Case Doctrines in Corporation Law (part I)

CASE DOCTRINES IN CORPORATION LAW (part I)

Prepared by  Glenn Rey D. Anino

Bourns vs. Carman, 7 Phil., 117, December 04, 1906

1.PARTNERSHIP OF "CUENTAS EN PARTICIPACIÓN."—A partnership constituted in such a manner that its existence was only known to those who had an interest in the same, there being no mutual agreement between the partners, and without a corporate name indicating to the public in some way that there were other people besides the one who ostensibly managed and conducted the business, is exactly the accidental partnership of cuentas en participación defined in article 239 of the Code of Commerce.

2.ID.—Those who contracted with the person in whose name the business of a partnership of cuentas en participación is conducted, shall have only the right of action against such person and not against the other persons interested, and the latter, on the other hand, shall have no right of action against the third person who contracted with the manager unless such manager formally transferred his right to them. (Art, 242, Code of Commerce.) [Bourns vs. Carman, 7 Phil., 117(1906)]

Harden v. Benguet  Consolidated Mining Co., 58 Phils. 141   (1933)

CORPORATIONS; MlNING CORPORATION; PROHIBITION AGAINST OWNING INTEREST IN OTHER MINING CORPORATION; RIGHT OF ACTION.—Inasmuch as the Corporation Law contains, in section 190 (A), provisions fully penalizing the violation of subsection 5 of sec tion 13 of Act No. 1459,—which prohibits the acquisition by one mining corporation of any interest in another,—and inasmuch as these provisions have been enacted in the exercise of the general police powers of the Government, it results that, where one mining corporation acquires a prohibited interest in another such corporation, the shareholders of the latter cannot maintain an action to annul the contract by which such interest was acquired. The remedy must be sought in a criminal proceeding or quo warranto action, under section 190 (A), instituted by the Government. Until thus assailed in a direct proceeding the contract by which the interest was acquired will be treated as valid, as between the parties.

Benguet Consolidated Mining Co. vs. Pineda, 98 Phil. 711, March 28, 1956

1.CORPORATION LAW; PROHIBITION AGAINST EXTENSION OF CORPORATE EXISTENCE BY AMENDMENT OF THE ORIGINAL ARTICLES, APPLICABLE TO “SOCIEDADES ANONIMAS."—The prohibition contained in section 18 of Act No. 1459, against extending the period of corporate existence by amendment of the original articles, was intended to apply, and does apply, to sociedades anonimas, already formed, organized and existing at the time of the effectivity of the Corporation Law (Act 1459) in 1906.

2. ID.; ID.; PROHIBITION VALID AND IMPAIRS NO VESTED RIGHTS.—The aforesaid statutory prohibition is valid and impairs no vested rights or constitutional inhibition where no agreement to extend the original period of corporate life was perfected before the enactment of the Corporation Law.

3.WHEN “SOCIEDAD ANONIMAS", MAY NOT CLAIM TO REFORM INTO A CORPORATION UNDER SECTION 75 OF THE ACT.—A sociedad anónima, existing before the Corporation Law, that continues to do business as such for a reasonable time after its enactment, is deemed to have made its election and may not subsequently claim to reform into a corporation under section 75 of Act No. 1459. Particularly should this be the case where it has asserted its privileges as such sociedad anónima before invoking its alleged right to ref orm into a corporation.

Liban vs. Gordon, 593 SCRA 68 , July 15, 2009 (PETITION to declare Senator Richard J. Gordon as Having Forfeited His Seat in the Senate.)

Special Proceedings; Quo Warranto; Quo warranto is generally commenced by the Government as the proper party plaintiff; An individual may commence such an action if he claims to be entitled to the public office allegedly usurped by another, in which case he can bring the action in his own name.—Quo warranto is generally commenced by the Government as the proper party plaintiff. However, under Section 5, Rule 66 of the Rules of Court, an individual may commence such an action if he claims to be entitled to the public office allegedly usurped by another, in which case he can bring the action in his own name. The person instituting quo warranto proceedings in his own behalf must claim and be able to show that he is entitled to the office in dispute, otherwise the action may be dismissed at any stage. In the present case, petitioners do not claim to be entitled to the Senate office of respondent. Clearly, petitioners have no standing to file the present petition.

Same; Same; Philippine National Red Cross (PNRC); Public Officers; Constitutional Law; The Philippine National Red Cross (PNRC) Chairman is not an official or employee of the Executive branch since his appointment does not fall under Section 16, Article VII of the Constitution; Not being a government official or employee, the Philippine National Red Cross (PNRC) Chairman, as such, does not hold a government office or employment.—The President does not appoint the Chairman of the PNRC. Neither does the head of any department, agency, commission or board appoint the PNRC Chairman. Thus, the PNRC Chairman is not an official or employee of the Executive branch since his appointment does not fall under Section 16, Article VII of the Constitution. Certainly, the PNRC Chairman is not an official or employee of the Judiciary or Legislature. This leads us to the obvious conclusion that the PNRC Chairman is not an official or employee of the Philippine Government. Not being a government official or employee, the PNRC Chairman, as such, does not hold a government office or employment.

Same; Same; Same; Philippine National Red Cross (PNRC) is not government-owned but privately owned.—The PNRC is not government-owned but privately owned. The vast majority of the thousands of PNRC members are private individuals, including students. Under the PNRC Charter, those who contribute to the annual fund campaign of the PNRC are entitled to membership in the PNRC for one year. Thus, any one between 6 and 65 years of age can be a PNRC member for one year upon contributing P35, P100, P300, P500 or P1,000 for the year. Even foreigners, whether residents or not, can be members of the PNRC. [Liban vs. Gordon, 593 SCRA 68(2009)]

Liban vs. Gordon, 639 SCRA 709 , January 18, 2011 (MOTION FOR CLARIFICATION AND/OR FOR RECONSIDERATION of a decision of the Supreme Court and MOTION FOR PARTIAL RECONSIDERATION of a decision of the Supreme Court)

Corporation Law; Philippine National Red Cross; A closer look at the nature of the Philippine National Red Cross (PNRC) would show that there is none like it not just in terms of structure, but also in terms of history, public service and official status.—The passage of several laws relating to the PNRC’s corporate existence notwithstanding the effectivity of the constitutional proscription on the creation of private corporations by law, is a recognition that the PNRC is not strictly in the nature of a private corporation contemplated by the aforesaid constitutional ban. A closer look at the nature of the PNRC would show that there is none like it not just in terms of structure, but also in terms of history, public service and official status accorded to it by the State and the international community. There is merit in PNRC’s contention that its structure is sui generis.

Same; Same; The sui generis character of Philippine National Red Cross (PNRC) requires us to approach controversies involving the PNRC on a case-to-case basis.—Although it is neither a subdivision, agency, or instrumentality of the government, nor a government-owned or controlled corporation or a subsidiary thereof, as succinctly explained in the Decision of July 15, 2009, so much so that respondent, under the Decision, was correctly allowed to hold his position as Chairman thereof concurrently while he served as a Senator, such a conclusion does not ipso facto imply that the PNRC is a “private corporation” within the contemplation of the provision of the Constitution, that must be organized under the Corporation Code. As correctly mentioned by Justice Roberto A. Abad, the sui generis character of PNRC requires us to approach controversies involving the PNRC on a case-to-case basis.

Same; Same; The Philippine National Red Cross (PNRC) has responded to almost all national disasters since 1947, and is widely known to provide a substantial portion of the country’s blood requirements.—It bears emphasizing that the PNRC has responded to almost all national disasters since 1947, and is widely known to provide a substantial portion of the country’s blood requirements. Its humanitarian work is unparalleled. The Court should not shake its existence to the core in an untimely and drastic manner that would not only have negative consequences to those who depend on it in times of disaster and armed hostilities but also have adverse effects on the image of the Philippines in the international community. The sections of the PNRC Charter that were declared void must therefore stay. [Liban vs. Gordon, 639 SCRA 709(2011)]

Tayag vs. Benguet Consolidated, Inc., 26 SCRA 242 , November 29, 1968

Special proceedings; Principal administration and ancillary administration distinguished; When ancillary administration is proper; Reason.—It is often necessary to have more than one administration of an estate. When a person dies intestate owning property in the country of his domicile as well as in a foreign country, administration is had in both countries. That which is granted in the jurisdiction of decedent's last domicile is termed the principal administration, while any other administration is termed the ancillary administration.The ancillary administration is proper, whenever a person dies, leaving in a country other than that of his last domicile, property to be administered in the nature of assets of the deceased liable for his individual debts or to be distributed among his heirs (Johannes v. Harvey, 43 Phil. 175). Ancillary administration is necessary or the reason for such administration is because a grant of administration does not ex proprio vigore have any effect beyond the limits of the country in which it is granted. Hence, an administrator appointed in a foreign state has no authority in the Philippines,

Settlement of estate of a decedent; Ancillary administrator; Scope of his power and authority.—No one could dispute the power of an ancillary administrator to gain control and possession of all assets of the decedent within the jurisdiction of the Philippines. Such a power is inherent in his duty to settle her estate and satisfy the claims of local creditors (Rule 84, Sec. 3, Rules of Court. Cf. Pavia v. De la Rosa, 8 Phil. 70; Liwanag v. Reyes, L-19159, Sept. 29, 1964; Ignacio v. Elchico, L-18937, May 16, 1967; etc.). It is a general rule universally recognized that administration, whether principal or ancillary, certainly extends to the assets of a decedent found within the state or country where it was granted, the corollary being "that an administrator appointed in one state or country has no power over property la another state or country" (Leon and Ghezzi v. Manufacturers Life Ins. Co., 90 Phil. 459).

Same; Refusal of domiciliary administrator to deliver shares of stock despite judicial order; Case at bar.—Since, in the case at bar, there is a refusal, persistently adhered to by the domiciliary administrator in New York, to deIiver the shares of stocks of appellant corporation owned by the decedent to fee ancillary administrator in the Philippines, there was nothing unreasonable or arbitrary in considering them as lost and requiring the appellant to issue new certificates in lieu thereof. Thereby, the task incumbent under the law on the ancillary administrator could be discharged and his responsibility fulfilled. Any other view would result in the compliance to a valid judicial order being made to depend on the uncontrolled discretion of a party or entity. In this connection, our Supreme Court held: "Our attention has not been called to any law or treaty that would make the findings of the Veterans' Administrator (of the United States), in actions where he is a party, conclusive on our courts. That, in effect, would deprive our tribunals of judicial descretion and render them subordinate instrumentalities of the Veterans' Administrator" (Viloria v. Administrator of Veterans Affairs, 101 Phil. 762). It is bad enough as the Viloria decision made patent for our judiciary to accept as final and conclusive, determinations made by foreign governmental agencies. It is infinitely worse if through the absence of any coercive power by our courts over juridical persons within our jurisdiction, the force and effectivity of their orders could be made to depend on the whim or caprice of alien entities. It is difficult to imagine of a situation more offensive to the dignity of the bench or the honor of the country.

Corporation law; Corporation; Concept and nature.—A corporation is an artificial being created by operation of law (Sec. 2, Act No. 1459). A corporation as known to Philippine jurisprudence is a creature without any existence until it has received the imprimatur of the state acting according to law. It is logically inconceivable therefore that it will have rights and privileges of a higher priority than that of its creator. More than that, it cannot legitimately refuse to yield obedience to acts of its state organs, certainly not excluding the judiciary. whenever called upon to do so. A corporation is not in fact and in reality a person, but the law treats it as though it were a person by process of fiction, or by regarding it as an artificial icial person distinct and separate from its individual stockholders (1 Fletcher, Cyclopedia Corporations, pp. 19-20). [Tayag vs. Benguet Consolidated, Inc., 26 SCRA 242(1968)]

Arnold vs. Willits & Patterson, 44 Phil. 634 , March 17, 1923

1.CONSTRUCTION OF CONTRACT.—Where A entered into a written contract with the firm of W & P by which he was employed as agent of the firm for a period of five years, and a dispute arose between them as to the compensation which A should receive for his services, and A wrote a letter, known in the record as Exhibit B, which clearly defined and specified the compensation which he was to receive, to which one member of the firm gave his "conforme," A's compensation for his services is measured and controlled by Exhibit B. [Arnold vs. Willits & Patterson, 44 Phil. 634(1923)]

2.WHEN CONTRACT WITH FIRM BINDS CORPORATION.—Where A entered upon the discharge of his duties under a contract with the firm of W & P, and the firm organized a corporation, which took over all of its assets and continued to conduct the business of the firm as a corporation and which dealt with and treated A as its agent, in the same manner as the firm had previously done, the corporation is bound by the contract which the firm made with A.

3.WHEN CONTRACT BY INDIVIDUAL BINDS CORPORATION.—Where a contract is made with A by W in his own name, and W is the owner of all of the capital stock of the corporation, and the corporation deals with A as its agent under the contract, the contract which W made with A becomes a contract between A and the corporation, and the corporation is bound by the contract.

4.IN THE ABSENCE OF FRAUD "CREDITORS' COMMITTEE" OF INSOLVENT CORPORATION CANNOT RESCIND CONTRACT OF CORPORATION.—Where a corporation becomes insolvent, and its affairs were placed in the hands of a "creditors' committee," the "committee" is bound by any valid contract made between A and the corporation, and, in the absence of fraud, the "creditors' committee" has no power to rescind the contract. [Arnold vs. Willits & Patterson, 44 Phil. 634(1923)]

Pantranco Employees Association (PEA-PTGWO) vs. National Labor Relations Commission, 581 SCRA 598, March 17, 2009

Judgments; Writs of Execution; It is a settled rule that the power of the court in executing judgments extends only to properties unquestionably belonging to the judgment debtor alone—to be sure, one man’s goods shall not be sold for another man’s debts.—We would like to stress the settled rule that the power of the court in executing judgments extends only to properties unquestionably belonging to the judgment debtor alone. To be sure, one man’s goods shall not be sold for another man’s debts. A sheriff is not authorized to attach or levy on property not belonging to the judgment debtor, and even incurs liability if he wrongfully levies upon the property of a third person.

