G.R. No.

90580 April 8, 1991

RUBEN SAW, DIONISIO SAW, LINA S. CHUA, LUCILA S. RUSTE AND EVELYN SAW,
petitioners,
vs.
HON. COURT OF APPEALS, HON. BERNARDO P. PARDO, Presiding Judge of Branch 43,
(Regional Trial Court of Manila), FREEMAN MANAGEMENT AND DEVELOPMENT
CORPORATION, EQUITABLE BANKING CORPORATION, FREEMAN INCORPORATED,
SAW CHIAO LIAN, THE REGISTER OF DEEDS OF CALOOCAN CITY, and DEPUTY
SHERIFF ROSALIO G. SIGUA, respondents.

Benito O. Ching, Jr. for petitioners.

William R. Vetor for Equitable Banking Corp.
Pineda, Uy & Janolo for Freeman, Inc. and Saw Chiao.

CRUZ, J.:

A collection suit with preliminary attachment was filed by Equitable Banking Corporation against
Freeman, Inc. and Saw Chiao Lian, its President and General Manager. The petitioners moved to
intervene, alleging that (1) the loan transactions between Saw Chiao Lian and Equitable Banking Corp.
were not approved by the stockholders representing at least 2/3 of corporate capital; (2) Saw Chiao
Lian had no authority to contract such loans; and (3) there was collusion between the officials of
Freeman, Inc. and Equitable Banking Corp. in securing the loans. The motion to intervene was denied,
and the petitioners appealed to the Court of Appeals.

Meanwhile, Equitable and Saw Chiao Lian entered into a compromise agreement which they submitted
to and was approved by the lower court. But because it was not complied with, Equitable secured a writ
of execution, and two lots owned by Freeman, Inc. were levied upon and sold at public auction to
Freeman Management and Development Corp.

The Court of Appeals1 sustained the denial of the petitioners' motion for intervention, holding that "the
compromise agreement between Freeman, Inc., through its President, and Equitable Banking Corp. will
not necessarily prejudice petitioners whose rights to corporate assets are at most inchoate, prior to the
dissolution of Freeman, Inc. . . . And intervention under Sec. 2, Rule 12 of the Revised Rules of Court
is proper only when one's right is actual, material, direct and immediate and not simply contingent or
expectant."

It also ruled against the petitioners' argument that because they had already filed a notice of appeal, the
trial judge had lost jurisdiction over the case and could no longer issue the writ of execution.

The petitioners are now before this Court, contending that:

1. The Honorable Court of Appeals erred in holding that the petitioners cannot intervene in Civil
Case No. 88-44404 because their rights as stockholders of Freeman are merely inchoate and not actual,
material, direct and immediate prior to the dissolution of the corporation;
2. The Honorable Court of Appeals erred in holding that the appeal of the petitioners in said Civil
Case No. 88-44404 was confined only to the order denying their motion to intervene and did not divest
the trial court of its jurisdiction over the whole case.

The petitioners base their right to intervene for the protection of their interests as stockholders on
Everett v. Asia Banking Corp.2 where it was held:

The well-known rule that shareholders cannot ordinarily sue in equity to redress wrongs done to the
corporation, but that the action must be brought by the Board of Directors, . . . has its exceptions. (If the
corporation [were] under the complete control of the principal defendants, . . . it is obvious that a
demand upon the Board of Directors to institute action and prosecute the same effectively would have
been useless, and the law does not require litigants to perform useless acts.

Equitable demurs, contending that the collection suit against Freeman, Inc, and Saw Chiao Lian is
essentially in personam and, as an action against defendants in their personal capacities, will not
prejudice the petitioners as stockholders of the corporation. The Everett case is not applicable because
it involved an action filed by the minority stockholders where the board of directors refused to bring an
action in behalf of the corporation. In the case at bar, it was Freeman, Inc. that was being sued by the
creditor bank.

Equitable also argues that the subject matter of the intervention falls properly within the original and
exclusive jurisdiction of the Securities and Exchange Commission under P.D. No. 902-A. In fact, at the
time the motion for intervention was filed, there was pending between Freeman, Inc. and the petitioners
SEC Case No. 03577 entitled "Dissolution, Accounting, Cancellation of Certificate of Registration with
Restraining Order or Preliminary Injunction and Appointment of Receiver." It also avers in its
Comment that the intervention of the petitioners could have only caused delay and prejudice to the
principal parties.

On the second assignment of error, Equitable maintains that the petitioners' appeal could only apply to
the denial of their motion for intervention and not to the main case because their personality as party
litigants had not been recognized by the trial court.

After examining the issues and arguments of the parties, the Court finds that the respondent court
committed no reversible error in sustaining the denial by the trial court of the petitioners' motion for
intervention.

In the case of Magsaysay-Labrador v. Court of Appeals,3 we ruled as follows:

Viewed in the light of Section 2, Rule 12 of the Revised Rules of Court, this Court affirms the
respondent court's holding that petitioners herein have no legal interest in the subject matter in
litigation so as to entitle them to intervene in the proceedings below. In the case of Batama Farmers'
Cooperative Marketing Association, Inc. v. Rosal, we held: "As clearly stated in Section 2 of Rule 12 of
the Rules of Court, to be permitted to intervene in a pending action, the party must have a legal interest
in the matter in litigation, or in the success of either of the parties or an interest against both, or he must
be so situated as to be adversely affected by a distribution or other disposition of the property in the
custody of the court or an officer thereof."

To allow intervention, [a] it must be shown that the movant has legal interest in the matter in litigation,
or otherwise qualified; and [b] consideration must be given as to whether the adjudication of the rights
of the original parties may be delayed or prejudiced, or whether the intervenor's rights may be protected
in a separate proceeding or not. Both requirements must concur as the first is not more important than
the second.

The interest which entitles a person to intervene in a suit between other parties must be in the matter in
litigation and of such direct and immediate character that the intervenor will either gain or lose by the
direct legal operation and effect of the judgment. Otherwise, if persons not parties of the action could
be allowed to intervene, proceedings will become unnecessarily complicated, expensive and
interminable. And this is not the policy of the law.

The words "an interest in the subject" mean a direct interest in the cause of action as pleaded, and
which would put the intervenor in a legal position to litigate a fact alleged in the complaint, without the
establishment of which plaintiff could not recover.

Here, the interest, if it exists at all, of petitioners-movants is indirect, contingent, remote, conjectural,
consequential and collateral. At the very least, their interest is purely inchoate, or in sheer expectancy
of a right in the management of the corporation and to share in the profits thereof and in the properties
and assets thereof on dissolution, after payment of the corporate debts and obligations.

While a share of stock represents a proportionate or aliquot interest in the property of the corporation, it
does not vest the owner thereof with any legal right or title to any of the property, his interest in the
corporate property being equitable or beneficial in nature. Shareholders are in no legal sense the owners
of corporate property, which is owned by the corporation as a distinct legal person.

On the second assignment of error, the respondent court correctly noted that the notice of appeal was
filed by the petitioners on October 24, 1988, upon the denial of their motion to intervene, and the writ
of execution was issued by the lower court on January 30, 1989. The petitioners' appeal could not have
concerned the "whole" case (referring to the decision) because the petitioners "did not appeal the
decision as indeed they cannot because they are not parties to the case despite their being stockholders
of respondent Freeman, Inc." They could only appeal the denial of their motion for intervention as they
were never recognized by the trial court as party litigants in the main case.

Intervention is "an act or proceeding by which a third person is permitted to become a party to an
action or proceeding between other persons, and which results merely in the addition of a new party or
parties to an original action, for the purpose of hearing and determining at the same time all conflicting
claims which may be made to the subject matter in litigation.4

It is not an independent proceeding, but an ancillary and supplemental one which, in the nature of
things, unless otherwise provided for by the statute or Rules of Court, must be in subordination to the
main proceeding.5 It may be laid down as a general rule that an intervenor is limited to the field of
litigation open to the original parties.6

In the case at bar, there is no more principal action to be resolved as a writ of execution had already
been issued by the lower court and the claim of Equitable had already been satisfied. The decision of
the lower court had already become final and in fact had already been enforced. There is therefore no
more principal proceeding in which the petitioners may intervene.

As we held in the case of Barangay Matictic v. Elbinias:7

An intervention has been regarded, as merely "collateral or accessory or ancillary to the principal
action and not an independent proceedings; and interlocutory proceeding dependent on and subsidiary
to, the case between the original parties." (Fransisco, Rules of Court, Vol. 1, p. 721). With the final
dismissal of the original action, the complaint in intervention can no longer be acted upon. In the case
of Clareza v. Resales, 2 SCRA 455, 457-458, it was stated that:

That right of the intervenor should merely be in aid of the right of the original party, like the plaintiffs
in this case. As this right of the plaintiffs had ceased to exist, there is nothing to aid or fight for. So the
right of intervention has ceased to exist.

Consequently, it will be illogical and of no useful purpose to grant or even consider further herein
petitioner's prayer for the issuance of a writ of mandamus to compel the lower court to allow and admit
the petitioner's complaint in intervention. The dismissal of the expropriation case has no less the
inherent effect of also dismissing the motion for intervention which is but the unavoidable
consequence.

The Court observes that even with the denial of the petitioners' motion to intervene, nothing is really
lost to them.1âwphi1 The denial did not necessarily prejudice them as their rights are being litigated in
the case now before the Securities and Exchange Commission and may be fully asserted and protected
in that separate proceeding.

WHEREFORE, the petition is DENIED, with costs against the petitioners. It is so ordered.

G.R. No. L-27155 May 18, 1978

PHILIPPINE NATIONAL BANK, petitioner,

vs.
THE COURT OF APPEALS, RITA GUECO TAPNIO, CECILIO GUECO and THE
PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY, INC., respondents.

Medina, Locsin, Coruña, & Sumbillo for petitioner.

Manuel Lim & Associates for private respondents.

ANTONIO, J.:

Certiorari to review the decision of the Court of Appeals which affirmed the judgment of the Court of
First Instance of Manila in Civil Case No. 34185, ordering petitioner, as third-party defendant, to pay
respondent Rita Gueco Tapnio, as third-party plaintiff, the sum of P2,379.71, plus 12% interest per
annum from September 19, 1957 until the same is fully paid, P200.00 attorney's fees and costs, the
same amounts which Rita Gueco Tapnio was ordered to pay the Philippine American General Insurance
Co., Inc., to be paid directly to the Philippine American General Insurance Co., Inc. in full satisfaction
of the judgment rendered against Rita Gueco Tapnio in favor of the former; plus P500.00 attorney's
fees for Rita Gueco Tapnio and costs. The basic action is the complaint filed by Philamgen (Philippine
American General Insurance Co., Inc.) as surety against Rita Gueco Tapnio and Cecilio Gueco, for the
recovery of the sum of P2,379.71 paid by Philamgen to the Philippine National Bank on behalf of
respondents Tapnio and Gueco, pursuant to an indemnity agreement. Petitioner Bank was made third-
party defendant by Tapnio and Gueco on the theory that their failure to pay the debt was due to the fault
or negligence of petitioner.

The facts as found by the respondent Court of Appeals, in affirming the decision of the Court of First
Instance of Manila, are quoted hereunder:

Plaintiff executed its Bond, Exh. A, with defendant Rita Gueco Tapnio as principal, in favor of the
Philippine National Bank Branch at San Fernando, Pampanga, to guarantee the payment of defendant
Rita Gueco Tapnio's account with said Bank. In turn, to guarantee the payment of whatever amount the
bonding company would pay to the Philippine National Bank, both defendants executed the indemnity
agreement, Exh. B. Under the terms and conditions of this indemnity agreement, whatever amount the
plaintiff would pay would earn interest at the rate of 12% per annum, plus attorney's fees in the amount
of 15 % of the whole amount due in case of court litigation.

The original amount of the bond was for P4,000.00; but the amount was later reduced to P2,000.00.

It is not disputed that defendant Rita Gueco Tapnio was indebted to the bank in the sum of P2,000.00,
plus accumulated interests unpaid, which she failed to pay despite demands. The Bank wrote a letter of
demand to plaintiff, as per Exh. C; whereupon, plaintiff paid the bank on September 18, 1957, the full
amount due and owing in the sum of P2,379.91, for and on account of defendant Rita Gueco's
obligation (Exhs. D and D-1).

Plaintiff, in turn, made several demands, both verbal and written, upon defendants (Exhs. E and F), but
to no avail.

Defendant Rita Gueco Tapnio admitted all the foregoing facts. She claims, however, when demand was
made upon her by plaintiff for her to pay her debt to the Bank, that she told the Plaintiff that she did not
consider herself to be indebted to the Bank at all because she had an agreement with one Jacobo-Nazon
whereby she had leased to the latter her unused export sugar quota for the 1956-1957 agricultural year,
consisting of 1,000 piculs at the rate of P2.80 per picul, or for a total of P2,800.00, which was already
in excess of her obligation guaranteed by plaintiff's bond, Exh. A. This lease agreement, according to
her, was with the knowledge of the bank. But the Bank has placed obstacles to the consummation of the
lease, and the delay caused by said obstacles forced 'Nazon to rescind the lease contract. Thus, Rita
Gueco Tapnio filed her third-party complaint against the Bank to recover from the latter any and all
sums of money which may be adjudged against her and in favor of the plaitiff plus moral damages,
attorney's fees and costs.

Insofar as the contentions of the parties herein are concerned, we quote with approval the following
findings of the lower court based on the evidence presented at the trial of the case:

It has been established during the trial that Mrs. Tapnio had an export sugar quota of 1,000 piculs for
the agricultural year 1956-1957 which she did not need. She agreed to allow Mr. Jacobo C. Tuazon to
use said quota for the consideration of P2,500.00 (Exh. "4"-Gueco). This agreement was called a
contract of lease of sugar allotment.

At the time of the agreement, Mrs. Tapnio was indebted to the Philippine National Bank at San
Fernando, Pampanga. Her indebtedness was known as a crop loan and was secured by a mortgage on
her standing crop including her sugar quota allocation for the agricultural year corresponding to said
standing crop. This arrangement was necessary in order that when Mrs. Tapnio harvests, the P.N.B.,
having a lien on the crop, may effectively enforce collection against her. Her sugar cannot be exported
without sugar quota allotment Sometimes, however, a planter harvest less sugar than her quota, so her
excess quota is utilized by another who pays her for its use. This is the arrangement entered into
between Mrs. Tapnio and Mr. Tuazon regarding the former's excess quota for 1956-1957 (Exh. "4"-
Gueco).

Since the quota was mortgaged to the P.N.B., the contract of lease had to be approved by said Bank,
The same was submitted to the branch manager at San Fernando, Pampanga. The latter required the
parties to raise the consideration of P2.80 per picul or a total of P2,800.00 (Exh. "2-Gueco") informing
them that "the minimum lease rental acceptable to the Bank, is P2.80 per picul." In a letter addressed to
the branch manager on August 10, 1956, Mr. Tuazon informed the manager that he was agreeable to
raising the consideration to P2.80 per picul. He further informed the manager that he was ready to pay
said amount as the funds were in his folder which was kept in the bank.

Explaining the meaning of Tuazon's statement as to the funds, it was stated by him that he had an
approved loan from the bank but he had not yet utilized it as he was intending to use it to pay for the
quota. Hence, when he said the amount needed to pay Mrs. Tapnio was in his folder which was in the
bank, he meant and the manager understood and knew he had an approved loan available to be used in
payment of the quota. In said Exh. "6-Gueco", Tuazon also informed the manager that he would want
for a notice from the manager as to the time when the bank needed the money so that Tuazon could
sign the corresponding promissory note.

Further Consideration of the evidence discloses that when the branch manager of the Philippine
National Bank at San Fernando recommended the approval of the contract of lease at the price of P2.80
per picul (Exh. 1 1-Bank), whose recommendation was concurred in by the Vice-president of said
Bank, J. V. Buenaventura, the board of directors required that the amount be raised to 13.00 per picul.
This act of the board of directors was communicated to Tuazon, who in turn asked for a reconsideration
thereof. On November 19, 1956, the branch manager submitted Tuazon's request for reconsideration to
the board of directors with another recommendation for the approval of the lease at P2.80 per picul, but
the board returned the recommendation unacted upon, considering that the current price prevailing at
the time was P3.00 per picul (Exh. 9-Bank).

The parties were notified of the refusal on the part of the board of directors of the Bank to grant the
motion for reconsideration. The matter stood as it was until February 22, 1957, when Tuazon wrote a
letter (Exh. 10-Bank informing the Bank that he was no longer interested to continue the deal, referring
to the lease of sugar quota allotment in favor of defendant Rita Gueco Tapnio. The result is that the
latter lost the sum of P2,800.00 which she should have received from Tuazon and which she could have
paid the Bank to cancel off her indebtedness,

The court below held, and in this holding we concur that failure of the negotiation for the lease of the
sugar quota allocation of Rita Gueco Tapnio to Tuazon was due to the fault of the directors of the
Philippine National Bank, The refusal on the part of the bank to approve the lease at the rate of P2.80
per picul which, as stated above, would have enabled Rita Gueco Tapnio to realize the amount of
P2,800.00 which was more than sufficient to pay off her indebtedness to the Bank, and its insistence on
the rental price of P3.00 per picul thus unnecessarily increasing the value by only a difference of
P200.00. inevitably brought about the rescission of the lease contract to the damage and prejudice of
Rita Gueco Tapnio in the aforesaid sum of P2,800.00. The unreasonableness of the position adopted by
the board of directors of the Philippine National Bank in refusing to approve the lease at the rate of
P2.80 per picul and insisting on the rate of P3.00 per picul, if only to increase the retail value by only
P200.00 is shown by the fact that all the accounts of Rita Gueco Tapnio with the Bank were secured by
chattel mortgage on standing crops, assignment of leasehold rights and interests on her properties, and
surety bonds, aside from the fact that from Exh. 8-Bank, it appears that she was offering to execute a
real estate mortgage in favor of the Bank to replace the surety bond This statement is further bolstered
by the fact that Rita Gueco Tapnio apparently had the means to pay her obligation fact that she has been
granted several value of almost P80,000.00 for the agricultural years from 1952 to 56. 1

Its motion for the reconsideration of the decision of the Court of Appeals having been denied, petitioner
filed the present petition.

The petitioner contends that the Court of Appeals erred:

(1) In finding that the rescission of the lease contract of the 1,000 piculs of sugar quota allocation
of respondent Rita Gueco Tapnio by Jacobo C. Tuazon was due to the unjustified refusal of petitioner
to approve said lease contract, and its unreasonable insistence on the rental price of P3.00 instead of
P2.80 per picul; and

(2) In not holding that based on the statistics of sugar price and prices of sugar quota in the
possession of the petitioner, the latter's Board of Directors correctly fixed the rental of price per picul of
1,000 piculs of sugar quota leased by respondent Rita Gueco Tapnio to Jacobo C. Tuazon at P3.00 per
picul.

Petitioner argued that as an assignee of the sugar quota of Tapnio, it has the right, both under its own
Charter and under the Corporation Law, to safeguard and protect its rights and interests under the deed
of assignment, which include the right to approve or disapprove the said lease of sugar quota and in the
exercise of that authority, its

Board of Directors necessarily had authority to determine and fix the rental price per picul of the sugar
quota subject of the lease between private respondents and Jacobo C. Tuazon. It argued further that
both under its Charter and the Corporation Law, petitioner, acting thru its Board of Directors, has the
perfect right to adopt a policy with respect to fixing of rental prices of export sugar quota allocations,
and in fixing the rentals at P3.00 per picul, it did not act arbitrarily since the said Board was guided by
statistics of sugar price and prices of sugar quotas prevailing at the time. Since the fixing of the rental
of the sugar quota is a function lodged with petitioner's Board of Directors and is a matter of policy, the
respondent Court of Appeals could not substitute its own judgment for that of said Board of Directors,
which acted in good faith, making as its basis therefore the prevailing market price as shown by
statistics which were then in their possession.

Finally, petitioner emphasized that under the appealed judgment, it shall suffer a great injustice because
as a creditor, it shall be deprived of a just claim against its debtor (respondent Rita Gueco Tapnio) as it
would be required to return to respondent Philamgen the sum of P2,379.71, plus interest, which amount
had been previously paid to petitioner by said insurance company in behalf of the principal debtor,
herein respondent Rita Gueco Tapnio, and without recourse against respondent Rita Gueco Tapnio.

