tear the records of the subject commercial case." Juanito also accused
Atty. Tan of surreptitiously photocopying the said orders prior to service of the summons, Complaint,
Writ of Attachment and Attachment Bond. According to Juanito, the purpose of obtaning a copy of the
orders was to thwart its implementation. Thus, when the authorities proceeded to the SMBI premises
to enforce the orders, they found that the place was padlocked, and that all corporate documents and
records were missing. On 14 December 2010, the Sheriff and other RTC Bacolod employees then
filed a Verified Complaint against Atty. Tan before this Court, which also contained the foregoing
allegations.25

Rachel then filed a Reply on 27 January 2010, claiming that Juanito’s reliance on the Hi-Yield case is
misplaced:

The facts x x x of this case are strikingly different from that in Hi-Yield Realty. In that case, the
Supreme Court noted that the complaining stockholder was a minority stockholder. However, in the
case at bar, Juanito Ang is one of the biggest stockholders of [SMBI]. x x x He is a member of
[SMBI’s] Board of Directors and is even the vice-president thereof. Furthermore, in Hi-Yield Realty,
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the Supreme Court noted that the complaining stockholder was excluded from the affairs of the
corporation. However, the evidence thus far presented, particularly Juanito Ang’s admission, show
that he and his wife, Anecita, participate in the disbursement of [SMBI’s] funds x x x.26

Juanito filed his Rejoinder on 2 March 2010.

The Ruling of the RTC Bacolod

On 27 September 2010, the RTC Bacolod issued an Order which stated that:

WHEREFORE, premises considered, the court hereby rules that the present action is a DERIVATIVE
SUIT and the Motion to Dismiss based on Affirmative Defenses raised by defendants is DENIED for
lack of merit.27

The RTC Bacolod found that the issuance of the checks to settle the purported obligations to
Rachel’s relatives, as well as the removal of Nancy as a stockholder in SMBI’s records as filed with
the SEC, shows that Rachel and Roberto committed fraud. The Order likewise stated that the
requirement of exhaustion of intra-corporate remedies is no longer necessary since Rachel and
Roberto exercised complete control over SMBI.

Aggrieved, Rachel filed a Petition for Certiorari with the CA-Cebu.

The Ruling of the CA-Cebu

On 20 September 2011, the CA-Cebu promulgated its Decision which reversed and set aside the
Order of the RTC Bacolod dated 27 September 2010. According to the CA-Cebu, the Complaint filed
by Juanito should be dismissed because it is a harassment suit, and not a valid derivative suit as
defined under the Interim Rules. The CA-Cebu also found that Juanito failed to exhaust intra-
corporate remedies and that the loan extended by Nancy and Theodore was not SMBI’s corporate
obligation. There is nothing on record to show that non-payment of the loan will result in any damage
or prejudice to SMBI.

Juanito then filed a Motion for Reconsideration with Prayer for Voluntary Inhibition on 28 October
2011. In his Motion, Juanito pointed out that Rachel filed her Petition for Certiorari without previously
filing a Motion for Reconsideration, warranting the dismissal of the said Petition. The CA-Cebu denied
the Motion.

Hence, this petition.

The Issues

The issues raised in the instant petition are:

<

p align="justify">I. Whether based on the allegations of the complaint, the nature of the case is
one of a derivative suit or not.

Corollary to the above, whether the Honorable Court of Appeals erred x x x in ordering the
dismissal of the Complaint on the ground that the case is not a derivative suit.

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 II. Whether the Honorable Court of Appeals x x x seriously erred in considering evidence
aliunde, that is, other than the four corners of the complaint, in determining the nature of the
complaint, in utter violation of the doctrine that the jurisdiction is determined by law and
allegations of the complaint alone.

III. Granting arguendo, but without necessarily admitting that the complaint is not one of a
derivative suit, but only an ordinary civil action, whether the Honorable Court of Appeals x x x
gravely erred in dismissing the petition entirely, when the Regional Trial Court a quo has
jurisdiction also over the case as an ordinary civil action, and can just proceed to hear the
same as such.28

The Ruling of this Court

The petition has no merit.

We uphold the CA-Cebu’s finding that the Complaint is not a derivative suit. A derivative suit is an
action brought by a stockholder on behalf of the corporation to enforce corporate rights against the
corporation’s directors, officers or other insiders.29 Under Sections 2330 and 3631 of the Corporation
Code, the directors or officers, as provided under the by-laws,32 have the right to decide whether or
not a corporation should sue. Since these directors or officers will never be willing to sue themselves,
or impugn their wrongful or fraudulent decisions, stockholders are permitted by law to bring an action
in the name of the corporation to hold these directors and officers accountable.33 In derivative suits,
the real party ininterest is the corporation, while the stockholder is a mere nominal party.