Corporation Law; Piercing the Veil of Corporate Fiction; The general rule is that a corporation has a personality separate and distinct from those of its stockholders and other corporations to which it may be connected, a fiction created by law for convenience and to prevent injustice; Settled is the rule that where one corporation sells or otherwise transfers all its assets to another corporation for value, the latter is not, by that fact alone, liable for the debts and liabilities of the transferor.—The general rule is that a corporation has a personality separate and distinct from those of its stockholders and other corporations to which it may be connected. This is a fiction created by law for convenience and to prevent injustice. Obviously, PNB, PNB-Madecor, Mega Prime, and PNEI are corporations with their own personalities. The “separate personalities” of the first three corporations had been recognized by this Court in PNB v. Mega Prime Realty and Holdings Corporation/Mega Prime Realty and Holdings Corporation v. PNB (567 SCRA 633 [2008]) where we stated that PNB was only a stockholder of PNB-Madecor which later sold its shares to Mega Prime; and that PNB-Madecor was the owner of the Pantranco properties. Moreover, these corporations are registered as separate entities and, absent any valid reason, we maintain their separate identities and we cannot treat them as one. Neither can we merge the personality of PNEI with PNB simply because the latter acquired the former. Settled is the rule that where one corporation sells or otherwise transfers all its assets to another corporation for value, the latter is not, by that fact alone, liable for the debts and liabilities of the transferor.

Same; Same; Words and Phrases; Under the doctrine of “piercing the veil of corporate fiction,” the court looks at the corporation as a mere collection of individuals or an aggregation of persons undertaking business as a group, disregarding the separate juridical personality of the corporation unifying the group; Any piercing of the corporate veil has to be done with caution, albeit the Court will not hesitate to disregard the corporate veil when it is misused or when necessary in the interest of justice.—Under the doctrine of “piercing the veil of corporate fiction,” the court looks at the corporation as a mere collection of individuals or an aggregation of persons undertaking business as a group, disregarding the separate juridical personality of the corporation unifying the group. Another formulation of this doctrine is that when two business enterprises are owned, conducted and controlled by the same parties, both law and equity will, when [Pantranco Employees Association necessary to protect the rights of third parties, disregard the legal fiction that two corporations are distinct entities and treat them as identical or as one and the same. Whether the separate personality of the corporation should be pierced hinges on obtaining facts appropriately pleaded or proved. However, any piercing of the corporate veil has to be done with caution, albeit the Court will not hesitate to disregard the corporate veil when it is misused or when necessary in the interest of justice. After all, the concept of corporate entity was not meant to promote unfair objectives.

Same; Same; Labor Law; It was clarified in Carag v. National Labor Relations Commission (520 SCRA 28 [2007]), and McLeod v. National Labor Relations Commission (512 SCRA 222 [2007]), that Article 212(e) of the Labor Code, by itself, does not make a corporate officer personally liable for the debts of the corporation—the governing law on personal liability of directors or officers for debts of the corporation is still Section 31 of the Corporation Code.—In the recent cases Carag v. National Labor Relations Commission (520 SCRA 28 [2007]), and McLeod v. National Labor Relations Commission (512 SCRA 222 [2007]), the Court explained the doctrine laid down in AC Ransom relative to the personal liability of the officers and agents of the employer for the debts of the latter. In AC Ransom, the Court imputed liability to the officers of the corporation on the strength of the definition of an employer in Article 212(c) (now Article 212[e]) of the Labor Code. Under the said provision, employer includes any person acting in the interest of an employer, directly or indirectly, but does not include any labor organization or any of its officers or agents except when acting as employer. It was clarified in Carag and McLeod that Article 212(e) of the Labor Code, by itself, does not make a corporate officer personally liable for the debts of the corporation. It added that the governing law on personal liability of directors or officers for debts of the corporation is still Section 31 of the Corporation Code. More importantly, as aptly observed by this Court in AC Ransom, it appears that Ransom, foreseeing the possibility or probability of payment of backwages to its employees, organized Rosario to replace Ransom, with the latter to be eventually phased out if the strikers win their case. The execution could not be implemented against Ransom because of the disposition posthaste of its leviable assets evidently in order to evade its just and due obligations. Hence, the Court sustained the piercing of the corporate veil and made the officers of Ransom personally liable for the debts of the latter.

Same; Same; The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: 1) defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion of an existing obligation; 2) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; or 3) alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.—What can be inferred from the earlier cases is that the doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: 1) defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion of an existing obligation; 2) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; or 3) alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation. In the absence of malice, bad faith, or a specific provision of law making a corporate officer liable, such corporate officer cannot be made personally liable for corporate liabilities.

Same; Same; The mere fact that a corporation owns all of the stocks of another corporation, taken alone, is not sufficient to justify their being treated as one entity—if used to perform legitimate functions, a subsidiary’s separate existence shall be respected, and the liability of the parent corporation as well as the subsidiary will be confined to those arising in their respective businesses.—For the sake of argument, that PNB may be held liable for the debts of PNEI, petitioners still cannot proceed against the Pantranco properties, the same being owned by PNB-Madecor, notwithstanding the fact that PNB-Madecor was a subsidiary of PNB. The general rule remains that PNB-Madecor has a personality separate and distinct from PNB. The mere fact that a corporation owns all of the stocks of another corporation, taken alone, is not sufficient to justify their being treated as one entity. If used to perform legitimate functions, a subsidiary’s separate existence shall be respected, and the liability of the parent corporation as well as the subsidiary will be confined to those arising in their respective businesses.

Same; Same; Circumstances which are useful in the determination of whether a subsidiary is but a mere instrumentality of the parent-corporation.—In PNB v. Ritratto Group, Inc. (362 SCRA 216 [2001]), we outlined the circumstances which are useful in the determination of whether a subsidiary is but a mere instrumentality of the parent-corporation, to wit: 1. The parent corporation owns all or most of the capital stock of the subsidiary; 2. The parent and subsidiary corporations have common directors or officers; 3. The parent corporation finances the subsidiary; 4. The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation; 5. The subsidiary has grossly inadequate capital; 6. The parent corporation pays the salaries and other expenses or losses of the subsidiary; 7. The subsidiary has substantially no business except with the parent corporation or no assets except those conveyed to or by the parent corporation; 8. In the papers of the parent corporation or in the statements of its officers, the subsidiary is described as a department or division of the parent corporation, or its business or financial responsibility is referred to as the parent corporation’s own; 9. The parent corporation uses the property of the subsidiary as its own; 10. The directors or executives of the subsidiary do not act independently in the interest of the subsidiary, but take their orders from the parent corporation; 11. The formal legal requirements of the subsidiary are not observed.

Actions; Parties; Writs of Execution; Settled is the rule that proceedings in court must be instituted by the real party in interest; Specifically, in proceedings to set aside an execution sale, the real party in interest is the person who has an interest either in the property sold or the proceeds thereof—one who is not interested or is not injured by the execution sale cannot question its validity.—It has been repeatedly stated that the Pantranco properties which were the subject of execution sale were owned by Macris and later, the PNB-Madecor. They were never owned by PNEI or PNB. Following our earlier discussion on the separate personalities of the different corporations involved in the instant case, the only entity which has the right and interest to question the execution sale and the eventual right to annul the same, if any, is PNB-Madecor or its successor-in-interest. Settled is the rule that proceedings in court must be instituted by the real party in interest. A real party in interest is the party who stands to be benefited or injured by the judgment in the suit, or the party entitled to the avails of the suit. “Interest” within the meaning of the rule means material interest, an interest in issue and to be affected by the decree, as distinguished from mere interest in the question involved, or a mere incidental interest. The interest of the party must also be personal and not one based on a desire to vindicate the constitutional right of some third and unrelated party. Real interest, on the other hand, means a present substantial interest, as distinguished from a mere expectancy or a future, contingent, subordinate, or consequential interest. Specifically, in proceedings to set aside an execution sale, the real party in interest is the person who has an interest either in the property sold or the proceeds thereof. Conversely, one who is not interested or is not injured by the execution sale cannot question its validity.

Suldao vs. Cimech System Construction, Inc., 506 SCRA 256 , October 30, 2006

Corporation Law; A corporation is invested by law with a personality separate from that of its stockholders or members.—A corporation is invested by law with a personality separate from that of its stockholders or members. It has a personality separate and distinct from those of the persons composing it as well as from that of any other entity to which it may be related. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not in itself sufficient ground for disregarding the separate corporate personality. A corporation’s authority to act and its liability for its actions are separate and apart from the individuals who own it.

Same; As a general rule, a corporation will be looked upon as a legal entity, unless and until sufficient reason to the contrary appears.—The veil of corporate fiction treats as separate and distinct the affairs of a corporation and its officers and stockholders. As a general rule, a corporation will be looked upon as a legal entity, unless and until sufficient reason to the contrary appears. When the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons. Also, the corporate entity may be disregarded in the interest of justice in such cases as fraud that may work inequities among members of the corporation internally, involving no rights of the public or third persons. In both instances, there must have been fraud and proof of it. For the separate juridical personality of a corporation to be disregarded, the wrongdoing must be clearly and convincingly established. It cannot be presumed.

Mambulao Lumber Co. vs. Philippine National Bank, 22 SCRA 359 , January 30, 1968

Damages; Moral damages; Award of damage to juridical persons.—An artificial person cannot experience physical sufferingS; mental anguish, fright, serious anxiety, wounded feelings, moral -shock or social humiliation which are the basis of moral damage. A corporation may have a good reputation which, if besmirched, may also be a ground for the award of moral damages. [Mambulao Lumber Co. vs. Philippine National Bank, 22 SCRA 359(1968)]

ABS-CBN Broadcasting Corporation vs. Court of Appeals, 301 SCRA 572 , January 21, 1999

Commercial Law; Corporation Code; Board of Directors; Under the Corporation Code, unless otherwise provided by said Code, corporate powers, such as the power to enter into contracts, are exercised by the Board of Directors. However, the Board may delegate such powers to either an executive committee or officials or contracted managers.— Under the Corporation Code, unless otherwise provided by said Code, corporate powers, such as the power to enter into contracts, are exercised by the Board of Directors. However, the Board may delegate such powers to either an executive committee or officials or contracted managers. The delegation, except for the executive committee, must be for specific purposes. Delegation to officers makes the latter agents of the corporation; accordingly, the general rules of agency as to the binding effects of their acts would apply. For such officers to be deemed fully clothed by the corporation to exercise a power of the Board, the latter must specially authorize them to do so. That Del Rosario did not have the authority to accept ABS-CBN’s counter-offer was best evidenced by his submission of the draft contract to VIVA’s Board of Directors for the latter’s approval. In any event, there was between Del Rosario and Lopez III no meeting of minds.

Same; Same; Same; The award of moral damages cannot be granted in favor of a corporation because, being an artificial person and having existence only in legal contemplation, it has no feelings, no emotions, no senses. It cannot, therefore, experience physical suffering and mental anguish, which can be experienced only by one having a nervous system.—The award of moral damages cannot be granted in favor of a corporation because, being an artificial person and having existence only in legal contemplation, it has no feelings, no emotions, no senses. It cannot, therefore, experience physical suffering and mental anguish, which can be experienced only by one having a nervous system. The statement in People v. Manero and Mambulao Lumber Co. v. PNB that a corporation may recover moral damages if it “has a good reputation that is debased, resulting in social humiliation” is an obiter dictum. On this score alone the award for damages must be set aside, since RBS is a corporation. [ABS-CBN Broadcasting Corporation vs. Court of Appeals, 301 SCRA 572(1999)]

National Power Corporation vs. Philipp Brothers Oceanic, Inc., 369 SCRA 629 , November 20, 2001

Same; Damages; A person will be protected only when he acts in the legitimate exercise of his right, that is, when he acts with prudence and in good faith; but not when he acts with negligence or abuse.—Owing to the discretionary character of the right involved in this case, the propriety of NAPOCOR’s act should therefore be judged on the basis of the general principles regulating human relations, the forefront provision of which is Article 19 of the Civil Code which provides 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.” Accordingly, a person will be protected only when he acts in the legitimate exercise of his right, that is, when he acts with prudence and in good faith; but not when he acts with negligence or abuse.

Same; Same; To recover actual damages, the amount of loss must not only be capable of proof but must actually be proven with reasonable degree of certainty, premised upon competent proof or best evidence obtainable of the actual amount thereof.—Basic is the rule that to recover actual damages, the amount of loss must not only be capable of proof but must actually be proven with reasonable degree of certainty, premised upon competent proof or best evidence obtainable of the actual amount thereof. A court cannot merely rely on speculations, conjectures, or guesswork as to the fact and amount of damages. Thus, while indemnification for damages shall comprehend not only the value of the loss suffered, but also that of the profits which the obligee failed to obtain, it is imperative that the basis of the alleged unearned profits is not too speculative and conjectural as to show the actual damages which may be suffered on a future period.

Same; Same; Moral damages are not, as a general rule, granted to a corporation.—The award of moral damages is likewise improper. To reiterate, NAPOCOR did not act in bad faith. Moreover, moral damages are not, as a general rule, granted to a corporation. While it is true that besmirched reputation is included in moral damages, it cannot cause mental anguish to a corporation, unlike in the case of a natural person, for a corporation has no reputation in the sense that an individual has, and besides, it is inherently impossible for a corporation to suffer mental anguish. [National Power Corporation vs. Philipp Brothers Oceanic, Inc., 369 SCRA 629(2001)]

Manila Electric Company vs. T.E.A.M. Electronics Corporation, 540 SCRA 62 , December 13, 2007

Same; Corporation Law; As a rule, a corporation is not entitled to moral damages because, not being a natural person, it cannot experience physical suffering or sentiments like wounded feelings, serious anxiety, mental anguish and moral shock, the only exception to this rule is when the corporation has a reputation that is debased, resulting in its humiliation in the business realm.—We, however, deem it proper to delete the award of moral damages. TEC’s claim was premised allegedly on the damage to its goodwill and reputation. As a rule, a corporation is not entitled to moral damages because, not being a natural person, it cannot experience physical suffering or sentiments like wounded feelings, serious anxiety, mental anguish and moral shock. The only exception to this rule is when the corporation has a reputation that is debased, resulting in its humiliation in the business realm. But in such a case, it is imperative for the claimant to present proof to justify the award. It is essential to prove the existence of the factual basis of the damage and its causal relation to petitioner’s acts. In the present case, the records are bereft of any evidence that the name or reputation of TEC/TPC has been debased as a result of petitioner’s acts. Besides, the trial court simply awarded moral damages in the dispositive portion of its decision without stating the basis thereof.