We must advert to the rule that this Court's appellate jurisdiction in proceedings of this nature is limited
to reviewing only errors of law, accepting as conclusive the factual fin dings of the Court of Appeals
upon its own assessment of the evidence. 2
The contract of lease of sugar quota allotment at P2.50 per picul between Rita Gueco Tapnio and
Jacobo C. Tuazon was executed on April 17, 1956. This contract was submitted to the Branch Manager
of the Philippine National Bank at San Fernando, Pampanga. This arrangement was necessary because
Tapnio's indebtedness to petitioner was secured by a mortgage on her standing crop including her sugar
quota allocation for the agricultural year corresponding to said standing crop. The latter required the
parties to raise the consideration to P2.80 per picul, the minimum lease rental acceptable to the Bank,
or a total of P2,800.00. Tuazon informed the Branch Manager, thru a letter dated August 10, 1956, that
he was agreeable to raising the consideration to P2.80 per picul. He further informed the manager that
he was ready to pay the said sum of P2,800.00 as the funds were in his folder which was kept in the
said Bank. This referred to the approved loan of Tuazon from the Bank which he intended to use in
paying for the use of the sugar quota. The Branch Manager submitted the contract of lease of sugar
quota allocation to the Head Office on September 7, 1956, with a recommendation for approval, which
recommendation was concurred in by the Vice-President of the Bank, Mr. J. V. Buenaventura. This
notwithstanding, the Board of Directors of petitioner required that the consideration be raised to P3.00
per picul.

Tuazon, after being informed of the action of the Board of Directors, asked for a reconsideration
thereof. On November 19, 1956, the Branch Manager submitted the request for reconsideration and
again recommended the approval of the lease at P2.80 per picul, but the Board returned the
recommendation unacted, stating that the current price prevailing at that time was P3.00 per picul.

On February 22, 1957, Tuazon wrote a letter, informing the Bank that he was no longer interested in
continuing the lease of sugar quota allotment. The crop year 1956-1957 ended and Mrs. Tapnio failed
to utilize her sugar quota, resulting in her loss in the sum of P2,800.00 which she should have received
had the lease in favor of Tuazon been implemented.

It has been clearly shown that when the Branch Manager of petitioner required the parties to raise the
consideration of the lease from P2.50 to P2.80 per picul, or a total of P2,800-00, they readily agreed.
Hence, in his letter to the Branch Manager of the Bank on August 10, 1956, Tuazon informed him that
the minimum lease rental of P2.80 per picul was acceptable to him and that he even offered to use the
loan secured by him from petitioner to pay in full the sum of P2,800.00 which was the total
consideration of the lease. This arrangement was not only satisfactory to the Branch Manager but it was
also approves by Vice-President J. V. Buenaventura of the PNB. Under that arrangement, Rita Gueco
Tapnio could have realized the amount of P2,800.00, which was more than enough to pay the balance
of her indebtedness to the Bank which was secured by the bond of Philamgen.

There is no question that Tapnio's failure to utilize her sugar quota for the crop year 1956-1957 was due
to the disapproval of the lease by the Board of Directors of petitioner. The issue, therefore, is whether
or not petitioner is liable for the damage caused.

As observed by the trial court, time is of the essence in the approval of the lease of sugar quota
allotments, since the same must be utilized during the milling season, because any allotment which is
not filled during such milling season may be reallocated by the Sugar Quota Administration to other
holders of allotments. 3 There was no proof that there was any other person at that time willing to lease
the sugar quota allotment of private respondents for a price higher than P2.80 per picul. "The fact that
there were isolated transactions wherein the consideration for the lease was P3.00 a picul", according to
the trial court, "does not necessarily mean that there are always ready takers of said price. " The
unreasonableness of the position adopted by the petitioner's Board of Directors is shown by the fact
that the difference between the amount of P2.80 per picul offered by Tuazon and the P3.00 per picul
demanded by the Board amounted only to a total sum of P200.00. Considering that all the accounts of
Rita Gueco Tapnio with the Bank were secured by chattel mortgage on standing crops, assignment of
leasehold rights and interests on her properties, and surety bonds and that she had apparently "the
means to pay her obligation to the Bank, as shown by the fact that she has been granted several sugar
crop loans of the total value of almost P80,000.00 for the agricultural years from 1952 to 1956", there
was no reasonable basis for the Board of Directors of petitioner to have rejected the lease agreement
because of a measly sum of P200.00.

While petitioner had the ultimate authority of approving or disapproving the proposed lease since the
quota was mortgaged to the Bank, the latter certainly cannot escape its responsibility of observing, for
the protection of the interest of private respondents, that degree of care, precaution and vigilance which
the circumstances justly demand in approving or disapproving the lease of said sugar quota. The law
makes it imperative that every person "must in the exercise of his rights and in the performance of his
duties, act with justice, give everyone his due, and observe honesty and good faith, 4 This petitioner
failed to do. Certainly, it knew that the agricultural year was about to expire, that by its disapproval of
the lease private respondents would be unable to utilize the sugar quota in question. In failing to
observe the reasonable degree of care and vigilance which the surrounding circumstances reasonably
impose, petitioner is consequently liable for the damages caused on private respondents. Under Article
21 of the New Civil Code, "any person who wilfully causes loss or injury to another in a manner that is
contrary to morals, good customs or public policy shall compensate the latter for the damage." The
afore-cited provisions on human relations were intended to expand the concept of torts in this
jurisdiction by granting adequate legal remedy for the untold number of moral wrongs which is
impossible for human foresight to specifically provide in the statutes. 5

A corporation is civilly liable in the same manner as natural persons for torts, because "generally
speaking, the rules governing the liability of a principal or master for a tort committed by an agent or
servant are the same whether the principal or master be a natural person or a corporation, and whether
the servant or agent be a natural or artificial person. All of the authorities agree that a principal or
master is liable for every tort which he expressly directs or authorizes, and this is just as true of a
corporation as of a natural person, A corporation is liable, therefore, whenever a tortious act is
committed by an officer or agent under express direction or authority from the stockholders or
members acting as a body, or, generally, from the directors as the governing body." 6

WHEREFORE, in view of the foregoing, the decision of the Court of Appeals is hereby AFFIRMED.

G.R. No. 102970 May 13, 1993

LUZAN SIA, petitioner,

vs.
COURT OF APPEALS and SECURITY BANK and TRUST COMPANY, respondents.

Asuncion Law Offices for petitioner.

Cauton, Banares, Carpio & Associates for private respondent.

DAVIDE, JR., J.:

The Decision of public respondent Court of Appeals in CA-G.R. CV No. 26737, promulgated on 21
August 1991,1 reversing and setting aside the Decision, dated 19 February 1990, 2 of Branch 47 of the
Regional Trial Court (RTC) of Manila in Civil Case No. 87-42601, entitled "LUZAN SIA vs.
SECURITY BANK and TRUST CO.," is challenged in this petition for review on certiorari under Rule
45 of the Rules Court.

Civil Case No. 87-42601 is an action for damages arising out of the destruction or loss of the stamp
collection of the plaintiff (petitioner herein) contained in Safety Deposit Box No. 54 which had been
rented from the defendant pursuant to a contract denominated as a Lease Agreement. 3 Judgment
therein was rendered in favor of the dispositive portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and against
the defendant, Security Bank & Trust Company, ordering the defendant bank to pay the plaintiff the
sum of —

a) Twenty Thousand Pesos (P20,000.00), Philippine Currency, as actual damages;

b) One Hundred Thousand Pesos (P100,000.00), Philippine Currency, as moral damages; and

c) Five Thousand Pesos (P5,000.00), Philippine Currency, as attorney's fees and legal expenses.

The counterclaim set up by the defendant are hereby dismissed for lack of merit.

No costs.

SO ORDERED.4

The antecedent facts of the present controversy are summarized by the public respondent in its
challenged decision as follows:

The plaintiff rented on March 22, 1985 the Safety Deposit Box No. 54 of the defendant bank at its
Binondo Branch located at the Fookien Times Building, Soler St., Binondo, Manila wherein he placed
his collection of stamps. The said safety deposit box leased by the plaintiff was at the bottom or at the
lowest level of the safety deposit boxes of the defendant bank at its aforesaid Binondo Branch.

During the floods that took place in 1985 and 1986, floodwater entered into the defendant bank's
premises, seeped into the safety deposit box leased by the plaintiff and caused, according to the
plaintiff, damage to his stamps collection. The defendant bank rejected the plaintiff's claim for
compensation for his damaged stamps collection, so, the plaintiff instituted an action for damages
against the defendant bank.

The defendant bank denied liability for the damaged stamps collection of the plaintiff on the basis of
the "Rules and Regulations Governing the Lease of Safe Deposit Boxes" (Exhs. "A-1", "1-A"),
particularly paragraphs 9 and 13, which reads (sic):

"9. The liability of the Bank by reason of the lease, is limited to the exercise of the diligence to
prevent the opening of the safe by any person other than the Renter, his authorized agent or legal
representative;
xxx xxx xxx

"13. The Bank is not a depository of the contents of the safe and it has neither the possession nor the
control of the same. The Bank has no interest whatsoever in said contents, except as herein provided,
and it assumes absolutely no liability in connection therewith."

The defendant bank also contended that its contract with the plaintiff over safety deposit box No. 54
was one of lease and not of deposit and, therefore, governed by the lease agreement (Exhs. "A", "L")
which should be the applicable law; that the destruction of the plaintiff's stamps collection was due to a
calamity beyond obligation on its part to notify the plaintiff about the floodwaters that inundated its
premises at Binondo branch which allegedly seeped into the safety deposit box leased to the plaintiff.

The trial court then directed that an ocular inspection on (sic) the contents of the safety deposit box be
conducted, which was done on December 8, 1988 by its clerk of court in the presence of the parties and
their counsels. A report thereon was then submitted on December 12, 1988 (Records, p. 98-A) and
confirmed in open court by both parties thru counsel during the hearing on the same date (Ibid., p. 102)
stating:

"That the Safety Box Deposit No. 54 was opened by both plaintiff Luzan Sia and the Acting Branch
Manager Jimmy B. Ynion in the presence of the undersigned, plaintiff's and defendant's counsel. Said
Safety Box when opened contains two albums of different sizes and thickness, length and width and a
tin box with printed word 'Tai Ping Shiang Roast Pork in pieces with Chinese designs and character."

Condition of the above-stated Items —

"Both albums are wet, moldy and badly damaged.

1. The first album measures 10 1/8 inches in length, 8 inches in width and 3/4 in thick. The leaves
of the album are attached to every page and cannot be lifted without destroying it, hence the stamps
contained therein are no longer visible.

2. The second album measure 12 1/2 inches in length, 9 3/4 in width 1 inch thick. Some of its
pages can still be lifted. The stamps therein can still be distinguished but beyond restoration. Others
have lost its original form.

3. The tin box is rusty inside. It contains an album with several pieces of papers stuck up to the
cover of the box. The condition of the album is the second abovementioned album."5

The SECURITY BANK AND TRUST COMPANY, hereinafter referred to as SBTC, appealed the trial
court's decision to the public respondent Court of Appeals. The appeal was docketed as CA-G.R. CV
No. 26737.

In urging the public respondent to reverse the decision of the trial court, SBTC contended that the latter
erred in (a) holding that the lease agreement is a contract of adhesion; (b) finding that the defendant had
failed to exercise the required diligence expected of a bank in maintaining the safety deposit box; (c)
awarding to the plaintiff actual damages in the amount of P20,000.00, moral damages in the amount of
P100,000.00 and attorney's fees and legal expenses in the amount of P5,000.00; and (d) dismissing the
counterclaim.
On 21 August 1991, the respondent promulgated its decision the dispositive portion of which reads:

WHEREFORE, the decision appealed from is hereby REVERSED and instead the appellee's complaint
is hereby DISMISSED. The appellant bank's counterclaim is likewise DISMISSED. No costs.6

In reversing the trial court's decision and absolving SBTC from liability, the public respondent found
and ruled that:

a) the fine print in the "Lease Agreement " (Exhibits "A" and "1" ) constitutes the terms and
conditions of the contract of lease which the appellee (now petitioner) had voluntarily and knowingly
executed with SBTC;

b) the contract entered into by the parties regarding Safe Deposit Box No. 54 was not a contract of
deposit wherein the bank became a depositary of the subject stamp collection; hence, as contended by
SBTC, the provisions of Book IV, Title XII of the Civil Code on deposits do not apply;

c) The following provisions of the questioned lease agreement of the safety deposit box limiting
SBTC's liability:

9. The liability of the bank by reason of the lease, is limited to the exercise of the diligence to
prevent the opening of the Safe by any person other than the Renter, his authorized agent or legal
representative.

xxx xxx xxx

13. The bank is not a depository of the contents of the Safe and it has neither the possession nor the
control of the same. The Bank has no interest whatsoever in said contents, except as herein provided,
and it assumes absolutely no liability in connection therewith.

are valid since said stipulations are not contrary to law, morals, good customs, public order or public
policy; and

d) there is no concrete evidence to show that SBTC failed to exercise the required diligence in
maintaining the safety deposit box; what was proven was that the floods of 1985 and 1986, which were
beyond the control of SBTC, caused the damage to the stamp collection; said floods were fortuitous
events which SBTC should not be held liable for since it was not shown to have participated in the
aggravation of the damage to the stamp collection; on the contrary, it offered its services to secure the
assistance of an expert in order to save most of the stamps, but the appellee refused; appellee must then
bear the lose under the principle of "res perit domino."

Unsuccessful in his bid to have the above decision reconsidered by the public respondent, 7 petitioner
filed the instant petition wherein he contends that:

IT WAS A GRAVE ERROR OR AN ABUSE OF DISCRETION ON THE PART OF THE

RESPONDENT COURT WHEN IT RULED THAT RESPONDENT SBTC DID NOT FAIL TO
EXERCISE THE REQUIRED DILIGENCE IN MAINTAINING THE SAFETY DEPOSIT BOX OF
THE PETITIONER CONSIDERING THAT SUBSTANTIAL EVIDENCE EXIST (sic) PROVING
THE CONTRARY.

II

THE RESPONDENT COURT SERIOUSLY ERRED IN EXCULPATING PRIVATE RESPONDENT

FROM ANY LIABILITY WHATSOEVER BY REASON OF THE PROVISIONS OF PARAGRAPHS
9 AND 13 OF THE AGREEMENT (EXHS. "A" AND "A-1").

III

THE RESPONDENT COURT SERIOUSLY ERRED IN NOT UPHOLDING THE AWARDS OF THE
TRIAL COURT FOR ACTUAL AND MORAL DAMAGES, INCLUDING ATTORNEY'S FEES AND
LEGAL EXPENSES, IN FAVOR OF THE PETITIONER.8

We subsequently gave due course the petition and required both parties to submit their respective
memoranda, which they complied with.9

Petitioner insists that the trial court correctly ruled that SBTC had failed "to exercise the required
diligence expected of a bank maintaining such safety deposit box . . . in the light of the environmental
circumstance of said safety deposit box after the floods of 1985 and 1986." He argues that such a
conclusion is supported by the evidence on record, to wit: SBTC was fully cognizant of the exact
location of the safety deposit box in question; it knew that the premises were inundated by floodwaters
in 1985 and 1986 and considering that the bank is guarded twenty-four (24) hours a day , it is safe to
conclude that it was also aware of the inundation of the premises where the safety deposit box was
located; despite such knowledge, however, it never bothered to inform the petitioner of the flooding or
take any appropriate measures to insure the safety and good maintenance of the safety deposit box in
question.

SBTC does not squarely dispute these facts; rather, it relies on the rule that findings of facts of the
Court of Appeals, when supported by substantial exidence, are not reviewable on appeal by certiorari.
10

The foregoing rule is, of course, subject to certain exceptions such as when there exists a disparity
between the factual findings and conclusions of the Court of Appeals and the trial court. 11 Such a
disparity obtains in the present case.

As We see it, SBTC's theory, which was upheld by the public respondent, is that the "Lease Agreement
" covering Safe Deposit Box No. 54 (Exhibit "A and "1") is just that — a contract of lease — and not a
contract of deposit, and that paragraphs 9 and 13 thereof, which expressly limit the bank's liability as
follows:

9. The liability of the bank by reason of the lease, is limited to the exercise of the diligence to
prevent the opening of the Safe by any person other than the Renter, his autliorized agent or legal
representative;

xxx xxx xxx

13. The bank is not a depository of the contents of the Safe and it has neither the possession nor the
control of the same. The Bank has no interest whatsoever said contents, except as herein provided, and
it assumes absolutely no liability in connection therewith. 12

are valid and binding upon the parties. In the challenged decision, the public respondent further avers
that even without such a limitation of liability, SBTC should still be absolved from any responsibility
for the damage sustained by the petitioner as it appears that such damage was occasioned by a
fortuitous event and that the respondent bank was free from any participation in the aggravation of the
injury.

We cannot accept this theory and ratiocination. Consequently, this Court finds the petition to be
impressed with merit.

In the recent case CA Agro-Industrial Development Corp. vs. Court of Appeals, 13 this Court explicitly
rejected the contention that a contract for the use of a safety deposit box is a contract of lease governed
by Title VII, Book IV of the Civil Code. Nor did We fully subscribe to the view that it is a contract of
deposit to be strictly governed by the Civil Code provision on deposit; 14 it is, as We declared, a
special kind of deposit. The prevailing rule in American jurisprudence — that the relation between a
bank renting out safe deposit boxes and its customer with respect to the contents of the box is that of a
bailor and bailee, the bailment for hire and mutual benefit 15 — has been adopted in this jurisdiction,
thus:

In the context of our laws which authorize banking institutions to rent out safety deposit boxes, it is
clear that in this jurisdiction, the prevailing rule in the United States has been adopted. Section 72 of
the General Banking Act [R.A. 337, as amended] pertinently provides:

"Sec. 72. In addition to the operations specifically authorized elsewhere in this Act, banking
institutions other than building and loan associations may perform the following services:

(a) Receive in custody funds, documents, and valuable objects, and rent safety deposit boxes for the
safequarding of such effects.

xxx xxx xxx

The banks shall perform the services permitted under subsections (a), (b) and (c) of this section as
depositories or as agents. . . ."(emphasis supplied)

Note that the primary function is still found within the parameters of a contract of deposit, i.e., the
receiving in custody of funds, documents and other valuable objects for safekeeping. The renting out of
the safety deposit boxes is not independent from, but related to or in conjunction with, this principal
function. A contract of deposit may be entered into orally or in writing (Art. 1969, Civil Code] and,
pursuant to Article 1306 of the Civil Code, the parties thereto may establish such stipulations, clauses,
terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good
customs, public order or public policy. The depositary's responsibility for the safekeeping of the objects
deposited in the case at bar is governed by Title I, Book IV of the Civil Code. Accordingly, the
depositary would be liable if, in performing its obligation, it is found guilty of fraud, negligence, delay
or contravention of the tenor of the agreement [Art. 1170, id.]. In the absence of any stipulation
prescribing the degree of diligence required, that of a good father of a family is to be observed [Art.
1173, id.]. Hence, any stipulation exempting the depositary from any liability arising from the loss of
the thing deposited on account of fraud, negligence or delay would be void for being contrary to law
and public policy. In the instant case, petitioner maintains that conditions 13 and l4 of the questioned
contract of lease of the safety deposit box, which read:

"13. The bank is a depositary of the contents of the safe and it has neither the possession nor control
of the same.

"14. The bank has no interest whatsoever in said contents, except as herein expressly provided, and it
assumes absolutely no liability in connection therewith."

are void as they are contrary to law and public policy. We find Ourselves in agreement with this
proposition for indeed, said provisions are inconsistent with the respondent Bank's responsibility as a
depositary under Section 72 (a) of the General Banking Act. Both exempt the latter from any liability
except as contemplated in condition 8 thereof which limits its duty to exercise reasonable diligence
only with respect to who shall be admitted to any rented safe, to wit:

"8. The Bank shall use due diligence that no unauthorized person shall be admitted to any rented
safe and beyond this, the Bank will not be responsible for the contents of any safe rented from it."

Furthermore condition 13 stands on a wrong premise and is contrary to the actual practice of the Bank.
It is not correct to assert that the Bank has neither the possession nor control of the contents of the box
since in fact, the safety deposit box itself is located in its premises and is under its absolute control;
moreover, the respondent Bank keeps the guard key to the said box. As stated earlier, renters cannot
open their respective boxes unless the Bank cooperates by presenting and using this guard key. Clearly
then, to the extent above stated, the foregoing conditions in the contract in question are void and
ineffective. It has been said:

"With respect to property deposited in a safe-deposit box by a customer of a safe-deposit company, the
parties, since the relation is a contractual one, may by special contract define their respective duties or
provide for increasing or limiting the liability of the deposit company, provided such contract is not in
violation of law or public policy. It must clearly appear that there actually was such a special contract,
however, in order to vary the ordinary obligations implied by law from the relationship of the parties;
liability of the deposit company will not be enlarged or restricted by words of doubtful meaning. The
company, in renting safe-deposit boxes, cannot exempt itself from liability for loss of the contents by
its own fraud or negligence or that, of its agents or servants, and if a provision of the contract may be
construed as an attempt to do so, it will be held ineffective for the purpose. Although it has been held
that the lessor of a safe-deposit box cannot limit its liability for loss of the contents thereof through its
own negligence, the view has been taken that such a lessor may limit its liability to some extent by
agreement or stipulation ."[10 AM JUR 2d., 466]. (citations omitted) 16

It must be noted that conditions No. 13 and No. 14 in the Contract of Lease of Safety Deposit Box in
CA Agro-Industrial Development Corp. are strikingly similar to condition No. 13 in the instant case.
On the other hand, both condition No. 8 in CA Agro-Industrial Development Corp. and condition No. 9
in the present case limit the scope of the exercise of due diligence by the banks involved to merely
seeing to it that only the renter, his authorized agent or his legal representative should open or have
access to the safety deposit box. In short, in all other situations, it would seem that SBTC is not bound
to exercise diligence of any kind at all. Assayed in the light of Our aforementioned pronouncements in
CA Agro-lndustrial Development Corp., it is not at all difficult to conclude that both conditions No. 9
and No. 13 of the "Lease Agreement" covering the safety deposit box in question (Exhibits "A" and
"1") must be stricken down for being contrary to law and public policy as they are meant to exempt
SBTC from any liability for damage, loss or destruction of the contents of the safety deposit box which
may arise from its own or its agents' fraud, negligence or delay. Accordingly, SBTC cannot take refuge
under the said conditions.