This Court, in Yu v. Yukayguan,34 explained:

The Court has recognized that a stockholder’s right to institute a derivative suit is not based on any
express provision of the Corporation Code, or even the Securities Regulation Code, but is impliedly
recognized when the said laws make corporate directors or officers liable for damages suffered by
the corporation and its stockholders for violation of their fiduciary duties. Hence, a stockholder may
sue for mismanagement, waste or dissipation of corporate assets because of a special injury to him
for which he is otherwise without redress. In effect, the suit is an action for specific performance of an
obligation owed by the corporation to the stockholders to assist its rights of action when the
corporation has been put in default by the wrongful refusal of the directors or management to make
suitable measures for its protection. The basis of a stockholder’s suit is always one in equity.
However, it cannot prosper without first complying with the legal requisites for its institution.
(Emphasis in the original)

Section 1, Rule 8 of the Interim Rules imposes the following requirements for derivative suits:

(1) The person filing the suit must be a stockholder or member at the time the acts or
transactions subject of the action occurred and the time the action was filed;

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

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

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

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Applying the foregoing, we find that the Complaint is not a derivative suit. The Complaint failed to
show how the acts of Rachel and Roberto resulted in any detriment to SMBI. The CA-Cebu correctly
concluded that the loan was not a corporate obligation, but a personal debt of the Ang brothers and
their spouses. The check was issued to "Juanito Ang and/or Anecita Ang and/or Roberto Ang and/or
Rachel Ang" and not SMBI. The proceeds of the loan were used for payment of the obligations of the
other corporations owned by the Angs as well as the purchase of real properties for the Ang brothers.
SMBI was never a party to the Settlement Agreement or the Mortgage. It was never named as a co-
debtor or guarantor of the loan. Both instruments were executed by Juanito and Anecita in their
personal capacity, and not in their capacity as directors or officers of SMBI. Thus, SMBI is under no
legal obligation to satisfy the obligation.

The fact that Juanito and Anecita attempted to constitute a mortgage over "their" share in a corporate
asset cannot affect SMBI. The Civil Code provides that in order for a mortgage to be valid, the
mortgagor must be the "absolute owner of the thing x x x mortgaged." 35 Corporate assets may be
mortgaged by authorized directors or officers on behalf of the corporation as owner, "as the
transaction of the lawful business of the corporation may reasonably and necessarily
require."36 However, the wording of the Mortgage reveals that it was signed by Juanito and Anecita in
their personal capacity as the "owners" of a pro-indiviso share in SMBI’s land and not on behalf of
SMBI:

This Mortgage is made and executed by and between:

Spouses JUANITO and ANECITA ANG, of legal age, Filipino citizens, residents of Sunrise Marketing
Building at Hilado Street, Capitol Shopping Center, Bacolod City, hereinafter referred to as the
MORTGAGORS;

Spouses THEODORE and NANCY ANG, x x x hereinafter referred to as the MORTGAGEES

represented in this instance through their attorney-in-fact, Mr. Kenneth Locsin;

xxxx

In order to ensure payment x x x the MORTGAGORS hereby CONVEY unto the MORTGAGEES by
way of EXTRA-JUDICIAL REAL ESTATE MORTGAGE their 50% rights and interests over the
following real properties to wit:

a. Those registered in the name of SUNRISE MARKETING (BACOLOD), INC. x x x

x x x x37 (Emphasis supplied)

Juanito and Anecita, as stockholders of SMBI, are not co-owners of SMBI assets. They do not own
pro-indiviso shares, and therefore, cannot mortgage the same except in their capacity as directors or
officers of SMBI.

We also find that there is insufficient evidence to suggest that Roberto and Rachel fraudulently and
wrongfully removed Nancy as a stockholder in SMBI’s reportorial requirements. As early as 2005,
when SMBI increased its capital stock, Juanito and Anecita already knew that Nancy was not listed
as a stockholder of SMBI. However, they attempted to rectify the error only in 2009, when the
Complaint was filed. That it took four years for them to make any attempt to question Nancy’s
exclusion as stockholder negates their allegation of fraud.

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Since damage to the corporation was not sufficiently proven by Juanito, the Complaint cannot be
considered a bona fide derivative suit. A derivative suit is one that seeks redress for injury to the
corporation, and not the stockholder. No such injury was proven in this case.

The Complaint also failed to allege that all available corporate remedies under the articles of
incorporation, by-laws, laws or rules governing the corporation were exhausted, as required under
the Interim Rules. The CA-Cebu, applying our ruling in the Yu case, pointed out:

x x x No written demand was ever made for the board of directors to address private respondent
Juanito Ang’s concerns.1âwphi1

The fact that [SMBI] is a family corporation does not exempt private respondent Juanito Ang from
complying with the Interim Rules. In the x x x Yu case, the Supreme Court held that a family
corporation is not exempt from complying with the clear requirements and formalities of the rules for
filing a derivative suit. There is nothing in the pertinent laws or rules which state that there is a
distinction between x x x family corporations x x x and other types of corporations in the institution by
a stockholder of a derivative suit.38 Furthermore, there was no allegation that there was an attempt to
remove Rachel or Roberto as director or officer of SMBI, as permitted under the Corporation Code
and the by-laws of the corporation. Thus, the Complaint failed to satisfy the requirements for a
derivative suit under the

Interim Rules.

The CA-Cebu correctly ruled that the Complaint should be dismissed since it is a nuisance or
harassment suit under Section 1(b) of the Interim Rules. Section 1(b) thereof provides:

b) Prohibition against nuisance and harassment suits. - Nuisance and harassment suits are
prohibited. In determining whether a suit is a nuisance or harassment suit, the court shall consider,
among others, the following:

(1) The extent of the shareholding or interest of the initiating stockholder or member;
(2) Subject matter of the suit;
(3) Legal and factual basis of the complaint;
(4) Availability of appraisal rights for the act or acts complained of; and
(5) Prejudice or damage to the corporation, partnership, or association in relation to the relief
sought.