Ching vs. Secretary of Justice, 481 SCRA 609 , February 06, 2006

Trust Receipt Law; An entrustee is one having or taking possession of goods, documents or instruments under a trust receipt transaction, and any successor in interest of such person for the purpose of payment specified in the trust receipt agreement; Obligations of an Entrustee.—An entrustee is one having or taking possession of goods, documents or instruments under a trust receipt transaction, and any successor in interest of such person for the purpose of payment specified in the trust receipt agreement. The entrustee is obliged to: (1) hold the goods, documents or instruments in trust for the entruster and shall dispose of them strictly in accordance with the terms and conditions of the trust receipt; (2) receive the proceeds in trust for the entruster and turn over the same to the entruster to the extent of the amount owing to the entruster or as appears on the trust receipt; (3) insure the goods for their total value against loss from fire, theft, pilferage or other casualties; (4) keep said goods or proceeds thereof whether in money or whatever form, separate and capable of identification as property of the entruster; (5) return the goods, documents or instruments in the event of non-sale or upon demand of the entruster; and (6) observe all other terms and conditions of the trust receipt not contrary to the provisions of the decree.

Same; The transaction between petitioner and respondent bank falls under the trust receipt transactions envisaged in P.D. No. 115.— In the case at bar, the transaction between petitioner and respondent bank falls under the trust receipt transactions envisaged in P.D. No. 115. Respondent bank imported the goods and entrusted the same to PBMI under the trust receipts signed by petitioner, as entrustee, with the bank as entruster.

Same; The failure of person to turn over the proceeds of the sale of the goods covered by the trust receipt to the entruster or to return said goods, if not sold, is a public nuisance to be abated by the imposition of penal sanctions.—It must be stressed that P.D. No. 115 is a declaration by legislative authority that, as a matter of public policy, the failure of person to turn over the proceeds of the sale of the goods covered by a trust receipt or to return said goods, if not sold, is a public nuisance to be abated by the imposition of penal sanctions.

Same; The issue of whether P.D. No. 115 encompasses transactions involving goods procured as a component of a product ultimately sold has been resolved in the affirmative in Allied Banking Corporation v. Ordoñez, 192 SCRA 246 (1990).—The Court likewise rules that the issue of whether P.D. No. 115 encompasses transactions involving goods procured as a component of a product ultimately sold has been resolved in the affirmative in Allied Banking Corporation v. Ordoñez. The law applies to goods used by the entrustee in the operation of its machineries and equipment. The non-payment of the amount covered by the trust receipts or the non-return of the goods covered by the receipts, if not sold or otherwise not disposed of, violate the entrustee’s obligation to pay the amount or to return the goods to the entruster.

Same; Failure of the entrustee to turn over the proceeds of the sale of the goods covered by the trust receipts to the entruster or to return said goods if they were not disposed of in accordance with the terms of the trust receipt is a crime under P.D. No. 115, without need of proving intent to defraud.—In Colinares v. Court of Appeals, the Court declared that there are two possible situations in a trust receipt transaction. The first is covered by the provision which refers to money received under the obligation involving the duty to deliver it (entregarla) to the owner of the merchandise sold. The second is covered by the provision which refers to merchandise received under the obligation to return it (devolvera) to the owner. Thus, failure of the entrustee to turn over the proceeds of the sale of the goods covered by the trust receipts to the entruster or to return said goods if they were not disposed of in accordance with the terms of the trust receipt is a crime under P.D. No. 115, without need of proving intent to defraud. The law punishes dishonesty and abuse of confidence in the handling of money or goods to the prejudice of the entruster, regardless of whether the latter is the owner or not. A mere failure to deliver the proceeds of the sale of the goods, if not sold, constitutes a criminal offense that causes prejudice, not only to another, but more to the public interest.

Same; Crime defined in P.D. No. 115 is malum prohibitum but is classified as estafa under paragraph 1(b), Article 315 of the Revised Penal Code, or estafa with abuse of confidence.—The crime defined in P.D. No. 115 is malum prohibitum but is classified as estafa under paragraph 1(b), Article 315 of the Revised Penal Code, or estafa with abuse of confidence. It may be committed by a corporation or other juridical entity or by natural persons. However, the penalty for the crime is imprisonment for the periods provided in said Article 315.

Same; Corporation Law; The law specifically makes the officers, employees or other officers or persons responsible for the offense, without prejudice to the civil liabilities of such corporation and/or board of directors, officers, or other officials or employees responsible for the offense.—Though the entrustee is a corporation, nevertheless, the law specifically makes the officers, employees or other officers or persons responsible for the offense, without prejudice to the civil liabilities of such corporation and/or board of directors, officers, or other officials or employees responsible for the offense. The rationale is that such officers or employees are vested with the authority and responsibility to devise means necessary to ensure compliance with the law and, if they fail to do so, are held criminally accountable; thus, they have a responsible share in the violations of the law.

Same; Same; If the crime is committed by a corporation or other juridical entity, the directors, officers, employees or other officers thereof responsible for the offense shall be charged and penalized for the crime; A corporation may be charged and prosecuted for a crime if the imposable penalty is fine.—If the crime is committed by a corporation or other juridical entity, the directors, officers, employees or other officers thereof responsible for the offense shall be charged and penalized for the crime, precisely because of the nature of the crime and the penalty therefor. A corporation cannot be arrested and imprisoned; hence, cannot be penalized for a crime punishable by imprisonment. However, a corporation may be charged and prosecuted for a crime if the imposable penalty is fine. Even if the statute prescribes both fine and imprisonment as penalty, a corporation may be prosecuted and, if found guilty, may be fined.

Same; Same; When a penal statute does not expressly apply to corporations, it does not create an offense for which a corporation may be punished; Corporate officers or employees, through whose act, default or omission the corporation commits a crime, are themselves individually guilty of the crime.—When a criminal statute designates an act of a corporation or a crime and prescribes punishment therefor, it creates a criminal offense which, otherwise, would not exist and such can be committed only by the corporation. But when a penal statute does not expressly apply to corporations, it does not create an offense for which a corporation may be punished. On the other hand, if the State, by statute, defines a crime that may be committed by a corporation but prescribes the penalty therefor to be suffered by the officers, directors, or employees of such corporation or other persons responsible for the offense, only such individuals will suffer such penalty. Corporate officers or employees, through whose act, default or omission the corporation commits a crime, are themselves individually guilty of the crime.

Summit Holdings, Inc. vs. Court of Appeals, 450 SCRA 169 , January 31, 2005

Same; Same; Commercial Law; Estoppel; Right of First Refusal; Contractual obligations arising from rights of first refusal are not new in this jurisdiction and have been recognized in numerous cases, and estoppel is too known a civil law concept to require an elongated discussion.—We reject petitioner’s argument that the present case may be considered under the Supreme Court Resolution dated February 23, 1984 which included among en banc cases those involving a novel question of law and those where a doctrine or principle laid down by the court en banc or in division may be modified or reversed. The case was resolved based on basic principles of the right of first refusal in commercial law and estoppel in civil law. Contractual obligations arising from rights of first refusal are not new in this jurisdiction and have been recognized in numerous cases. Estoppel is too known a civil law concept to require an elongated discussion. Fundamental principles on public bidding were likewise used to resolve the issues raised by the petitioner. To be sure, petitioner leans on the right to top in a public bidding in arguing that the case at bar involves a novel issue. We are not swayed. The right to top was merely a condition or a reservation made in the bidding rules which was fully disclosed to all bidding parties.

Same; Same; Separation of Powers; There is no “executive interference” in the functions of the Supreme Court by the mere filing of a memorandum by the Secretary of Finance, which memorandum was merely “noted” to acknowledge its filing—it had no further legal significance.—There is no “executive interference” in the functions of this Court by the mere filing of a memorandum by Secretary of Finance Jose Isidro Camacho. The memorandum was merely “noted” to acknowledge its filing. It had no further legal significance. Notably too, the assailed Resolution dated September 24, 2003 was decided unanimously by the Special First Division in favor of the respondents.

Bids and Bidding; Infrastructure Projects; There is nothing inherently illegal on a corporation’s act in seeking funding from parties who were losing bidders—this is a purely commercial decision over which the State should not interfere absent any legal infirmity; A case involving the disposition of shares in a corporation which the government seeks to privatize, in which the persons with whom it desires to enter into business with in order to raise funds to purchase the shares are basically its business, differs from a case involving a con tract for the operation or construction of a government infrastructure where the identity of the buyer/bidder or financier constitutes an important consideration.—We see no inherent illegality on PHILYARDS’ act in seeking funding from parties who were losing bidders. This is a purely commercial decision over which the State should not interfere absent any legal infirmity. It is emphasized that the case at bar involves the disposition of shares in a corporation which the government sought to privatize. As such, the persons with whom PHILYARDS desired to enter into business with in order to raise funds to purchase the shares are basically its business. This is in contrast to a case involving a contract for the operation of or construction of a government infrastructure where the identity of the buyer/bidder or financier constitutes an important consideration. In such cases, the government would have to take utmost precaution to protect public interest by ensuring that the parties with which it is contracting have the ability to satisfactorily construct or operate the infrastructure.

Same; Right of First Refusal; The agreement of co-shareholders to mutually grant the right of first refusal to each other, by itself, does not constitute a violation of the provisions of the Constitution limiting land ownership to Filipinos and Filipino corporations; If the foreign shareholdings of a landholding corporation exceeds 40%, it is not the foreign stockholders’ ownership of the shares which is adversely affected but the capacity of the corporation to own land—that is, the corporation becomes disqualified to own land. We uphold the validity of the mutual rights of first refusal under the JVA between KAWASAKI and NIDC. First of all, the right of first refusal is a property right of PHILSECO shareholders, KAWASAKI and NIDC, under the terms of their JVA. This right allows them to purchase the shares of their co-shareholder before they are offered to a third party. The agreement of co-shareholders to mutually grant this right to each other, by itself, does not constitute a violation of the provisions of the Constitution limiting land ownership to Filipinos and Filipino corporations. As PHILYARDS correctly puts it, if PHILSECO still owns land, the right of first refusal can be validly assigned to a qualified Filipino entity in order to maintain the 60%-40% ratio. This transfer, by itself, does not amount to a violation of the Anti-Dummy Laws, absent proof of any fraudulent intent. The transfer could be made either to a nominee or such other party which the holder of the right of first refusal feels it can comfortably do business with. Alternatively, PHILSECO may divest of its landholdings, in which case KAWASAKI, in exercising its right of first refusal, can exceed 40% of PHILSECO’s equity. In fact, it can even be said that if the foreign shareholdings of a landholding corporation exceeds 40%, it is not the foreign stockholders’ ownership of the shares which is adversely affected but the capacity of the corporation to own land—that is, the corporation becomes disqualified to own land. This finds support under the basic corporate law principle that the corporation and its stockholders are separate juridical entities. In this vein, the right of first refusal over shares pertains to the shareholders whereas the capacity to own land pertains to the corporation. Hence, the fact that PHILSECO owns land cannot deprive stockholders of their right of first refusal. No law disqualifies a person from purchasing shares in a landholding corporation even if the latter will exceed the allowed foreign equity, what the law disqualifies is the corporation from owning land.

Constitutional Law; National Economy and Patrimony; Statutory Construction; The prohibition under Section 7, Article XII of the Constitution applies only to ownership of land—it does not extend to immovable or real property as defined under Article 415 of the Civil Code.—As correctly observed by the public respondents, the prohibition in the Constitution applies only to ownership of land. It does not extend to immovable or real property as defined under Article 415 of the Civil Code. Otherwise, we would have a strange situation where the ownership of immovable property such as trees, plants and growing fruit attached to the land would be limited to Filipinos and Filipino corporations only. [J.G. Summit Holdings, Inc. vs. Court of Appeals, 450 SCRA 169(2005)]

General Credit Corporation vs. Alsons Development and Investment Corporation, 513 SCRA 225 , January 29, 2007

Corporation Law; Doctrine of Piercing the Veil of Corporate Fiction; The first consequence of the doctrine of legal entity of the separate personality of the corporation is that a corporation may not be made to answer for acts and liabilities of its stockholders or those of legal entities to which it may be connected or vice versa.—A corporation is an artificial being vested by law with a personality distinct and separate from those of the persons composing it as well as from that of any other entity to which it may be related. The first consequence of the doctrine of legal entity of the separate personality of the corporation is that a corporation may not be made to answer for acts and liabilities of its stockholders or those of legal entities to which it may be connected or vice versa. The notion of separate personality, however, may be disregarded under the doctrine—“piercing the veil of corporate fiction”—as in fact the court will often look at the corporation as a mere collection of individuals or an aggregation of persons undertaking business as a group, disregarding the separate juridical personality of the corporation unifying the group. Another formulation of this doctrine is that when two (2) business enterprises are owned, conducted and controlled by the same parties, both law and equity will, when necessary to protect the rights of third parties, disregard the legal fiction that two corporations are distinct entities and treat them as identical or one and the same.

Same; Same; Whether the separate personality of the corporation should be pierced hinges on obtaining facts, appropriately pleaded or proved.—Whether the separate personality of the corporation should be pierced hinges on obtaining facts, appropriately pleaded or proved. However, any piercing of the corporate veil has to be done with caution, albeit the Court will not hesitate to disregard the corporate veil when it is misused or when necessary in the interest of justice. After all, the concept of corporate entity was not meant to promote unfair objectives. Authorities are agreed on at least three (3) basic areas where piercing the veil, with which the law covers and isolates the corporation from any other legal entity to which it may be related, is allowed. These are: 1) defeat of public convenience, as when the corporate fiction is used as vehicle for the evasion of an existing obligation; 2) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; or 3) alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.

