1. Magsaysay-Labrador v. CA, GR 58168, December 19, 1989, Fernan, CJ., Third Division.

FACTS:
Adelaida Magsaysay, widow and administratrix of the estate of the late Senator Magsaysay, filed
an action against Artemio, Subic Land Corporation (Subic), Filipinas Manufacturer’s Bank
(Filmanbank), and the Zambales register of deeds. She alleges:
In 1958, her husband acquired thru conjugal funds a land known as “Pequeña Island”
covered by TCT 3258. After her husband died, she found an annotation at the back of TCT
3258 that the land was acquired by her husband from his separate capital. Her husband
executed a deed of assignment in favor of Subic. Subic then mortgaged the land to
Filmanbank for P2.7M. These acts are void since the land is conjugal and her marital
consent to the annotation on TCT 3258 was not obtained. She prayed that the assignment
and mortgage be annulled and Subic’s new TCT 22431 on the land be cancelled.
Petitioners, sisters of Senator Magsaysay, filed a motion for intervention claiming that their brother
conveyed to them ½ of his shareholdings in Subic or 416,566.6 shares or 41% of the total
outstanding shares of Subic. Thus, they claim that have legal interest in the subject matter of
litigation.

Trial court denied the motion for intervention. CA affirmed. Hence this petition.

ISSUE:
Contention: Petitioners claim that their ownership of 41.66% of the outstanding capital stock of
Subic entitles them to a significant vote in the corporate affairs and that they are affected by the
action of Adelaida since it concerns the only tangible asset of Subic.
HELD: No legal interest as to be allowed to intervene.
1) Under RoC, to be allowed to intervene, the party must have a legal interest in the matter in
litigation, or in the success of either parties or against both parties etc. To allow intervention, a)
the movant must have legal interest in the matter in litigation, and b) consideration must be given
as to whether adjudication of the rights of the original parties may be delayed or prejudiced, or
whether intervenor’s rights may be protected in a separate proceeding or not. The interst of a
person must be direct and immediate.

Here, the interest, if it exists at all, of petitioners is indirect, remote, conjectural, contingent,
and collateral. Their interest is purely inchoate or in sheer expectancy of a right in the
management of the corporation and to share in the profits thereof and in the properties and assets
thereof on dissolution. While a share of stock represents a proportionate interest in the property of
the corporation, it does not vest the owner with any legal right or title to any of the property,
his interest in corporate property being equitable or beneficial in nature. shareholders are not
owners of corporate property, which is owned by the corporation as a distinct legal person.

SC also held that petitioners’ interest may be protected in a separate proceedings since there are 4
other pending cases.

2. Sulo ng Bayan, Inc. v. Gregorio Araneta, Inc., GR L-31061, August 17, 1976, Antonio, J.,
Second Division.
FACTS:
Petitioner Sulo ng Bayan, Inc. filed an accion de revindicacion with CFI against respondents to
recover ownership and possession of a land in Bulacan registered in the name of respondents’
predecessors-in-interest. The complaint alleged:
Petitioner is a corporation. Its membership is composed of natural persons residing at San
Jose del Monte, Bulacan. The members of petitioner had cultivated the land since the
Spanish regime and continuously possessed it openly and publicly. In 1958, respondent
Gregorio Araneta, Inc., thru force and intimidation, ejected the members of petitioner from
the land. Petitioners’ members found that the land had been “fraudulently or erroneously”
included by fraud in OCT 466, which OCT is fictitious since the CFI which issued the
decree of registration had no jurisdiction as petitioners’ members, who were then in
possession, were not notified of the proceedings. Thus, petitioners pray that its members
be declared absolute owners of the land.
CFI dismissed the complaint. Hence this petition.

HELD:
1) A corporation is a distinct legal entity separate and apart from the individual stockholders
or members who compose it and is not affected by the personal rights, obligations, and
transactions of its stockholders/members. The property of the corporation is its property and
not that of the stockholders, as owners, although they have equities in it. Properties registered in
the name of the corporation are owned by it as an entity separate and distinct from its
members. Conversely, a corporation ordinarily has no interest in the individual property of its
stockholders unless transferred to the corporation, "even in the case of a one-man corporation. The
mere fact that one is president of a corporation does not render the property which he owns or
possesses the property of the corporation, since the president, as individual, and the corporation
are separate similarities. Similarly, stockholders in a corporation engaged in buying and dealing in
real estate whose certificates of stock entitled the holder thereof to an allotment in the distribution
of the land of the corporation upon surrender of their stock certificates were considered not to have
such legal or equitable title or interest in the land, as would support a suit for title, especially
against parties other than the corporation.

The judirical personality of a corporation is but a legal fiction for the purpose of convenience. The
veil of corporate fiction may be pierced in cases where it is used as a cloak or cover for fraud or
illegality etc. (SC discussed piercing doctrine)

Here, it is not claimed that petitioners’ members have assigned or transferred their rights on the
land to petitioner corporation. Absent any showing of interest, a corporation like petitioner has no
personality to bring an action for and in behalf of its stockholders/members for the purpose
of recovering property which belongs to said stockholders/members in their personal
capacities. The elements of a cause of action are legal right of plaintiff, correlative obligation of
defendant, an act or omission of defendant in violation of said right. Here, no right of action exists
in favor of petitioner since it does not have any interest in the subject matter of the case as to
entitle it to file suit as a real party in interest. Thus, petitioner corporation has no cause of action.

2) Contention: The complaint may be treated as a class suit.