Public respondent further postulates that SBTC cannot be held responsible for the destruction or loss of
the stamp collection because the flooding was a fortuitous event and there was no showing of SBTC's
participation in the aggravation of the loss or injury. It states:

Article 1174 of the Civil Code provides:

"Except in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when
the nature of the obligation requires the assumption of risk, no person shall be responsible for those
events which could not be foreseen, or which, though foreseen, were inevitable.'

In its dissertation of the phrase "caso fortuito" the Enciclopedia Jurisdicada Española 17 says: "In a
legal sense and, consequently, also in relation to contracts, a "caso fortuito" prevents (sic) 18 the
following essential characteristics: (1) the cause of the unforeseen ands unexpected occurrence, or of
the failure of the debtor to comply with his obligation, must be independent of the human will; (2) it
must be impossible to foresee the event which constitutes the "caso fortuito," or if it can be foreseen, it
must be impossible to avoid; (3) the occurrence must be such as to render it impossible for one debtor
to fulfill his obligation in a normal manner; and (4) the obligor must be free from any participation in
the aggravation of the injury resulting to the creditor." (cited in Servando vs. Phil., Steam Navigation
Co., supra). 19

Here, the unforeseen or unexpected inundating floods were independent of the will of the appellant
bank and the latter was not shown to have participated in aggravating damage (sic) to the stamps
collection of the appellee. In fact, the appellant bank offered its services to secure the assistance of an
expert to save most of the then good stamps but the appelle refused and let (sic) these recoverable
stamps inside the safety deposit box until they were ruined. 20

Both the law and authority cited are clear enough and require no further elucidation. Unfortunately,
however, the public respondent failed to consider that in the instant case, as correctly held by the trial
court, SBTC was guilty of negligence. The facts constituting negligence are enumerated in the petition
and have been summarized in this ponencia. SBTC's negligence aggravated the injury or damage to the
stamp collection. SBTC was aware of the floods of 1985 and 1986; it also knew that the floodwaters
inundated the room where Safe Deposit Box No. 54 was located. In view thereof, it should have lost no
time in notifying the petitioner in order that the box could have been opened to retrieve the stamps, thus
saving the same from further deterioration and loss. In this respect, it failed to exercise the reasonable
care and prudence expected of a good father of a family, thereby becoming a party to the aggravation of
the injury or loss. Accordingly, the aforementioned fourth characteristic of a fortuitous event is absent
Article 1170 of the Civil Code, which reads:

Those who in the performance of their obligation are guilty of fraud, negligence, or delay, and those
who in any manner contravene the tenor thereof, are liable for damages,

thus comes to the succor of the petitioner. The destruction or loss of the stamp collection which was, in
the language of the trial court, the "product of 27 years of patience and diligence" 21 caused the
petitioner pecuniary loss; hence, he must be compensated therefor.
We cannot, however, place Our imprimatur on the trial court's award of moral damages. Since the
relationship between the petitioner and SBTC is based on a contract, either of them may be held liable
for moral damages for breach thereof only if said party had acted fraudulently or in bad faith. 22 There
is here no proof of fraud or bad faith on the part of SBTC.

WHEREFORE, the instant petition is hereby GRANTED. The challenged Decision and Resolution of
the public respondent Court of Appeals of 21 August 1991 and 21 November 1991, respectively, in CA-
G.R. CV No. 26737, are hereby SET ASIDE and the Decision of 19 February 1990 of Branch 47 of the
Regional Trial Court of Manila in Civil Case No. 87-42601 is hereby REINSTATED in full, except as
to the award of moral damages which is hereby set aside.

[G.R. Nos. 116124-25. November 22, 2000]

BIBIANO O. REYNOSO, IV, petitioner, vs. HON. COURT OF APPEALS and GENERAL
CREDIT CORPORATION, respondents.

DECISION

YNARES-SANTIAGO, J.:

Assailed in this petition for review is the consolidated decision of the Court of Appeals dated July 7,
1994, which reversed the separate decisions of the Regional Trial Court of Pasig City and the Regional
Trial Court of Quezon City in two cases between petitioner Reynoso and respondent General Credit
Corporation (GCC).

Sometime in the early 1960s, the Commercial Credit Corporation (hereinafter, CCC), a financing and
investment firm, decided to organize franchise companies in different parts of the country, wherein it
shall hold thirty percent (30%) equity. Employees of the CCC were designated as resident managers of
the franchise companies. Petitioner Bibiano O. Reynoso, IV was designated as the resident manager of
the franchise company in Quezon City, known as the Commercial Credit Corporation of Quezon City
(hereinafter, CCC-QC).

CCC-QC entered into an exclusive management contract with CCC whereby the latter was granted the
management and full control of the business activities of the former. Under the contract, CCC-QC shall
sell, discount and/or assign its receivables to CCC. Subsequently, however, this discounting
arrangement was discontinued pursuant to the so-called DOSRI Rule, prohibiting the lending of funds
by corporations to its directors, officers, stockholders and other persons with related interests therein.

On account of the new restrictions imposed by the Central Bank policy by virtue of the DOSRI Rule,
CCC decided to form CCC Equity Corporation, (hereinafter, CCC-Equity), a wholly-owned subsidiary,
to which CCC transferred its thirty (30%) percent equity in CCC-QC, together with two seats in the
latters Board of Directors.

Under the new set-up, several officials of Commercial Credit Corporation, including petitioner
Reynoso, became employees of CCC-Equity. While petitioner continued to be the Resident Manager of
CCC-QC, he drew his salaries and allowances from CCC-Equity. Furthermore, although an employee
of CCC-Equity, petitioner, as well as all employees of CCC-QC, became qualified members of the
Commercial Credit Corporation Employees Pension Plan.

As Resident Manager of CCC-QC, petitioner oversaw the operations of CCC-QC and supervised its
employees. The business activities of CCC-QC pertain to the acceptance of funds from depositors who
are issued interest-bearing promissory notes. The amounts deposited are then loaned out to various
borrowers. Petitioner, in order to boost the business activities of CCC-QC, deposited his personal funds
in the company. In return, CCC-QC issued to him its interest-bearing promissory notes.

On August 15, 1980, a complaint for sum of money with preliminary attachment,[1] docketed as Civil
Case No. Q-30583, was instituted in the then Court of First Instance of Rizal by CCC-QC against
petitioner, who had in the meantime been dismissed from his employment by CCC-Equity. The
complaint was subsequently amended in order to include Hidelita Nuval, petitioners wife, as a party
defendant.[2] The complaint alleged that petitioner embezzled the funds of CCC-QC amounting to
P1,300,593.11. Out of this amount, at least P630,000.00 was used for the purchase of a house and lot
located at No. 12 Macopa Street, Valle Verde I, Pasig City. The property was mortgaged to CCC, and
was later foreclosed.

In his amended Answer, petitioner denied having unlawfully used funds of CCC-QC and asserted that
the sum of P1,300,593.11 represented his money placements in CCC-QC, as shown by twenty-three
(23) checks which he issued to the said company.[3]

The case was subsequently transferred to the Regional Trial Court of Quezon City, Branch 86, pursuant
to the Judiciary Reorganization Act of 1980.

On January 14, 1985, the trial court rendered its decision, the decretal portion of which states:

Premises considered, the Court finds the complaint without merit. Accordingly, said complaint is
hereby DISMISSED.

By reason of said complaint, defendant Bibiano Reynoso IV suffered degradation, humiliation and
mental anguish.

On the counterclaim, which the Court finds to be meritorious, plaintiff corporation is hereby ordered:

a) to pay defendant the sum of P185,000.00 plus 14% interest per annum from October 2, 1980 until
fully paid;

b) to pay defendant P3,639,470.82 plus interest thereon at the rate of 14% per annum from June 24,
1981, the date of filing of Amended Answer, until fully paid; from this amount may be deducted the
remaining obligation of defendant under the promissory note of October 24, 1977, in the sum of
P9,738.00 plus penalty at the rate of 1% per month from December 24, 1977 until fully paid;

c) to pay defendants P200,000.00 as moral damages;

d) to pay defendants P100,000.00 as exemplary damages;

e) to pay defendants P25,000.00 as and for attorney's fees; plus costs of the suit.
SO ORDERED.

Both parties appealed to the then Intermediate Appellate Court. The appeal of Commercial Credit
Corporation of Quezon City was dismissed for failure to pay docket fees. Petitioner, on the other hand,
withdrew his appeal.

Hence, the decision became final and, accordingly, a Writ of Execution was issued on July 24, 1989.[4]
However, the judgment remained unsatisfied,[5] prompting petitioner to file a Motion for Alias Writ of
Execution, Examination of Judgment Debtor, and to Bring Financial Records for Examination to Court.
CCC-QC filed an Opposition to petitioners motion,[6] alleging that the possession of its premises and
records had been taken over by CCC.

Meanwhile, in 1983, CCC became known as the General Credit Corporation.

On November 22, 1991, the Regional Trial Court of Quezon City issued an Order directing General
Credit Corporation to file its comment on petitioners motion for alias writ of execution.[7] General
Credit Corporation filed a Special Appearance and Opposition on December 2, 1991,[8] alleging that it
was not a party to the case, and therefore petitioner should direct his claim against CCC-QC and not
General Credit Corporation. Petitioner filed his reply,[9] stating that the CCC-QC is an adjunct
instrumentality, conduit and agency of CCC. Furthermore, petitioner invoked the decision of the
Securities and Exchange Commission in SEC Case No. 2581, entitled, Avelina G. Ramoso, et al.,
Petitioner versus General Credit Corp., et al., Respondents, where it was declared that General Credit
Corporation, CCC-Equity and other franchised companies including CCC-QC were declared as one
corporation.

On December 9, 1991, the Regional Trial Court of Quezon City ordered the issuance of an alias writ of
execution.[10] On December 20, 1991, General Credit Corporation filed an Omnibus Motion,[11]
alleging that SEC Case No. 2581 was still pending appeal, and maintaining that the levy on properties
of the General Credit Corporation by the deputy sheriff of the court was erroneous.

In his Opposition to the Omnibus Motion, petitioner insisted that General Credit Corporation is just the
new name of Commercial Credit Corporation; hence, General Credit Corporation and Commercial
Credit Corporation should be treated as one and the same entity.

On February 13, 1992, the Regional Trial Court of Quezon City denied the Omnibus Motion.[12] On
March 5, 1992, it issued an Order directing the issuance of an alias writ of execution.[13]

Previously, on February 21, 1992, General Credit Corporation instituted a complaint before the
Regional Trial Court of Pasig against Bibiano Reynoso IV and Edgardo C. Tanangco, in his capacity as
Deputy Sheriff of Quezon City,[14] docketed as Civil Case No. 61777, praying that the levy on its
parcel of land located in Pasig, Metro Manila and covered by Transfer Certificate of Title No. 29940 be
declared null and void, and that defendant sheriff be enjoined from consolidating ownership over the
land and from further levying on other properties of General Credit Corporation to answer for any
liability under the decision in Civil Case No. Q-30583.

The Regional Trial Court of Pasig, Branch 167, did not issue a temporary restraining order. Thus,
General Credit Corporation instituted two (2) petitions for certiorari with the Court of Appeals,
docketed as CA-G.R. SP No. 27518[15] and CA-G.R. SP No. 27683. These cases were later
consolidated.
On July 7, 1994, the Court of Appeals rendered a decision in the two consolidated cases, the dispositive
portion of which reads:

WHEREFORE, in SP No. 27518 we declare the issue of the respondent court's refusal to issue a
restraining order as having been rendered moot by our Resolution of 7 April 1992 which, by way of
injunctive relief, provided that "the respondents and their representatives are hereby enjoined from
conducting an auction sale (on execution) of petitioner's properties as well as initiating similar acts of
levying (upon) and selling on execution other properties of said petitioner". The injunction thus
granted, as modified by the words in parenthesis, shall remain in force until Civil Case No. 61777 shall
have been finally terminated.

In SP No. 27683, we grant the petition for certiorari and accordingly NULLIFY and SET ASIDE, for
having been issued in excess of jurisdiction, the Order of 13 February 1992 in Civil Case No. Q-30583
as well as any other order or process through which the petitioner is made liable under the judgment in
said Civil Case No. Q-30583.

No damages and no costs.

SO ORDERED.[16]

Hence, this petition for review anchored on the following arguments:

1. THE HONORABLE COURT OF APPEALS ERRED IN CA-G.R. SP NO. 27683 WHEN IT

NULLIFIED AND SET ASIDE THE 13 FEBRUARY 1992 ORDER AND OTHER ORDERS OR
PROCESS OF BRANCH 86 OF THE REGIONAL TRIAL COURT OF QUEZON CITY THROUGH
WHICH GENERAL CREDIT CORPORATION IS MADE LIABLE UNDER THE JUDGMENT
THAT WAS RENDERED IN CIVIL CASE NO. Q-30583.

2. THE HONORABLE COURT OF APPEALS ERRED IN CA-G.R. SP NO. 27518 WHEN IT

ENJOINED THE AUCTION SALE ON EXECUTION OF THE PROPERTIES OF GENERAL
CREDIT CORPORATION AS WELL AS INITIATING SIMILAR ACTS OF LEVYING UPON AND
SELLING ON EXECUTION OF OTHER PROPERTIES OF GENERAL CREDIT CORPORATION.

3. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT GENERAL CREDIT

CORPORATION IS A STRANGER TO CIVIL CASE NO. Q-30583, INSTEAD OF, DECLARING
THAT COMMERCIAL CREDIT CORPORATION OF QUEZON CITY IS THE ALTER EGO,
INSTRUMENTALITY, CONDUIT OR ADJUNCT OF COMMERCIAL CREDIT CORPORATION
AND ITS SUCCESSOR GENERAL CREDIT CORPORATION.

At the outset, it must be stressed that there is no longer any controversy over petitioners claims against
his former employer, CCC-QC, inasmuch as the decision in Civil Case No. Q-30583 of the Regional
Trial Court of Quezon City has long become final and executory. The only issue, therefore, to be
resolved in the instant petition is whether or not the judgment in favor of petitioner may be executed
against respondent General Credit Corporation. The latter contends that it is a corporation separate and
distinct from CCC-QC and, therefore, its properties may not be levied upon to satisfy the monetary
judgment in favor of petitioner. In short, respondent raises corporate fiction as its defense. Hence, we
are necessarily called upon to apply the doctrine of piercing the veil of corporate entity in order to
determine if General Credit Corporation, formerly CCC, may be held liable for the obligations of CCC-
QC.

The petition is impressed with merit.

A corporation is an artificial being created by operation of law, having the right of succession and the
powers, attributes, and properties expressly authorized by law or incident to its existence.[17] It is an
artificial being invested by law with a personality separate and distinct from those of the persons
composing it as well as from that of any other legal entity to which it may be related.[18] It was
evolved to make possible the aggregation and assembling of huge amounts of capital upon which big
business depends. It also has the advantage of non-dependence on the lives of those who compose it
even as it enjoys certain rights and conducts activities of natural persons.

Precisely because the corporation is such a prevalent and dominating factor in the business life of the
country, the law has to look carefully into the exercise of powers by these artificial persons it has
created.

Any piercing of the corporate veil has to be done with caution. However, the Court will not hesitate to
use its supervisory and adjudicative powers where the corporate fiction is used as an unfair device to
achieve an inequitable result, defraud creditors, evade contracts and obligations, or to shield it from the
effects of a court decision. The corporate fiction has to be disregarded when necessary in the interest of
justice.

In First Philippine International Bank v. Court of Appeals, et al.,[19] we held:

When the fiction is urged as a means of perpetrating a fraud or an illegal act or as a vehicle for the
evasion of an existing obligation, the circumvention of statutes, the achievement or perfection of a
monopoly or generally the perpetration of knavery or crime, the veil with which the law covers and
isolates the corporation from the members or stockholders who compose it will be lifted to allow for its
consideration merely as an aggregation of individuals.

Also in the above-cited case, we stated that this Court has pierced the veil of corporate fiction in
numerous cases where it was used, among others, to avoid a judgment credit;[20] to avoid inclusion of
corporate assets as part of the estate of a decedent;[21] to avoid liability arising from debt;[22] when
made use of as a shield to perpetrate fraud and/or confuse legitimate issues;[23] or to promote unfair
objectives or otherwise to shield them.[24]

In the appealed judgment, the Court of Appeals sustained respondents arguments of separateness and
its character as a different corporation which is a non-party or stranger to this case.

The defense of separateness will be disregarded where the business affairs of a subsidiary corporation
are so controlled by the mother corporation to the extent that it becomes an instrument or agent of its
parent. But even when there is dominance over the affairs of the subsidiary, the doctrine of piercing the
veil of corporate fiction applies only when such fiction is used to defeat public convenience, justify
wrong, protect fraud or defend crime.[25]

We stated in Tomas Lao Construction v. National Labor Relations Commission,[26] that the legal
fiction of a corporation being a judicial entity with a distinct and separate personality was envisaged for
convenience and to serve justice. Therefore, it should not be used as a subterfuge to commit injustice
and circumvent the law.

Precisely for the above reasons, we grant the instant petition.

It is obvious that the use by CCC-QC of the same name of Commercial Credit Corporation was
intended to publicly identify it as a component of the CCC group of companies engaged in one and the
same business, i.e., investment and financing. Aside from CCC-Quezon City, other franchise
companies were organized such as CCC-North Manila and CCC-Cagayan Valley. The organization of
subsidiary corporations as what was done here is usually resorted to for the aggrupation of capital, the
ability to cover more territory and population, the decentralization of activities best decentralized, and
the securing of other legitimate advantages. But when the mother corporation and its subsidiary cease
to act in good faith and honest business judgment, when the corporate device is used by the parent to
avoid its liability for legitimate obligations of the subsidiary, and when the corporate fiction is used to
perpetrate fraud or promote injustice, the law steps in to remedy the problem. When that happens, the
corporate character is not necessarily abrogated. It continues for legitimate objectives. However, it is
pierced in order to remedy injustice, such as that inflicted in this case.

Factually and legally, the CCC had dominant control of the business operations of CCC-QC. The
exclusive management contract insured that CCC-QC would be managed and controlled by CCC and
would not deviate from the commands of the mother corporation. In addition to the exclusive
management contract, CCC appointed its own employee, petitioner, as the resident manager of CCC-
QC.

Petitioners designation as resident manager implies that he was placed in CCC-QC by a superior
authority. In fact, even after his assignment to the subsidiary corporation, petitioner continued to
receive his salaries, allowances, and benefits from CCC, which later became respondent General Credit
Corporation. Not only that. Petitioner and the other permanent employees of CCC-QC were qualified
members and participants of the Employees Pension Plan of CCC.

There are other indications in the record which attest to the applicability of the identity rule in this case,
namely: the unity of interests, management, and control; the transfer of funds to suit their individual
corporate conveniences; and the dominance of policy and practice by the mother corporation insure that
CCC-QC was an instrumentality or agency of CCC.

As petitioner stresses, both CCC and CCC-QC were engaged in the same principal line of business
involving a single transaction process. Under their discounting arrangements, CCC financed the
operations of CCC-QC. The subsidiary sold, discounted, or assigned its accounts receivables to CCC.

The testimony of Joselito D. Liwanag, accountant and auditor of CCC since 1971, shows the pervasive
and intensive auditing function of CCC over CCC-QC.[27] The two corporations also shared the same
office space. CCC-QC had no office of its own.

The complaint in Civil Case No. Q-30583, instituted by CCC-QC, was even verified by the director-
representative of CCC. The lawyers who filed the complaint and amended complaint were all in-house
lawyers of CCC.

The challenged decision of the Court of Appeals states that CCC, now General Credit Corporation, is
not a formal party in the case. The reason for this is that the complaint was filed by CCC-QC against
petitioner. The choice of parties was with CCC-QC. The judgment award in this case arose from the
counterclaim which petitioner set up against CCC-QC.