Same; Same; The Court agrees with the disposition of the appellate court on the application of the piercing doctrine to the transaction subject of the instant case where, per the Court’s count, the trial court enumerated no less than 20 documented circumstances and transactions which, taken as a package, indeed strongly supported the conclusion that a corporation was but an adjunct, an instrumentality or business conduit of another corporation.—The Court agrees with the disposition of the appellate court on the application of the piercing doctrine to the transaction subject of this case. Per the Court’s count, the trial court enumerated no less than 20 documented circumstances and transactions, which, taken as a package, indeed strongly supported the conclusion that respondent EQUITY was but an adjunct, an instrumentality or business conduit of petitioner GCC. This relation, in turn, provides a justifying ground to pierce petitioner’s corporate existence as to ALSONS’ claim in question. Foremost of what the trial court referred to as “certain circumstances” are the commonality of directors, officers and stockholders and even sharing of office between petitioner GCC and respondent EQUITY; certain financing and management arrangements between the two, allowing the petitioner to handle the funds of the latter; the virtual domination if not control wielded by the petitioner over the finances, business policies and practices of respondent EQUITY; and the establishment of respondent EQUITY by the petitioner to circumvent CB rules.

Velarde vs. Lopez, Inc., 419 SCRA 422 , January 14, 2004

Corporation Law; Securities and Exchange Commission; Section 5(c) of P.D. No. 902-A applies to a corporate officer’s dismissal; The question of remuneration involving a person who is not a mere employee but a stock-holder and officer of the corporation is not a simple labor problem but a matter that comes within the area of corporate affairs and management, and is in fact a corporate controversy in contemplation of the Corporation Code.—Section 5(c) of P.D. 902-A (as amended by R.A. 8799, the Securities Regulation Code) applies to a corporate officer’s dismissal. For a corporate officer’s dismissal is always a corporate act and/or an intra-corporate controversy and that its nature is not altered by the reason or wisdom which the Board of Directors may have in taking such action. With regard to petitioner’s claim for unpaid salaries, unpaid share in net income, reasonable return on the stock ownership plan and other benefits for services rendered to Sky Vision, jurisdiction thereon pertains to the Securities Exchange Commission even if the complaint by a corporate officer includes money claims since such claims are actually part of the prerequisite of his position and, therefore, interlinked with his relations with the corporation. The question of remuneration involving a person who is not a mere employee but a stockholder and officer of the corporation is not a simple labor problem but a matter that comes within the area of corporate affairs and management, and is in fact a corporate controversy in contemplation of the Corporation Code.

Same; Piercing the veil of corporate fiction; Piercing the veil of corporate fiction is warranted, only in cases when the separate legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, such that in the case of two corporations, the law will regard the corporations as merged into one.—Petitioner argues nevertheless that jurisdiction over the subsidiary is justified by piercing the veil of corporate fiction. Piercing the veil of corporate fiction is warranted, however, only in cases when the separate legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, such that in the case of two corporations, the law will regard the corporations as merged into one. The rationale behind piercing a corporation’s identity is to remove the barrier between the corporation from the persons comprising it to thwart the fraudulent and illegal schemes of those who use the corporate personality as a shield for undertaking certain proscribed activities.

Same; Same; Requisites to be established in applying the doctrine of piercing the veil of corporate fiction.—In applying the doctrine of piercing the veil of corporate fiction, the following requisites must be established: (1) control, not merely majority or complete stock control; (2) such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest acts in contravention of plaintiff’s legal rights; and (3) the aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.

Same; Same; The existence of interlocking directors, corporate officers and shareholders is not enough justification to pierce the veil of corporate fiction in the absence of fraud or other public policy considerations.—Nowhere, however, in the pleadings and other records of the case can it be gathered that respondent has complete control over Sky Vision, not only of finances but of policy and business practice in respect to the transaction attacked, so that Sky Vision had at the time of the transaction no separate mind, will or existence of its own. The existence of interlocking directors, corporate officers and shareholders is not enough justification to pierce the veil of corporate fiction in the absence of fraud or other public policy considerations.

Heirs of Ramon Durano, Sr. vs. Uy, 344 SCRA 238 , October 24, 2000

Corporation Law; Doctrine of Piercing the Veil of Corporate Fiction; Test.—The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as follows: 1. Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; 2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust acts in contravention of plaintiff’s legal rights; and 3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of. The absence of any one of these elements prevents “piercing the corporate veil.” In applying the “instrumentality” or “alter ego” doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defendant’s relationship to that operation.

Same; Same; The question of whether a corporation is a mere alter ego is purely one of fact.—The question of whether a corporation is a mere alter ego is purely one of fact. The Court sees no reason to reverse the finding of the Court of Appeals. The facts show that shortly after the purported sale by Cepco to Durano & Co., the latter sold the property to petitioner Ramon Durano III, who immediately procured the registration of the property in his name. Obviously, Durano & Co. was used by petitioners merely as an instrumentality to appropriate the disputed property for themselves.

Philippine National Bank vs. Ritratto Group, Inc., 362 SCRA 216 , July 31, 2001

Actions; Parties; Agency; Loans; In a foreclosure of a mortgage undertaken by an attorney-in-fact, the validity of a loan contract cannot be raised against said agent, as the matter is solely between the principal and the other party to the contract; An agent not a party to a contract of loan has no power to re-compute the interest rates set forth in the contract.—The contract questioned is one entered into between respondent and PNB-IFL, not PNB. In their complaint, respondents admit that petitioner is a mere attorney-in-fact for the PNB-IFL with full power and authority to, inter alia, foreclose on the properties mortgaged to secure their loan obligations with PNB-IFL. In other words, herein petitioner is an agent with limited authority and specific duties under a special power of attorney incorporated in the real estate mortgage. It is not privy to the loan contracts entered into by respondents and PNB-IFL. The issue of the validity of the loan contracts is a matter between PNB-IFL, the petitioner’s principal and the party to the loan contracts, and the respondents. Yet, despite the recognition that petitioner is a mere agent, the respondents in their complaint prayed that the petitioner PNB be ordered to re-compute the rescheduling of the interest to be paid by them in accordance with the terms and conditions in the documents evidencing the credit facilities and crediting the amount previously paid to PNB by herein respondents. Clearly, petitioner not being a party to the contract has no power to re-compute the interest rates set forth in the contract. Respondents, therefore, do not have any cause of action against petitioner.

Same; Same; Corporation Law; Doctrine of Piercing the Veil of Corporate Fiction; The mere fact that a corporation owns all of the stocks of another corporation, taken alone is not sufficient to justify their being treated as one entity.—The general rule is that as a legal entity, a corporation has a personality distinct and separate from its individual stockholders or members, and is not affected by the personal rights, obligations and transactions of the latter. The mere fact that a corporation owns all of the stocks of another corporation, taken alone is not sufficient to justify their being treated as one entity. If used to perform legitimate functions, a subsidiary’s separate existence may be respected, and the liability of the parent corporation as well as the subsidiary will be confined to those arising in their respective business. The courts may in the exercise of judicial discretion step in to prevent the abuses of separate entity privilege and pierce the veil of corporate entity.

Same; Same; Same; Same; The doctrine of piercing the corporate 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.—In this jurisdiction, we have held that the doctrine of piercing the corporate veil is an equitable doctrine developed to address situations where the separate corporate personality of a corporation is abused or used for wrongful purposes. The doctrine applies when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime, or when it is made as a shield to confuse the legitimate issues, or where a corporation is the mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.

Same; Same; Same; Same; Test in Determining Applicability of the Doctrine of Piercing the Veil of Corporate Fiction.—In Concept Builders, Inc. v. NLRC, we have laid the test in determining the applicability of the doctrine of piercing the veil of corporate fiction, to wit: 1. Control, not mere majority or complete control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own. 2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and, unjust act in contravention of plaintiff’s legal rights; and, 3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of. The absence of any one of these elements prevents “piercing the corporate veil.” In applying the “instrumentality” or “alter ego” doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defendant’s relationship to the operation.

Same; Same; Same; Agency; A suit against an agent cannot without compelling reasons be considered a suit against the principal.—In any case, the parent-subsidiary relationship between PNB and PNB-IFL is not the significant legal relationship involved in this case since the petitioner was not sued because it is the parent company of PNB-IFL. Rather, the petitioner was sued because it acted as an attorney-in-fact of PNB-IFL in initiating the foreclosure proceedings. A suit against an agent cannot without compelling reasons be considered a suit against the principal. Under the Rules of Court, every action must be prosecuted or defended in the name of the real party-in-interest, unless otherwise authorized by law or these Rules. In mandatory terms, the Rules require that “parties-in-interest without whom no final determination can be had, an action shall be joined either as plaintiffs or defendants.” In the case at bar, the injunction suit is directed only against the agent, not the principal.

Same; Preliminary Injunction; A writ of preliminary injunction is an ancillary or preventive remedy that may only be resorted to by a litigant to protect or preserve his rights or interests and for no other purpose during the pendency of the principal action—the dismissal of the principal action thus results in the denial of the prayer for the issuance of the writ.—Anent the issuance of the preliminary injunction, the same must be lifted as it is a mere provisional remedy but adjunct to the main suit. A writ of preliminary injunction is an ancillary or preventive remedy that may only be resorted to by a litigant to protect or preserve his rights or interests and for no other purpose during the pendency of the principal action. The dismissal of the principal action thus results in the denial of the prayer for the issuance of the writ.

Same; Same; An injunctive remedy may only be resorted to when there is a pressing necessity to avoid injurious consequences which cannot be remedied under any standard compensation.—An injunctive remedy may only be resorted to when there is a pressing necessity to avoid injurious consequences which cannot be remedied under any standard compensation. Respondents do not deny their indebtedness. Their properties are by their own choice encumbered by real estate mortgages. Upon the non-payment of the loans, which were secured by the mortgages sought to be foreclosed, the mortgaged properties are properly subject to a foreclosure sale. Moreover, respondents questioned the alleged void stipulations in the contract only when petitioner initiated the foreclosure proceedings. Clearly, respondents have failed to prove that they have a right protected and that the acts against which the writ is to be directed are violative of said right. The Court is not unmindful of the findings of both the trial court and the appellate court that there may be serious grounds to nullify the provisions of the loan agreement. However, as earlier discussed, respondents committed the mistake of filing the case against the wrong party, thus, they must suffer the consequences of their error.

Sunio vs. National Labor Relations Commission, 127 SCRA 390 , January 31, 1984

Same; Damages; A company manager acting in good faith within the scope of his authority in terminating the services of certain employees cannot be personally liable for damages.—We come now to the personal liability of petitioner, Sunio, who was made jointly and severally responsible with petitioner company and CIPI for the payment of the backwages of private respondents. This is reversible error. The Assistant Regional Director’s Decision failed to disclose the reason why he was made personally liable. Respondents, however, alleged as grounds thereof, his being the owner of one-half (½) interest of said corporation, and his alleged arbitrary dismissal of private respondents. Petitioner Sunio was impleaded in the Complaint in his capacity as General Manager of petitioner corporation. There appears to be no evidence on record that he acted maliciously or in bad faith in terminating the services of private respondents. His act, therefore, was within the scope of his authority and was a corporate act.

Same; Same; Corporations; A stockholder or officer of a corporation cannot be held personally liable for damages on account of termination of services of the corporation’s employees.—It is basic that a corporation is 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. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality. Petitioner Sunio, therefore, should not have been made personally answerable for the payment of private respondents’ back salaries.

Collector of Internal Revenue vs. Club Filipino, Inc. de Cebu, 5 SCRA 321 , May 31, 1962

Taxation; Percentage Tax; Bar and Restaurant; When operator not engaged in business.—The liability for fixed and percentage taxes as provided by Sections 182, 183 and 191 of the Tax Code does not ipso facto attach by mere reason of the operation of a bar and restaurant. For the liability to attach, the operator thereof must be engaged in the business as a barkeeper and restaurateur.

Same; Words and Phrases; "Business", meaning of.—The plain and ordinary meaning of business is restricted to activities or affairs where profit is the purpose or livelihood is the motive, and the term business when used without qualification, should be construed in its plain and ordinary meaning, restricted to activities for profit or livelihood.

Same; Club Filipino, Inc. de Cebu; Not engaged in bar and restaurant.—The Club Filipino, Inc. de Cebu was organized to develop and cultivate sports of all class and denomination, for the healthful recreation and entertainment of its stockholders and members; that upon its dissolution, its remaining assets, after paying debts shall be donated to a charitable Philippine Institution in Cebu; that it is operated mainly with funds derived from membership fees and dues; that the Club's bar and restaurant catered only to its members and their guests; that there was in fact no cash dividend distribution to its stockholders and that whatever was derived on retail from its bar and restaurant was used to defray its overall overhead expenses and to improve its golf course (cost-plus-expenses-basis), it stands to reason that the Club is not engaged in the business of an operator of bar and restaurant. [Collector of Internal Revenue vs. Club Filipino, Inc. de Cebu, 5 SCRA 321(1962)]

Shipside Incorporated vs. Court of Appeals, 352 SCRA 334 , February 20, 2001

Actions; Parties; Corporation Law; The power of a corporation to sue and be sued in any court is lodged with the board of directors that exercises its corporate powers.—A corporation, such as petitioner, has no power except those expressly conferred on it by the Corporation Code and those that are implied or incidental to its existence. In turn, a corporation exercises said powers through its board of directors and/or its duly authorized officers and agents. Thus, it has been observed that the power of a corporation to sue and be sued in any court is lodged with the board of directors that exercises its corporate powers (Premium Marble Resources, Inc. v. CA, 264 SCRA 11 [1996]). In turn, physical acts of the corporation, like the signing of documents, can be performed only by natural persons duly authorized for the purpose by corporate by-laws or by a specific act of the board of directors.