Held:
For a class suit to prosper, the requisites are: 1) subject matter of the controversy is one of common
or general interest to many persons, 2) the parties are so numerous that it is impracticable to bring
them all before the court. Here, there is only one party plaintiff, and the plaintiff corporation does
not even have an interest in the subject matter of the controversy and thus cannot represent its
members or stockholders who claim in their individual capacities ownership of said property. Also,
a class suit does not lie in actions to recover property where several persons claim partnership of
their respective portions, as each one could allege and prove his respective right in a different way
for each portion of the land, thus they cannot all have identical title thru acquisitive prescription.

3. Bataan Shipyard & Engineering Co., Inc. (BASECO) v. PCGG, GR 75885, May 27, 1987,
Narvasa, J., En Banc.
FACTS:
Commissioner Bautista issued a sequestration order to 3 agents of PCGG, ordering sequestration
of various companies, including petitioner BASECO. Later, Commissioner Diaz decreed the
provisional takeover by PCGG of BASECO, invoking EO 1, S3(c). Petitioner filed this special
civil action for certiorari and prohibition, challenging the sequestration, takeover, and other orders
and acts done pursuant to said orders by PCGG.

BASECO acquisitions with Marcos intervention- BASECO is a shiprepair and shipbuilding

company incorporated as a domestic private corporation by Filipino shipping executives. Its
articles of incorporation disclose that its authorized capital stock is P60M divided into 60k shares,
of which 12k shares with a value of P12M has been subscribed and on said subscription P3M has
been paid by the incorporators. It had 15 incorporators. By 1986, of these 15, 6 had ceased to be
stockholders. As of 1986, there were 20 stockholders listed in BASECO’s stock and transfer book.
Its total stocks were 218,819 shares.

Barely 6 months after its incorporation on Aug. 30, 1972, BASECO acquired from National
Shipyard & Steel Corporation (NASSCO), GOCC, NASSCO’s shipyard in Bataan (Bataan
National Shipyard) and all its structures and equipment by virtue of a contract of purchase and sale
with chattel mortgage executed on Feb. 13, 1973 for P52M. The P52M price was reduced by more
than one-half to P24M 8 months later thru a MOA signed at the top right corner of the first page
“APPROVED” in president Marcos’ handwriting followed by his usual full signature.

BASECO also acquired 300ha of land in Mariveles from Export Processing Zone Authority for
P10M in the document of sale.

On July 15, 1975, BASECO, again with the intervention of president Marcos, acquired ownership
of the rest of NASSCO’s assets which were not included in the first two purchase documents thru
a “Contract of purchase and sale” which also bore “APPROVED” in Marcos’ handwriting with
his usual full signature. What was transferred were NASSCO’s ownership of all titles over all
equipment and facilities in the Engineer Island Shops.

Reports to Marcos- BASECO president, in a letter on September 05, 1977, reported to Marcos that
there are no orders for ship construction and if this continued, he feared that BASECO would not
be able to pay its debts to the government of P165M. He suggested a spin-off company for
BASECO’s shipbuilding activities. Capt. Romualdez also reported to the president 11 days later,
stating that BASECO faced great difficulties in meeting its loan obligations. He also advised that
5 stockholders had assigned their shareholdings in blank and recommended that their replacements
be effected so that “we can register their names in the stock book prior to the implementation of
your instructions to pass a board resolution to legalize the transfers under SEC regulations.” He
transmitted to Marcos the stock certificates indorsed and assigned in blank.

Marcos responded, authorizing the spin-off.

HELD:
Thus, the actuality of the control by president Marcos of BASECO has been sufficiently
shown. Not only does he exercise control over BASECO, but he actually owns well nigh 100% of
its outstanding stock.

Of the 20 stockholders of BASECO, 4 were juridical persons: 1) Metro Bay Drydock-

136,370shares, 2) Fidelity Management, Inc.- 65,882 shares, 3) Trident Management- 7,412
shares, 4) United Phil Lines- 1,240 shares. The first three own 209,664, or 95.82% of the
outstanding stock. When president Marcos suddenly fled from Malacanang, found therein were
certificates corresponding to more than 95% of BASECO outstanding shares endorse in blank
together with deeds of assignment of all the shares of these 3 corporations.

In the light of the affirmative showing by the Government that, prima facie at least, the
stockholders and directors of BASECO as of April, 1986 were mere "dummies," nominees or alter
egos of President Marcos; at any rate, that they are no longer owners of any shares of stock in
the corporation, the conclusion cannot be avoided that said stockholders and directors have no
basis and no standing whatever to cause the filing and prosecution of the instant proceeding;
and to grant relief to BASECO, as prayed for in the petition, would in effect be to restore the assets,
properties and business sequestered and taken over by the PCGG to persons who are "dummies,"
nominees or alter egos of the former president.

SC thus sustained PCGG’s act of sequestration and takeover.

4. Luxuria Homes, Inc. v. CA, GR 125986, January 28, 1999, Martinez, J., First Division.
(No intent to defraud as to allow piercing corporate personality where corporation
established before relationship turned sour; Pierce only where personality is used for fraud)
FACTS:
Petitioner Aida Posadas owned a 1.6ha property in Sucat, Muntinlupa which was occupied by
squatters. Posadas negotiated with respondent Jaime Bravo regarding the development of said
property into a residential subdivision. Posadas authorized Bravo to negotiate with the squatters to
leave the property. On Dec. 11, 1989, Posadas assigned the property to petitioner Luxuria Homes,
Inc. for tax avoidance purposes. Bravo signed as a witness to the execution of the deed of
assignment and the articles of incorporation of Luxuria.