In case of nuisance or harassment suits, the court may, motu proprio or upon motion, forthwith
dismiss the case.

Records show that Juanito, apart from being Vice President, owns the highest number of shares,
equal to those owned by Roberto. Also, as explained earlier, there appears to be no damage to SMBI
if the loan extended by Nancy and Theodore remains unpaid. The CA-Cebu correctly concluded that
"a plain reading of the allegations in the Complaint would readily show that the case x x x was mainly
filed to collect a debt allegedly extended by the spouses Theodore and Nancy Ang to [SMBI]. Thus,
the aggrieved party is not SMBI x x x but the spouses Theodore and Nancy Ang, who are not even x
x x stockholders."39

WHEREFORE, we DENY the petition. We AFFIRM the 20 September 2011 Decision of the Court of
Appeals-Cebu in CA-G.R. SP No. 05546. SO ORDERED.

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CANDIDO PASCUAL, plaintiff-appellant, vs. EUGENIO DEL SAZ OROZCO, ET AL, defendants-
appellees. G.R. No. L-5174 March 17, 1911 TRENT, J.:

This is an appeal by the plaintiff from a judgment sustaining a demurrer to the first and second
causes of action set forth in the amended complaint. The demurrer as to both causes of action was
based upon the following grounds:

(a) Lack of legal capacity to use on part of plaintiff;

(b) Failure to state facts constituting a cause of action;
(c) Defect of parties plaintiff; and,
(d) Uncertainty.

The lower court sustained the demurrer as to both causes of action upon the second ground above-
mentioned.

The following errors have been assigned:

The court a quo erred in sustaining the demurrer to the first cause of action and dismissing the same
because (a) the facts alleged constitute a cause of action, and (b) the remedy sought by the plaintiff
is the only one available.

The same errors are assigned as to the second cause of action.

The gist of the first and second causes of action is as follows:

That during the years 1903, 1904, 1905, and 1907 the defendants and appellees, without the
knowledge, consent, or acquiescence of the stockholders, deducted their respective compensation
from the gross income instead of from the net profits of the bank, thereby defrauding the bank and its
stockholders of approximately P20,000 per annum; that though due demands has been made upon
them therefor, defendants refuse to refund to the bank the sums so misappropriated, or any part
thereof; that defendants constitute a majority of the present board of directors of the bank, who alone
can authorize an action against them in the name of the corporation, and that prior to the filing of the
present suit plaintiff exhausted every remedy in the premises within this banking corporation.

The second cause of action sets forth that defendants' and appellees' immediate predecessors in
office in this bank during the years 1899, 1900, 1901, and 1902, committed the same illegality as to
their compensation as is charged against the defendants themselves; that in the four years
immediately following the year 1902, the defendants and appellees were the only officials or
representatives of the bank who could and should investigate and take action in regard to the sums
of money thus fraudulently appropriated by their predecessors; that they were the only persons
interested in the bank who knew of the fraudulent appropriation by their predecessors; that they
wholly neglected to take any action in the premises or inform the stockholders thereof; that due
demand has been made upon defendants to reimburse the bank for this loss; that the bank itself can
not bring an action in its own name against the defendants and appellees, for the reason already
stated, and that there remains no remedy within the corporation itself.

The questions raised in third cause of action are not before us at this as the demurrer to that cause of
action was overruled.

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The court below sustained the demurrer as to the first and second causes of action on the ground
that in actions of this character the plaintiff must aver in his complaint that he was the owner of stock
in the corporation at the time of the occurrences complained of, or else that the stock has since
devolved upon him by operation of law.

This action was brought by the plaintiff Pascual, in his own right as a stockholder of the bank, for the
benefit of the bank, and all the other stockholders thereof. The plaintiff sues on behalf of the
corporation, which, even though nominally a defendant, is to all intents and purposes the real plaintiff
in this case. That such is the case is shown by the prayer of the complaint which is that judgment be
entered in favor of the bank.

According to the pleadings, the Banco Español-Filipino is a banking corporation, constituted as such
by royal decree of the Crown of Spain in the year 1854, the original grant having been subsequently
extended and modified by royal decree of July 14, 1897, and by Act No. 1790 of the Philippine
Commission. From the first it has been a bank of issue, and under the Spanish regime was regarded
as a quasi-public institution, its full title having been originally "Banco Español-Filipino de Isabel II."
The Captain-General of the Philippine Islands was its protector and supreme head. To him belonged
the power to appoint its directors and other managing officers, remove them from office for cause, fix
the rate of interest demandable by the bank, resolve all doubts and controversies relating to its
management, "and finally, exercise, as representative of Her Majesty's Government, the powers that
the laws give him respecting public establishments protected and privileged."

It is alleged in the amended complaint that the only compensation contemplated or provided for the
managing officers of the bank was a certain per cent of the net profits resulting from the bank's
operations, as set forth in article 30 of its reformed charter or statutes, which article is as follows:

Of the profits or gains which may result from the bank's operations, after deducting all the
expenses of its administration and the part, if any, which corresponds to the legal reserve fund,
there shall be set apart ten per cent for the directors and five per cent for the board of
government, the distribution of which shall be made as provided in the regulations. The eighty-
five per cent remaining shall belong integrally to the shareholders pro rata the number of
shares owned by each.