Same; Pleadings and Practice; Verification; The requirement regarding verification of a pleading is formal, not jurisdictional—verification is simply intended to secure an assurance that the allegations in the pleading are true and correct and not the product of the imagination or a matter of speculation, and that the pleading is filed in good faith.—The Court has consistently held that the requirement regarding verification of a pleading is formal, not jurisdictional (Uy v. LandBank, G.R. No. 136100, July 24, 2000, 336 SCRA 419). Such requirement is simply a condition affecting the form of the pleading, non-compliance with which does not necessarily render the pleading fatally defective. Verification is simply intended to secure an assurance that the allegations in the pleading are true and correct and not the product of the imagination or a matter of speculation, and that the pleading is filed in good faith. The court may order the correction of the pleading if verification is lacking or act on the pleading although it is not verified, if the attending circumstances are such that strict compliance with the rules may be dispensed with in order that the ends of justice may thereby be served.

Same; Same; Certification on Non-Forum Shopping; The rule that the lack of certification against forum shopping is generally not curable by the submission thereof after the filing of the petition applies to certifications against forum shopping signed by a person on behalf of a corporation which are unaccompanied by proof that said signatory is authorized to file a petition on behalf of the corporation.—On the other hand, the lack of certification against forum shopping is generally not curable by the submission thereof after the filing of the petition. Section 5, Rule 45 of the 1997 Rules of Civil Procedure provides that the failure of the petitioner to submit the required documents that should accompany the petition, including the certification against forum shopping, shall be sufficient ground for the dismissal thereof. The same rule applies to certifications against forum shopping signed by a person on behalf of a corporation which are unaccompanied by proof that said signatory is authorized to file a petition on behalf of the corporation. In certain exceptional circumstances, however, the Court has allowed the belated filing of the certification. In Loyola v. Court of Appeals, et al. (245 SCRA 477 [1995]), the Court considered the filing of the certification one day after the filing of an election protest as substantial compliance with the requirement. In Roadway Express, Inc. v. Court of Appeals, et al. (264 SCRA 696 [1996]), the Court allowed the filing of the certification 14 days before the dismissal of the petition. In Uy v. LandBank, supra, the Court had dismissed Uy’s petition for lack of verification and certification against non-forum shopping. However, it subsequently reinstated the petition after Uy submitted a motion to admit certification and non-forum shopping certification. In all these cases, there were special circumstances or compelling reasons that justified the relaxation of the rule requiring verification and certification on non-forum shopping.

Same; Same; Same; Procedural Rules; While the swift unclogging of court dockets is a laudable objective, the granting of substantial justice is an even more urgent ideal.—It must also be kept in mind that while the requirement of the certificate of non-forum shopping is mandatory, nonetheless the requirements must not be interpreted too literally and thus defeat the objective of preventing the undesirable practice of forum-shopping (Bernardo v. NLRC, 255 SCRA 108 [1996]). Lastly, technical rules of procedure should be used to promote, not frustrate justice. While the swift unclogging of court dockets is a laudable objective, the granting of substantial justice is an even more urgent ideal.

Same; Revival of Judgment; Prescription; An action for revival of judgment must be brought within ten years from the time said judgment becomes final.—The action instituted by the Solicitor General in the trial court is one for revival of judgment which is governed by Article 1144(3) of the Civil Code and Section 6, Rule 39 of the 1997 Rules on Civil Procedure. Article 1144(3) provides that an action upon a judgment “must be brought within 10 years from the time the right of action accrues.” On the other hand, Section 6, Rule 39 provides that a final and executory judgment or order may be executed on motion within five (5) years from the date of its entry, but that after the lapse of such time, and before it is barred by the statute of limitations, a judgment may be enforced by action. Taking these two provisions into consideration, it is plain that an action for revival of judgment must be brought within ten years from the time said judgment becomes final.

Same; Same; Same; Government-Owned and Controlled Corpora. tions; While it is true that prescription does not run against the State, the same may not be invoked by the government where it is no longer interested in the subject matter.—While it is true that prescription does not run against the State, the same may not be invoked by the government in this case since it is no longer interested in the subject matter. While Camp Wallace may have belonged to the government at the time Rafael Galvez’s title was ordered cancelled in Land Registration Case No. N-361, the same no longer holds true today.

Same; Parties; Words and Phrases; “Real Party in Interest,” Explained; To qualify a person to be a real party in interest in whose name an action must be prosecuted, he must appear to be the present real owner of the right sought to be enforced.—With the transfer of Camp Wallace to the BCDA, the government no longer has a right or interest to protect. Consequently, the Republic is not a real party in interest and it may not institute the instant action. Nor may it raise the defense of imprescriptibility, the same being applicable only in cases where the government is a party in interest. Under Section 2 of Rule 3 of the 1997 Rules of Civil Procedure, “every action must be prosecuted or defended in the name of the real party in interest.” To qualify a person to be a real party in interest in whose name an action must be prosecuted, he must appear to be the present real owner of the right sought to be enforced (Pioneer Insurance v. CA, 175 SCRA 668 [1989]). A real party in interest is the party who stands to be benefited or injured by the judgment in the suit, or the party entitled to the avails of the suit. And by real interest is meant a present substantial interest, as distinguished from a mere expectancy, or a future, contingent, subordinate or consequential interest (Ibonilla v. Province of Cebu, 210 SCRA 526 [1992]). Being the owner of the areas covered by Camp Wallace, it is the Bases Conversion and Development Authority, not the Government, Which stands to be benefited if the land covered by TCT No. T-5710 issued in the name of petitioner is cancelled.

Same; Same; Government-owned and Controlled Corporations; Bases Conversion and Development Authority; The BCDA is an entity invested with a personality separate and distinct from the government.—We, however, must not lose sight of the fact that the BCDA is an entity invested with a personality separate and distinct from the government. Section 3 of Republic Act No. 7227 reads: Section 3. Creation of the Bases Conversion and Development Authority.—There is hereby created a body corporate to be known as the Conversion Authority which shall have the attribute of perpetual succession and shall be vested with the powers of a corporation.

Same; Same; Same; Same; Constituent and Ministrant Functions; While public benefit and public welfare, particularly, the promotion of the economic and social development of Central Luzon, may be attributable to the operation of the BCDA, yet it is certain that the functions performed by the BCDA are basically proprietary in nature—the promotion of economic and social development of Central Luzon, in particular, and the country’s goal for enhancement, in general, do not make the BCDA equivalent to the Government; The BCDA is not a mere agency of the Government but a corporate body performing proprietary functions.—It may not be amiss to state at this point that the functions of government have been classified into governmental or constituent and proprietary or ministrant. While public benefit and public welfare, particularly, the promotion of the economic and social development of Central Luzon, may be attributable to the operation of the BCDA, yet it is certain that the functions performed by the BCDA are basically proprietary in nature. The promotion of economic and social development of Central Luzon, in particular, and the country’s goal for enhancement, in general, do not make the BCDA equivalent to the Government. Other corporations have been created by government to act as its agents for the realization of its programs, the SSS, GSIS, NAWASA and the NIA, to count a few, and yet, the Court has ruled that these entities, although performing functions aimed at promoting public interest and public welfare, are not government-function corporations invested with governmental attributes. It may thus be said that the BCDA is not a mere agency of the Government but a corporate body performing proprietary functions.

Same; Prescription; Parties; The rule that prescription does not run against the State does not apply to corporations or artificial bodies created by the State for special purposes, it being said that when the title of the Republic has been divested, its grantees, although artificial bodies of its own creation, are in the same category as ordinary persons.—E.B. Marcha is, however, not on all fours with the case at bar. In the former, the Court considered the Republic a proper party to sue since the claims of the Republic and the Philippine Ports Authority against the petitioner therein were the same. To dismiss the complaint in E.B. Marcha would have brought needless delay in the settlement of the matter since the PPA would have to refile the case on the same claim already litigated upon. Such is not the case here since to allow the government to sue herein enables it to raise the issue of imprescriptibility, a claim which is not available to the BCDA. The rule that prescription does not run against the State does not apply to corporations or artificial bodies created by the State for special purposes, it being said that when the title of the Republic has been divested, its grantees, although artificial bodies of its own creation, are in the same category as ordinary persons (Kingston v. LeHigh Valley Coal Co., 241 Pa 469). By raising the claim of imprescriptibility, a claim which cannot be raised by the BCDA, the Government not only assists the BCDA, as it did in E.B. Marcha, it even supplants the latter, a course of action proscribed by said case.

Roman Cath. Apostolic Adm. of Davao, Inc. vs. Land Reg. Com., et al., 102 Phil. 596 , December 20, 1957

1.CORPORATION SOLE; COMPONENTS AND PURPOSE OF; POWER TO HOLD AND TRANSMIT CHURCH PROPERTIES TO His SUCCESSOR IN OFFICE.—A corporation sole is a special form of corporation usually associated with the clergy * * * designed to facilitate the exercise of the functions of ownership of the church which was regarded as the property owner (I Bouvier's Law Dictionary, p. 682-683). It consists of one person only, and his successors (who will always be one at a time), in some particular station, who are incorporated by law in order to give them some legal capacities and advantages particularly that of perpetuity which in their natural persons they could not have. * * * (Reid vs. Barry, 93 Fla. 849 112 So. 846). Through this legal fiction, church properties acquired by the incumbent of a corporation sole pass, by operation of law, upon his death not to his personal heirs but to his successor in office. A corporation sole, therefore, is created not only to administer the temporalities of the church or religious society where he belongs, but also to hold and transmit the same to his successor in said office.

2.ID.; PERSONALITY OF, SEPARATE AND DISTINCT FROM THAT OF ROMAN PONTIFF.—Although a branch of the Universal Roman Catholic Apostolic Church, every Roman Catholic Church in different countries, if it exercises its mission and is lawfully incorporated in accordance with the laws of the country where it is located, is considered an entity or person with all the rights and privileges granted to such artificial being under the laws of that country, separate and distinct from the personality of the Roman Pontiff or the Holy See, without prejudice to its religious relations with the latter which are governed by the Cannon Law or their rules and regulations.

3.ID.; ID.; POWER AND QUALIFICATION TO PURCHASE IN ITS NAME PRIVATE LANDS; 60 PER CENTUM FILIPINO CAPITAL REQUIREMENT NOT INTENDED TO CORPORATION SOLE.—Under the circumstances of the present case, it is safe to state that even before the establishment of the Philippine Commonwealth and of the Republic of the Philippines every corporation sole then organized and registered had by express provision of law (Corporation Law, Public Act No. 1459) the necessary power and qualification to purchase in its name private lands located in the territory in which it exercised its functions or ministry and for which it was created, independently of the nationality of its incumbent unique and single member and head, the bishop of the diocese. It can be also maintained without fear of being gainsaid that the Roman Catholic Apostolic Church in the Philippines has no nationality and that the framers of the Constitution did not have in mind the religious corporation sole when they provided that 60 per centum of the capital thereof be owned by Filipino citizens. Thus, if this constitutional provision were not intended for corporation sole, it is obvious that this could not be regulated or restricted by said provision.

4.ID.; ID.; ID.; ID.; CONSTITUTION REQUIREMENT LIMITED TO OWNERSHIP NOT TO CONTROL.—Both the Corporation Law and the Canon Law are explicit in their provisions that a corporation sole or "ordinary" is not the owner of the properties that he may acquire but merely the administrator thereof and holds the same in trust for the church to which the corporation is an organized and constituent part. Being mere administrator of the temporalities or properties titled in his name, the constitutional provision requiring 60 per centum Filipino ownership is not applicable. The said constitutional provision is limited by its terms to ownership alone and does not extend to control unless the control over the property affected has been devised to circumvent the real purpose of the constitution.

5.ID.; CORPORATION SOLE WITHOUT NATIONALITY; NATIONALITY OF CONSTITUENTS DETERMINES WHETHER CONSTITUTIONAL REQUIREMENT is APPLICABLE.—The corporation sole by reason of their peculiar constitution and form of operation have no designed owner of its temporalities, although by the terms of the law it can be safely implied that they ordinarily hold them in trust for the benefit of the Roman Catholic faithful of their respective locality or diocese. They can not be considered as aliens because they have no nationality at all. In determining, therefore, whether the constitutional provision requiring 60 per centum Filipino capital is applicable to corporations sole, the nationality of the constituents of the diocese, and not the nationality of the actual incumbent of the parish, must be taken into consideration. In the present case, even if the question of nationality be considered, the aforesaid constitutional requirement is fully met and satisfied, considering that the corporation sole in question is composed of an overwhelming majority of Filipinos.

Philippine Long Distance Telephone Company vs. National Telecommunications Commission, 539 SCRA 365 , December 04, 2007

Administrative Law; Public Service Act; National Telecommunications Commission (NTC); Supervision and Regulation Fees (SRF); Corporation Law; Words and Phrases; “Capital,” Defined; All the stock dividends that are part of the outstanding capital stock of Philippine Long Distance Telephone Company (PLDT) are subject to the Supervision and Regulation Fees (SRF).—Crucial in point is our disquisition in G.R. No. 127937 entitled National Telecommunications Commission v. Honorable Court of Appeals, 311 SCRA 508 (1999), which we quote: The term “capital” and other terms used to describe the capital structure of a corporation are of universal acceptance and their usages have long been established in jurisprudence. Briefly, capital refers to the value of the property or assets of a corporation. The capital subscribed is the total amount of the capital that persons (subscribers or shareholders) have agreed to take and pay for, which need not necessarily by, and can be more than, the par value of the shares. In fine, it is the amount that the corporation receives, inclusive of the premiums if any, in consideration of the original issuance of the shares. In the case of stock dividends, it is the amount that the corporation transfers from its surplus profit account to its capital account. It is the same amount that can be loosely termed as the “trust fund” of the corporation. The “Trust Fund” doctrine considers this subscribed capital as a trust fund for the payment of the debts of the corporation, to which the creditors may look for satisfaction. Until the liquidation of the corporation, no part of the subscribed capital may be returned or released to the stockholder (except in the redemption of redeemable shares) without violating this principle. Thus, dividends must never impair the subscribed capital; subscription commitments cannot be condoned or remitted; nor can the corporation buy its own shares using the subscribed capital as the considerations therefor. (Emphasis supplied.) Two concepts can be gleaned from the above. First, what constitutes capital stock that is subject to the SRF. Second, such capital stock is equated to the “trust fund” of a corporation held in trust as security for satisfaction to creditors in case of corporate liquidation. The first asks if stock dividends are part of the outstanding capital stocks of a corporation insofar as it is subject to the SRF. They are. The first issue we have to tackle is, are all the stock dividends that are part of the outstanding capital stock of PLDT subject to the SRF? Yes, they are.