In 1992, the relationship between Posadas and Bravo turned sour when Posadas could not accept
the management contracts to develop the property into a residential subdivision that Bravo was
proposing. In retaliation, Bravo demanded payment for services rendered of P1.7M- for relocation
of squatters, preparation of architectural design and site development plan, survey, and fencing.
Posadas refused to pay. Thus, Bravo filed a complaint for specific performance in RTC against
petitioners Posadas and Luxuria.

Posadas was declared in default. RTC ruled that Posadas was solidarily liable with Luxuria to pay
Bravo the balance of payment for services performed and damages. CA affirmed. Hence this
petition.

ISSUE:
Whether Luxuria can be held solidarily liable with Posadas.
HELD: NO.
SC held Posadas liable for the contract price of survey of the land of P140k (less P130k partial
payments) and P450k (less P25k partial payments) for preparation of architectural design and site
development plan. But SC found no proof that the contract for ejectment of squatters and fencing
were actually fulfilled.

1) Respondents sent demand letters on 21 August 1991 and 14 September 1991, or more than a
year and a half after the execution of the Deed of Assignment on 11 December 1989, and the
issuance of the Articles of Incorporation of petitioner Luxuria Homes on 26 January 1990. And,
the transfer was made at the time the relationship between petitioner Posadas and private
respondents was supposedly very pleasant. In fact the Deed of Assignment dated 11 December
1989 and the Articles of Incorporation of Luxuria Homes, Inc., issued 26 January 1990 were both
signed by respondent Bravo himself as witness. It cannot be said then that the incorporation of
petitioner Luxuria Homes and the eventual transfer of the subject property to it were in fraud of
private respondents as such were done with the full knowledge of respondent Bravo himself.

Also, Posadas is not a majority stockholder of Luxuria as she owns only 33% of the capital stock.
Thus, Posadas cannot be considered an alter ego of Luxuria.

1.1) To disregard the separate juridical personality of a corporation, the wrongdoing must be
clearly and convincingly established. The separate personality may be disregarded ONLY when
the corporation is used as a cloak or cover for fraud or illegality or to work injustice or where
necessary for the protection of creditors. Thus in Del Roscrrio v. NLRC, where Philsa
International was organized in 1981 several years before the complainant filed a case in 1985, we
held that this cannot imply fraud.

Here, respondents failed to failed to show proof that Posadas acted in BF. Thus, since Luxiria is
not a party to the transactions, it cannot be held liable jointly or solidarily to respondents. Only
Posadas is liable.

2) As to respondents prayer for the court to compel Posadas to execute a management contract
(specific performance), SC held that the authorization letter to negotiate to squatters is not an
agreement.

While there is an agreement to develop the area, this was also not perfected and are mere drafts of
a proposed agreement. Thus, the drafts are mere unaccepted offers. There is no contract without
the element of agreement or mutual assent of the parties. To compel Posadas to execute a
management contract would violate the principle of consensuality of contracts.

5. Concept Builders Inc. v. NLRC, GR 108734, May 29, 1996, Hermosisima, Jr., J., First
Division.
FACTS:
Petitioner Concept with principal office at 355 Maysan Road, Valenzuela, is engaged in the
construction business. Respondents were employed thereby as laborers, carpenters, and riggers.
Respondents were served with written notices of termination of employment by Concept, stating
that the project in which they were hired had been completed. Respondent found out that the
project had not in fact yet been completed as Concept had to engage sub-contractors whose
workers performed the functions of respondents. Thus, respondents filed a complaint for illegal
dismissal against Concept.

LC ordered Concept to reinstate respondents and pay them 1y backwages. NLRC dismissed
Concept’s MR on the ground that the decision had become final and executory.

LA issued a writ of execution. The sheriff submitted a report that he tried to serve the writ on
Concept but the employees at 355 Maysan Road claimed that they were employees of Hydro Pipes
Philippines, Inc. (HPPI) and not of Concept. respondents moved for issuance of a break-open
order, alleging that HPPI and Concept were owned by the same incorporators/stockholders.
Respondents submitted the general information sheet of Concept and HPPI, which showed that the
stockholders, board of directors, officers, and address of both corporations were the same.

LA denied the motion for break open order. NLRC reversed, issuing a break-open order for the
properties already levied upon and dismissed the third-party claim previously filed by the VP of
HPPI, a certain Cuyegkeng. Hence this petition.

ISSUE:
Contention: Concept alleges that HPPI is engaged in the manufacture and sale of steel, concrete,
and iron pipes, a business distinct and separate from Concept’s construction business.
HELD: Corporate veil pierced.
A corporation is an entity separate and distinct from its stockholders and other corporations to
which it may be connected. But this separate personality is merely a fiction created by law for
convenience and to promote justice. When the separate personality is used to defeat public
convenience, justify wrong, protect fraud, or defend crime, or is used as a device to defeat
labor laws, the separate personality may be disregarded. This is also true when the corporation is
merely an adjunct, a business conduit or alter ego of another corporation.

No hard and fast rule can be accurately laid down, but there are some PROBATIVE FACTORS
OF IDENTITY that justifies application of the doctrine of piercing:
"1. Stock ownership by one or common ownership of both corporations.
2. Identity of directors and officers.
3. The manner of keeping corporate books and records.
4. Methods of conducting the business."
SEC en banc explained the “instrumentality rule” (Instrumentality or alter ego doctrine):
 "Where one corporation is so organized and controlled and its affairs are conducted so that
it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity
of the ‘instrumentality’ may be disregarded. The control necessary to invoke the rule is not
majority or even complete stock control but such domination of finances, policies and
practices that the controlled corporation has, so to speak, no separate mind, will or
existence of its own, and is but a conduit for its principal. The control must be shown
to have been exercised at the time the acts complained of took place. Moreover, the control
and breach of duty must proximately cause the injury or unjust loss for which the
complaint is made."
The test in determining the applicability of the doctrine of piercing the veil is:
"1. Control, not mere majority or complete stock control, but complete domination, not
only of finances but of policy and business practice in respect to the transaction attacked
so that the corporate entity as to this transaction had at the time no separate mind, will or
existence of its own;

2. Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust
act in contravention of 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 the piercing of corporate veil.