The circumstances which led to the filing of the aforesaid complaint are quite revealing. As narrated
above, the discounting agreements through which CCC controlled the finances of its subordinates
became unlawful when Central Bank adopted the DOSRI prohibitions. Under this rule the directors,
officers, and stockholders are prohibited from borrowing from their company. Instead of adhering to
the letter and spirit of the regulations by avoiding DOSRI loans altogether, CCC used the corporate
device to continue the prohibited practice. CCC organized still another corporation, the CCC-Equity
Corporation. However, as a wholly owned subsidiary, CCC-Equity was in fact only another name for
CCC. Key officials of CCC, including the resident managers of subsidiary corporations, were
appointed to positions in CCC-Equity.

In order to circumvent the Central Banks disapproval of CCC-QCs mode of reducing its DOSRI lender
accounts and its directive to follow Central Bank requirements, resident managers, including petitioner,
were told to observe a pseudo-compliance with the phasing out orders. For his unwillingness to
satisfactorily conform to these directives and his reluctance to resort to illegal practices, petitioner
earned the ire of his employers. Eventually, his services were terminated, and criminal and civil cases
were filed against him.

Petitioner issued twenty-three checks as money placements with CCC-QC because of difficulties faced
by the firm in implementing the required phase-out program. Funds from his current account in the Far
East Bank and Trust Company were transferred to CCC-QC. These monies were alleged in the criminal
complaints against him as having been stolen. Complaints for qualified theft and estafa were brought
by CCC-QC against petitioner. These criminal cases were later dismissed. Similarly, the civil complaint
which was filed with the Court of First Instance of Pasig and later transferred to the Regional Trial
Court of Quezon City was dismissed, but his counterclaims were granted.

Faced with the financial obligations which CCC-QC had to satisfy, the mother firm closed CCC-QC, in
obvious fraud of its creditors. CCC-QC, instead of opposing its closure, cooperated in its own demise.
Conveniently, CCC-QC stated in its opposition to the motion for alias writ of execution that all its
properties and assets had been transferred and taken over by CCC.

Under the foregoing circumstances, the contention of respondent General Credit Corporation, the new
name of CCC, that the corporate fiction should be appreciated in its favor is without merit.

Paraphrasing the ruling in Claparols v. Court of Industrial Relations,[28] reiterated in Concept Builders
Inc. v. National Labor Relations,[29] it is very obvious that respondent seeks the protective shield of a
corporate fiction whose veil the present case could, and should, be pierced as it was deliberately and
maliciously designed to evade its financial obligation of its employees.

If the corporate fiction is sustained, it becomes a handy deception to avoid a judgment debt and work
an injustice. The decision raised to us for review is an invitation to multiplicity of litigation. As we
stated in Islamic Directorate vs. Court of Appeals,[30] the ends of justice are not served if further
litigation is encouraged when the issue is determinable based on the records.

A court judgment becomes useless and ineffective if the employer, in this case CCC as a mother
corporation, is placed beyond the legal reach of the judgment creditor who, after protracted litigation,
has been found entitled to positive relief. Courts have been organized to put an end to controversy. This
purpose should not be negated by an inapplicable and wrong use of the fiction of the corporate veil.

WHEREFORE, the decision of the Court of Appeals is hereby REVERSED and ASIDE. The injunction
against the holding of an auction sale for the execution of the decision in Civil Case No. Q-30583 of
properties of General Credit Corporation, and the levying upon and selling on execution of other
properties of General Credit Corporation, is LIFTED.

SO ORDERED.

G.R. No. 177493

ERIC GODFREY STANLEY LIVESEY, Petitioner,

vs.
BINSWANGER PHILIPPINES, INC. and KEITH ELLIOT, Respondent.

DECISION

BRION, J.:

We resolve this petition for review on certiorari1 assailing the decision2 dated August 18, 2006 and the
resolution3 dated March 29, 2007 of the Court of Appeals (CA) in CA-G.R. SP No. 94461.

The Antecedents

In December 2001, petitioner Eric Godfrey Stanley Livesey filed a complaint for illegal dismissal with
money claims4 against CBB Philippines Strategic Property Services, Inc. (CBB) and Paul Dwyer. CBB
was a domestic corporation engaged in real estate brokerage and Dwyer was its President.

Designated as Acting Member in lieu of Associate Justice Estela M. Perlas-Bernabe, per Special Order
No. 1650 dated March 13, 2014.

Livesey alleged that on April 12, 2001, CBB hired him as Director and Head of Business Space
Development, with a monthly salary of US$5,000.00; shareholdings in CBB’s offshore parent
company; and other benefits. In August 2001, he was appointed as Managing Director and his salary
was increased to US$16,000.00 a month. Allegedly, despite the several deals for CBB he drew up, CBB
failed to pay him a significant portion of his salary. For this reason, he was compelled to resign on
December 18, 2001. He claimed CBB owed him US$23,000.00 in unpaid salaries.

CBB denied liability. It alleged that it engaged Livesey as a corporate officer in April 2001: he was
elected Vice-President (with a salary of P75,000.00/month), and thereafter, he became President (at
P1,200,000.00/year). It claimed that Livesey was later designated as Managing Director when it
became an extension office of its principal in Hongkong.5

On December 17, 2001, Livesey demanded that CBB pay him US$25,000.00 in unpaid salaries and, at
the same time, tendered his resignation. CBB posited that the labor arbiter (LA) had no jurisdiction as
the complaint involved an intra-corporate dispute.
In his decision dated September 20, 2002,6 LA Jaime M. Reyno found that Livesey had been illegally
dismissed. LA Reyno ordered CBB to reinstate Livesey to his former position as Managing Director
and to pay him US$23,000.00 in accrued salaries (from July to December 2001), and US$5,000.00 a
month in back salaries from January 2002 until reinstatement; and 10% of the total award as attorney’s
fees.

Thereafter, the parties entered into a compromise agreement7 which LA Reyno approved in an order
dated November 6, 2002.8 Under the agreement, Livesey was to receive US$31,000.00 in full
satisfaction of LA Reyno’s decision, broken down into US$13,000.00 to be paid by CBB to Livesey or
his authorized representative upon the signing of the agreement; US$9,000.00 on or before June 30,
2003; and US$9,000.00 on or before September 30, 2003. Further, the agreement provided that unless
and until the agreement is fully satisfied, CBB shall not: (1) sell, alienate, or otherwise dispose of all or
substantially all of its assets or business; (2) suspend, discontinue, or cease its entire, or a substantial
portion of its business operations; (3) substantially change the nature of its business; and (4) declare
bankruptcy or insolvency.

CBB paid Livesey the initial amount of US$13,000.00, but not the next two installments as the
company ceased operations. In reaction, Livesey moved for the issuance of a writ of execution. LA
Eduardo G. Magno granted the writ,9 but it was not enforced. Livesey then filed a motion for the
issuance of an alias writ of execution,10 alleging that in the process of serving respondents the writ, he
learned "that respondents, in a clear and willful attempt to avoid their liabilities to complainant x x x
have organized another corporation, [Binswanger] Philippines, Inc."11 He claimed that there was
evidence showing that CBB and Binswanger Philippines, Inc. (Binswanger) are one and the same
corporation, pointing out that CBB stands for Chesterton Blumenauer Binswanger.12 Invoking the
doctrine of piercing the veil of corporate fiction, Livesey prayed that an alias writ of execution be
issued against respondents Binswanger and Keith Elliot, CBB’s former President, and now
Binswanger’s President and Chief Executive Officer (CEO).

The Compulsory Arbitration Rulings

In an order13 dated March 22, 2004, LA Catalino R. Laderas denied Livesey’s motion for an alias writ
of execution, holding that the doctrine of piercing the corporate veil was inapplicable in the case. He
explained that the stockholders of the two corporations were not the same. Further, LA Laderas stressed
that LA Reyno’s decision had already become final and could no longer be altered or modified to
include additional respondents.

Livesey filed an appeal which the National Labor Relations Commission (NLRC) granted in its
decision14 dated September 7, 2005. It reversed LA Laderas’ March 22, 2004 order and declared the
respondents jointly and severally liable with CBB for LA Reyno’s decision15 of September 20, 2002 in
favor of Livesey. The respondents moved for reconsideration, filed by an Atty. Genaro S. Jacosalem,16
not by their counsel of record at the time, Corporate Counsels Philippines, Law Offices. The NLRC
denied the motion in its resolution of January 6, 2006.17 The respondents then sought relief from the
CA through a petition for certiorari under Rule 65 of the Rules of Court.

The respondents charged the NLRC with grave abuse of discretion for holding them liable to Livesey
and in exercising jurisdiction over an intra-corporate dispute. They maintained that Binswanger is a
separate and distinct corporation from CBB and that Elliot signed the compromise agreement in CBB’s
behalf, not in his personal capacity. It was error for the NLRC, they argued, when it applied the
doctrine of piercing the veil of corporate fiction to the case, despite the absence of clear evidence in
that respect.

For his part, Livesey contended that the petition should be dismissed outright for being filed out of
time. He claimed that the respondents’ counsel of record received a copy of the NLRC resolution
denying their motion for reconsideration as early as January 19, 2006, yet the petition was filed only on
May 15, 2006. He insisted that in any event, there was ample evidence supporting the application of the
doctrine of piercing the veil of corporate fiction to the case.

The CA Decision

The CA granted the petition,18 reversed the NLRC decision19 of September 7, 2005 and reinstated LA
Laderas’ order20 of March 22, 2004. The CA found untenable Livesey’s contention that the petition for
certiorari was filed out of time, stressing that while there was no valid substitution or withdrawal of the
respondents’ former counsel, the NLRC impliedly recognized Atty. Jacosalem as their new counsel
when it resolved the motion for reconsideration which he filed.

On the merits of the case, the CA disagreed with the NLRC finding that the respondents are jointly and
severally liable with CBB in the case. It emphasized that the mere fact that Binswanger and CBB have
the same President is not in itself sufficient to pierce the veil of corporate fiction of the two entities, and
that although Elliot was formerly CBB’s President, this circumstance alone does not make him
answerable for CBB’s liabilities, there being no proof that he was motivated by malice or bad faith
when he signed the compromise agreement in CBB’s behalf; neither was there proof that Binswanger
was formed, or that it was operated, for the purpose of shielding fraudulent or illegal activities of its
officers or stockholders or that the corporate veil was used to conceal fraud, illegality or inequity at the
expense of third persons like Livesey.

Livesey moved for reconsideration, but the CA denied the motion in its resolution dated March 29,
2007.21 Hence, the present petition.

The Petition

Livesey prays for a reversal of the CA rulings on the basis of the following arguments:

1. The CA erred in not denying the respondents’ petition for certiorari dated May 12, 2006 for being
filed out of time.

Livesey assails the CA’s reliance on the Court’s pronouncement in Rinconada Telephone Co., Inc. v.
Hon. Buenviaje22 to justify its ruling that the receipt on March 17, 2006 by Atty. Jacosalem of the
NLRC’s denial of the respondents’ motion for reconsideration was the reckoning date for the filing of
the petition for certiorari, not the receipt of a copy of the same resolution on January 19, 2006 by the
respondents’ counsel of record, the Corporate Counsels Philippines, Law Offices. The cited Court’s
pronouncement reads:

In view of respondent judge’s recognition of Atty. Santos as new counsel for petitioner without even a
valid substitution or withdrawal of petitioner’s former counsel, said new counsel logically awaited for
service to him of any action taken on his motion for reconsideration. Respondent judge’s sudden
change of posture in insisting that Atty. Maggay is the counsel of record is, therefore, a whimsical and
capricious exercise of discretion that prevented petitioner and Atty. Santos from taking a timely
appeal[.]23

With the above citation, Livesey points out, the CA opined that a copy of the NLRC resolution denying
the respondents’ motion for reconsideration should have been served on Atty. Jacosalem and no longer
on the counsel of record, so that the sixty (60)-day period for the filing of the petition should be
reckoned from March 17, 2006 when Atty. Jacosalem secured a copy of the resolution from the NLRC
(the petition was filed by a Jeffrey Jacosalem on May 15, 2006).24 Livesey submits that the CA’s
reliance on Rinconada was misplaced. He argues that notwithstanding the signing by Atty. Jacosalem of
the motion for reconsideration, it was only proper that the NLRC served a copy of the resolution on the
Corporate Counsels Philippines, Law Offices as it was still the respondents’ counsel at the time.25 He
adds that Atty. Jacosalem never participated in the NLRC proceedings because he did not enter his
appearance as the respondents’ counsel before the labor agency; further, he did not even indicate his
office address on the motion for reconsideration he signed.

2. The CA erred in not applying the doctrine of piercing the veil of corporate fiction to the case.

Livesey bewails the CA’s refusal to pierce Binswanger’s corporate veil in his bid to make the company
and Elliot liable, together with CBB, for the judgment award to him. He insists that CBB and
Binswanger are one and the same corporation as shown by the "overwhelming evidence" he presented
to the LA, the NLRC and the CA, as follows:

a.CBB stands for "Chesterton Blumenauer Binswanger."26

b.After executing the compromise agreement with him, through Elliot, CBB ceased operations
following a transaction where a substantial amount of CBB shares changed hands. Almost
simultaneously with CBB’s closing (in July 2003), Binswanger was established with its headquarters
set up beside CBB’s office at Unit 501, 5/F Peninsula Court Building in Makati City.27

c.Key CBB officers and employees moved to Binswanger led by Elliot, former CBB President who
became Binswanger’s President and CEO; Ferdie Catral, former CBB Director and Head of
Operations; Evangeline Agcaoili and Janet Pei.

d.Summons served on Binswanger in an earlier labor case was received by Binswanger using CBB’s
receiving stamp.28

e.A Leslie Young received on August 23, 2003 an online query on whether CBB was the same as
Blumaneuver Binswanger (BB). Signing as Web Editor, Binswanger/CBB, Young replied via e-mail:29

We are known as either CBB (Chesterton Blumenauer Binswanger) or as Chesterton Petty Ltd. in the
Philippines. Contact info for our office in Manila is as follows:

Manila Philippines
CBB Philippines Unit 509, 5th Floor
Peninsula Court, Paseo de Roxas corner Makati Avenue
1226 Makati City Philippines Contact: Keith Elliot

f. In a letter dated August 21, 2003,30 Elliot noted a Binswanger bid solicitation for a project with the
Philippine National Bank (PNB) which
was actually a CBB project as shown by a CBB draft proposal to PNB dated January 24, 2003.31

g.The affidavit32 dated October 1, 2003 of Hazel de Guzman, another former CBB employee who also
filed an illegal dismissal case against the company, attested to the existence of Livesey’s documentary
evidence in his own case and who deposed that at one time, Elliot told her of CBB’s plan to close the
corporation and to organize another for the purpose of evading CBB’s liabilities.

h.The findings33 of facts of LA Veneranda C. Guerrero who ruled in De Guzman’s favor that bolstered
his own evidence in the present case.

3. The CA erred in not holding Elliot liable for the judgment award.

Livesey questions the CA’s reliance on Laperal Development Corporation v. Court of Appeals,34
Sunio, et al. v. NLRC, et al.,35 and Palay, Inc., et al. v. Clave, etc., et al.,36 in support of its ruling that
Elliot is not liable to him for the LA’s award. He argues that in these cases, the Court upheld the
separate personalities of the corporations and their officers/employees because there was no evidence
that the individuals sought to be held liable were in bad faith or that there were badges of fraud in their
actions against the aggrieved party or parties in said cases. He reiterates his submission to the CA that
the circumstances of the present case are different from those of the cited cases. He posits that the
closure of CBB and its immediate replacement by Binswanger could not have been possible without
Elliot’s guiding hand, such that when CBB ceased operations, Elliot (CBB’s President and CEO)
moved to Binswanger in the same position. More importantly, Livesey points out, as signatory for CBB
in the compromise agreement between him (Livesey) and CBB, Elliot knew that it had not been and
would never be fully satisfied.

Livesey thus laments Elliot’s devious scheme of leaving him an unsatisfied award, stressing that Elliot
was the chief orchestrator of CBB and Binswanger’s fraudulent act of evading the full satisfaction of
the compromise agreement. In this light, he submits that the Court’s ruling in

A.C. Ransom Labor Union-CCLU v. NLRC,37 which deals with the issue of who is liable for the
worker’s backwages when a corporation ceases operations, should apply to his situation.

The Respondents’Position

Through their comment38 and memorandum,39 the respondents pray that the petition be denied for the
following reasons:

1. The NLRC had no jurisdiction over the dispute between Livesey and CBB/Dwyer as it involved an
intra-corporate controversy; under Republic Act No. 8799, the Regional Trial Court exercises
jurisdiction over the case.

As shown by the records, Livesey was appointed as CBB’s Managing Director during the relevant
period and was also a shareholder, making him a corporate officer.

2.There was no employer-employee relationship between Livesey and Binswanger. Under Article 217
of the Labor Code, the labor arbiters and the NLRC have jurisdiction only over disputes where there is
an employer- employee relationship between the parties.
3.The NLRC erred in applying the doctrine of piercing the veil of corporate fiction to the case based
only on mere assumptions. Point by point, they take exception to Livesey’s submissions as follows:

a.The e-mail statement in reply to an online query of Young (CBB’s Web Editor) that CBB is known as
Chesterton Blumenauer Binswanger or Chesterton Petty. Ltd. to establish a connection between CBB
and Binswanger is inconclusive as there was no mention in the statement of Binswanger Philippines,
Inc.

b.The affidavit of De Guzman, former CBB Associate Director, who also resigned from the company
like Livesey, has no probative value as it was self-serving and contained only misrepresentation of
facts, conjectures and surmises.

c.When Binswanger was organized and incorporated, CBB had already been abandoned by its Board of
Directors and no longer subsidized by CBB-Hongkong; it had no business operations to work with.

d.The mere transfer of Elliot and Catral from CBB to Binswanger is not a ground to pierce the
corporate veil in the present case absent a clear evidence supporting the application of the doctrine. The
NLRC applied the doctrine on the basis only of LA Guerrero’s decision in the De Guzman case.

e.The respondents’ petition for certiorari was filed on time. Atty. Jacosalem, who was presumed to have
been engaged as the respondents’ counsel, was deemed to have received a copy of the NLRC resolution
(denying the motion for reconsideration) on March 17, 2006 when he requested and secured a copy
from the NLRC. The petition was filed on May 15, 2006 or fifty-nine (59)days from March 17, 2006.
Atty. Jacosalem may have failed to indicate his address on the motion for reconsideration he filed but
that is not a reason for him to be deprived of the notices and processes of the case.

The Court’s Ruling

The procedural question

The respondents’ petition for certiorari before the CA was filed out of time. The sixty (60)-day filing
period under Rule 65 of the Rules of Court should have been counted from January 19, 2006, the date
of receipt of a copy of the NLRC resolution denying the respondents’ motion for reconsideration by the
Corporate Counsels Philippines, Law Offices which was the respondents’ counsel of record at the time.
The respondents cannot insist that Atty. Jacosalem’s receipt of a copy of the resolution on March 17,
2006 as the reckoning date for the filing of the petition as we shall discuss below.

The CA chided the NLRC for serving a copy of the resolution on the Corporate Counsels Philippines,
Law Offices, instead of on Atty. Jacosalem as it believed that the labor tribunal impliedly recognized
Atty. Jacosalem as the respondents’ counsel when it acted on the motion for reconsideration that he
signed. As we see it, the fault was not on the NLRC but on Atty. Jacosalem himself as he left no
forwarding address with the NLRC, a serious lapse that even he admitted.40 This is a matter that
cannot just be taken for granted as it betrays a careless legal representation that can cause adverse
consequences to the other party.

To our mind, Atty. Jacosalem’s non-observance of a simple, but basic requirement in the practice of law
lends credence to Livesey’s claim that the lawyer did not formally enter his appearance before the
NLRC as the respondents’ new counsel; if it had been otherwise, he would have supplied his office
address to the NLRC. Also, had he exercised due diligence in the performance of his duty as counsel,
he could have inquired earlier with the NLRC and should not have waited as late as March 17, 2006
about the outcome of the respondents’ motion for reconsideration which was filed as early as October
28, 2005.

To reiterate, the filing of the respondents’ petition for certiorari should have been reckoned from
January 19, 2006 when a copy of the subject NLRC resolution was received by the Corporate Counsels
Philippines, Law Offices, which, as of that date, had not been discharged or had withdrawn and
therefore remained to be the respondents’ counsel of record. Clearly, the petition for certiorari was filed
out of time. Section 6(a), Rule III of the NLRC Revised Rules of Procedure provides that "[f]or
purposes of appeal, the period shall be counted from receipt of such decisions, resolutions, or orders by
the counsel or representative of record."

We now come to the issue of whether the NLRC had jurisdiction over the controversy between Livesey
and CBB/Dwyer on the ground that it involved an intra-corporate dispute.

Based on the facts of the case, we find this issue to have been rendered academic by the compromise
agreement between Livesey and CBB and approved by LA Reyno.41 That CBB reneged in the
fulfillment of its obligation under the agreement is no reason to revive the issue and further frustrate the
full settlement of the obligation as agreed upon.

The substantive aspect of the case

Even if we rule that the respondents’ appeal before the CA had been filed on time, we believe and so
hold that the appellate court committed a reversible error of judgment in its challenged decision.