Corporation Law; Dividends, regardless of the form these are declared, that is, cash, property or stocks, are valued at the amount of the declared dividend taken from the unrestricted retained earnings of a corporation—thus, the value of the declaration in the case of a stock dividend is the actual value of the original issuance of said stocks.—PLDT’s contention, that stock dividends are not similarly situated as the subscribed capital stock because the subscribers or shareholders do not pay for their issuances as no amount was received by the corporation in consideration of such issuances since these are effected as a mere book entry, is erroneous. Dividends, regardless of the form these are declared, that is, cash, property or stocks, are valued at the amount of the declared dividend taken from the unrestricted retained earnings of a corporation. Thus, the value of the declaration in the case of a stock dividend is the actual value of the original issuance of said stocks. In G.R. No. 127937 we said that “in the case of stock dividends, it is the amount that the corporation transfers from its surplus profit account to its capital account” or “it is the amount that the corporation receives in consideration of the original issuance of the shares.” It is “the distribution of current or accumulated earnings to the shareholders of a corporation pro rata based on the number of shares owned.” Such distribution in whatever form is valued at the declared amount or monetary equivalent.

Same; It cannot be said that no consideration is involved in the issuance of stock dividends; When stock dividends are distributed, the amount declared ceases to belong to the corporation but is distributed among the shareholders—the unrestricted retained earnings of the corporation are diminished by the amount of the declared dividend while the stockholders’ equity is increased.—It cannot be said that no consideration is involved in the issuance of stock dividends. In fact, the declaration of stock dividends is akin to a forced purchase of stocks. By declaring stock dividends, a corporation ploughs back a portion or its entire unrestricted retained earnings either to its working capital or for capital asset acquisition or investments. It is simplistic to say that the corporation did not receive any actual payment for these. When the dividend is distributed, it ceases to be a property of the corporation as the entire or portion of its unrestricted retained earnings is distributed pro rata to corporate shareholders. When stock dividends are distributed, the amount declared ceases to belong to the corporation but is distributed among the shareholders. Consequently, the unrestricted retained earnings of the corporation are diminished by the amount of the declared dividend while the stockholders’ equity is increased. Furthermore, the actual payment is the cash value from the unrestricted retained earnings that each shareholder foregoes for additional stocks/shares which he would otherwise receive as required by the Corporation Code to be given to the stockholders subject to the availability and conditioned on a certain level of retained earnings. Elsewise put, where the unrestricted retained earnings of a corporation are more than 100% of the paid-in capital stock, the corporate Board of Directors is mandated to declare dividends which the shareholders will receive in cash unless otherwise declared as property or stock dividends, which in the latter case the stockholders are forced to forego cash in lieu of property or stocks.

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

Same; Accounting Practice; Acquisition Cost; In accounting practice, the journal entries for transactions are recorded in historical value or cost; It is common practice that the values of the accounts recorded at historical value or cost are not increased or decreased due to market forces.—We are not unaware that in accounting practice, the journal entries for transactions are recorded in historical value or cost. Thus, the purchase of properties or assets is recorded at acquisition cost. The same is true with liabilities and equity transactions where the actual loan and the amount paid for the subscription are recorded at the actual payment, including the premiums paid for the subscription of capital stock. Moreover, it is common practice that the values of the accounts recorded at historical value or cost are not increased or decreased due to market forces. In the case of properties, the appreciation in values is generally not recorded as income nor the increase in the corresponding asset because the increase or decrease is not yet realized until the property is actually sold. The same is true with the capital account. The market value may be much higher than the actual payment of the par value and premium of capital stock. Still, the books of account will not reflect such increase; and vice versa, any decrease of the value of stocks is likewise not reflected in the books of account. Thus, given the general practice that book entries of the premiums and subscriptions for capital stock are the actual value for the original issuance of stocks, then the NTC was correct to follow the schedule of capital stocks submitted by PLDT.

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

Gamboa vs. Teves, 652 SCRA 690 , June 28, 2011

Special Civil Actions; Declaratory Relief; Mandamus; Court treats the petition for declaratory relief as one for mandamus if the issue involved has far-reaching implications.—In short, it is well-settled that this Court may treat a petition for declaratory relief as one for mandamus if the issue involved has far-reaching implications. As this Court held in Salvacion: The Court has no original and exclusive jurisdiction over a petition for declaratory relief. However, exceptions to this rule have been recognized. Thus, where the petition has far-reaching implications and raises questions that should be resolved, it may be treated as one for mandamus.

Actions; Locus Standi; Petitioner being a stockholder of Philippine Long Distance Telephone (PLDT) has the right to question the subject sale which he claims to violate the nationality requirement prescribed in Section 11, Article XII of the Constitution; Court upheld the right of a citizen to bring a suit on matters of transcendental importance to the public.—There is no dispute that petitioner is a stockholder of PLDT. As such, he has the right to question the subject sale, which he claims to violate the nationality requirement prescribed in Section 11, Article XII of the Constitution. If the sale indeed violates the Constitution, then there is a possibility that PLDT’s franchise could be revoked, a dire consequence directly affecting petitioner’s interest as a stockholder. More importantly, there is no question that the instant petition raises matters of transcendental importance to the public. The fundamental and threshold legal issue in this case, involving the national economy and the economic welfare of the Filipino people, far outweighs any perceived impediment in the legal personality of the petitioner to bring this action. In Chavez v. PCGG, 299 SCRA 744 (1998), the Court upheld the right of a citizen to bring a suit on matters of transcendental importance to the public.

Corporation Law; Words and Phrases; “Capital”; The term “capital” in Section 11, Article XII of the Constitution refers only to shares of stock entitled to vote in the election of directors, and thus in the present case only to common shares, and not to the total outstanding capital stock comprising both common and non-voting preferred shares.—We agree with petitioner and petitioners-in-intervention. The term “capital” in Section 11, Article XII of the Constitution refers only to shares of stock entitled to vote in the election of directors, and thus in the present case only to common shares, and not to the total outstanding capital stock comprising both common and non-voting preferred shares.

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

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

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

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

VELASCO, JR., J., Separate Dissenting Opinion:

Actions; Locus Standi; Petitioner has not shown any real interest substantial enough to give him the requisite locus standi to question the sale of the government’s PTIC shares to First Pacific.—The Rules of Court specifically requires that “[e]very action must be prosecuted or defended in the name of the real party in interest.” A real party in interest is defined as the “party who stands to be benefited or injured by the judgment in the suit, or the party entitled to the avails of the suit.” Petitioner has failed to allege any interest in the 111,415 PTIC shares nor in any of the previous purchase contracts he now seeks to annul. He is neither a shareholder of PTIC nor of First Pacific. Also, he has not alleged that he was an interested bidder in the government’s auction sale of the PTIC shares. Finally, he has not shown how, as a nominal shareholder of PLDT, he stands to benefit from the annulment of the sale of the 111,415 PTIC shares or of any of the sales of the PLDT common shares held by foreigners. In fine, petitioner has not shown any real interest substantial enough to give him the requisite locus standi to question the sale of the government’s PTIC shares to First Pacific.

Same; Same; A taxpayer is deemed to have the standing to raise a constitutional issue when it is established that public funds have been disbursed in alleged contravention of the law or the Constitution.—Likewise, petitioner’s assertion that he has standing to bring the suit as a “taxpayer” must fail. In Gonzales v. Narvasa, We discussed that “a taxpayer is deemed to have the standing to raise a constitutional issue when it is established that public funds have been disbursed in alleged contravention of the law or the Constitution.” In this case, no public funds have been disbursed. In fact, the opposite has happened—there is an inflow of funds into the government coffers.

Same; Jurisdiction; Declaratory Relief; Petitions for declaratory relief, annulment of sale and injunction do not fall within the exclusive jurisdiction of this Court; The proper jurisdiction for declaratory relief is the Regional Trial Court (RTC); Requisites for an Action for Declaratory Relief.—Based on the foregoing provisos, it is patently clear that petitions for declaratory relief, annulment of sale and injunction do not fall within the exclusive original jurisdiction of this Court. First, the court with the proper jurisdiction for declaratory relief is the Regional Trial Court (RTC). Sec. 1, Rule 63 of the Rules of Court stresses that an action for declaratory relief is within the exclusive original jurisdiction of the RTC, viz.: Any person interested under a deed, will, contract or other written instrument, whose rights are affected by a statute, executive order or regulation, ordinance, or any other governmental regulation may, before breach or violation thereof, bring an action in the appropriate Regional Trial Court to determine any question of construction or validity arising, and for a declaration of his rights or duties, thereunder.

(Emphasis supplied.) An action for declaratory relief also requires the following: (1) a justiciable controversy between persons whose interests are adverse; (2) the party seeking the relief has a legal interest in the controversy; and (3) the issue is ripe for judicial determination. As previously discussed, petitioner lacks any real interest in this action; thus, no justiciable controversy between adverse interests exists.

Same; Same; Same; The exercise of such discretion, whether to treat a petition for declaratory relief as one for mandamus, presupposes that the petition is otherwise viable or meritorious.—Despite this, the ponencia decided to treat the petition for declaratory relief as one for mandamus, citing the rule that “where the petition has far-reaching implications and raises questions that should be resolved, it may be treated as one for mandamus.” However, such rule is not absolute. In Macasiano v. National Housing Authority, 224 SCRA 236 (1993), the Court explicitly stated that the exercise of such discretion, whether to treat a petition for declaratory relief as one for mandamus, presupposes that the petition is otherwise viable or meritorious. As I shall discuss subsequently in the substantive portion of this opinion, the petition in this case is clearly not viable or meritorious.

Same; Mandamus; A petition for mandamus is premature if there are administrative remedies available to petitioner.—A petition for mandamus is premature if there are administrative remedies available to petitioner. Under the doctrine of primary administrative jurisdiction, “courts cannot or will not determine a controversy where the issues for resolution demand the exercise of sound administrative discretion requiring the special knowledge, experience, and services of the administrative tribunal to determine technical and intricate matters of fact. In other words, 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.” Along with this, the doctrine of exhaustion of administrative remedies also requires that where an administrative remedy is provided by statute relief must be sought by exhausting this remedy before the courts will act.

Same; Hierarchy of Courts; The doctrine dictates that when jurisdiction is shared concurrently with different courts, the proper suit should first be filed with the lower-ranking court.—Although this Court, the CA, and the RTC have “concurrent jurisdiction to issue writs of certiorari, prohibition, mandamus, quo warranto, habeas corpus and injunction, such concurrence does not give the petitioner unrestricted freedom of choice of court forum.” The doctrine of hierarchy of courts dictates that when jurisdiction is shared concurrently with different courts, the proper suit should first be filed with the lower-ranking court. Failure to do so is sufficient cause for the dismissal of a petition.

Corporation Law; Capital; The intent of the framers of the Constitution was not to limit the application of the word “capital” to voting or common shares alone.—Contrary to pronouncement of the ponencia, the intent of the framers of the Constitution was not to limit the application of the word “capital” to voting or common shares alone. In fact, the Records of the Constitutional Commission reveal that even though the UP Law Center proposed the phrase “voting stock or controlling interest,” the framers of the Constitution did not adopt this but instead used the word “capital.”

Same; Same; Stockholders, whether holding voting or non-voting stocks, have all the rights, powers and privileges of ownership over their stocks; Control is another inherent right of ownership.—Stockholders, whether holding voting or non-voting stocks, have all the rights, powers and privileges of ownership over their stocks. This necessarily includes the right to vote because such is inherent in and incidental to the ownership of corporate stocks, and as such is a property right. Additionally, control is another inherent right of ownership. The circumstances enumerated in Sec. 6 of the Corporation Code clearly evince this. It gives voting rights to the stocks deemed as non-voting as to fundamental and major corporate changes. Thus, the issue should not only dwell on the daily management affairs of the corporation but also on the equally important fundamental changes that may need to be voted on. On this, the “non-voting” shares also exercise control, together with the voting shares.

Same; Same; Securities and Exchange Commission; Securities and Exchange Commission (SEC) defined “capital” as to include both voting and non-voting in the determination of the nationality of a corporation.—More importantly, the SEC defined “capital” as to include both voting and non-voting in the determination of the nationality of a corporation, to wit: In view of the foregoing, it is opined that the term “capital” denotes the sum total of the shares subscribed and paid by the shareholders, or secured to be paid, irrespective of their nomenclature to be issued by the corporation in the conduct of its operation. Hence, non-voting preferred shares are considered in the computation of the 60-40% Filipino-alien equity requirement of certain economic activities under the Constitution. (Emphasis supplied.)

Same; Same; Outstanding Capital Stock; The Corporation Code defines “outstanding capital stock” as the “total shares of stock issued”; It includes all types of shares.—Similarly, the Corporation Code defines “outstanding capital stock” as the “total shares of stock issued.” It does not distinguish between common and preferred shares. It includes all types of shares.