Before proceeding to the determination of the real questions involved in this case it might be well to
note briefly the origin and history of the right of a stockholder in a corporation to maintain a suit of this
kind.

A corporation is an artificial being, invinsible, intangible, and existing only in contemplation of

law. (Chief Justice Marshall in Trustees of Dartmouth College vs. Woodward, 4 Wheat., 636.)

The word "corporation" is but a collective name for the corporators or members who compose
an incorporated association; and where it is said that a corporation is itself a person, or being,
or creature, this must be understood in a figurative sense only. (Morawetz on Private
Corporations, 2nd ed., sec. 1.)

A corporation is "an artificial person created by the sovereign from natural persons and in
which artificial person the natural persons of which it is composed become merged and
nonexistent." (Quoted with approval in case of The People, ex rel. Winchester, etc.,
respondent, vs. Coleman, et al., commissioners of taxes etc., appellants, 133 N.Y. Appls.,
279.)
133
In suits of this character the corporation itself and not the plaintiff stockholder is the real party in
interest. The rights of the individual stockholder are merged into that of the corporation. It is a
universally recognized doctrine that a stockholder in a corporation has no title legal or equitable to the
corporate property; that both of these are in the corporation itself for the benefit of all the
stockholders. Text writers illustrate this rule by the familiar example of one person or entity owning all
the stock and still having no greater or essentially different title than if he owned but one single share.
Since, therefore, the stockholder has no title, it is evident that what he does have, with respect to the
corporation and his fellow stockholder, are certain rights sui generis. These rights are generally
enumerated as being, first, to have a certificate or other evidence of his status as stockholder issued
to him; second, to vote at meetings of the corporation; third, to receive his proportionate share of the
profits of the corporation; and lastly, to participate proportionately in the distribution of the corporate
assets upon the dissolution or winding up. (Purdy's Beach on Private Corporations, sec. 554.)

The right of individual stockholders to maintain suits for and on behalf of the corporation was denied
until within a comparatively short time, but his right is now no longer doubted. On this point Cook on
Corporations, 5th ed. (1903), secs. 644, 645, and 646, says:

Notwithstanding this fact, however, that it was the duty and right of the corporation to bring suit
remedy these wrongs, it gradually became apparent that frequently the corporation was helpless and
unable to institute the suit. It was found, where the guilty parties themselves controlled the directors
and also a majority of the stock, that the corporation was in their power, was unable to institute suit,
and that the minority of the stockholders were being defrauded of their rights and were without
remedy. The time came when the minority of the stockholders of the defrauded corporation — the
corporation itself being controlled by the guilty parties — were given a standing in court for the
purpose of taking up the cause of the corporation, and, in its name and stead, of bringing the guilty
parties to an account. Accordingly, in 1843, in the leading case of Foss vs. Harbottle, a stockholder
brought suit in the name of himself and other defrauded stockholders, and for the benefit of the
corporation, against the directors, for a breach of their duty to the corporation. This case was decided
against the complaining stockholder, on the ground that the complainant had not proved that the
corporation itself was under the control of the guilty parties, and had not proved that it was unable to
institute suit. The court, however, broadly intimated that a case might arise when a suit instituted by
defrauded stockholders would be entertained by the court and redress given. Acting upon this
suggestion, and impelled by the utter inadequacy of suits instituted by the corporation, defrauded
stockholders continued to institute these suits and to urge the courts of equity to grant relief. These
efforts were unsuccessful in clearly establishing the right of stockholders herein until the cases of
Atwol against Merriwether, in England, 1867, and of Dodge vs. Woolsey, in this country, in 1855.
These two great and leading cases have firmly established the law for England and America, that
where corporate directors have committed a breach of trust either by their frauds, ultra vires acts, or
negligence, and the corporation is unable or unwilling to institute suit to remedy the wrong, a single
stockholder may institute that suit, suing on behalf of himself and other stockholders and for the
benefit of the corporation, to bring about a redress of the wrong done directly to the corporation and
indirectly to the stockholders.

It is now no longer doubted, — said Mr. Justice Wayne, in the case of Dodge vs. Woolsey, 18
How. (U.S.), 331 — either in England or the United States, that courts of equity, in both, have a
jurisdiction over corporations, at the instance of one or more of their members; to apply
preventive remedies by injunction, to restrain those who administer them from doing acts which
would amount to a violation of charters, or to prevent any misapplication of their capitals or
profits, which might result in lessening the dividends of stockholders, or the value of their
shares, as either may be protected by the franchises of a corporation, if the acts intended to be
134
 done create what is in the law denominated a breach of trust. And the jurisdiction extends to
inquire into, and to enjoin, as the case may require that to be done, any proceedings by
individuals, in whatever character they may profess to act, if the subject of complaint is an
imputed violation of a corporate franchise, or the denial of a right growing out of it, for which
there is not an adequate remedy at law.

So it is clear that the plaintiff, by reason of the fact that he is a stockholder in the bank (corporation)
has a right to maintain a suit for and on behalf of the bank, but the extent of such a right must depend
upon when, how, and for what purpose he acquired the shares which he now owns. In the
determination of these questions we can not see how, if it be true that the bank is a quasi-public
institution, it can affect in any way the final result.