The NLRC committed no grave abuse of discretion in reversing LA Laderas’ ruling as there is
substantial evidence in the records that Livesey was prevented from fully receiving his monetary
entitlements under the compromise agreement between him and CBB, with Elliot signing for CBB as
its President and CEO. Substantial evidence is more than a scintilla; it means such relevant evidence as
a reasonable mind might accept as adequate to support a conclusion.42

Shortly after Elliot forged the compromise agreement with Livesey, CBB ceased operations, a
corporate event that was not disputed by the respondents. Then Binswanger suddenly appeared. It was
established almost simultaneously with CBB’s closure, with no less than Elliot as its President and
CEO. Through the confluence of events surrounding CBB’s closure and Binswanger’s sudden
emergence, a reasonable mind would arrive at the conclusion that Binswanger is CBB’s alter ego or
that CBB and Binswanger are one and the same corporation. There are also indications of badges of
fraud in Binswanger’s incorporation. It was a business strategy to evade CBB’s financial liabilities,
including its outstanding obligation to Livesey.

The respondents impugned the probative value of Livesey’s documentary evidence and insist that the
NLRC erred in applying the doctrine of piercing the veil of corporate fiction in the case to avoid
liability. They consider the NLRC conclusions as mere assumptions.

We disagree.

It has long been settled that the law vests a corporation with a personality distinct and separate from its
stockholders or members. In the same vein, a corporation, by legal fiction and convenience, is an entity
shielded by a protective mantle and imbued by law with a character alien to the persons comprising
it.43 Nonetheless, the shield is not at all times impenetrable and cannot be extended to a point beyond
its reason and policy. Circumstances might deny a claim for corporate personality, under the "doctrine
of piercing the veil of corporate fiction."

Piercing the veil of corporate fiction is an equitable doctrine developed to address situations where the
separate corporate personality of a corporation is abused or used for wrongful purposes.44 Under the
doctrine, the corporate existence may be disregarded where the entity is formed or used for non-
legitimate purposes, such as to evade a just and due obligation, or to justify a wrong, to shield or
perpetrate fraud or to carry out similar or inequitable considerations, other unjustifiable aims or
intentions,45 in which case, the fiction will be disregarded and the individuals composing it and the
two corporations will be treated as identical.46

In the present case, we see an indubitable link between CBB’s closure and Binswanger’s incorporation.
CBB ceased to exist only in name; it re-emerged in the person of Binswanger for an urgent purpose

— to avoid payment by CBB of the last two installments of its monetary obligation to Livesey, as well
as its other financial liabilities. Freed of CBB’s liabilities, especially that owing to Livesey, Binswanger
can continue, as it did continue, CBB’s real estate brokerage business.

Livesey’s evidence, whose existence the respondents never denied, converged to show this continuity
of business operations from CBB to Binswanger.1âwphi1 It was not just coincidence that Binswanger
is engaged in the same line of business CBB embarked on: (1) it even holds office in the very same
building and on the very same floor where CBB once stood; (2) CBB’s key officers, Elliot, no less, and
Catral moved over to Binswanger, performing the tasks they were doing at CBB; (3) notwithstanding
CBB’s closure, Binswanger’s Web Editor (Young), in an e-mail correspondence, supplied the
information that Binswanger is "now known" as either CBB (Chesterton Blumenauer Binswanger or as
Chesterton Petty, Ltd., in the Philippines; (4) the use of Binswanger of CBB’s paraphernalia (receiving
stamp) in connection with a labor case where Binswanger was summoned by the authorities, although
Elliot claimed that he bought the item with his own money; and (5) Binswanger’s takeover of CBB’s
project with the PNB.

While the ostensible reason for Binswanger’s establishment is to continue CBB’s business operations
in the Philippines, which by itself is not illegal, the close proximity between CBB’s disestablishment
and Binswanger’s coming into existence points to an unstated but urgent consideration which, as we
earlier noted, was to evade CBB’s unfulfilled financial obligation to Livesey under the compromise
agreement.47

This underhanded objective, it must be stressed, can only be attributed to Elliot as it was apparent that
Binswanger’s stockholders had nothing to do with Binswanger’s operations as noted by the NLRC and
which the respondents did not deny.48 Elliot was well aware of the compromise agreement between
Livesey and CBB, as he "agreed and accepted" the terms of the agreement49 for CBB. He was also
well aware that the last two installments of CBB’s obligation to Livesey were due on June 30, 2003 and
September 30, 2003. These installments were not met and the reason is that after the alleged sale of the
majority of CBB’s shares of stock, it closed down.

With CBB’s closure, Livesey asked why people would buy into a corporation and simply close it down
immediately thereafter?50 The answer
— to pave the way for CBB’s reappearance as Binswanger. Elliot’s "guiding hand," as Livesey puts it,
is very much evident in CBB’s demise and Binswanger’s creation. Elliot knew that CBB had not fully
complied with its financial obligation under the compromise agreement. He made sure that it would not
be fulfilled when he allowed CBB's closure, despite the condition in the agreement that "unless and
until the Compromise Amount has been fully settled and paid by the Company in favor of Mr. Livesey,
the Company shall not x x x suspend, discontinue, or cease its entire or a substantial portion of its
business operations[.]"51

What happened to CBB, we believe, supports Livesey's assertion that De Guzman, CBB's former
Associate Director, informed him that at one time Elliot told her of CBB 's plan to close the corporation
and organize another for the purpose of evading CBB 's liabilities to Livesey and its other financial
liabilities.52 This wrongful intent we cannot and must not condone, for it will give a premium to an
iniquitous business strategy where a corporation is formed or used for a non-legitimate purpose, such as
to evade a just and due obligation.53 We, therefore, find Elliot as liable as Binswanger for CBB 's
unfulfilled obligation to Livesey.

WHEREFORE, premises considered, we hereby GRANT the petition. The decision dated August 18,
2006 and the Resolution dated March 29, 2007 of the Court of Appeals are SET ASIDE. Binswanger
Philippines, Inc. and Keith Elliot (its President and CEO) are declared jointly and severally liable for
the second and third installments of CBB 's liability to Eric Godfrey Stanley Livesey under the
compromise agreement dated October 14, 2002. Let the case record be remanded to the National Labor
Relations Commission for execution of this Decision.