Here, the information sheets of Concept and HPPI were filed by the same Virgilio Casiño to SEC
as corporate secretary of both corporations. Both corporations also had the same president, board
of directors, corporate officers, and substantially the same subscribers. They also have the same
address/premises. Thus, Concept ceased its business operations to evade payment ot respondents
of backwages and to bar their reinstatement. HPPI is obviously a business conduit of Concept
and its emergence was orchestrated to avoid the financial liability that already attached to Concept.

SC affirmed the break open order.

6. Francisco Motors Corporation v. CA, GR 100812, June 25, 1999, Quisumbing, J., Second
Division. (Cannot pierce corporate veil to hold corporation liable for claim against its
directors/officers/incorporators; Doctrine would be turned upside-down)
FACTS:
Petitioner filed a complaint against respondents Sps Manuel to recover P3,412, price of jeep body
purchased, P20k, unpaid balance of cost of repair of the vehicle, P6k cost of suit. In their answer,
respondents interposed a counterclaim for unpaid legal services by respondent Gregorio Manuel
of P50k which was not paid by the incorporators, directors, and officers of petitioner.

Gregorio alleged that while he was petitioner’s legal officer, he represented members of the
Francisco family in the intestate estate proceedings of the late Benita Trinidad for which services
he is not yet paid.
RTC ruled for petitioner as to its money claim, but also allowed the counterclaim of respondents.
CA affirmed, stating that the petitioner is composed of the heirs of the late Benita as
directors/incorporators for whom Gregorio rendered legal services. Thus, justice requires that
petitioner’s veil of corporate identity be pierced and Gregorio be compensated for legal services
rendered to the heirs. Hence this petition.

ISSUE:
Whether petitioner’s separate personality may be pierced so that it may be held liable for the debts
of its directors and incorporators.
HELD: NO.
Given the facts, the doctrine of piercing the corporate veil is not applicable. The rationale behind
piercing a corporation’s identity in a given case 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. However, here,
instead of holding certain individuals or persons responsible for an alleged corporate act, the
situation has been reversed. It is the petitioner as a corporation which is being ordered to answer
for the personal liability of certain individual directors, officers and incorporators concerned.
Hence, it appears to us that the doctrine has been turned upside down because of its erroneous
invocation. Note that according to private respondent Gregorio Manuel his services were solicited
as counsel for members of the Francisco family to represent them in the intestate proceedings over
Benita Trinidad’s estate. These estate proceedings did not involve any business of petitioner.

Considering the nature of legal services, the obligation was incurred by the incorporators etc. in
their personal capacity. The personality of the corporation and those of its incorporators etc. in
their personal capacities ought to be kept separate in this case. Every action, including a
counterclaim, must be prosecuted or defended in the name of the real party in interest. It is plain
error to lay the claim for legal fees of Gregorio against petitioner rather than the individual
members of the Francisco family.

7. Times Transportation Company, Inc. v. Sotelo, GR 163786, February 16, 2005, Yanres-
Santiago, J., First Division,
FACTS:
Petitioner Times is engaged in the business of land transportation. The Times Employees Union
(TEU) was formed and issued a certificate of union registration. TEU held a strike in response to
Times’ alleged attempt to form a rival union and dismissal of active union members. DOLE Sec.
Quisumbing assumed jurisdiction and referred the matter to NLRC.

Later, TEU was certified in a certification election as the exclusive bargaining agent in Times.
TEU’s president wrote Times for collective bargaining. Times refused. TEU filed a notice of strike.
Times implemented a retrenchment program and retrenched some employees, including
respondents.

Meanwhile, Mencorp Transport Systems Inc. had acquired ownership over Times’ certificate of
public convenience (CPC) and a number of its buses. Mencorp is controlled and operated by
Virginia Mendoza, daughter of Santiago Rondaris, majority stockholder of Times.
In 1998, after the closure of Times, the retrenched employees, including respondents, filed cases
for illegal dismissal and ULP against Times in the RAB. Respondents impleaded Mencorp and
Sps. Reynaldo and Virginia Mendoza.

LA ruled in favor of respondents and ordered Times, Rondaris, Mencorp, Sps. Mendoza to cause
reinstatement of respondents and to pay solidarily full backwages of P43M. NLRC, on appeal to
it, remanded the case to LA for further proceedings and vacated LA’s decision. CA reversed and
reinstated LA’s decision. Hence this petition.

ISSUE:
Whether Mencorp, Sps. Mendoza, and Rondaries were properly impleaded under the doctrine of
piercing the corporate veil.
HELD: YES.
We have held that piercing the corporate veil 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. It may be
allowed only if the following elements concur: (1) control — not mere stock control, but complete
domination — not only of finances, but of policy and business practice in respect to the transaction
attacked; (2) such control must have been used to commit a fraud or a wrong to perpetuate the
violation of a statutory or other positive legal duty, or a dishonest and an unjust act in contravention
of a legal right; and (3) the said control and breach of duty must have proximately caused the
injury or unjust loss complained of.