It is alleged that the plaintiff became a stockholder on the 13th of November, 1903; that the
defendants, as members of the board of directors and board of government, respectively, during
each and all the years 1903, 1904, 1905, 1906, and 1907, did fraudulently, and to the great prejudice
of the bank and its stockholders, appropriate to their own use from the profits of the bank sums of
money amounting approximately to P20,000 per annum.

Article 31 of the bank's charter provides that dividends shall be declared each semestre. The
stockholders meet once a year, in February, to receive and consider the report of the bank's
operations contained in the annual balance and memorial. Beyond this they have no direct voice in
the affairs of the bank, but all who are then stockholders and have a right to vote must clearly have a
right to vote upon all the business proceedings of the year, irrespective of the date upon which they
may have become stockholders. They are entitled to all the dividends that have been earned by their
stock during the year which has not been earned by their stock during the year which has not been
already declared and paid, regardless of the precise period of the year in which it may have accrued.
So, in the general meeting of the stockholders on February 3, 1904, the plaintiff had a right to
participate.

Neither the charter, the by-laws, nor the regulations prescribe when, within the semestre, the
dividends shall be declared; but it may be presumed that such dividends are declared at the end of
the semestre and that the first semestre begins with the first day of January of each year. On this
basis the owner of stock from whom the plaintiff purchased his ten shares might have received the
dividends corresponding to these ten shares for the first semestre (six months) of the year 1903. The
dividends were declared twice a year, every six months. The times for declaring the dividends are
specifically and distinctly pointed out — one period is separated from the other. Every six months
forms a period. So if the plaintiff was not entitled to the dividends for the first period (from January to
July, 1903), he having become a stockholder in September of that year, he would have been entitled
to the dividends on his stock for the second period, or semestre. The plaintiff was, therefore, a
stockholder during all the time for which he seeks recovery in his first cause of action, except the first
six months of the year 1903. Then again, as a matter of fact (which we do not now decide), if the
defendants had taken their salaries for the year 1903 at the close of that year or at any time after
September 13, the plaintiff would then have had an interest and, on the theory that he was a
stockholder, could have questioned the legality of the defendants' right to take such salary, inasmuch
as his dividends would be directly affected, in that, if the defendants took 10 per cent of the gross
instead of the net earnings of the bank, his dividend on his ten shares for the second period (from
July to December, 1903) would be less.

135
Conceding that this cause of action is demurrable on the grounds that the plaintiff was not a
stockholder during the first six moths of the year 1903, should the demurrer have been sustained as
to the whole cause of action when the time for which recovery is sought is clearly divisible?

Section 90 of the Code of Civil Procedure in force in the Philippine Islands provides, in part, as
follows:

2. ... If the complaint contains more than one cause of action, each distinct cause of action
must be set forth in a separate paragraph containing all the facts constituting the particular
cause of action.

Where the matter in a single count is divisible in its nature, the demurrer should be confined to
those parts which are defective, as the same general rule which applies to different counts
applies also to divisible matter in the same count constituting different causes of action; and
where one count, containing distinct averments, discloses a good cause of action in one of
such averments, as when several breaches are assigned, some well and others ill, a general
demurrer will be overruled. (6 Ency. Plead. & Prac., 303, 304.)

The complaint contains three causes of action, each set forth in a separate paragraph. The matter in
the first cause is, as we have said, divisible in its nature. The rule above quoted is, therefore,
perfectly applicable.

The most important question to be decided is, did the lower court err in sustaining the demurrer to the
second cause of action? If this question be decided in the negative, then it will not be necessary to
determine whether or not the allegations in this part of the complaint are sufficient to hold the
defendants liable for the acts of their predecessors.

It affirmatively appears from the complaint that the plaintiff was not a stockholder during any of the
time in question in this second cause of action. Upon the question whether or not a stockholder can
maintain a suit of this character upon a cause of action pertaining to the corporation when it appears
that he was not a stockholder at the time of the occurrence of the acts complained of and upon which
the action is based, the authorities do not agree.

In the case of Hawes vs. Oakland (14 Otto [104 U.S.], 450, 456), the plaintiff, a shareholder in the
Contra Costa Waterworks Company, brought a bill in equity against the company and the city of
Oakland in the Circuit Court of the United States for California, on the ground that he was a citizen of
New York and the defendant citizens of California, alleging that the company was furnishing the city
of Oakland with water free charge beyond what the law required it to do, and that, although he had
required them to desist, the directors had failed to heed his protest and that unless enjoined they
would continue to furnish water to the city in excess of their legal obligations in this particular, to the
damage of plaintiff and the shareholders.

To this complaint the city of Oakland demurred upon the ground that the appellant had shown no
capacity in himself to maintain the suit, the injury, if any, being to the corporation and the right to sue
pertaining to it solely. The demurrer was sustained and the bill dismissed, whereupon the plaintiff
carried the case to the Supreme Court of the United States.