G.R. No. 195580 April 21, 2014

NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND DEVELOPMENT,
INC., and MCARTHUR MINING, INC., Petitioners,
vs.
REDMONT CONSOLIDATED MINES CORP., Respondent.
DECISION
VELASCO, JR., J.:
Before this Court is a Petition for Review on Certiorari under Rule 45 filed by Narra Nickel and Mining Development
Corp. (Narra), Tesoro Mining and Development, Inc. (Tesoro), and McArthur Mining Inc. (McArthur), which seeks to
reverse the October 1, 2010 Decision1 and the February 15, 2011 Resolution of the Court of Appeals (CA).
The Facts
Sometime in December 2006, respondent Redmont Consolidated Mines Corp. (Redmont), a domestic corporation
organized and existing under Philippine laws, took interest in mining and exploring certain areas of the province of
Palawan. After inquiring with the Department of Environment and Natural Resources (DENR), it learned that the
areas where it wanted to undertake exploration and mining activities where already covered by Mineral Production
Sharing Agreement (MPSA) applications of petitioners Narra, Tesoro and McArthur.
Petitioner McArthur, through its predecessor-in-interest Sara Marie Mining, Inc. (SMMI), filed an application for an
MPSA and Exploration Permit (EP) with the Mines and Geo-Sciences Bureau (MGB), Region IV-B, Office of the
Department of Environment and Natural Resources (DENR).
Subsequently, SMMI was issued MPSA-AMA-IVB-153 covering an area of over 1,782 hectares in Barangay
Sumbiling, Municipality of Bataraza, Province of Palawan and EPA-IVB-44 which includes an area of 3,720 hectares
in Barangay Malatagao, Bataraza, Palawan. The MPSA and EP were then transferred to Madridejos Mining
Corporation (MMC) and, on November 6, 2006, assigned to petitioner McArthur.2
Petitioner Narra acquired its MPSA from Alpha Resources and Development Corporation and Patricia Louise Mining
& Development Corporation (PLMDC) which previously filed an application for an MPSA with the MGB, Region IV-
B, DENR on January 6, 1992. Through the said application, the DENR issued MPSA-IV-1-12 covering an area of
3.277 hectares in barangays Calategas and San Isidro, Municipality of Narra, Palawan. Subsequently, PLMDC
conveyed, transferred and/or assigned its rights and interests over the MPSA application in favor of Narra.
Another MPSA application of SMMI was filed with the DENR Region IV-B, labeled as MPSA-AMA-IVB-154
(formerly EPA-IVB-47) over 3,402 hectares in Barangays Malinao and Princesa Urduja, Municipality of Narra,
Province of Palawan. SMMI subsequently conveyed, transferred and assigned its rights and interest over the said
MPSA application to Tesoro.
On January 2, 2007, Redmont filed before the Panel of Arbitrators (POA) of the DENR three (3) separate petitions for
the denial of petitioners’ applications for MPSA designated as AMA-IVB-153, AMA-IVB-154 and MPSA IV-1-12.
In the petitions, Redmont alleged that at least 60% of the capital stock of McArthur, Tesoro and Narra are owned and
controlled by MBMI Resources, Inc. (MBMI), a 100% Canadian corporation. Redmont reasoned that since MBMI is
a considerable stockholder of petitioners, it was the driving force behind petitioners’ filing of the MPSAs over the
areas covered by applications since it knows that it can only participate in mining activities through corporations
which are deemed Filipino citizens. Redmont argued that given that petitioners’ capital stocks were mostly owned by
MBMI, they were likewise disqualified from engaging in mining activities through MPSAs, which are reserved only
for Filipino citizens.
In their Answers, petitioners averred that they were qualified persons under Section 3(aq) of Republic Act No. (RA)
7942 or the Philippine Mining Act of 1995 which provided:
Sec. 3 Definition of Terms. As used in and for purposes of this Act, the following terms, whether in singular or plural,
shall mean:
xxxx
(aq) "Qualified person" means any citizen of the Philippines with capacity to contract, or a corporation, partnership,
association, or cooperative organized or authorized for the purpose of engaging in mining, with technical and financial
capability to undertake mineral resources development and duly registered in accordance with law at least sixty per
cent (60%) of the capital of which is owned by citizens of the Philippines: Provided, That a legally organized foreign-
owned corporation shall be deemed a qualified person for purposes of granting an exploration permit, financial or
technical assistance agreement or mineral processing permit.
Additionally, they stated that their nationality as applicants is immaterial because they also applied for Financial or
Technical Assistance Agreements (FTAA) denominated as AFTA-IVB-09 for McArthur, AFTA-IVB-08 for Tesoro and
AFTA-IVB-07 for Narra, which are granted to foreign-owned corporations. Nevertheless, they claimed that the issue
on nationality should not be raised since McArthur, Tesoro and Narra are in fact Philippine Nationals as 60% of their
capital is owned by citizens of the Philippines. They asserted that though MBMI owns 40% of the shares of PLMC
(which owns 5,997 shares of Narra),3 40% of the shares of MMC (which owns 5,997 shares of McArthur)4 and 40%
of the shares of SLMC (which, in turn, owns 5,997 shares of Tesoro),5 the shares of MBMI will not make it the owner
of at least 60% of the capital stock of each of petitioners. They added that the best tool used in determining the
nationality of a corporation is the "control test," embodied in Sec. 3 of RA 7042 or the Foreign Investments Act of
1991. They also claimed that the POA of DENR did not have jurisdiction over the issues in Redmont’s petition since
they are not enumerated in Sec. 77 of RA 7942. Finally, they stressed that Redmont has no personality to sue them
because it has no pending claim or application over the areas applied for by petitioners.
On December 14, 2007, the POA issued a Resolution disqualifying petitioners from gaining MPSAs. It held:
[I]t is clearly established that respondents are not qualified applicants to engage in mining activities. On the other
hand, [Redmont] having filed its own applications for an EPA over the areas earlier covered by the MPSA application
of respondents may be considered if and when they are qualified under the law. The violation of the requirements for
the issuance and/or grant of permits over mining areas is clearly established thus, there is reason to believe that the
cancellation and/or revocation of permits already issued under the premises is in order and open the areas covered to
other qualified applicants.
xxxx
WHEREFORE, the Panel of Arbitrators finds the Respondents, McArthur Mining Inc., Tesoro Mining and
Development, Inc., and Narra Nickel Mining and Development Corp. as, DISQUALIFIED for being considered as
Foreign Corporations. Their Mineral Production Sharing Agreement (MPSA) are hereby x x x DECLARED NULL
AND VOID.6
The POA considered petitioners as foreign corporations being "effectively controlled" by MBMI, a 100% Canadian
company and declared their MPSAs null and void. In the same Resolution, it gave due course to Redmont’s EPAs.
Thereafter, on February 7, 2008, the POA issued an Order7 denying the Motion for Reconsideration filed by
petitioners.
Aggrieved by the Resolution and Order of the POA, McArthur and Tesoro filed a joint Notice of Appeal8 and
Memorandum of Appeal9 with the Mines Adjudication Board (MAB) while Narra separately filed its Notice of
Appeal10 and Memorandum of Appeal.11
In their respective memorandum, petitioners emphasized that they are qualified persons under the law. Also, through a
letter, they informed the MAB that they had their individual MPSA applications converted to FTAAs. McArthur’s
FTAA was denominated as AFTA-IVB-0912 on May 2007, while Tesoro’s MPSA application was converted to AFTA-
IVB-0813 on May 28, 2007, and Narra’s FTAA was converted to AFTA-IVB-0714 on March 30, 2006.
Pending the resolution of the appeal filed by petitioners with the MAB, Redmont filed a Complaint15 with the
Securities and Exchange Commission (SEC), seeking the revocation of the certificates for registration of petitioners
on the ground that they are foreign-owned or controlled corporations engaged in mining in violation of Philippine
laws. Thereafter, Redmont filed on September 1, 2008 a Manifestation and Motion to Suspend Proceeding before the
MAB praying for the suspension of the proceedings on the appeals filed by McArthur, Tesoro and Narra.
Subsequently, on September 8, 2008, Redmont filed before the Regional Trial Court of Quezon City, Branch 92 (RTC)
a Complaint16 for injunction with application for issuance of a temporary restraining order (TRO) and/or writ of
preliminary injunction, docketed as Civil Case No. 08-63379. Redmont prayed for the deferral of the MAB
proceedings pending the resolution of the Complaint before the SEC.
But before the RTC can resolve Redmont’s Complaint and applications for injunctive reliefs, the MAB issued an
Order on September 10, 2008, finding the appeal meritorious. It held:
WHEREFORE, in view of the foregoing, the Mines Adjudication Board hereby REVERSES and SETS ASIDE the
Resolution dated 14 December 2007 of the Panel of Arbitrators of Region IV-B (MIMAROPA) in POA-DENR Case
Nos. 2001-01, 2007-02 and 2007-03, and its Order dated 07 February 2008 denying the Motions for Reconsideration
of the Appellants. The Petition filed by Redmont Consolidated Mines Corporation on 02 January 2007 is hereby
ordered DISMISSED.17
Belatedly, on September 16, 2008, the RTC issued an Order18 granting Redmont’s application for a TRO and setting
the case for hearing the prayer for the issuance of a writ of preliminary injunction on September 19, 2008.
Meanwhile, on September 22, 2008, Redmont filed a Motion for Reconsideration19 of the September 10, 2008 Order
of the MAB. Subsequently, it filed a Supplemental Motion for Reconsideration20 on September 29, 2008.
Before the MAB could resolve Redmont’s Motion for Reconsideration and Supplemental Motion for Reconsideration,
Redmont filed before the RTC a Supplemental Complaint21 in Civil Case No. 08-63379.
On October 6, 2008, the RTC issued an Order22 granting the issuance of a writ of preliminary injunction enjoining the
MAB from finally disposing of the appeals of petitioners and from resolving Redmont’s Motion for Reconsideration
and Supplement Motion for Reconsideration of the MAB’s September 10, 2008 Resolution.
On July 1, 2009, however, the MAB issued a second Order denying Redmont’s Motion for Reconsideration and
Supplemental Motion for Reconsideration and resolving the appeals filed by petitioners.
Hence, the petition for review filed by Redmont before the CA, assailing the Orders issued by the MAB. On October
1, 2010, the CA rendered a Decision, the dispositive of which reads:
WHEREFORE, the Petition is PARTIALLY GRANTED. The assailed Orders, dated September 10, 2008 and July 1,
2009 of the Mining Adjudication Board are reversed and set aside. The findings of the Panel of Arbitrators of the
Department of Environment and Natural Resources that respondents McArthur, Tesoro and Narra are foreign
corporations is upheld and, therefore, the rejection of their applications for Mineral Product Sharing Agreement
should be recommended to the Secretary of the DENR.
With respect to the applications of respondents McArthur, Tesoro and Narra for Financial or Technical Assistance
Agreement (FTAA) or conversion of their MPSA applications to FTAA, the matter for its rejection or approval is left
for determination by the Secretary of the DENR and the President of the Republic of the Philippines.
SO ORDERED.23
In a Resolution dated February 15, 2011, the CA denied the Motion for Reconsideration filed by petitioners.
After a careful review of the records, the CA found that there was doubt as to the nationality of petitioners when it
realized that petitioners had a common major investor, MBMI, a corporation composed of 100% Canadians. Pursuant
to the first sentence of paragraph 7 of Department of Justice (DOJ) Opinion No. 020, Series of 2005, adopting the
1967 SEC Rules which implemented the requirement of the Constitution and other laws pertaining to the exploitation
of natural resources, the CA used the "grandfather rule" to determine the nationality of petitioners. It provided:
Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens
shall be considered as of Philippine nationality, but if the percentage of Filipino ownership in the corporation or
partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as of
Philippine nationality. Thus, if 100,000 shares are registered in the name of a corporation or partnership at least 60%
of the capital stock or capital, respectively, of which belong to Filipino citizens, all of the shares shall be recorded as
owned by Filipinos. But if less than 60%, or say, 50% of the capital stock or capital of the corporation or partnership,
respectively, belongs to Filipino citizens, only 50,000 shares shall be recorded as belonging to aliens.24(emphasis
supplied)
In determining the nationality of petitioners, the CA looked into their corporate structures and their corresponding
common shareholders. Using the grandfather rule, the CA discovered that MBMI in effect owned majority of the
common stocks of the petitioners as well as at least 60% equity interest of other majority shareholders of petitioners
through joint venture agreements. The CA found that through a "web of corporate layering, it is clear that one
common controlling investor in all mining corporations involved x x x is MBMI."25 Thus, it concluded that petitioners
McArthur, Tesoro and Narra are also in partnership with, or privies-in-interest of, MBMI.
Furthermore, the CA viewed the conversion of the MPSA applications of petitioners into FTAA applications
suspicious in nature and, as a consequence, it recommended the rejection of petitioners’ MPSA applications by the
Secretary of the DENR.
With regard to the settlement of disputes over rights to mining areas, the CA pointed out that the POA has jurisdiction
over them and that it also has the power to determine the of nationality of petitioners as a prerequisite of the
Constitution prior the conferring of rights to "co-production, joint venture or production-sharing agreements" of the
state to mining rights. However, it also stated that the POA’s jurisdiction is limited only to the resolution of the dispute
and not on the approval or rejection of the MPSAs. It stipulated that only the Secretary of the DENR is vested with the
power to approve or reject applications for MPSA.
Finally, the CA upheld the findings of the POA in its December 14, 2007 Resolution which considered petitioners
McArthur, Tesoro and Narra as foreign corporations. Nevertheless, the CA determined that the POA’s declaration that
the MPSAs of McArthur, Tesoro and Narra are void is highly improper.
While the petition was pending with the CA, Redmont filed with the Office of the President (OP) a petition dated May
7, 2010 seeking the cancellation of petitioners’ FTAAs. The OP rendered a Decision26 on April 6, 2011, wherein it
canceled and revoked petitioners’ FTAAs for violating and circumventing the "Constitution x x x[,] the Small Scale
Mining Law and Environmental Compliance Certificate as well as Sections 3 and 8 of the Foreign Investment Act and
E.O. 584."27 The OP, in affirming the cancellation of the issued FTAAs, agreed with Redmont stating that petitioners
committed violations against the abovementioned laws and failed to submit evidence to negate them. The Decision
further quoted the December 14, 2007 Order of the POA focusing on the alleged misrepresentation and claims made
by petitioners of being domestic or Filipino corporations and the admitted continued mining operation of PMDC using
their locally secured Small Scale Mining Permit inside the area earlier applied for an MPSA application which was
eventually transferred to Narra. It also agreed with the POA’s estimation that the filing of the FTAA applications by
petitioners is a clear admission that they are "not capable of conducting a large scale mining operation and that they
need the financial and technical assistance of a foreign entity in their operation, that is why they sought the
participation of MBMI Resources, Inc."28 The Decision further quoted:
The filing of the FTAA application on June 15, 2007, during the pendency of the case only demonstrate the violations
and lack of qualification of the respondent corporations to engage in mining. The filing of the FTAA application
conversion which is allowed foreign corporation of the earlier MPSA is an admission that indeed the respondent is not
Filipino but rather of foreign nationality who is disqualified under the laws. Corporate documents of MBMI
Resources, Inc. furnished its stockholders in their head office in Canada suggest that they are conducting operation
only through their local counterparts.29
The Motion for Reconsideration of the Decision was further denied by the OP in a Resolution30 dated July 6, 2011.
Petitioners then filed a Petition for Review on Certiorari of the OP’s Decision and Resolution with the CA, docketed
as CA-G.R. SP No. 120409. In the CA Decision dated February 29, 2012, the CA affirmed the Decision and
Resolution of the OP. Thereafter, petitioners appealed the same CA decision to this Court which is now pending with a
different division.
Thus, the instant petition for review against the October 1, 2010 Decision of the CA. Petitioners put forth the
following errors of the CA:
I.
The Court of Appeals erred when it did not dismiss the case for mootness despite the fact that the subject
matter of the controversy, the MPSA Applications, have already been converted into FTAA applications and
that the same have already been granted.
II.
 The Court of Appeals erred when it did not dismiss the case for lack of jurisdiction considering that the Panel
of Arbitrators has no jurisdiction to determine the nationality of Narra, Tesoro and McArthur.
III.
The Court of Appeals erred when it did not dismiss the case on account of Redmont’s willful forum shopping.
IV.
The Court of Appeals’ ruling that Narra, Tesoro and McArthur are foreign corporations based on the
"Grandfather Rule" is contrary to law, particularly the express mandate of the Foreign Investments Act of
1991, as amended, and the FIA Rules.
V.
The Court of Appeals erred when it applied the exceptions to the res inter alios acta rule.
VI.
The Court of Appeals erred when it concluded that the conversion of the MPSA Applications into FTAA
Applications were of "suspicious nature" as the same is based on mere conjectures and surmises without any
shred of evidence to show the same.31
We find the petition to be without merit.
This case not moot and academic
The claim of petitioners that the CA erred in not rendering the instant case as moot is without merit.
Basically, a case is said to be moot and/or academic when it "ceases to present a justiciable controversy by virtue of
supervening events, so that a declaration thereon would be of no practical use or value."32 Thus, the courts "generally
decline jurisdiction over the case or dismiss it on the ground of mootness."33
The "mootness" principle, however, does accept certain exceptions and the mere raising of an issue of "mootness" will
not deter the courts from trying a case when there is a valid reason to do so. In David v. Macapagal-Arroyo (David),
the Court provided four instances where courts can decide an otherwise moot case, thus:
1.) There is a grave violation of the Constitution;
2.) The exceptional character of the situation and paramount public interest is involved;
3.) When constitutional issue raised requires formulation of controlling principles to guide the bench, the bar,
and the public; and
4.) The case is capable of repetition yet evading review.34
All of the exceptions stated above are present in the instant case. We of this Court note that a grave violation of the
Constitution, specifically Section 2 of Article XII, is being committed by a foreign corporation right under our
country’s nose through a myriad of corporate layering under different, allegedly, Filipino corporations. The intricate
corporate layering utilized by the Canadian company, MBMI, is of exceptional character and involves paramount
public interest since it undeniably affects the exploitation of our Country’s natural resources. The corresponding
actions of petitioners during the lifetime and existence of the instant case raise questions as what principle is to be
applied to cases with similar issues. No definite ruling on such principle has been pronounced by the Court; hence, the
disposition of the issues or errors in the instant case will serve as a guide "to the bench, the bar and the
public."35 Finally, the instant case is capable of repetition yet evading review, since the Canadian company, MBMI,
can keep on utilizing dummy Filipino corporations through various schemes of corporate layering and conversion of
applications to skirt the constitutional prohibition against foreign mining in Philippine soil.
Conversion of MPSA applications to FTAA applications
We shall discuss the first error in conjunction with the sixth error presented by petitioners since both involve the
conversion of MPSA applications to FTAA applications. Petitioners propound that the CA erred in ruling against them
since the questioned MPSA applications were already converted into FTAA applications; thus, the issue on the
prohibition relating to MPSA applications of foreign mining corporations is academic. Also, petitioners would want us
to correct the CA’s finding which deemed the aforementioned conversions of applications as suspicious in nature,
since it is based on mere conjectures and surmises and not supported with evidence.
We disagree.
The CA’s analysis of the actions of petitioners after the case was filed against them by respondent is on point. The
changing of applications by petitioners from one type to another just because a case was filed against them, in truth,
would raise not a few sceptics’ eyebrows. What is the reason for such conversion? Did the said conversion not stem
from the case challenging their citizenship and to have the case dismissed against them for being "moot"? It is quite
obvious that it is petitioners’ strategy to have the case dismissed against them for being "moot."
Consider the history of this case and how petitioners responded to every action done by the court or appropriate
government agency: on January 2, 2007, Redmont filed three separate petitions for denial of the MPSA applications of
petitioners before the POA. On June 15, 2007, petitioners filed a conversion of their MPSA applications to FTAAs.
The POA, in its December 14, 2007 Resolution, observed this suspect change of applications while the case was
pending before it and held:
The filing of the Financial or Technical Assistance Agreement application is a clear admission that the respondents are
not capable of conducting a large scale mining operation and that they need the financial and technical assistance of a
foreign entity in their operation that is why they sought the participation of MBMI Resources, Inc. The participation
of MBMI in the corporation only proves the fact that it is the Canadian company that will provide the finances and the
resources to operate the mining areas for the greater benefit and interest of the same and not the Filipino stockholders
who only have a less substantial financial stake in the corporation.
xxxx
x x x The filing of the FTAA application on June 15, 2007, during the pendency of the case only demonstrate the
violations and lack of qualification of the respondent corporations to engage in mining. The filing of the FTAA
application conversion which is allowed foreign corporation of the earlier MPSA is an admission that indeed the
respondent is not Filipino but rather of foreign nationality who is disqualified under the laws. Corporate documents of
MBMI Resources, Inc. furnished its stockholders in their head office in Canada suggest that they are conducting
operation only through their local counterparts.36
On October 1, 2010, the CA rendered a Decision which partially granted the petition, reversing and setting aside the
September 10, 2008 and July 1, 2009 Orders of the MAB. In the said Decision, the CA upheld the findings of the POA
of the DENR that the herein petitioners are in fact foreign corporations thus a recommendation of the rejection of their
MPSA applications were recommended to the Secretary of the DENR. With respect to the FTAA applications or
conversion of the MPSA applications to FTAAs, the CA deferred the matter for the determination of the Secretary of
the DENR and the President of the Republic of the Philippines.37
In their Motion for Reconsideration dated October 26, 2010, petitioners prayed for the dismissal of the petition
asserting that on April 5, 2010, then President Gloria Macapagal-Arroyo signed and issued in their favor FTAA No.
05-2010-IVB, which rendered the petition moot and academic. However, the CA, in a Resolution dated February 15,
2011 denied their motion for being a mere "rehash of their claims and defenses."38 Standing firm on its Decision, the
CA affirmed the ruling that petitioners are, in fact, foreign corporations. On April 5, 2011, petitioners elevated the case
to us via a Petition for Review on Certiorari under Rule 45, questioning the Decision of the CA. Interestingly, the OP
rendered a Decision dated April 6, 2011, a day after this petition for review was filed, cancelling and revoking the
FTAAs, quoting the Order of the POA and stating that petitioners are foreign corporations since they needed the
financial strength of MBMI, Inc. in order to conduct large scale mining operations. The OP Decision also based the
cancellation on the misrepresentation of facts and the violation of the "Small Scale Mining Law and Environmental
Compliance Certificate as well as Sections 3 and 8 of the Foreign Investment Act and E.O. 584."39 On July 6, 2011,
the OP issued a Resolution, denying the Motion for Reconsideration filed by the petitioners.
Respondent Redmont, in its Comment dated October 10, 2011, made known to the Court the fact of the OP’s Decision
and Resolution. In their Reply, petitioners chose to ignore the OP Decision and continued to reuse their old arguments
claiming that they were granted FTAAs and, thus, the case was moot. Petitioners filed a Manifestation and Submission
dated October 19, 2012,40 wherein they asserted that the present petition is moot since, in a remarkable turn of events,
MBMI was able to sell/assign all its shares/interest in the "holding companies" to DMCI Mining Corporation (DMCI),
a Filipino corporation and, in effect, making their respective corporations fully-Filipino owned.
Again, it is quite evident that petitioners have been trying to have this case dismissed for being "moot." Their final act,
wherein MBMI was able to allegedly sell/assign all its shares and interest in the petitioner "holding companies" to
DMCI, only proves that they were in fact not Filipino corporations from the start. The recent divesting of interest by
MBMI will not change the stand of this Court with respect to the nationality of petitioners prior the suspicious change
in their corporate structures. The new documents filed by petitioners are factual evidence that this Court has no power
to verify.
The only thing clear and proved in this Court is the fact that the OP declared that petitioner corporations have violated
several mining laws and made misrepresentations and falsehood in their applications for FTAA which lead to the
revocation of the said FTAAs, demonstrating that petitioners are not beyond going against or around the law using
shifty actions and strategies. Thus, in this instance, we can say that their claim of mootness is moot in itself because
their defense of conversion of MPSAs to FTAAs has been discredited by the OP Decision.
Grandfather test
The main issue in this case is centered on the issue of petitioners’ nationality, whether Filipino or foreign. In their
previous petitions, they had been adamant in insisting that they were Filipino corporations, until they submitted their
Manifestation and Submission dated October 19, 2012 where they stated the alleged change of corporate ownership to
reflect their Filipino ownership. Thus, there is a need to determine the nationality of petitioner corporations.
Basically, there are two acknowledged tests in determining the nationality of a corporation: the control test and the
grandfather rule. Paragraph 7 of DOJ Opinion No. 020, Series of 2005, adopting the 1967 SEC Rules which
implemented the requirement of the Constitution and other laws pertaining to the controlling interests in enterprises
engaged in the exploitation of natural resources owned by Filipino citizens, provides:
Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens
shall be considered as of Philippine nationality, but if the percentage of Filipino ownership in the corporation or
partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as of
Philippine nationality. Thus, if 100,000 shares are registered in the name of a corporation or partnership at least 60%
of the capital stock or capital, respectively, of which belong to Filipino citizens, all of the shares shall be recorded as
owned by Filipinos. But if less than 60%, or say, 50% of the capital stock or capital of the corporation or partnership,
respectively, belongs to Filipino citizens, only 50,000 shares shall be counted as owned by Filipinos and the other
50,000 shall be recorded as belonging to aliens.
The first part of paragraph 7, DOJ Opinion No. 020, stating "shares belonging to corporations or partnerships at least
60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality," pertains to
the control test or the liberal rule. On the other hand, the second part of the DOJ Opinion which provides, "if the
percentage of the Filipino ownership in the corporation or partnership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as Philippine nationality," pertains to the stricter, more stringent
grandfather rule.
Prior to this recent change of events, petitioners were constant in advocating the application of the "control test" under
RA 7042, as amended by RA 8179, otherwise known as the Foreign Investments Act (FIA), rather than using the
stricter grandfather rule. The pertinent provision under Sec. 3 of the FIA provides:
SECTION 3. Definitions. - As used in this Act:
a.) The term Philippine national shall mean a citizen of the Philippines; or a domestic partnership or association
wholly owned by the citizens of the Philippines; a corporation organized under the laws of the Philippines of which at
least sixty percent (60%) of the capital stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee
of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and
at least sixty percent (60%) of the fund will accrue to the benefit of Philippine nationals: Provided, That were a
corporation and its non-Filipino stockholders own stocks in a Securities and Exchange Commission (SEC) registered
enterprise, at least sixty percent (60%) of the capital stock outstanding and entitled to vote of each of both
corporations must be owned and held by citizens of the Philippines and at least sixty percent (60%) of the members of
the Board of Directors, in order that the corporation shall be considered a Philippine national. (emphasis supplied)
The grandfather rule, petitioners reasoned, has no leg to stand on in the instant case since the definition of a
"Philippine National" under Sec. 3 of the FIA does not provide for it. They further claim that the grandfather rule "has
been abandoned and is no longer the applicable rule."41 They also opined that the last portion of Sec. 3 of the FIA
admits the application of a "corporate layering" scheme of corporations. Petitioners claim that the clear and
unambiguous wordings of the statute preclude the court from construing it and prevent the court’s use of discretion in
applying the law. They said that the plain, literal meaning of the statute meant the application of the control test is
obligatory.
We disagree. "Corporate layering" is admittedly allowed by the FIA; but if it is used to circumvent the Constitution
and pertinent laws, then it becomes illegal. Further, the pronouncement of petitioners that the grandfather rule has
already been abandoned must be discredited for lack of basis.
Art. XII, Sec. 2 of the Constitution provides:
Sec. 2. All lands of the public domain, waters, minerals, coal, petroleum and other mineral oils, all forces of potential
energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural resources are owned by the State. With
the exception of agricultural lands, all other natural resources shall not be alienated. The exploration, development,
and utilization of natural resources shall be under the full control and supervision of the State. The State may directly
undertake such activities, or it may enter into co-production, joint venture or production-sharing agreements with
Filipino citizens, or corporations or associations at least sixty per centum of whose capital is owned by such citizens.
Such agreements may be for a period not exceeding twenty-five years, renewable for not more than twenty-five years,
and under such terms and conditions as may be provided by law.
xxxx
The President may enter into agreements with Foreign-owned corporations involving either technical or financial
assistance for large-scale exploration, development, and utilization of minerals, petroleum, and other mineral oils
according to the general terms and conditions provided by law, based on real contributions to the economic growth
and general welfare of the country. In such agreements, the State shall promote the development and use of local
scientific and technical resources. (emphasis supplied)
The emphasized portion of Sec. 2 which focuses on the State entering into different types of agreements for the
exploration, development, and utilization of natural resources with entities who are deemed Filipino due to 60 percent
ownership of capital is pertinent to this case, since the issues are centered on the utilization of our country’s natural
resources or specifically, mining. Thus, there is a need to ascertain the nationality of petitioners since, as the
Constitution so provides, such agreements are only allowed corporations or associations "at least 60 percent of such
capital is owned by such citizens." The deliberations in the Records of the 1986 Constitutional Commission shed light
on how a citizenship of a corporation will be determined:
Mr. BENNAGEN: Did I hear right that the Chairman’s interpretation of an independent national economy is freedom
from undue foreign control? What is the meaning of undue foreign control?
MR. VILLEGAS: Undue foreign control is foreign control which sacrifices national sovereignty and the welfare of
the Filipino in the economic sphere.
MR. BENNAGEN: Why does it have to be qualified still with the word "undue"? Why not simply freedom from
foreign control? I think that is the meaning of independence, because as phrased, it still allows for foreign control.
MR. VILLEGAS: It will now depend on the interpretation because if, for example, we retain the 60/40 possibility in
the cultivation of natural resources, 40 percent involves some control; not total control, but some control.
MR. BENNAGEN: In any case, I think in due time we will propose some amendments.
MR. VILLEGAS: Yes. But we will be open to improvement of the phraseology.
Mr. BENNAGEN: Yes.
Thank you, Mr. Vice-President.
xxxx
MR. NOLLEDO: In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign equity; namely,
60-40 in Section 3, 60-40 in Section 9, and 2/3-1/3 in Section 15.
MR. VILLEGAS: That is right.
MR. NOLLEDO: In teaching law, we are always faced with the question: ‘Where do we base the equity requirement,
is it on the authorized capital stock, on the subscribed capital stock, or on the paid-up capital stock of a corporation’?
Will the Committee please enlighten me on this?
MR. VILLEGAS: We have just had a long discussion with the members of the team from the UP Law Center who
provided us with a draft. The phrase that is contained here which we adopted from the UP draft is ‘60 percent of the
voting stock.’
MR. NOLLEDO: That must be based on the subscribed capital stock, because unless declared delinquent, unpaid
capital stock shall be entitled to vote.
MR. VILLEGAS: That is right.
MR. NOLLEDO: Thank you.
With respect to an investment by one corporation in another corporation, say, a corporation with 60-40 percent equity
invests in another corporation which is permitted by the Corporation Code, does the Committee adopt the grandfather
rule?
MR. VILLEGAS: Yes, that is the understanding of the Committee.
MR. NOLLEDO: Therefore, we need additional Filipino capital?
MR. VILLEGAS: Yes.42 (emphasis supplied)
It is apparent that it is the intention of the framers of the Constitution to apply the grandfather rule in cases where
corporate layering is present.
Elementary in statutory construction is when there is conflict between the Constitution and a statute, the Constitution
will prevail. In this instance, specifically pertaining to the provisions under Art. XII of the Constitution on National
Economy and Patrimony, Sec. 3 of the FIA will have no place of application. As decreed by the honorable framers of
our Constitution, the grandfather rule prevails and must be applied.
Likewise, paragraph 7, DOJ Opinion No. 020, Series of 2005 provides:
The above-quoted SEC Rules provide for the manner of calculating the Filipino interest in a corporation for purposes,
among others, of determining compliance with nationality requirements (the ‘Investee Corporation’). Such manner of
computation is necessary since the shares in the Investee Corporation may be owned both by individual stockholders
(‘Investing Individuals’) and by corporations and partnerships (‘Investing Corporation’). The said rules thus provide
for the determination of nationality depending on the ownership of the Investee Corporation and, in certain instances,
the Investing Corporation.
Under the above-quoted SEC Rules, there are two cases in determining the nationality of the Investee Corporation.
The first case is the ‘liberal rule’, later coined by the SEC as the Control Test in its 30 May 1990 Opinion, and pertains
to the portion in said Paragraph 7 of the 1967 SEC Rules which states, ‘(s)hares belonging to corporations or
partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine
nationality.’ Under the liberal Control Test, there is no need to further trace the ownership of the 60% (or more)
Filipino stockholdings of the Investing Corporation since a corporation which is at least 60% Filipino-owned is
considered as Filipino.
The second case is the Strict Rule or the Grandfather Rule Proper and pertains to the portion in said Paragraph 7 of the
1967 SEC Rules which states, "but if the percentage of Filipino ownership in the corporation or partnership is less
than 60%, only the number of shares corresponding to such percentage shall be counted as of Philippine nationality."
Under the Strict Rule or Grandfather Rule Proper, the combined totals in the Investing Corporation and the Investee
Corporation must be traced (i.e., "grandfathered") to determine the total percentage of Filipino ownership.
Moreover, the ultimate Filipino ownership of the shares must first be traced to the level of the Investing Corporation
and added to the shares directly owned in the Investee Corporation x x x.
xxxx
In other words, based on the said SEC Rule and DOJ Opinion, the Grandfather Rule or the second part of the SEC
Rule applies only when the 60-40 Filipino-foreign equity ownership is in doubt (i.e., in cases where the joint venture
corporation with Filipino and foreign stockholders with less than 60% Filipino stockholdings [or 59%] invests in other
joint venture corporation which is either 60-40% Filipino-alien or the 59% less Filipino). Stated differently, where the
60-40 Filipino- foreign equity ownership is not in doubt, the Grandfather Rule will not apply. (emphasis supplied)
After a scrutiny of the evidence extant on record, the Court finds that this case calls for the application of the
grandfather rule since, as ruled by the POA and affirmed by the OP, doubt prevails and persists in the corporate
ownership of petitioners. Also, as found by the CA, doubt is present in the 60-40 Filipino equity ownership of
petitioners Narra, McArthur and Tesoro, since their common investor, the 100% Canadian corporation––MBMI,
funded them. However, petitioners also claim that there is "doubt" only when the stockholdings of Filipinos are less
than 60%.43
The assertion of petitioners that "doubt" only exists when the stockholdings are less than 60% fails to convince this
Court. DOJ Opinion No. 20, which petitioners quoted in their petition, only made an example of an instance where
"doubt" as to the ownership of the corporation exists. It would be ludicrous to limit the application of the said word
only to the instances where the stockholdings of non-Filipino stockholders are more than 40% of the total
stockholdings in a corporation. The corporations interested in circumventing our laws would clearly strive to have
"60% Filipino Ownership" at face value. It would be senseless for these applying corporations to state in their
respective articles of incorporation that they have less than 60% Filipino stockholders since the applications will be
denied instantly. Thus, various corporate schemes and layerings are utilized to circumvent the application of the
Constitution.
Obviously, the instant case presents a situation which exhibits a scheme employed by stockholders to circumvent the
law, creating a cloud of doubt in the Court’s mind. To determine, therefore, the actual participation, direct or indirect,
of MBMI, the grandfather rule must be used.
McArthur Mining, Inc.
To establish the actual ownership, interest or participation of MBMI in each of petitioners’ corporate structure, they
have to be "grandfathered."
As previously discussed, McArthur acquired its MPSA application from MMC, which acquired its application from
SMMI. McArthur has a capital stock of ten million pesos (PhP 10,000,000) divided into 10,000 common shares at one
thousand pesos (PhP 1,000) per share, subscribed to by the following:44

Name Nationality Number of Amount Subscribed Amount Paid

Shares
Madridejos Mining Filipino 5,997 PhP 5,997,000.00 PhP 825,000.00
Corporation
MBMI Resources, Canadian 3,998 PhP 3,998,000.0 PhP 1,878,174.60
Inc.
Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
Fernando B. Esguerra Filipino 1 PhP 1,000.00 PhP 1,000.00
Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00
Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00
Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
Total 10,000 PhP 10,000,000.00 PhP 2,708,174.60
(emphasis supplied)
Interestingly, looking at the corporate structure of MMC, we take note that it has a similar structure and composition
as McArthur. In fact, it would seem that MBMI is also a major investor and "controls"45 MBMI and also, similar
nominal shareholders were present, i.e. Fernando B. Esguerra (Esguerra), Lauro L. Salazar (Salazar), Michael T.
Mason (Mason) and Kenneth Cawkell (Cawkell):
Madridejos Mining Corporation

Name Nationality Number of Amount Subscribed Amount Paid

Shares
Olympic Mines & Filipino 6,663 PhP 6,663,000.00 PhP 0

Development

Corp.