Here:
1. The sale was transferred to a corporation controlled by Virginia Mendoza, daughter of Rondaris
of Times where whe is also a director.
2. All stockholders of Mencorp: Reynaldo, Virginia, Vernon Vivian, Vevey Mendoza are all
relatives of Rondaris.
3. The timing of the sale was to negate the employees’ right to organization as it was effected when
TEU was just organized.
4. Mencorp never obtained a franchise for its incorporation but all of Times’ buses are already
being operated by Mencorp, the franchise of Times having been transferred to it.

The sale of the franchise and bus units to a company owned by Rondaris’ daughter and family
members in the middle of a labor dispute is highly suspicious. The transaction is evidently to
remove Times’ remaining assets from the reach of any judgment that may be rendered in the ULP
cases filed against it.

8. Yao Sr. v. People, GR 168306, June 19, 2007, Chico-Nazario, J., Third Division.
FACTS:
Petitioners are incorporators and officers of Masagana Gas Corporation, an entity engaged in
refilling, sale, and distribution of LPG products. Respondents Petron and Pilipinas Shell sell their
LPG products under the marks “GASUL” and “SHELLANE”.

NBI agent Oblanca filed 2 applications for search warrant in RTC for violation of S155 (TM
infringement) in relation to S170 of RA 8293, alleging that per personal verification of Oblanca,
petitioners are producing, selling, and distributing LPG products using steel cylinders owned by
and bearing the trademarks, tradenames, and devices of Petron and Pilipinas Shell in violation of
their rights. The attached affidavit states that she, with Alajar, conducted a test-buy. RTC issued
the search warrants for seizure of LPG containers bearing the tradename SHELL/GASUL etc. NBI
operatives then searched the premises of Masagana and obtained LPG cylinders with the
tradenames of Shell and Petron, one motor compressor for filing system, LPG refilling machine,
etc.

Petitioners moved to quash search warrants. Masagana filed a motion as a third-party claimant
for return of motor compressor and LPG refilling machine, claiming that it is the owner of these
items. RTC denied the two motions, holding that Masaga is not a third party claimant since
petitioenrs are stockholders of Masagana. To rule otherwise would be a misapplication of the veil
of corporate fiction. CA affirmed. Hence this petition.

HELD:
1) Contention: Oblanca and Alajar had no personal knowledge of the matters on which they
testified since they were not the ones who conducted the test-buys but such persons were “Nikko
Javier” and “G. Villanueva” as shown in the entry/exit slips of Masagana. If Oblanca and Alajar
had used different names, they should have mentioned this in their applications for search warrants
and testimonies during preliminary examination.
Held:
The facts required for probable cause pertain to facts personally known to the applicant and his
witnesses. That Oblanca and Alajar used different names do not negate their personal knowledge.
There is no law which mandates the applicant for search warrant to state in their affidavits that
they used different names while conducting undercover investigations or to divulge such fact
during preliminary examination.

2) Contention: Petitioners claim that the applications for search warrant did not specify the
particular area to be searched since the Masagana compound is about 10,000m2 with several
structures, thus the warrants were general warrants.
Held:
A description of the place to be searched is sufficient if the officer can, with reasonable effort,
ascertain and identify the place intended and distinguish it from other places in the community.
The warrants here commanded a search of Masagana compound in Trece Martires, Cavite City.
the raiding team ascertained the Masagana compound without difficulty since Masagana does not
have any other offices in Cavite, Trece Martires. The structures in the compound are essential
components of petitioners’ business and cannot be treated separately as they form part of one entire
compound.

3) Petitioners claim that Masagana has the right to intervene and move for the return of the seized
items since these were being used in Masagana’s business. Since there is no action for infringement
filed against Masagana, the articles must be returned to the owner.
Held:
A corporation is an entity separate and distinct from its stockholders, directors or officers.
However, 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; or,
in the case of two corporations, merge them into one. Here, petitioners, as officers/directors of
Masagana, are utilizing Masagana in violating the IP rights of Petron and Shell. Thus,
petitioners collectively and Masagana should be considered as one and the same person for
liability purposes. Thus, Masagana’s third party claim serves no refuge for petitioners.

Even if we sustain Masagana’s separate personality, the law does not require the property to be
seized to be owned by the person against whom the warrants are directed. Ownership is of no
consequence. It is sufficient that the person against whom the warrants are directed has control or
possession of the property sought to be seized. Thus, even if Masanaga owned the properties, their
seizure under the search warrants is still valid.

9. Seventh Day Adventist Conference Church of Southern PH, Inc. v. Northeastern

Mindanao Mission of Seventh Day Adventist, Inc., GR 150416, July 21, 2006, Corona, J.,
Second Division. (De Facto Corporation)
FACTS:
Sps. Cosio donated a 1,069m2 lot in Bayugan, Agusan del Sur to South PH Union Mission of 7th
Day Aventist Church of Bayugan (SPUM-SDA Bayugan). This was accepted by an elder of the
church. 21 years later, the same land was sold by Sps. Cosio to the 7th Day Adventist Church fo
Northeastern Mindanao Mission (SDA-NEMM). New title was issued in SDA-NEMM’s name.
Petitioners, successors-in-interest of the donee. filed a case to cancel the title of SDA-NEMM, for
quieting of ownership, and reconveyance in RTC.

RTC upheld the sale. CA affirmed. Hence this petition.

ISSUE:
Contention: Petitioners allege that as a de facto corporation, they should benefit from the donation.
HELD:
1) Donation is an act of liberality whereby a person disposes gratuitously of a thing or right in
favor of another person who accepts it. The donation could not have been made in favor of an
entity yet inexistent at the time it was made. The donation here was made not to any informal
group of SDA members but a supposed SPUM-SDA Bayugan which at the time had neither
juridical personality nor capacity to accept such gift.