The decision of the court, which was written by Mr. Justice Miller and concurred in by all the other
justices, contains a review of the earlier decisions of the English and American courts with respect to
the right of stockholders of corporations to maintain suits of this character. In concluding, the court,
136
after enumerating a number of circumstances in which a stockholder might be permitted to sue upon
a cause of action pertaining to the corporation, said:

But in addition to the existence of grievances which call for this kind of relief, it is equally important
that before the shareholder is permitted, in his own name to institute and conduct a litigation which
usually belongs to the corporation, he should show to the satisfaction of the court that he has
exhausted all the means within his reach to attain within the corporation itself, the redress of his
grievances, or action in conformity to his wishes. He must make an earnest, not a simulated effort,
with the managing body of the corporation, to induce remedial action on their part, and this must be
made apparent to the court. If the time permits, or has permitted, he must show, if he fails with the
directors, that he has made an honest effort to obtain action by the stockholders as a body, in the
matter of which he complains. And he must show a case, if this is not done, where it could not be
done, or it was not reasonable to require it.

The effort to induce such action as plaintiff desires on the part of the directors, or of the
stockholders when that is necessary, and the cause of failure in these efforts, and all allegation
that plaintiff was a shareholder at the time of the transactions of which he complains, or that
the shares have devolved on him since by operation of law and that the suit is not a collusive
one to confer on a court otherwise have no cognizance, should be in the bill, which should be
verified by affidavit.

This case was decided January 16, 1882. More than a year afterward the Supreme Court embodied
the procedural part of this decision in the 94th Equity Rule, adopted January 23, 1883. The rule reads
as follows:

Every bill brought by one or more stockholders in a corporation against the corporation and
other parties, founded on rights which may properly be asserted by the corporation, must be
verified by oath, and must contain an allegation that the plaintiff was a shareholder at the time
of the transaction of which he complains, or that his shares had devolved on him since by
operation of law, and that the suit is not a collusive one to confer on a court of the United
States jurisdiction of a case of which it would not otherwise have cognizance. It must also set
forth with particularity the efforts of the plaintiff to secure such action as he desires on the part
of the managing directors or trustees, and, if necessary, of the shareholders, and the causes of
his failure to obtain such action.

January 21, 1884, the Supreme Court decided the case of Dimpfel vs. Ohio, etc., R.R. Co. (110 U.S.,
212; 28 Law Ed., 121, 122), which was similar to the Hawes case, above cited. Mr. Justice Field, by
whom the opinion of the court was written, says (p. 122):

The suit was brought to set aside a contract by which the Ohio and Mississippi Railway
Company became the owner of a portion of its road known as the Springfield Division, and to
obtain a decree from the court declaring that the bonds, issued by the company and secured
by a mortgage upon that division, are null and void. It was commenced by Dimpfel, and
individual stockholder in the company, who stated in his bill, that it was filed on behalf of
himself and such other stockholders as might join him in the suit. Callaghan, another
stockholder, is the only one who joined him. The two claim to be owners of fifteen hundred
shares of the stock of the company. The whole number of shares is 240,000. The owners of
the balance of this large number make no complaint of the transactions which the complainants
seek to annul. And it does not appear that the complainant owned their shares when these
transactions took place. For aught we can see to the contrary, they may have purchased the
137
 shares long afterwards, expressly to annoy and vex the company, in the hope that they might
thereby extort, from its fears, a larger benefit than the other stockholders have received or may
reasonably expect from the purchase, or compel the company to buy their shares at prices
above the market value. Unfortunately, litigation against large companies is often instituted by
individual stockholders from no higher motive.

The bill in this case was also open to the objection that the plaintiff had not exhausted the means of
redress available within the corporation. The next proceeds to consider this point, but prefaces its
remarks with the following significant phrase:

But assuming that the complainants were the owners of the shares held by them when the
transactions of which they complain took place, it does not appear that they made any attempt,
etc.

Counsel for the plaintiff in a very able and exhaustive brief sought to show that the doctrine laid down
in these two cases is not applicable to the case at bar, first, because the Supreme Court in these
cases merely established a rule of practice, designed to prevent collusive suits in the Federal court;
and, second, that if such rule is to be regarded as a declaration of substantive law, it is wrong on
principle and should be disregarded. Many of the authorities cited by the plaintiff to the effect that the
rule is merely one of practice, peculiar to the Federal court, base that conclusion upon the fact that
the requirement of the inclusion of the averments in question in the bill to be found in the 94th Equity
Rule. Some of the authorities cited, which hold this view, are: Pomeroy, Eq. Jur., sec. 1096;
Thompson, Corporations, sec. 4570; Cook, Corporations vol. 3, secs. 736, 737; Morawetz,
Corporations, sec. 209; Forrester vs. Mining Co., 55 Pac. Rep., 229.

In the first place the doctrine was announced in Hawes vs. Oakland, supra, more than a year before
the 94th Equity Rule was promulgated, so that it can admit of no dispute that in the opinion of the
Supreme Court, as least, the ownership of stock at the time of the transaction complained of was
essential to the right to maintain such an action as a matter of substantive law, prior to and
independent of the Equity Rule.