Republic Planters Bank vs. Agana, Sr., 269 SCRA 1 , March 03, 1997

Corporation Law; Shares of Stock; Preferred Shares of Stock; Words and Phrases; A preferred share of stock is one which entitles the holder thereof to certain preferences over the holders of common stock.—Before passing upon the merits of this petition, it may be pertinent to provide an overview on the nature of preferred shares and the redemption thereof, considering that these issues lie at the heart of the dispute. A preferred share of stock, on one hand, is one which entitles the holder thereof to certain preferences over the holders of common stock. The preferences are designed to induce persons to subscribe for shares of a corporation. Preferred shares take a multiplicity of forms. The most common forms may be classified into two: (1) preferred shares as to assets; and (2) preferred shares as to dividends. The former is a share which gives the holder thereof preference in the distribution of the assets of the corporation in case of liquidation; the latter is a share the holder of which is entitled to receive dividends on said share to the extent agreed upon before any dividends at all are paid to the holders of common stock. There is no guaranty, however, that the share will receive any dividends.

Same; Same; Same; Preferences granted to preferred stockholders do not give them a lien upon the property of the corporation nor make them creditors of the corporation, the right of the former being always subordinate to the latter; Shareholders, both common and preferred, are considered risk takers who invest capital in the business and who can look only to what is left after corporate debts and liabilities are fully paid.—Thus, the declaration of dividends is dependent upon the availability of surplus profit or unrestricted retained earnings, as the case may be. Preferences granted to preferred stockholders, moreover, do not give them a lien upon the property of the corporation nor make them creditors of the corporation, the right of the former being always subordinate to the latter. Dividends are thus payable only when there are profits earned by the corporation and as a general rule, even if there are existing profits, the board of directors has the discretion to determine whether or not dividends are to be declared. Shareholders, both common and preferred, are considered risk takers who invest capital in the business and who can look only to what is left after corporate debts and liabilities are fully paid.

Same; Same; Same; Redeemable Shares; Words and Phrases; Redeemable shares are shares usually preferred, which by their terms are redeemable at a fixed date, or at the option of either issuing corporation, or the stockholder, or both at a certain redemption price; Redemption may not be made where the corporation is insolvent or if such redemption will cause insolvency or inability of the corporation to meet its debts as they mature.—Redeemable shares, on the other hand, are shares usually preferred, which by their terms are redeemable at a fixed date, or at the option of either issuing corporation, or the stockholder, or both at a certain redemption price. A redemption by the corporation of its stock is, in a sense, a repurchase of it for cancellation. The present Code allows redemption of shares even if there are no unrestricted retained earnings on the books of the corporation. This is a new provision which in effect qualifies the general rule that the corporation cannot purchase its own shares except out of current retained earnings. However, while redeemable shares may be redeemed regardless of the existence of unrestricted retained earnings, this is subject to the condition that the corporation has, after such redemption, assets in its books to cover debts and liabilities inclusive of capital stock. Redemption, therefore, may not be made where the corporation is insolvent or if such redemption will cause insolvency or inability of the corporation to meet its debts as they mature.

Same; Same; Same; Same; Statutory Construction; It is settled doctrine in statutory construction that the word “may” denotes discretion, and cannot be construed as having a mandatory effect.—What respondent judge failed to recognize was that while the stock certificate does allow redemption, the option to do so was clearly vested in the petitioner bank. The redemption therefore is clearly the type known as “optional.” Thus, except as otherwise provided in the stock certificate, the redemption rests entirely with the corporation and the stockholder is without right to either compel or refuse the redemption of its stock. Furthermore, the terms and conditions set forth therein use the word “may.” It is a settled doctrine in statutory construction that the word “may” denotes discretion, and cannot be construed as having a mandatory effect. We fail to see how respondent judge can ignore what, in his words, are the “very wordings of the terms and conditions in said stock certificates” and construe what is clearly a mere option to be his legal basis for compelling the petitioner to redeem the shares in question.

Same; Same; Same; Same; Banks and Banking; A directive issued by the Central Bank Governor obviously meant to preserve the status quo and to prevent the financial ruin of a banking institution, limiting the exercise of a right granted by law to a corporate entity, may be considered as an exercise of police power.—The redemption of said shares cannot be allowed. As pointed out by the petitioner, the Central Bank made a finding that said petitioner has been suffering from chronic reserve deficiency, and that such finding resulted in a directive, issued on January 31, 1973 by then Gov. G.S. Licaros of the Central Bank, to the President and Acting Chairman of the Board of the petitioner bank prohibiting the latter from redeeming any preferred share, on the ground that said redemption would reduce the assets of the Bank to the prejudice of its depositors and creditors. Redemption of preferred shares was prohibited for a just and valid reason. The directive issued by the Central Bank Governor was obviously meant to preserve the status quo, and to prevent the financial ruin of a banking institution that would have resulted in adverse repercussions, not only to its depositors and creditors, but also to the banking industry as a whole. The directive, in limiting the exercise of a right granted by law to a corporate entity, may thus be considered as an exercise of police power. The respondent judge insists that the directive constitutes an impairment of the obligation of contracts. It has, however, been settled that the Constitutional guaranty of non-impairment of obligations of contract is limited by the exercise of the police power of the state, the reason being that public welfare is superior to private rights.

Same; Same; Same; “Interest bearing stocks,” on which the corporation agrees absolutely to pay interest before dividends are paid to common stockholders, is legal only when construed as requiring payment of interest as dividends from net earnings or surplus only.— Both Sec. 16 of the Corporation Law and Sec. 43 of the present Corporation Code prohibit the issuance of any stock dividend without the approval of stockholders, representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. These provisions underscore the fact that payment of dividends to a stockholder is not a matter of right but a matter of consensus. Furthermore, “interest bearing stocks,” on which the corporation agrees absolutely to pay interest before dividends are paid to common stockholders, is legal only when construed as requiring payment of interest as dividends from net earnings or surplus only. Clearly, the respondent judge, in compelling the petitioner to redeem the shares in question and to pay the corresponding dividends, committed grave abuse of discretion amounting to lack or excess of jurisdiction in ignoring both the terms and conditions specified in the stock certificate, as well as the clear mandate of the law.

Action; Prescription; A right of action that is founded upon a written contract prescribes in ten (10) years.—Anent the issue of prescription, this Court so holds that the claim of private respondent is already barred by prescription as well as laches. Art. 1144 of the New Civil Code provides that a right of action that is founded upon a written contract prescribes in ten (10) years. The letter-demand made by the private respondents to the petitioner was made only on January 5, 1979, or almost eighteen years after receipt of the written contract in the form of the stock certificate. As noted earlier, this letter-demand, significantly, was not formally offered in evidence, nor were any other evidence of demand presented. Therefore, we conclude that the only time the private respondents saw it fit to assert their rights, if any, to the preferred shares of stock, was after the lapse of almost eighteen years. The same clearly indicates that the right of the private respondents to any relief under the law has already prescribed.

Same; Laches, Defined; Words and Phrases.—Moreover, the claim of the private respondents is also barred by laches. Laches has been defined as the failure or neglect, for an unreasonable length of time, to do that which by exercising due diligence could or should have been done earlier; it is negligence or omission to assert a right within a reasonable time, warranting a presumption that the party entitled to assert it either has abandoned it or declined to assert it.

Commissioner of Internal Revenue vs. Court of Appeals, 301 SCRA 152 , January 20, 1999

Same; Corporation Law; Stock Dividends; Stock dividends, strictly speaking, represent capital and do not constitute income to its recipient—in a loose sense, stock dividends issued by the corporation, are considered unrealized gain, and cannot be subjected to income tax until that gain has been realized.—Having been derived from a foreign law, resort to the jurisprudence of its origin may shed light. Under the US Revenue Code, this provision originally referred to “stock dividends” only, without any exception. Stock dividends, strictly speaking, represent capital and do not constitute income to its recipient. So that the mere issuance thereof is not yet subject to income tax as they are nothing but an “enrichment through increase in value of capital investment.” As capital, the stock dividends postpone the realization of profits because the “fund represented by the new stock has been transferred from surplus to capital and no longer available for actual distribution.” Income in tax law is “an amount of money coming to a person within a specified time, whether as payment for services, interest, or profit from investment.” It means cash or its equivalent. It is gain derived and severed from capital, from labor or from both combined—so that to tax a stock dividend would be to tax a capital increase rather than the income. In a loose sense, stock dividends issued by the corporation, are considered unrealized gain, and cannot be subjected to income tax until that gain has been realized. Before the realization, stock dividends are nothing but a representation of an interest in the corporate properties. As capital, it is not yet subject to income tax. It should be noted that capital and income are different. Capital is wealth or fund; whereas income is profit or gain or the flow of wealth. The determining factor for the imposition of income tax is whether any gain or profit was derived from a transaction.

Same; Same; Same; Depending on the circumstances, the proceeds of redemption of stock dividends are essentially distribution of cash dividends, which when paid becomes the absolute property of the stockholder, who, having realized gain from that redemption, cannot escape income tax.—Although redemption and cancellation are generally considered capital transactions, as such, they are not subject to tax. However, it does not necessarily mean that a shareholder may not realize a taxable gain from such transactions. Simply put, depending on the circumstances, the proceeds of redemption of stock dividends are essentially distribution of cash dividends, which when paid becomes the absolute property of the stockholder. Thereafter, the latter becomes the exclusive owner thereof and can exercise the freedom of choice. Having realized gain from that redemption, the income earner cannot escape income tax.

Same; Same; Same; Criteria in Determining Whether Amount Distributed in the Redemption of Stock Dividends Should be Treated as Equivalent of “Taxable Dividend.”—As qualified by the phrase “such time and in such manner,” the exception was not intended to characterize as taxable dividend every distribution of earnings arising from the redemption of stock dividends. So that, whether the amount distributed in the redemption should be treated as the equivalent of a “taxable dividend” is a question of fact, which is determinable on “the basis of the particular facts of the transaction in question.” No decisive test can be used to determine the application of the exemption under Section 83(b). The use of the words “such manner” and “essentially equivalent” negative any idea that a weighted formula can resolve a crucial issue—Should the distribution be treated as taxable dividend. On this aspect, American courts developed certain recognized criteria, which includes the following: 1) the presence or absence of real business purpose, 2) the amount of earnings and profits available for the declaration of a regular dividend and the corporation’s past record with respect to the declaration of dividends, 3) the effect of the distribution as compared with the declaration of regular dividend, 4) the lapse of time between issuance and redemption, 5) the presence of a substantial surplus and a generous supply of cash which invites suspicion as does a meager policy in relation both to current earnings and accumulated surplus.

Same; Same; Same; Requisites for Application of Exempting Clause of Section 83(b) of the 1939 Tax Code.—For the exempting clause of Section 83(b) to apply, it is indispensable that: (a) there is redemption or cancellation; (b) the transaction involves stock dividends; and (c) the “time and manner” of the transaction makes it “essentially equivalent to a distribution of taxable dividends.” Of these, the most important is the third.

Same; Same; Same; Words and Phrases; “Redemption of Stocks,” Explained.—Redemption is repurchase, a reacquisition of stock by a corporation which issued the stock in exchange for property, whether or not the acquired stock is cancelled, retired or held in the treasury. Essentially, the corporation gets back some of its stock, distributes cash or property to the shareholder in payment for the stock, and continues in business as before. The redemption of stock dividends previously issued is used as a veil for the constructive distribution of cash dividends. In the instant case, there is no dispute that ANSCOR redeemed shares of stocks from a stockholder (Don Andres) twice (28,000 and 80,000 common shares). But where did the shares redeemed come from? If its source is the original capital subscriptions upon establishment of the corporation or from initial capital investment in an existing enterprise, its redemption to the concurrent value of acquisition may not invite the application of Sec. 83(b) under the 1939 Tax Code, as it is not income but a mere return of capital. On the contrary, if the redeemed shares are from stock dividend declarations other than as initial capital investment, the proceeds of the redemption is additional wealth, for it is not merely a return of capital but a gain thereon.

Same; Same; Same; Same; Trust Fund Doctrine; In the absence of evidence to the contrary, the Tax Code presumes that every distribution of corporate property, in whole or in part, is made out of corporate profits, such as stock dividends; Under the trust fund doctrine, the capital stock, property and other assets of the corporation are regarded as equity in trust for the payment of the corporate creditors.—It is not the stock dividends but the proceeds of its redemption that may be deemed as taxable dividends. Here, it is undisputed that at the time of the last redemption, the original common shares owned by the estate were only 25,247.5. This means that from the total of 108,000 shares redeemed from the estate, the balance of 82,752.5 (108,000 less 25,247.5) must have come from stock dividends. Besides, in the absence of evidence to the contrary, the Tax Code presumes that every distribution of corporate property, in whole or in part, is made out of corporate profits, such as stock dividends. The capital cannot be distributed in the form of redemption of stock dividends without violating the trust fund doctrine—wherein the capital stock, property and other assets of the corporation are regarded as equity in trust for the payment of the corporate creditors. Once capital, it is always capital. That doctrine was intended for the protection of corporate creditors.

Same; Same; Same; Same; Net Effect Test; The time alone that lapsed from the issuance to the redemption is not a sufficient indicator to determine taxability—it is necessary to determine the “net effect” of the transaction between the shareholder-income taxpayer and the acquiring (redeeming) corporation; The “net effect” test is not evidence or testimony to be considered—it is rather an inference to be drawn or a conclusion to be reached.—With respect to the third requisite, ANSCOR redeemed stock dividends issued just 2 to 3 years earlier. The time alone that lapsed from the issuance to the redemption is not a sufficient indicator to determine taxability. It is a must to consider the factual circumstances as to the manner of both the issuance and the redemption. The “time” element is a factor to show a device to evade tax and the scheme of cancelling or redeeming the same shares is a method usually adopted to accomplish the end sought. Was this transaction used as a “continuing plan,” “device” or “artifice” to evade payment of tax? It is necessary to determine the “net effect” of the transaction between the share-holder-income taxpayer and the acquiring (redeeming) corporation. The “net effect” test is not evidence or testimony to be considered; it is rather an inference to be drawn or a conclusion to be reached. It is also important to know whether the issuance of stock dividends was dictated by legitimate business reasons, the presence of which might negate a tax evasion plan.