There are stringent requirements before one can qualify as a de facto corporation:
(a) the existence of a valid law under which it may be incorporated;
(b) an attempt in good faith to incorporate; and
(c) assumption of corporate powers.
The filing of articles of incorporation and the issuance of the certificate of incorporation are
essential for the existence of a de facto corporation. An organization not registered with SEC
cannot be considered a corporation in any concept, not even as a corporation de facto.

Here, petitioners admitted that at the time of the donation, they were not registered with SEC
nor did they even attempt to organize to comply with legal requirements.

1.1) Corporate existence begins only from the moment a certiificate of incorporation is issued.
No such certificate was issued to petitioners or their supposed predecessor in interest.
2) The de facto doctrine thus effects a compromise between two conflicting public interest[s] —
the one opposed to an unauthorized assumption of corporate privileges; the other in favor of doing
justice to the parties and of establishing a general assurance of security in business dealing with
corporations."
Generally, the doctrine exists to protect the public dealing with supposed corporate entities, not
to favor the defective or non-existent corporation.

Thus, there was no donation to petitioners or to their predecessor-in-interest.

3) Respondent’s title is valid. The sale has the requisites of a contract under Art. 1318 of NCC.
Although the P2,000 consideration is somewhat insufficient, “inadequacy of cause shall not
invalidate a contract, unless there has been fraud, mistake, or undue influence.” (Art. 1355, NCC).
There is no evidence of fraud, mistake, or undue influence.

Under Art. 1477 of NCC, ownership of the thing sold shall be transferred to the vendee upon actual
or constructive delivery. The execution of a public instrument transfers ownership from vendor to
vendee. Here, transfer of ownership from Sps. Cosio to SDA-NEMM was made upon constructive
delivery of the property when the sale was made thru a public instrument.

10. Lim Tong Lim v. PH Fishing Gear Industries, Inc., GR 136448, November 03, 1999,
Panganiban, J., Third Division. (Third person who, knowing that an association of persons
is unincorporated, treats it as a corporation may be estopped from denying the corporate
existence in a suit against the alleged corporation)
FACTS:
Chua and Yao, on behalf of “Ocean Quest Fishing Corporation”, entered into a contract for the
purchase of fishing nets of various sizes from PH Fishing Gear Industries, Inc. (respondent). They
claimed that they were engaged in a business venture with petitioner Lim who was not a signatory
to the agreement. The buyers failed to pay for the fishing nets and floats. Respondent thus filed a
collection suit against Chua, Yao, and petitioner as general partners, on the allegation that “Ocean
Quest” was a nonexistent corporation.

RTC issued a writ of attachment which was enforced on the fishing nets on board FB Lourdes.
Petitioner moved to lift attachment. RTC maintained the writ and ordered the sale of the nets at
public auction and the P900k proceeds were deposited with RTC.

RTC then ruled that petitioner, Chua, and Yao, as general partners, were jointly liable to pay
respondent. CA affirmed. Hence this petition.

HELD:
1) Contention: Petitioner disclaims any participation in the purchase of nets, arguing that the
negotiations were done by Chua and Yao only. Also, he is merely a lessor of FB Lourdes, not a
partner of Chua and Yao.
Held:
Petitioner, Chua, and Yao bought boats worth P3.35M financed by a loan acquired from Jesus
Lim, petitioner’s brother. They also intended to pay the loan with the proceeds of the sale of the
boats and to divide equally among them the excess or loss. These boats, the purchase, and the
repair of which were financed with borrowed money fell under the term “common fund” under
Art. 1767. The partnership extended not only to the purchase of the boat but also to that of the nets
and the floats. Thus, there was a partnership.

2) Contention: Petitioner argues that under the doctrine of corporation by estoppel, liability can be
imputed to Chua and Yao only, and not to him since only Chua and Yao dealt in the name of the
ostensible corporation and his name does not appear in the purchase contract of the nets and floats.
Held:
S21 of Corporation Code (S20, RCC) states:
"Sec. 21. Corporation by estoppel. — All persons who assume to act as a corporation
knowing it to be without authority to do so shall be liable as general partners for all debts,
liabilities and damages incurred or arising as a result thereof: Provided however, That when
any such ostensible corporation is sued on any transaction entered by it as a corporation or
on any tort committed by it as such, it shall not be allowed to use as a defense its lack of
corporate personality.
"One who assumes an obligation to an ostensible corporation as such, cannot resist
performance thereof on the ground that there was in fact no corporation."
Thus, even if the ostensible corporate entity is proven to be legally nonexistent, a party may be
estopped from denying its corporate existence. "The reason behind this doctrine is obvious — an
unincorporated association has no personality and would be incompetent to act and appropriate for
itself the power and attributes of a corporation as provided by law; it cannot create agents or
confer authority on another to act in its behalf; thus, those who act or purport to act as its
representatives or agents do so without authority and at their own risk. A person who acts as an
agent without authority or without a principal is himself regarded as the principal, possessed
of all the right and subject to all the liabilities of a principal, a person acting or purporting to act
on behalf of a corporation which has no valid existence assumes such privileges and obligations
and becomes personally liable for contracts entered into or for other acts performed as such agent."

The doctrine may apply to the alleged corporation AND TO A THIRD PARTY. In the first, an
unincorporated association which represented itself as a corporation will be estopped from denying
its corporate capacity. On the other hand, a third party who, knowing an association to be
unincorporated, nonetheless treated it as a corporation and received benefits from it, may
be barred from denying its corporate existence in a suit brought against the alleged
corporation. In such case, all those who benefited from the transaction made by the ostensible
corporation despite knowledge of its legal defects may be held liable for contracts they impliedly
assented to or took advantage of.