It is true that the court in writing the decision in the Hawes case, had in mind the prevalence of the
practice of bringing suits in the Federal courts, by collusion between the parties, which should
property be tried in the State court. It is equally true that the court was desirous of preventing a
continuance of these fraudulent practices, by establishing a test which should prevent them. The
basis of the right to sue in the Federal courts being diversity of citizenship, the usual method
employed to enable parties to suits of this kind to invoke the jurisdiction of these courts was to have a
few shares of stock transferred to some person who was a citizen of a State other than that of which
the proposed defendants were citizens. In a case of this kind the transfer of the stock would be, of
necessity, merely nominal, and the plaintiff, under such circumstances, would not be a bona
fide stockholder, and would not be entitled to maintain the suit. Of necessity, in cases of this kind, of
genuine collusion to create a fictitious diversity of citizenship the nominal transfer of the stock is
made at a date subsequent to that of the occurrence of the acts or omissions complained of.
Although the court was lawfully entitled to protect itself against such frauds as those of which it
complains in this case, and to refuse to take cognizance of cases in which, owing to the purely
fictitious nature of the simulated diversity of citizenship, the proper tribunals were the State courts, on
the other hand, in cases of genuine diversity of citizenship, it could not lawfully refuse to exercise the
jurisdiction vested in it. No citation of authority is needed to support the proposition that it is the duty
of courts to exercise the jurisdiction properly conferred upon them. It is elementary that where there is
a higher tribunal authorized to issue the writ, mandamus will lie to put the judicial machinery in
138
motion. (Spelling, Extraordinary Relief, sec. 1394.) This being the case, the conclusion is obvious that
the mere fact that in some cases persons suing as stockholders for the redress of grievances anterior
to the transfer of the stock held by the plaintiff are not acting in good faith would not justify or
authorize a refusal to take jurisdiction in any case in which the plaintiff's stock was acquired after the
occurrence of the facts supposed to constitute the cause of action, unless the court were of the
opinion, as a matter of substantive law, that in no event would a stockholder so situated be entitled to
maintain such an action.

It is only upon this assumption that the correctness of the decision in Hawes vs. Oakland and the
legality of the 94th Equity Rule can be maintained. The court had no authority to change the
substantive law either by its decision or the rule, and it is not to be presumed that it intended to do so.
A careful examination of the Hawes case and of the rule will show that no such change was in fact
made. The decision is merely declaratory of the preexisting law, as the court understood it to be, and
the rule merely provides a rule of pleading.

The decision in the Hawes case it that among other necessary averments, the bill should contain "an
allegation that the plaintiff was a shareholder at the time of the transaction of which he complains ...
and that the suit is not a collusive one to confer jurisdiction on a court of the United States in a case
in which it would otherwise have no cognizance ... ." The language of the 94th Equity Rule is
practically identical with this. It provides, in terms that a stockholder's bill in cases of this character
"must contain an allegation that the plaintiff was a stockholder at the time of the transaction of which
he complains ... and that the suit is not a collusive one to confer jurisdiction . . . ."

This is, obviously, a mere rule of pleading — it requires averments of facts upon which the plaintiff's
cause of action and the jurisdiction of the court rest. It assumes, as the court had already decided,
that the ownership of the stock at the time of the transaction is a fact essential to the maintenance of
the suit in any event. Unless that fact exists no cause of action exists, whether the suit is collusive or
not. Even if the stock was owned prior to the transaction complained of, if the suit is collusive — as it
would be, for instance if one of the defendants had acquired a merely colorable domicile in another
State to support the allegation of diversity of citizenship — the plaintiff has no right to maintain the
action in a Federal court. Consequently, the rule requires that these two facts be distinctly averred.
The requirement that they be pleaded is procedural. The necessity of the existence of the facts in
order to give rise to the right of action is substantive.

If the Supreme Court had been of the opinion, as are some of the State courts and text writers cited
in plaintiff's brief, that the transferee of shares of stock in a corporation acquires the right to sue upon
the causes of action which accrued before he acquired such shares, it surely would not have
attempted to deprive him of the right to exercise in the Federal court an action which, were it not for
diversity of citizenship, he might exercise in a State court. If the court had believed that the transferee
of stock could, under any circumstances, sue upon a cause of action accruing to the corporation prior
to such transfer, the rule instead of requiring the plaintiff to allege unconditionally that he was a
stockholder at the time of the transaction complained of and that the suit is not collusive, would have
provided that the plaintiff should be required to aver in his sworn bill the date upon which he acquired
his stock, and if it appeared that it was acquired after the occurrence of the acts complained of, then
that he should also required to aver under oath that the suit was not collusive.

Sound reason and good authority sustain the rule that a purchaser of stock can not complain of
the prior acts and management of the corporation. (Home Fire Ins. Co. vs. Baker, 60 L.R.A.,
927, 933, citing Hawes vs. Oakland, supra; Dimpfel vs. Ohio & M.R. Co., supra; Taylor vs.
Fayette Fuel Gas Co., 146 Pa., 13; Alexander vs. Searcy, 81 Ga., 536; Clark vs. American
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 Coal Co., 86 Iowa, 436; United Electric Securities Co., vs. Louisiana Electric Light Co., 68
Fed., 673; Venner vs. Atchison T. & S.F.R. Co., 28 Fed., 581; Heath vs. Erie R. Co., 8 Blachf.,
347; Dannmeyer vs. Coleman, 8 Sawy., 51; Works vs. Sowers, 2 Walk (Pa.), 416; 4 Thompson
Corp., 4569.)

In Alexander vs. Searcy, supra, the court said (p. 550):

The weight of authority seems to be that a person who did not own stock at the time of the
transactions complained of can not complain or bring a suit to have them declared illegal.