Same; Same; Same; The issuance of stock dividends and its subsequent redemption must be separate, distinct, and not related, for the redemption to be considered a legitimate tax scheme.—The issuance of stock dividends and its subsequent redemption must be separate, distinct, and not related, for the redemption to be considered a legitimate tax scheme. Redemption cannot be used as a cloak to distribute corporate earnings. Otherwise, the apparent intention to avoid tax becomes doubtful as the intention to evade becomes manifest. It has been ruled that: “[A]n operation with no business or corporate purpose—is a mere devise which put on the form of a corporate reorganization as a disguise for concealing its real character, and the sole object and accomplishment of which was the consummation of a preconceived plan, not to reorganize a business or any part of a business, but to transfer a parcel of corporate shares to a stockholder.”

Same; Same; Same; It is the “net effect rather than the motives and plans of the taxpayer or his corporation” that is the fundamental guide in administering Sec. 83(b).—ANSCOR invoked two reasons to justify the redemptions—(1) the alleged “filipinization” program and (2) the reduction of foreign exchange remittances in case cash dividends are declared. The Court is not concerned with the wisdom of these purposes but on their relevance to the whole transaction which can be inferred from the outcome thereof. Again, it is the “net effect rather than the motives and plans of the taxpayer or his corporation” that is the fundamental guide in administering Sec. 83(b). This tax provision is aimed at the result. It also applies even if at the time of the issuance of the stock dividend, there was no intention to redeem it as a means of distributing profit or avoiding tax on dividends.

Same; Same; Same; The existence of legitimate business purposes in support of the redemption of stock dividends is immaterial in income taxation—it has no relevance in determining “dividend equivalence.”—The existence of legitimate business purposes in support of the redemption of stock dividends is immaterial in income taxation. It has no relevance in determining “dividend equivalence.” Such purposes may be material only upon the issuance of the stock dividends. The test of taxability under the exempting clause, when it provides “such time and manner” as would make the redemption “essentially equivalent to the distribution of a taxable dividend,” is whether the redemption resulted into a flow of wealth. If no wealth is realized from the redemption, there may not be a dividend equivalence treatment. In the metaphor of Eisner v. Macomber, income is not deemed “realized” until the fruit has fallen or been plucked from the tree.

Same; Same; Same; Elements in the Imposition of Income Tax.—The three elements in the imposition of income tax are: (1) there must be gain or profit, (2) that the gain or profit is realized or received, actually or constructively, and (3) it is not exempted by law or treaty from income tax. Any business purpose as to why or how the income was earned by the taxpayer is not a requirement. Income tax is assessed on income received from any property, activity or service that produces the income because the Tax Code stands as an indifferent neutral party on the matter of where income comes from.

Same; Same; Same; The issuance and the redemption of stocks are two different transactions; The substance of the whole transaction, not its form, usually controls the tax consequences.—The ruling in the American cases cited and relied upon by ANSCOR that “the redeemed shares are the equivalent of dividend only if the shares were not issued for genuine business purposes,” or the “redeemed shares have been issued by a corporation bona fide” bears no relevance in determining the non-taxability of the proceeds of redemption. ANSCOR, relying heavily and applying said cases, argued that so long as the redemption is supported by valid corporate purposes the proceeds are not subject to tax. The adoption by the courts below of such argument is misleading if not misplaced. A review of the cited American cases shows that the presence or absence of “genuine business purposes” may be material with respect to the issuance or declaration of stock dividends but not on its subsequent redemption. The issuance and the redemption of stocks are two different transactions. Although the existence of legitimate corporate purposes may justify a corporation's acquisition of its own shares under Section 41 of the Corporation Code, such purposes cannot excuse the stock-holder from the effects of taxation arising from the redemption. If the issuance of stock dividends is part of a tax evasion plan and thus, without legitimate business reasons, the redemption becomes suspicious which may call for the application of the exempting clause. The substance of the whole transaction, not its form, usually controls the tax consequences.

Same; Same; Same; Although a corporation under certain exceptions, has the prerogative when to issue dividends, yet when no cash dividends was issued for about three decades, this circumstance negates the legitimacy of the corporation’s alleged purposes of authorizing redemption to reduce foreign exchange remittance in case cash dividends are declared.—The Board Resolutions authorizing the redemptions state only one purpose—reduction of foreign exchange remittances in case cash dividends are declared. Not even this purpose can be given credence. Records show that despite the existence of enormous corporate profits no cash dividend was ever declared by ANSCOR from 1945 until the BIR started making assessments in the early 1970’s. Although a corporation under certain exceptions, has the prerogative when to issue dividends, yet when no cash dividends was issued for about three decades, this circumstance negates the legitimacy of ANSCOR’s alleged purposes.

Same; Same; Same; A “taxable dividend” under Section 83(b) is part of the “entire income” subject to tax under Section 22 in relation to Section 21 of the 1939 Tax Code.—After considering the manner and the circumstances by which the issuance and redemption of stock dividends were made, there is no other conclusion but that the proceeds thereof are essentially considered equivalent to a distribution of taxable dividends. As “taxable dividend” under Section 83(b), it is part of the “entire income” subject to tax under Section 22 in relation to Section 21 of the 1939 Code. Moreover, under Section 29(a) of said Code, dividends are included in “gross income.” As income, it is subject to income tax which is required to be withheld at source. The 1997 Tax Code may have altered the situation but it does not change this disposition.

Same; Same; Common and Preferred Stocks; The exchange of common stocks with preferred stocks, or preferred for common or a combination of either for both, may not produce a recognized gain or loss, so long as the provisions of Section 83(b) is not applicable.— Exchange is an act of taking or giving one thing for another involving reciprocal transfer and is generally considered as a taxable transaction. The exchange of common stocks with preferred stocks, or preferred for common or a combination of either for both, may not produce a recognized gain or loss, so long as the provisions of Section 83(b) is not applicable. This is true in a trade between two (2) persons as well as a trade between a stockholder and a corporation. In general, this trade must be parts of merger, transfer to controlled corporation, corporate acquisitions or corporate reorganizations. No taxable gain or loss may be recognized on exchange of property, stock or securities related to reorganizations.

Same; Same; Same; Words and Phrases; Doctrine of Equality of Shares; A common stock represents the residual ownership interest in the corporation, a basic class of stock ordinarily and usually issued without extraordinary rights or privileges and entitles the shareholder to a pro rata division of profits; Preferred stocks are those which entitle the shareholder to some priority on dividends and asset distribution; Under the doctrine of equality of shares, all stocks issued by the corporation are presumed equal with the same privileges and liabilities, provided that the Articles of Incorporation is silent on such differences.—Reclassification of shares does not always bring any substantial alteration in the subscriber’s proportional interest. But the exchange is different—there would be a shifting of the balance of stock features, like priority in dividend declarations or absence of voting rights. Yet neither the reclassification nor exchange per se, yields realize income for tax purposes. A common stock represents the residual ownership interest in the corporation. It is a basic class of stock ordinarily and usually issued without extraordinary rights or privileges and entitles the shareholder to a pro rata division of profits. Preferred stocks are those which entitle the shareholder to some priority on dividends and asset distribution. Both shares are part of the corporation’s capital stock. Both stockholders are no different from ordinary investors who take on the same investment risks. Preferred and common shareholders participate in the same venture, willing to share in the profits and losses of the enterprise. Moreover, under the doctrine of equality of shares—all stocks issued by the corporation are presumed equal with the same privileges and liabilities, provided that the Articles of Incorporation is silent on such differences.

Ong Yong vs. Tiu, 401 SCRA 1 , April 08, 2003

Corporation Law; Corporation Code; Remedies; The Corporation Code, SEC Rules and even the Rules of Court provide for appropriate and adequate intra-corporate remedies, other than rescission.—The Corporation Code, SEC rules and even the Rules of Court provide for appropriate and adequate intra-corporate remedies, other than rescission, in situations like this. Rescission is certainly not one of them, specially if the party asking for it has no legal personality to do so and the requirements of the law therefor have not been met. A contrary doctrine will tread on extremely dangerous ground because it will allow just any stockholder, for just about any real or imagined offense, to demand rescission of his subscription and call for the distribution of some part of the corporate assets to him without complying with the requirements of the Corporation Code.

Same; Same; Trust Fund Doctrine; This doctrine is the underlying principle in the procedure for the distribution of capital assets.—The Trust Fund Doctrine, first enunciated by this Court in the 1923 case of Philippine Trust Co. vs. Rivera provides that subscriptions to the capital stock of a corporation constitute a fund to which the creditors have a right to look for the satisfaction of their claims. This doctrine is the underlying principle in the procedure for the distribution of capital assets, embodied in the Corporation Code, which allows the distribution of corporate capital only in three instances: (1) amendment of the Articles of Incorporation to reduce the authorized capital stock, (2) purchase of redeemable shares by the corporation, regardless of the existence of unrestricted retained earnings, and (3) dissolution and eventual liquidation of the corporation. Furthermore, the doctrine is articulated in Section 41 on the power of a corporation to acquire its own shares and in Section 122 on the prohibition against the distribution of corporate assets and property unless the stringent requirements therefor are complied with.

Same; Same; Same; The distribution of corporate assets and property cannot be made to depend on the whims and caprices of the stockholders, officers and directors of the corporation, or by the court.—The distribution of corporate assets and property cannot be made to depend on the whims and caprices of the stockholders, officers or directors of the corporation, or even, for that matter, on the earnest desire of the court a quo “to prevent further squabbles and future litigations” unless the indispensable conditions and procedures for the protection of corporate creditors are followed. Otherwise, the “corporate peace” laudably hoped for by the court will remain nothing but a dream because this time, it will be the creditors’ turn to engage in “squabbles and litigations” should the court order an unlawful distribution in blatant disregard of the Trust Fund Doctrine.

Same; Same; “Business Judgment Rule”; Definition.—Truth to tell, a judicial order to decrease capital stock without the assent of FLADC’s directors and stockholders is a violation of the “business judgment rule” which states that: xxx xxx xxx (C)ontracts intra vires entered into by the board of directors are binding upon the corporation and courts will not interfere unless such contracts are so unconscionable and oppressive as to amount to wanton destruction to the rights of the minority, as when plaintiffs aver that the defendants (members of the board), have concluded a transaction among themselves as will result in serious injury to the plaintiffs stockholders.

Same; Same; Same; Rationale; The social contract in the corporate family to decide the course of the corporate business has been vested in the board and not with courts.—Courts and other tribunals are wont to override the business judgment of the board mainly because, courts are not in the business of business, and the laissez faire rule or the free enterprise system prevailing in our social and economic set-up dictates that it is better for the State and its organs to leave business to the businessmen; especially so, when courts are ill-equipped to make business decisions. More importantly, the social contract in the corporate family to decide the course of the corporate business has been vested in the board and not with courts.

Lanuza vs. Court of Appeals, 454 SCRA 54 , March 28, 2005

Corporation Law; Articles of Incorporation; The articles of incorporation has been described as one that defines the charter of the corporation and the contractual relationships between the State and the corporation, the stockholders and the State, and between the corporation and its stockholders; A review of PMMSI’s articles of incorporation shows that the corporation complied with the requirements laid down by Act No. 1459.—The articles of incorporation has been described as one that defines the charter of the corporation and the contractual relationships between the State and the corporation, the stockholders and the State, and between the corporation and its stockholders. When PMMSI was incorporated, the prevailing law was Act No. 1459, otherwise known as “The Corporation Law.” A review of PMMSI’s articles of incorporation shows that the corporation complied with the requirements laid down by Act No. 1459.

Same; Same; Stock and Transfer Book; A stock and transfer book is the book which records the names and addresses of all stockholders arranged alphabetically, the installments paid and unpaid on all stock for which subscription has been made, and the date of payment thereof, a statement of every alienation, sale or transfer of stock made, the date thereof and by and to whom made, and such other entries as may be prescribed by law; A stock and transfer book, like other corporate books and records, is not in any sense a public record, and thus is not exclusive evidence of the matters and things which ordinarily are or should be written therein.—A stock and transfer book is the book which records the names and addresses of all stockholders arranged alphabetically, the installments paid and unpaid on all stock for which subscription has been made, and the date of payment thereof; a statement of every alienation, sale or transfer of stock made, the date thereof and by and to whom made; and such other entries as may be prescribed by law. A stock and transfer book is necessary as a measure of precaution, expediency and convenience since it provides the only certain and accurate method of establishing the various corporate acts and transactions and of showing the ownership of stock and like matters. However, a stock and transfer book, like other corporate books and records, is not in any sense a public record, and thus is not exclusive evidence of the matters and things which ordinarily are or should be written therein. In fact, it is generally held that the records and minutes of a corporation are not conclusive even against the corporation but are prima facie evidence only, and may be impeached or even contradicted by other competent evidence. Thus, parol evidence may be admitted to supply omissions in the records or explain ambiguities, or to contradict such records.

Same; Same; Same; The stock and transfer book of PMMSI cannot be used as the sole basis for determining the quorum as it does not reflect the totality of shares which have been subscribed, more so when the articles of incorporation show a significantly larger amount of shares issued and outstanding as compared to that listed in the stock and transfer book.—To base the computation of quorum solely on the obviously deficient, if not inaccurate stock and transfer book, and completely disregarding the issued and outstanding shares as indicated in the articles of incorporation would work injustice to the owners and/or successors in interest of the said shares. This case is one instance where resort to documents other than the stock and transfer books is necessary. The stock and transfer book of PMMSI cannot be used as the sole basis for determining the quorum as it does not reflect the totality of shares which have been subscribed, more so when the articles of incorporation show a significantly larger amount of shares issued and outstanding as compared to that listed in the stock and transfer book.

Same; Same; Same; One who is actually a stockholder cannot be denied his right to vote by the corporation merely because the corporate officers failed to keep its records accurately.—One who is actually a stockholder cannot be denied his right to vote by the corporation merely because the corporate officers failed to keep its records accurately. A corporation’s records are not the only evidence of the ownership of stock in a corporation. [Lanuza vs. Court of Appeals, 454 SCRA 54(2005)]