Here, petitioner benefited from the use of the nets. He in fact questions the attachment of the
nets since such has effectively stopped his use of the fishing vessel FB Lourdes.

11. International Express Travel & Tour Services, Inc. v. CA, GR 119020, October 19, 2000,
Kapunan, J., First Division.
FACTS:
Petitioner sent a letter to PH Football Federation (PFF) thru the federation’s president, respondent
Henri Kahn, where petitioner offered its services as a travel agency. The offer was accepted.
Petitioner secured the airline tickets for the trips of athletes and officials of the federation to the
South East Asian Games in Kuala Lumpur and other trips to China and Brisbane. The total cost
amounted to P449k. PFF paid only P176k, P31k, and Henri Kahn paid thru personal check P50k.
No further payments were made.

Thus, petitioner filed a civil case in RTC against Henri as president of the federation and
impleading PFF as alternative defendant. Petitioner sought to hold Henri liable on the ground that
Henri allegedly guaranteed the obligation. Henri averred that petitioner had no cause of action
against him since he did not guarantee payment but merely acted as agent of PFF which has a
separate and distinct juridical personality.

RTC held Henri liable, finding that the corporate existence of PFF was not proven, thus the officers
or agents are themselves personally liable. CA reversed, recognizing the juridical existence of PFF.
Hence this petition.

ISSUE:
Whether the PH Football Federation has juridical existence such that Henri cannot be held
personally liable for the services rendered by petitioner.
HELD: NO.
1) RA 3135 and PD 604 recognized the juridical existence of national sports commissions. This
may be gleaned from the powers and functions granted to these associations. They are empowered
to a) adopt a constitution and by laws, b) to purchase, sell, lease, encumber property, c) affiliate
with international/regional sports associations etc. The power to purchase, sell, lease, and
encumber property are acts which may only be done by persons with juridical capacity.
However, while the national sports associations may be accorded corporate status, such does not
automatically take place by the mere passage of these laws.

2) PFF has no juridical personality- Before a corporation may acquire juridical personality, the
state must give its consent either in the form of a special alw or a general enabling act. Nowhere
in RA 3135 and PD 604 is a provision creating the PFF. These laws merely recognized the
existence of national sports associations and provided the manner by which these entities may
acquire juridical personality.

RA 3135, S11 provides that applications for recognition as a national sports association shall be
filed with the executive committee with a copy of its constitution and bylaws. The executive
committee may give the recognition or reject it. PD 604, S7 similarly provides for such application
for accreditation/recognition as a national sports association. These provisions require that before
an entity may be considered a national sports commission, the entity must be recognized by the
accrediting organization therein provided.

Here, Henri only attached a copy of PFF’s constitution and by laws in his MR. But this does not
prove that PFF has been accredited. Thus, Henri should be held liable for the unpaid obligations
of the unincorporated PFF. It is settled principle in corporation law that any person acting or
purporting to act on behalf of a corporation which has no valid existence assumes such privileges
and becomes personally liable for contract entered into or for other acts performed as such agent.
As president of the Federation, Henri Kahn is presumed to have known about the corporate
existence or non-existence of the Federation.

3) Erroneous application of corporation by estoppel doctrine- We do not agree with CA that even
assuming that the Federation was defectively incorporated, the petitioner cannot deny the corporate
existence of the Federation because it had contracted and dealt with the Federation in such a
manner as to recognize and in effect admit its existence. The doctrine of corporation by estoppel
is mistakenly applied by CA to petitioner. The application of the doctrine applies to a third party
only when he tries to escape liabilities on a contract from which he has benefited on the irrelevant
ground of defective incorporation. Here, petitioner is not trying to escape liability from the contract
but rather is the one claiming from the contract.

12. Filipinas Broadcasting Network, Inc. v. Ago Medical and Educational Center-Bicol
Christian College of Medicine, GR 141994, January 17, 2005, Carpio, J., First Division.
(Moral damages can be awarded to a corporation for libel under Art. 2219[7])
FACTS:
Exposé is a radio documentary program hosted by Rima and Alegre. It is aired every morning over
DZRZ-AM which is owned by petitioner FBNI and is heard over Legazpi City, Albay, and Bicol.
On Dec. 14 and 15 of 1989, Rima and Alegre eposed various complaints from students, teachers,
and parents against respondent AMEC:
Students are required to take and pay for the subject even if the subject does not have an
instructor — such greed for money on the part of Amec’s administration.
The administrators of Amec, to minimize expenses in salary, continue to accept “rejects”
(former teachers removed because of immorality. Amec is a dumping ground, garbage, not
merely of moral and physical misfits.
It is likely that the students would be influenced by evil. When they become members of
society outside of campus will be liabilities rather than assets.
Amec and Ago, as dean, filed a complaint for damages against FBNI, Rima, and Alegre, claiming
that the broadcasts were defamatory.

RTC found FBNI and Alegre liable for libel, awarding P300k moral damages to Amec. CA
affirmed, making Rima also liable. Hence this petition.

ISSUE:
Whether Amec, a juridical person, is entitled to moral damages for the libelous remarks.
HELD: YES.
SC found that the broadcasts were libelous. The broadcasts are not based on established facts and
thus not privileged communication under Borjal.

A juridical person is generally not entitled to moral damages because, unlike a natural person,
it cannot experience physical suffering or such sentiments as wounded feelings, etc.
Nonetheless, Amec’s claim for moral damages falls under Art. 2219, (7) which expressly
authorizes recovery of moral damages in cases of libel, slander, or any other form of defamation.
Art. 2219 (7) does not qualify whether plaintiff is a natural or juridical person. Where the
broadcasts are libelous per se, the law implies damages.
But since there is no showing that Amec actually suffered material damages to its reputation, the
moral damages was reduced from P300k to P150k.