MBMI Resources, Canadian 3,331 PhP 3,331,000.00 PhP 2,803,900.00

Inc.
 Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00
Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00

Esguerra

Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Emmanuel G. Filipino 1 PhP 1,000.00 PhP 1,000.00

Hernando

Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
Total 10,000 PhP 10,000,000.00 PhP 2,809,900.00

(emphasis supplied)

Noticeably, Olympic Mines & Development Corporation (Olympic) did not pay any amount with respect to the
number of shares they subscribed to in the corporation, which is quite absurd since Olympic is the major stockholder
in MMC. MBMI’s 2006 Annual Report sheds light on why Olympic failed to pay any amount with respect to the
number of shares it subscribed to. It states that Olympic entered into joint venture agreements with several Philippine
companies, wherein it holds directly and indirectly a 60% effective equity interest in the Olympic
Properties.46 Quoting the said Annual report:
On September 9, 2004, the Company and Olympic Mines & Development Corporation ("Olympic") entered into a
series of agreements including a Property Purchase and Development Agreement (the Transaction Documents) with
respect to three nickel laterite properties in Palawan, Philippines (the "Olympic Properties"). The Transaction
Documents effectively establish a joint venture between the Company and Olympic for purposes of developing the
Olympic Properties. The Company holds directly and indirectly an initial 60% interest in the joint venture. Under
certain circumstances and upon achieving certain milestones, the Company may earn up to a 100% interest, subject to
a 2.5% net revenue royalty.47 (emphasis supplied)
Thus, as demonstrated in this first corporation, McArthur, when it is "grandfathered," company layering was utilized
by MBMI to gain control over McArthur. It is apparent that MBMI has more than 60% or more equity interest in
McArthur, making the latter a foreign corporation.
Tesoro Mining and Development, Inc.
Tesoro, which acquired its MPSA application from SMMI, has a capital stock of ten million pesos (PhP 10,000,000)
divided into ten thousand (10,000) common shares at PhP 1,000 per share, as demonstrated below:
[[reference = http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pdf]]

Name Nationality Number of Amount Amount Paid

Shares Subscribed
Sara Marie Filipino 5,997 PhP 5,997,000.00 PhP 825,000.00

Mining, Inc.

MBMI Canadian 3,998 PhP 3,998,000.00 PhP 1,878,174.60

Resources, Inc.

Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00

Esguerra

Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00

Agcaoili

Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP 10,000,000.00 PhP 2,708,174.60

(emphasis supplied)

Except for the name "Sara Marie Mining, Inc.," the table above shows exactly the same figures as the corporate
structure of petitioner McArthur, down to the last centavo. All the other shareholders are the same: MBMI, Salazar,
Esguerra, Agcaoili, Mason and Cawkell. The figures under "Nationality," "Number of Shares," "Amount Subscribed,"
and "Amount Paid" are exactly the same. Delving deeper, we scrutinize SMMI’s corporate structure:
Sara Marie Mining, Inc.
[[reference = http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pdf]]

Name Nationality Number of Amount Amount Paid

Shares Subscribed

Olympic Mines & Filipino 6,663 PhP 6,663,000.00 PhP 0

Development

Corp.
MBMI Resources, Canadian 3,331 PhP 3,331,000.00 PhP 2,794,000.00

Inc.

Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00

Esguerra

Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Emmanuel G. Filipino 1 PhP 1,000.00 PhP 1,000.00

Hernando

Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP 10,000,000.00 PhP 2,809,900.00

(emphasis supplied)

After subsequently studying SMMI’s corporate structure, it is not farfetched for us to spot the glaring similarity
between SMMI and MMC’s corporate structure. Again, the presence of identical stockholders, namely: Olympic,
MBMI, Amanti Limson (Limson), Esguerra, Salazar, Hernando, Mason and Cawkell. The figures under the headings
"Nationality," "Number of Shares," "Amount Subscribed," and "Amount Paid" are exactly the same except for the
amount paid by MBMI which now reflects the amount of two million seven hundred ninety four thousand pesos (PhP
2,794,000). Oddly, the total value of the amount paid is two million eight hundred nine thousand nine hundred pesos
(PhP 2,809,900).
Accordingly, after "grandfathering" petitioner Tesoro and factoring in Olympic’s participation in SMMI’s corporate
structure, it is clear that MBMI is in control of Tesoro and owns 60% or more equity interest in Tesoro. This makes
petitioner Tesoro a non-Filipino corporation and, thus, disqualifies it to participate in the exploitation, utilization and
development of our natural resources.
Narra Nickel Mining and Development Corporation
Moving on to the last petitioner, Narra, which is the transferee and assignee of PLMDC’s MPSA application, whose
corporate structure’s arrangement is similar to that of the first two petitioners discussed. The capital stock of Narra is
ten million pesos (PhP 10,000,000), which is divided into ten thousand common shares (10,000) at one thousand
pesos (PhP 1,000) per share, shown as follows:
[[reference = http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pdf]]

Name Nationality Number of Amount Amount Paid

 Shares Subscribed

Patricia Louise Filipino 5,997 PhP 5,997,000.00 PhP 1,677,000.00

Mining &

Development

Corp.

MBMI Canadian 3,998 PhP 3,996,000.00 PhP 1,116,000.00

Resources, Inc.

Higinio C. Filipino 1 PhP 1,000.00 PhP 1,000.00

Mendoza, Jr.

Henry E. Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernandez

Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00

Agcaoili

Ma. Elena A. Filipino 1 PhP 1,000.00 PhP 1,000.00

Bocalan

Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1,000.00

Robert L. American 1 PhP 1,000.00 PhP 1,000.00

McCurdy

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP 10,000,000.00 PhP 2,800,000.00

(emphasis supplied)
Again, MBMI, along with other nominal stockholders, i.e., Mason, Agcaoili and Esguerra, is present in this corporate
structure.
Patricia Louise Mining & Development Corporation
Using the grandfather method, we further look and examine PLMDC’s corporate structure:

Name Nationality Number of Amount Amount Paid

Shares Subscribed

Palawan Alpha South Resources Filipino 6,596 PhP 6,596,000.00 PhP 0

Development Corporation
MBMI Resources, Canadian 3,396 PhP 3,396,000.00 PhP 2,796,000.00

Inc.

Higinio C. Mendoza, Jr. Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernando B. Esguerra Filipino 1 PhP 1,000.00 PhP 1,000.00
Henry E. Fernandez Filipino 1 PhP 1,000.00 PhP 1,000.00
Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00
Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1,000.00
Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00
Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
Total 10,000 PhP 10,000,000.00 PhP 2,708,174.60
(emphasis
supplied)
Yet again, the usual players in petitioners’ corporate structures are present. Similarly, the amount of money paid by the
2nd tier majority stock holder, in this case, Palawan Alpha South Resources and Development Corp. (PASRDC), is
zero.
Studying MBMI’s Summary of Significant Accounting Policies dated October 31, 2005 explains the reason behind the
intricate corporate layering that MBMI immersed itself in:
JOINT VENTURES The Company’s ownership interests in various mining ventures engaged in the acquisition,
exploration and development of mineral properties in the Philippines is described as follows:
(a) Olympic Group
The Philippine companies holding the Olympic Property, and the ownership and interests therein, are as follows:
Olympic- Philippines (the "Olympic Group")
Sara Marie Mining Properties Ltd. ("Sara Marie") 33.3%
Tesoro Mining & Development, Inc. (Tesoro) 60.0%
Pursuant to the Olympic joint venture agreement the Company holds directly and indirectly an effective equity interest
in the Olympic Property of 60.0%. Pursuant to a shareholders’ agreement, the Company exercises joint control over
the companies in the Olympic Group.
(b) Alpha Group
The Philippine companies holding the Alpha Property, and the ownership interests therein, are as follows:
Alpha- Philippines (the "Alpha Group")
Patricia Louise Mining Development Inc. ("Patricia") 34.0%
Narra Nickel Mining & Development Corporation (Narra) 60.4%
Under a joint venture agreement the Company holds directly and indirectly an effective equity interest in the Alpha
Property of 60.4%. Pursuant to a shareholders’ agreement, the Company exercises joint control over the companies in
the Alpha Group.48 (emphasis supplied)
Concluding from the above-stated facts, it is quite safe to say that petitioners McArthur, Tesoro and Narra are not
Filipino since MBMI, a 100% Canadian corporation, owns 60% or more of their equity interests. Such conclusion is
derived from grandfathering petitioners’ corporate owners, namely: MMI, SMMI and PLMDC. Going further and
adding to the picture, MBMI’s Summary of Significant Accounting Policies statement– –regarding the "joint venture"
agreements that it entered into with the "Olympic" and "Alpha" groups––involves SMMI, Tesoro, PLMDC and Narra.
Noticeably, the ownership of the "layered" corporations boils down to MBMI, Olympic or corporations under the
"Alpha" group wherein MBMI has joint venture agreements with, practically exercising majority control over the
corporations mentioned. In effect, whether looking at the capital structure or the underlying relationships between and
among the corporations, petitioners are NOT Filipino nationals and must be considered foreign since 60% or more of
their capital stocks or equity interests are owned by MBMI.
Application of the res inter alios acta rule
Petitioners question the CA’s use of the exception of the res inter alios acta or the "admission by co-partner or agent"
rule and "admission by privies" under the Rules of Court in the instant case, by pointing out that statements made by
MBMI should not be admitted in this case since it is not a party to the case and that it is not a "partner" of petitioners.
Secs. 29 and 31, Rule 130 of the Revised Rules of Court provide:
Sec. 29. Admission by co-partner or agent.- The act or declaration of a partner or agent of the party within the scope
of his authority and during the existence of the partnership or agency, may be given in evidence against such party
after the partnership or agency is shown by evidence other than such act or declaration itself. The same rule applies to
the act or declaration of a joint owner, joint debtor, or other person jointly interested with the party.
Sec. 31. Admission by privies.- Where one derives title to property from another, the act, declaration, or omission of
the latter, while holding the title, in relation to the property, is evidence against the former.
Petitioners claim that before the above-mentioned Rule can be applied to a case, "the partnership relation must be
shown, and that proof of the fact must be made by evidence other than the admission itself."49 Thus, petitioners assert
that the CA erred in finding that a partnership relationship exists between them and MBMI because, in fact, no such
partnership exists.
Partnerships vs. joint venture agreements
Petitioners claim that the CA erred in applying Sec. 29, Rule 130 of the Rules by stating that "by entering into a joint
venture, MBMI have a joint interest" with Narra, Tesoro and McArthur. They challenged the conclusion of the CA
which pertains to the close characteristics of
"partnerships" and "joint venture agreements." Further, they asserted that before this particular partnership can be
formed, it should have been formally reduced into writing since the capital involved is more than three thousand pesos
(PhP 3,000). Being that there is no evidence of written agreement to form a partnership between petitioners and
MBMI, no partnership was created.
We disagree.
A partnership is defined as two or more persons who bind themselves to contribute money, property, or industry to a
common fund with the intention of dividing the profits among themselves.50 On the other hand, joint ventures have
been deemed to be "akin" to partnerships since it is difficult to distinguish between joint ventures and partnerships.
Thus:
[T]he relations of the parties to a joint venture and the nature of their association are so similar and closely akin to a
partnership that it is ordinarily held that their rights, duties, and liabilities are to be tested by rules which are closely
analogous to and substantially the same, if not exactly the same, as those which govern partnership. In fact, it has been
said that the trend in the law has been to blur the distinctions between a partnership and a joint venture, very little law
being found applicable to one that does not apply to the other.51
Though some claim that partnerships and joint ventures are totally different animals, there are very few rules that
differentiate one from the other; thus, joint ventures are deemed "akin" or similar to a partnership. In fact, in joint
venture agreements, rules and legal incidents governing partnerships are applied.52
Accordingly, culled from the incidents and records of this case, it can be assumed that the relationships entered
between and among petitioners and MBMI are no simple "joint venture agreements." As a rule, corporations are
prohibited from entering into partnership agreements; consequently, corporations enter into joint venture agreements
with other corporations or partnerships for certain transactions in order to form "pseudo partnerships."
Obviously, as the intricate web of "ventures" entered into by and among petitioners and MBMI was executed to
circumvent the legal prohibition against corporations entering into partnerships, then the relationship created should
be deemed as "partnerships," and the laws on partnership should be applied. Thus, a joint venture agreement between
and among corporations may be seen as similar to partnerships since the elements of partnership are present.
Considering that the relationships found between petitioners and MBMI are considered to be partnerships, then the
CA is justified in applying Sec. 29, Rule 130 of the Rules by stating that "by entering into a joint venture, MBMI have
a joint interest" with Narra, Tesoro and McArthur.
Panel of Arbitrators’ jurisdiction
We affirm the ruling of the CA in declaring that the POA has jurisdiction over the instant case. The POA has
jurisdiction to settle disputes over rights to mining areas which definitely involve the petitions filed by Redmont
against petitioners Narra, McArthur and Tesoro. Redmont, by filing its petition against petitioners, is asserting the
right of Filipinos over mining areas in the Philippines against alleged foreign-owned mining corporations. Such claim
constitutes a "dispute" found in Sec. 77 of RA 7942:
Within thirty (30) days, after the submission of the case by the parties for the decision, the panel shall have exclusive
and original jurisdiction to hear and decide the following:
(a) Disputes involving rights to mining areas
(b) Disputes involving mineral agreements or permits
We held in Celestial Nickel Mining Exploration Corporation v. Macroasia Corp.:53
The phrase "disputes involving rights to mining areas" refers to any adverse claim, protest, or opposition to an
application for mineral agreement. The POA therefore has the jurisdiction to resolve any adverse claim, protest, or
opposition to a pending application for a mineral agreement filed with the concerned Regional Office of the MGB.
This is clear from Secs. 38 and 41 of the DENR AO 96-40, which provide:
Sec. 38.
xxxx
Within thirty (30) calendar days from the last date of publication/posting/radio announcements, the authorized
officer(s) of the concerned office(s) shall issue a certification(s) that the publication/posting/radio announcement have
been complied with. Any adverse claim, protest, opposition shall be filed directly, within thirty (30) calendar days
from the last date of publication/posting/radio announcement, with the concerned Regional Office or through any
concerned PENRO or CENRO for filing in the concerned Regional Office for purposes of its resolution by the Panel
of Arbitrators pursuant to the provisions of this Act and these implementing rules and regulations. Upon final
resolution of any adverse claim, protest or opposition, the Panel of Arbitrators shall likewise issue a certification to
that effect within five (5) working days from the date of finality of resolution thereof. Where there is no adverse
claim, protest or opposition, the Panel of Arbitrators shall likewise issue a Certification to that effect within five
working days therefrom.
xxxx
No Mineral Agreement shall be approved unless the requirements under this Section are fully complied with and any
adverse claim/protest/opposition is finally resolved by the Panel of Arbitrators.
Sec. 41.
xxxx
Within fifteen (15) working days form the receipt of the Certification issued by the Panel of Arbitrators as provided in
Section 38 hereof, the concerned Regional Director shall initially evaluate the Mineral Agreement applications in
areas outside Mineral reservations. He/She shall thereafter endorse his/her findings to the Bureau for further
evaluation by the Director within fifteen (15) working days from receipt of forwarded documents. Thereafter, the
Director shall endorse the same to the secretary for consideration/approval within fifteen working days from receipt of
such endorsement.
In case of Mineral Agreement applications in areas with Mineral Reservations, within fifteen (15) working days from
receipt of the Certification issued by the Panel of Arbitrators as provided for in Section 38 hereof, the same shall be
evaluated and endorsed by the Director to the Secretary for consideration/approval within fifteen days from receipt of
such endorsement. (emphasis supplied)
It has been made clear from the aforecited provisions that the "disputes involving rights to mining areas" under Sec.
77(a) specifically refer only to those disputes relative to the applications for a mineral agreement or conferment of
mining rights.
The jurisdiction of the POA over adverse claims, protest, or oppositions to a mining right application is further
elucidated by Secs. 219 and 43 of DENR AO 95-936, which read:
Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the provisions of Sections 28, 43 and 57
above, any adverse claim, protest or opposition specified in said sections may also be filed directly with the Panel of
Arbitrators within the concerned periods for filing such claim, protest or opposition as specified in said Sections.
Sec. 43. Publication/Posting of Mineral Agreement.-
xxxx
The Regional Director or concerned Regional Director shall also cause the posting of the application on the bulletin
boards of the Bureau, concerned Regional office(s) and in the concerned province(s) and municipality(ies), copy
furnished the barangays where the proposed contract area is located once a week for two (2) consecutive weeks in a
language generally understood in the locality. After forty-five (45) days from the last date of publication/posting has
been made and no adverse claim, protest or opposition was filed within the said forty-five (45) days, the concerned
offices shall issue a certification that publication/posting has been made and that no adverse claim, protest or
opposition of whatever nature has been filed. On the other hand, if there be any adverse claim, protest or opposition,
the same shall be filed within forty-five (45) days from the last date of publication/posting, with the Regional Offices
concerned, or through the Department’s Community Environment and Natural Resources Officers (CENRO) or
Provincial Environment and Natural Resources Officers (PENRO), to be filed at the Regional Office for resolution of
the Panel of Arbitrators. However previously published valid and subsisting mining claims are exempted from
posted/posting required under this Section.
No mineral agreement shall be approved unless the requirements under this section are fully complied with and any
opposition/adverse claim is dealt with in writing by the Director and resolved by the Panel of Arbitrators. (Emphasis
supplied.)
It has been made clear from the aforecited provisions that the "disputes involving rights to mining areas" under Sec.
77(a) specifically refer only to those disputes relative to the applications for a mineral agreement or conferment of
mining rights.
The jurisdiction of the POA over adverse claims, protest, or oppositions to a mining right application is further
elucidated by Secs. 219 and 43 of DENRO AO 95-936, which reads:
Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the provisions of Sections 28, 43 and 57
above, any adverse claim, protest or opposition specified in said sections may also be filed directly with the Panel of
Arbitrators within the concerned periods for filing such claim, protest or opposition as specified in said Sections.
Sec. 43. Publication/Posting of Mineral Agreement Application.-
xxxx
The Regional Director or concerned Regional Director shall also cause the posting of the application on the bulletin
boards of the Bureau, concerned Regional office(s) and in the concerned province(s) and municipality(ies), copy
furnished the barangays where the proposed contract area is located once a week for two (2) consecutive weeks in a
language generally understood in the locality. After forty-five (45) days from the last date of publication/posting has
been made and no adverse claim, protest or opposition was filed within the said forty-five (45) days, the concerned
offices shall issue a certification that publication/posting has been made and that no adverse claim, protest or
opposition of whatever nature has been filed. On the other hand, if there be any adverse claim, protest or opposition,
the same shall be filed within forty-five (45) days from the last date of publication/posting, with the Regional offices
concerned, or through the Department’s Community Environment and Natural Resources Officers (CENRO) or
Provincial Environment and Natural Resources Officers (PENRO), to be filed at the Regional Office for resolution of
the Panel of Arbitrators. However, previously published valid and subsisting mining claims are exempted from
posted/posting required under this Section.
No mineral agreement shall be approved unless the requirements under this section are fully complied with and any
opposition/adverse claim is dealt with in writing by the Director and resolved by the Panel of Arbitrators. (Emphasis
supplied.)
These provisions lead us to conclude that the power of the POA to resolve any adverse claim, opposition, or protest
relative to mining rights under Sec. 77(a) of RA 7942 is confined only to adverse claims, conflicts and oppositions
relating to applications for the grant of mineral rights.
POA’s jurisdiction is confined only to resolutions of such adverse claims, conflicts and oppositions and it has no
authority to approve or reject said applications. Such power is vested in the DENR Secretary upon recommendation of
the MGB Director. Clearly, POA’s jurisdiction over "disputes involving rights to mining areas" has nothing to do with
the cancellation of existing mineral agreements. (emphasis ours)
Accordingly, as we enunciated in Celestial, the POA unquestionably has jurisdiction to resolve disputes over MPSA
applications subject of Redmont’s petitions. However, said jurisdiction does not include either the approval or
rejection of the MPSA applications, which is vested only upon the Secretary of the DENR. Thus, the finding of the
POA, with respect to the rejection of petitioners’ MPSA applications being that they are foreign corporation, is valid.
Justice Marvic Mario Victor F. Leonen, in his Dissent, asserts that it is the regular courts, not the POA, that has
jurisdiction over the MPSA applications of petitioners.
This postulation is incorrect.
It is basic that the jurisdiction of the court is determined by the statute in force at the time of the commencement of the
action.54
Sec. 19, Batas Pambansa Blg. 129 or "The Judiciary Reorganization
Act of 1980" reads:
Sec. 19. Jurisdiction in Civil Cases.—Regional Trial Courts shall exercise exclusive original jurisdiction:
1. In all civil actions in which the subject of the litigation is incapable of pecuniary estimation.
On the other hand, the jurisdiction of POA is unequivocal from Sec. 77 of RA 7942:
Section 77. Panel of Arbitrators.—
x x x Within thirty (30) days, after the submission of the case by the parties for the decision, the panel shall
have exclusive and original jurisdiction to hear and decide the following:
(c) Disputes involving rights to mining areas
(d) Disputes involving mineral agreements or permits
It is clear that POA has exclusive and original jurisdiction over any and all disputes involving rights to mining areas.
One such dispute is an MPSA application to which an adverse claim, protest or opposition is filed by another
interested applicant. In the case at bar, the dispute arose or originated from MPSA applications where petitioners are
1âwphi1