In the United Electric Securities Co. vs. Louisiana Electric Light Co., supra, it is said:

As a general proposition, the purchaser of stock in a corporation is not allowed to attack the
acts and management of the company prior to the acquisition of his stock; otherwise we might
have a case where stock duly represented in a corporation consented to and participated in
bad management and waste, and after reaping the benefits from such transaction, could be
easily passed into the hands of a subsequent purchaser, who could make his harvest by
appearing and contesting the very acts and conducts which his vendor had consented to.

Where stock is required for the purpose of bringing suit it has been held that the complainant is a
mere interloper and entitled to no consideration. And stockholder suits not brought in good faith in the
interest of the corporation have been dismissed on the ground. (Home Fire Ins. Co. vs. Baker, supra,
and cases cited therein.) Some of the State courts hold that a purchaser of shares in a corporation
acquires all the rights of the vendor. The Alabama Supreme Court has gone so far as to hold that a
purchaser in good faith is not necessarily disqualified as a suitor in all cases because the prior holder
was personally disqualified. (Parsons vs. Joseph, 92 Ala., 403.) From the pleadings in this case (it
having been decided by the Supreme Court upon a demurrer) it appears that Joseph sought to have
cancelled certain certificates of stock issued by the Street Railway Company to Parsons, on the
ground that said stock was fictitious and was issued in violation of the constitution and statute law of
the State. It was alleged, as a special defense, that if the transactions, which form the basis of the
issuance of the stock to Parsons, were illegal, and fraudulent, and not done in good faith, the
complainant, Joseph, was estopped from setting up fraud in such transactions or, seeking to cancel
the stock, because one E. Lesser, who was complainant's transferrer, participated in all of said
transactions. In this case the court, speaking through Mr. Justice Coleman, said:

If the transferee purchased the shares in good faith, and without notice of the fact that the prior
holder had precluded himself from suing, he would have as just a title to relief as if he had
purchased from a shareholder who was under no disability; but if the purchaser was aware that
the prior holder had barred his right to relief, neither justice nor public policy would require that
the transferee, under these circumstances, should be accorded any greater rights than his
transferrer.

If a stockholder participates in a wrongful or fraudulent contract, or silently acquiesces until the

contract becomes executed, he can not then come into a court of equity to cancel the contract,
and more especially if the company, or himself, as a stockholder, has reaped a benefit from the
contract; and this rule holds good, although the consideration of the contract may be one
expressly prohibited by statute. The same disability would attach to the transferee of his stock
who bought with notice.

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This rule, in the main, is correctly stated, but we think that the latter part of the same should be
modified so as to read: "The same disability would attach to the transferee of his stock who bought
with or without notice." We base our modification of this rule upon the ground that a transferee could
not sue as being a bona fide purchaser in ignorance of the disability attaching to his vendor, because
shares of stock, strictly speaking, are not negotiable, and the sale can not pass greater rights than
those possessed by the vendor. (Clark vs. American Coal Co., 86 Iowa, 436; 4 Thomp. Corp., 3410.)

It is self-evident that the plaintiff in the case at bar was not, before he acquired in September, 1903,
the shares which he now owns, injured or affected in any manner by the transactions set forth in the
second cause of action. His vendor could have complained of these transactions, but he did not
choose to do so. The discretion whether to sue to set them aside, or to acquiesce in and agree to
them, is, in our opinion, incapable of transfer. If the plaintiff himself had been injured by the acts of
defendants' predecessors that is another matter. He ought to take things as he found them when he
voluntarily acquired his ten shares. If he was defrauded in the purchase of these shares he should
sue his vendor.

If the party himself, who is the victim of fraud or usury, chooses to waive his remedy and
release the party, it does not belong to a subsequent purchaser under him to recall and
assume the remedy for him. (Quoted with approval in the case of the Graham vs. La Crosse
and Milwaukee R.R. Co., 102., U.S., 148.)

But it is contended that this is a case in which the debtor corporation was defrauded of its
property, and that as the company had a right of proceeding for its recovery, any of its
judgment and execution creditors have an equal right; that it is a property right, and one that
inures to the benefit of creditors.

Conceding that creditors who were such when the fraudulent procurement of the debtor's
property occurred — and cases to that effect have been cited — the question still remains,
whether, the debtor being unwilling to disturb the transaction, subsequent creditors have such
an interest that they can reach the property for the satisfaction of their debts. We doubt
whether any case, going as far as this, can be found. No such case has been cited in the
argument. Dicta of judges to that effect may undoubtedly be produced, but they are not
supported by the facts of the cases under consideration.

It seems clear that subsequent creditors have no better right than subsequent purchasers, to
question a previous transaction in which the debtor's property was obtained from him by fraud,
which he has acquiesced in, and which he has manifested no desire to disturb. Yet, in such a
case, subsequent purchasers have no such right. (Id.)

So it seems to be settled by the Supreme Court of the United States, as a matter of substantive law,
that a stockholder in a corporation who was not such at the time of the transactions complained of, or
whose shares had not devolved upon him since by operation of law, can not maintain suits of this
character, unless such transactions continue and are injurious to the stockholder, or affect him
especially and specifically in some other way.

We are, therefore of the opinion, and so hold, that the judgment appealed from, sustaining the
demurrer to the first cause of action should be, and the same is hereby reversed; and the judgment
sustaining the demurrer to the second cause of action should be, and is hereby affirmed, without any
special ruling as to costs. The record will be returned to the court whence it came for further
proceedings in accordance with this decision. So ordered.
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