asserting their rights to mining areas subject of their respective MPSA applications. Since respondent filed 3 separate
petitions for the denial of said applications, then a controversy has developed between the parties and it is POA’s
jurisdiction to resolve said disputes.
Moreover, the jurisdiction of the RTC involves civil actions while what petitioners filed with the DENR Regional
Office or any concerned DENRE or CENRO are MPSA applications. Thus POA has jurisdiction.
Furthermore, the POA has jurisdiction over the MPSA applications under the doctrine of primary jurisdiction. Euro-
med Laboratories v. Province of Batangas55 elucidates:
The doctrine of primary jurisdiction holds that if a case is such that its determination requires the expertise,
specialized training and knowledge of an administrative body, relief must first be obtained in an administrative
proceeding before resort to the courts is had even if the matter may well be within their proper jurisdiction.
Whatever may be the decision of the POA will eventually reach the court system via a resort to the CA and to this
Court as a last recourse.
Selling of MBMI’s shares to DMCI
As stated before, petitioners’ Manifestation and Submission dated October 19, 2012 would want us to declare the
instant petition moot and academic due to the transfer and conveyance of all the shareholdings and interests of MBMI
to DMCI, a corporation duly organized and existing under Philippine laws and is at least 60% Philippine-
owned.56 Petitioners reasoned that they now cannot be considered as foreign-owned; the transfer of their shares
supposedly cured the "defect" of their previous nationality. They claimed that their current FTAA contract with the
State should stand since "even wholly-owned foreign corporations can enter into an FTAA with the
State."57Petitioners stress that there should no longer be any issue left as regards their qualification to enter into FTAA
contracts since they are qualified to engage in mining activities in the Philippines. Thus, whether the "grandfather
rule" or the "control test" is used, the nationalities of petitioners cannot be doubted since it would pass both tests.
The sale of the MBMI shareholdings to DMCI does not have any bearing in the instant case and said fact should be
disregarded. The manifestation can no longer be considered by us since it is being tackled in G.R. No. 202877
pending before this Court. Thus, the question of whether petitioners, allegedly a Philippine-owned corporation due to
1âwphi1

the sale of MBMI's shareholdings to DMCI, are allowed to enter into FTAAs with the State is a non-issue in this case.
In ending, the "control test" is still the prevailing mode of determining whether or not a corporation is a Filipino
corporation, within the ambit of Sec. 2, Art. II of the 1987 Constitution, entitled to undertake the exploration,
development and utilization of the natural resources of the Philippines. When in the mind of the Court there is doubt,
based on the attendant facts and circumstances of the case, in the 60-40 Filipino-equity ownership in the corporation,
then it may apply the "grandfather rule."
WHEREFORE, premises considered, the instant petition is DENIED. The assailed Court of Appeals Decision dated
October 1, 2010 and Resolution dated February 15, 2011 are hereby AFFIRMED.

G.R. No. 176579 October 9, 2012

HEIRS OF WILSON P. GAMBOA,* Petitioners,

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

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

R E S O LUTIO N

CARPIO, J.:

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

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

We deny the motions for reconsideration.

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

As we emphatically stated in the 28 June 2011 Decision, the interpretation of the term "capital" in
Section 11, Article XII of the Constitution has far-reaching implications to the national economy. In
fact, a resolution of this issue will determine whether Filipinos are masters, or second-class citizens, in
their own country. What is at stake here is whether Filipinos or foreigners will have effective control of
the Philippine national economy. Indeed, if ever there is a legal issue that has far-reaching implications
to the entire nation, and to future generations of Filipinos, it is the threshold legal issue presented in this
case.

Contrary to Pangilinan’s narrow view, the serious economic consequences resulting in the
interpretation of the term "capital" in Section 11, Article XII of the Constitution undoubtedly demand
an immediate adjudication of this issue. Simply put, the far-reaching implications of this issue justify
the treatment of the petition as one for mandamus.7

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

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

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

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

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

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

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

xxxx

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

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

xxxx

In light of the foregoing jurisprudence, it is my opinion that the stock-swap transaction in question may
not be constitutionally upheld. While it may be ordinary corporate practice to classify corporate shares
into common voting shares and preferred non-voting shares, any arrangement which attempts to defeat
the constitutional purpose should be eschewed. Thus, the resultant equity arrangement which would
place ownership of 60%11 of the common (voting) shares in the Japanese group, while retaining 60%
of the total percentage of common and preferred shares in Filipino hands would amount to
circumvention of the principle of control by Philippine stockholders that is implicit in the 60%
Philippine nationality requirement in the Constitution. (Emphasis supplied)
In short, Minister Mendoza categorically rejected the theory that the term "capital" in Section 9, Article
XIV of the 1973 Constitution includes "both preferred and common stocks" treated as the same class of
shares regardless of differences in voting rights and privileges. Minister Mendoza stressed that the 60-
40 ownership requirement in favor of Filipino citizens in the Constitution is not complied with unless
the corporation "satisfies the criterion of beneficial ownership" and that in applying the same "the
primordial consideration is situs of control."

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

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

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

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

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

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

The Commission may review upon its own initiative or upon the petition of any interested party any
action of any department or office, individual Commissioner, or staff member of the Commission.

SEC. 5. Powers and Functions of the Commission.- 5.1. The Commission shall act with transparency
and shall have the powers and functions provided by this Code, Presidential Decree No. 902-A, the
Corporation Code, the Investment Houses Law, the Financing Company Act and other existing laws.
Pursuant thereto the Commission shall have, among others, the following powers and functions:

xxxx

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

x x x x (Emphasis supplied)

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

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

JUSTICE CARPIO:

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

SEC Opinion, correct?

COMMISSIONER GAITE:13

That’s correct, Your Honor.

JUSTICE CARPIO:

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

COMMISSIONER GAITE:

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

JUSTICE CARPIO:

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

individual employee of the Commission?

COMMISSIONER GAITE:

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

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

COMMISSIONER GAITE:

That’s correct, Your Honor.

JUSTICE CARPIO:

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

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

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

COMMISSIONER GAITE:

They are not rules and regulations.

JUSTICE CARPIO:

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

COMMISSIONER GAITE:

Yes, Your Honor.14 (Emphasis supplied)

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

The avowed purpose of the Constitution is to place in the hands of Filipinos the exploitation of our
natural resources. Necessarily, therefore, the Rule interpreting the constitutional provision should not
diminish that right through the legal fiction of corporate ownership and control. But the constitutional
provision, as interpreted and practiced via the 1967 SEC Rules, has favored foreigners contrary to the
command of the Constitution. Hence, the Grandfather Rule must be applied to accurately determine the
actual participation, both direct and indirect, of foreigners in a corporation engaged in a nationalized
activity or business.
Compliance with the constitutional limitation(s) on engaging in nationalized activities must be
determined by ascertaining if 60% of the investing corporation’s outstanding capital stock is owned by
"Filipino citizens", or as interpreted, by natural or individual Filipino citizens. If such investing
corporation is in turn owned to some extent by another investing corporation, the same process must be
observed. One must not stop until the citizenships of the individual or natural stockholders of layer
after layer of investing corporations have been established, the very essence of the Grandfather Rule.

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

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

MR. VILLEGAS. That is right.

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

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

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

MR. VILLEGAS. That is right.

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

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

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

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

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

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

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

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

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

In his motion for reconsideration, the PSE President cites the cases of National Telecommunications
Commission v. Court of Appeals17 and Philippine Long Distance Telephone Company v. National
Telecommunications Commission18 in arguing that the Court has already defined the term "capital" in
Section 11, Article XII of the 1987 Constitution.19

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

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

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

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

III.
Filipinization of Public Utilities

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

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

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

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

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

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

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

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

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

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

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

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

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

IV.
Definition of "Philippine National"

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

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

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

The definition of a "Philippine national" in the FIA reiterated the meaning of such term as provided in
its predecessor statute, Executive Order No. 226 or the Omnibus Investments Code of 1987,25 which
was issued by then President Corazon C. Aquino. Article 15 of this Code states:

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

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

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

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

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

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

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

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

Under Section 3 of Republic Act No. 5455 or the Foreign Business Regulations Act, which took effect
on 30 September 1968, if the investment in a domestic enterprise by non-Philippine nationals exceeds
30% of its outstanding capital stock, such enterprise must obtain prior approval from the Board of
Investments before accepting such investment. Such approval shall not be granted if the investment
"would conflict with existing constitutional provisions and laws regulating the degree of required
ownership by Philippine nationals in the enterprise."31 A "non-Philippine national" cannot own and
operate a reserved economic activity like a public utility. Again, this means that only a "Philippine
national" can own and operate a public utility.

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

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

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

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

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

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

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

To repeat, among the areas of investment covered by the Foreign Investment Negative List A is the
ownership and operation of public utilities, which the Constitution expressly reserves to Filipino
citizens and to corporations at least 60% owned by Filipino citizens. In other words, Negative List A of
the FIA reserves the ownership and operation of public utilities only to "Philippine nationals," defined
in Section 3(a) of the FIA as "(1) a citizen of the Philippines; x x x or (3) a corporation organized under
the laws of the Philippines of which at least sixty percent (60%) of the capital stock outstanding and
entitled to vote is owned and held by citizens of the Philippines; or (4) a corporation organized abroad
and registered as doing business in the Philippines under the Corporation Code of which one hundred
percent (100%) of the capital stock outstanding and entitled to vote is wholly owned by Filipinos or a
trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a
Philippine national and at least sixty percent (60%) of the fund will accrue to the benefit of Philippine
nationals."

Clearly, from the effectivity of the Investment Incentives Act of 1967 to the adoption of the Omnibus
Investments Code of 1981, to the enactment of the Omnibus Investments Code of 1987, and to the
passage of the present Foreign Investments Act of 1991, or for more than four decades, the statutory
definition of the term "Philippine national" has been uniform and consistent: it means a Filipino citizen,
or a domestic corporation at least 60% of the voting stock is owned by Filipinos. Likewise, these same
statutes have uniformly and consistently required that only "Philippine nationals" could own and
operate public utilities in the Philippines. The following exchange during the Oral Arguments is
revealing:

JUSTICE CARPIO:

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

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

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

COMMISSIONER GAITE:

Yes, Your Honor.

JUSTICE CARPIO:

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

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

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

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

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

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

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

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

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

COMMISSIONER GAITE:

Correct, Your Honor.33 (Emphasis supplied)

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

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

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

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

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

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

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

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

7. SEC-OGC Opinion No. 03-08, addressed to Attys. Ruby Rose J. Yusi and Rudyard S. Arbolado.

The SEC legal officers’ occasional but blatant disregard of the definition of the term "Philippine
national" in the FIA signifies their lack of integrity and competence in resolving issues on the 60-40
ownership requirement in favor of Filipino citizens in Section 11, Article XII of the Constitution.
The PSE President argues that the term "Philippine national" defined in the FIA should be limited and
interpreted to refer to corporations seeking to avail of tax and fiscal incentives under investment
incentives laws and cannot be equated with the term "capital" in Section 11, Article XII of the 1987
Constitution. Pangilinan similarly contends that the FIA and its predecessor statutes do not apply to
"companies which have not registered and obtained special incentives under the schemes established by
those laws."

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

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

PART III. FOREIGN INVESTMENTS WITHOUT INCENTIVES

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

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

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

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

Mere legal title is insufficient to meet the 60 percent Filipino-owned "capital" required in the
Constitution. Full beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60
percent of the voting rights, is required. The legal and beneficial ownership of 60 percent of the
outstanding capital stock must rest in the hands of Filipino nationals in accordance with the
constitutional mandate. Otherwise, the corporation is "considered as non-Philippine national[s]."
(Emphasis supplied)
This is consistent with Section 3 of the FIA which provides that where 100% of the capital stock is held
by "a trustee of funds for pension or other employee retirement or separation benefits," the trustee is a
Philippine national if "at least sixty percent (60%) of the fund will accrue to the benefit of Philippine
nationals." Likewise, Section 1(b) of the Implementing Rules of the FIA provides that "for stocks to be
deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not enough to
meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate
voting rights, is essential."

Since the constitutional requirement of at least 60 percent Filipino ownership applies not only to voting
control of the corporation but also to the beneficial ownership of the corporation, it is therefore
imperative that such requirement apply uniformly and across the board to all classes of shares,
regardless of nomenclature and category, comprising the capital of a corporation. Under the
Corporation Code, capital stock35 consists of all classes of shares issued to stockholders, that is,
common shares as well as preferred shares, which may have different rights, privileges or restrictions
as stated in the articles of incorporation.36

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

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

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

VI.
Intent of the framers of the Constitution

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

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

MR. VILLEGAS. That is right.

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

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

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

MR. VILLEGAS. That is right.

MR. NOLLEDO. Thank you.

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

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

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

MR. VILLEGAS. Yes.39

xxxx

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

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

MR. VILLEGAS. Yes.

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

MR. VILLEGAS. That is right.

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

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

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

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

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

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

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

The OSG, in its own behalf and as counsel for the State,43 agrees fully with the Court’s interpretation
of the term "capital." In its Consolidated Comment, the OSG explains that the deletion of the phrase
"controlling interest" and replacement of the word "stock" with the term "capital" were intended
specifically to extend the scope of the entities qualified to operate public utilities to include
associations without stocks. The framers’ omission of the phrase "controlling interest" did not mean the
inclusion of all shares of stock, whether voting or non-voting. The OSG reiterated essentially the
Court’s declaration that the Constitution reserved exclusively to Philippine nationals the ownership and
operation of public utilities consistent with the State’s policy to "develop a self-reliant and independent
national economy effectively controlled by Filipinos."
As we held in our 28 June 2011 Decision, to construe broadly the term "capital" as the total outstanding
capital stock, treated as a single class regardless of the actual classification of shares, grossly
contravenes the intent and letter of the Constitution that the "State shall develop a self-reliant and
independent national economy effectively controlled by Filipinos." We illustrated the glaring anomaly
which would result in defining the term "capital" as the total outstanding capital stock of a corporation,
treated as a single class of shares regardless of the actual classification of shares, to wit:

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

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

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

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

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

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

During the Oral Arguments, the OSG emphasized that there was never a question on the intent of the
framers of the Constitution to limit foreign ownership, and assure majority Filipino ownership and
control of public utilities. The OSG argued, "while the delegates disagreed as to the percentage
threshold to adopt, x x x the records show they clearly understood that Filipino control of the public
utility corporation can only be and is obtained only through the election of a majority of the members
of the board."
Indeed, the only point of contention during the deliberations of the Constitutional Commission on 23
August 1986 was the extent of majority Filipino control of public utilities. This is evident from the
following exchange:

THE PRESIDENT. Commissioner Jamir is recognized.

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

xxxx

THE PRESIDENT: Will Commissioner Jamir first explain?

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

MR. ROMULO. Madam President.

THE PRESIDENT. Commissioner Romulo is recognized.

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

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

x x x x45

MS. ROSARIO BRAID. Madam President.

THE PRESIDENT. Commissioner Rosario Braid is recognized.

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

xxxx
THE PRESIDENT. Just to clarify, would Commissioner Rosario Braid support the proposal of two-
thirds rather than the 60 percent?

MS. ROSARIO BRAID. I have added a clause that will put management in the hands of Filipino
citizens.

x x x x46

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

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

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

THE PRESIDENT. The Commissioner may proceed.

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

xxxx

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

MS. ROSARIO BRAID. Madam President.

THE PRESIDENT. This is still on Section 15.

MS. ROSARIO BRAID. Yes.

MR. VILLEGAS. Yes, Madam President.

xxxx

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

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

xxxx

FR. BERNAS. Madam President.

THE PRESIDENT. Commissioner Bernas is recognized.

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

MR. BENGZON. Let us hear it.

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

MR. VILLEGAS. "ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH

CORPORATIONS AND ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES."

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

FR. BERNAS. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING BODY

OF ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE
SHARE IN THE CAPITAL THEREOF..." I do not have the rest of the copy.

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

MR. VILLEGAS. Yes.

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

MS. ROSARIO BRAID. Yes.

xxxx

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

MR. VILLEGAS. That is right.

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

MR. REGALADO. It is accepted.

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

VOTING

xxxx

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

xxxx

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

MR. RAMA. Yes, Madam President.

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

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

MR. BENGZON. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING

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

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

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

VOTING

xxxx

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

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

VIII.
The undisputed facts

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

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

IX.
PLDT is not an indispensable party;
SEC is impleaded in this case.

In his petition, Gamboa prays, among others:

xxxx

5. For the Honorable Court to issue a declaratory relief that ownership of common or voting shares is
the sole basis in determining foreign equity in a public utility and that any other government rulings,
opinions, and regulations inconsistent with this declaratory relief be declared unconstitutional and a
violation of the intent and spirit of the 1987 Constitution;
6. For the Honorable Court to declare null and void all sales of common stocks to foreigners in excess
of 40 percent of the total subscribed common shareholdings; and

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

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

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

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

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

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

In any event, the SEC has expressly manifested54 that it will abide by the Court’s decision and defer to
the Court’s definition of the term "capital" in Section 11, Article XII of the Constitution. Further, the
SEC entered its special appearance in this case and argued during the Oral Arguments, indicating its
submission to the Court’s jurisdiction. It is clear, therefore, that there exists no legal impediment
against the proper and immediate implementation of the Court’s directive to the SEC.
PLDT is an indispensable party only insofar as the other issues, particularly the factual questions, are
concerned. In other words, PLDT must be impleaded in order to fully resolve the issues on (1) whether
the sale of 111,415 PTIC shares to First Pacific violates the constitutional limit on foreign ownership of
PLDT; (2) whether the sale of common shares to foreigners exceeded the 40 percent limit on foreign
equity in PLDT; and (3) whether the total percentage of the PLDT common shares with voting rights
complies with the 60-40 ownership requirement in favor of Filipino citizens under the Constitution for
the ownership and operation of PLDT. These issues indisputably call for an examination of the parties’
respective evidence, and thus are clearly within the jurisdiction of the SEC. In short, PLDT must be
impleaded, and must necessarily be heard, in the proceedings before the SEC where the factual issues
will be thoroughly threshed out and resolved.

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

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

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

X.
Foreign Investments in the Philippines

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

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

I would like also to get from you Dr. Villegas if you have additional information on whether this high
FDI59 countries in East Asia have allowed foreigners x x x control [of] their public utilities, so that we
can compare apples with apples.

DR. VILLEGAS:

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

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

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

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

XI.
Prospective Application of Sanctions

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

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

XII.
Final Word

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

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

Filipinos have only to remind themselves of how this country was exploited under the Parity
Amendment, which gave Americans the same rights as Filipinos in the exploitation of natural
resources, and in the ownership and control of public utilities, in the Philippines. To do this the 1935
Constitution, which contained the same 60 percent Filipino ownership and control requirement as the
present 1987 Constitution, had to be amended to give Americans parity rights with Filipinos. There was
bitter opposition to the Parity Amendment62 and many Filipinos eagerly awaited its expiration. In late
1968, PLDT was one of the American-controlled public utilities that became Filipino-controlled when
the controlling American stockholders divested in anticipation of the expiration of the Parity
Amendment on 3 July 1974.63 No economic suicide happened when control of public utilities and
mining corporations passed to Filipinos’ hands upon expiration of the Parity Amendment.

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

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

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