FBNI was held solidarily liable with Rima and Alegre since Rima and Alegre were performing
official duties as hosts of FBNI’s program and there is no proof that FBNI exercised due diligence
in the selection and supervision of Rima and Alegre.

13. Coastal Pacific Trading Inc. v. Southern Rolling Mills, Co., Inc., GR 118692. July 28,
2006, Panganiban, CJ., First Division.
FACTS:
Southern Rolling Mills was organized in 1959 to engage in a steel processing business. It was later
renamed to Visayan Integrated Steel Corporation (VISCO).

DBP loan/ Respondents loan- In 1961, VISCO loaned from DBP P836k secured by a recorded
REM over VISCO’s 3 lands, including the machineries and equipment found there. In 1963,
VISCO entered into a loan agreement with respondent banks FEBTC et al. (Consortium) for P21M
to finance importation of raw materials secured by a second unrecorded mortgage over the same
land, machineries, and equipment. VISCO defaulted in its loan to the Consortium. VISCO and
Consortium agreed to convert the unpaid loan into equity in the corporation and thus, Consortium
acquired more than 90% of VISCO’s equity, leaving the balance of the debt to P16M.

Petitioner’s credit- In 1964-1965, VISCO entered into a processing agreement with petitioner
Coastal. Petitioner delivered 3000 metric tons of hot rolled steel coils to VISCO for processing
into block iron sheets. But VISCO delivered to petitioner only 1600 metric tons of those sheets,
leaving 1400 metric tons unaccounted for.

Change of bank account name- In 1972, because of government takeovers of other corporations,
VISCO renamed its bank deposit with FEBTC of its unexpended funds from “Board of Trustees
VISCO Consortium of Banks” into “Board of Trustees Consortium of Banks” to protect its
interests.

Sale of VISCO generator sets to pay DBP- In 1974, the VISCO board of directors met in the
FEBTC Boardroom and decided to sell two generator sets to Filmag Phil to pay VISCO’s debt to
DBP. The proceeds were deposited in a special account in FEBTC held in trust for the consortium.

Assignemnt of DBP mortgage to respondents- In 1975, petitioner filed with RTC a petition for
recovery of property and damages with attachment (Case 21272), alleging that VISCO misapplied
the steel sheets entrusted to it. RTC issued a writ of preliminary attachment. While this was
pending, VISCO acquired a cash advance of P1.3M from FEBTC to pay the DBP debt. On June
29, 1976, DBP issued a check for P1.3M payable to DBP. On the same date, DBP executed a deed
of assignment of mortgage rights in favor of respondent Consortium of Banks. Thus, the
Consortium obtained DBP’s recorded primary lien over the properties of VISCO.

The Consortium foreclosed this mortgage and acquired the properties as highest bidder. VISCO
assigned the right of redemption thereof to National Steel Corporation (NSC) for P100k.
In 1985, petitioner filed against respondents Consortium a complaint to annul the sale with
damages, alleging that despite its writ of attachment in Case 21272, Consortium sold the properties
to NSC beyond the reach of VISCO’s other creditors. The assignment of mortgage by DBP to
Consortium was fraudulent since DBP was paid with proceeds from the sale of generator sets
owned by VISCO, and not with Consortium’s funds.

RTC ruled in favor of Consortium. CA affirmed. Hence this petition.

ISSUE:
Whether respondents Consortium disposed of VISCO’s assets in fraud of creditors.
HELD: YES.
1) Since Consortium acquired 90% of VISCO’s equity, it occupied 9 of 10 directors thereof and
thus controlled the board. As such directors of VISCO, the Consortium officials were in a position
of trust and owed it a duty of loyalty. Because they were trustees of the creditors, they should have
managed the corporate assets with strict regard for the creditor’s interests. The change of VISCO’s
unexpended funds name in FEBTC shows an effort to hide the funds for Consortium themselves
by removing the name “VISCO” to avoid takeover by the government, also a creditor of VISCO.

The DBP’s assignment of mortgage to Consortium was fraudulent. Consortium’s mortgage was
unrecorded and not binding on the other creditors. Thus, if Consortium had paid DBP directly,
DBP’s recorded mortgage would have been satisfied and VISCO’s properties would have been
freed up to the satisfaction of all of VISCO’s other creditors. This would have been fair to all.
Instead, Consortium obtained DBP’s primary registered lien by allowing it to pay VISCO’s loan
to DBP. This scheme of Consortium continued the efficacy of the primary lien in its favor to the
detriment of the other creditors. The assignment in favor of Consortium was a rescissible contract
for having been taken in fraud of creditors (Art. 1385, NCC).

Mutual restitution is required in rescission but since it is not possible anymore due to the sale to
NSC (who is not proved to have acted in BF), an indemnity for damages operates as restitution.

2) Petitioner’s actual damages is its final and executory judgment in Case 21272 of P851k which
it could not enforce against VISCO due to respondent Consortium’s fraudulent disposition of
VISCO’s assets. Also, exemplary damages (P250k) is proper due to the finding of fraud as a
warning to other creditors not to abuse their rights.

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 good
reputation that is debased, resulting in its humiliation in the business realm. Here, the records do
not show any evidence that the name or reputation of petitioner has been sullied as a result of the
Consortium's fraudulent acts. Accordingly, moral damages are not warranted.

14. California Manufacturing Company, Inc. v. Advanced Technology System, Inc., GR

202454, April 25, 2017, Sereno, CJ., First Division.
FACTS:
Petitioner CMCI is engaged in the food and beverage manufacturing business. Respondent ATSI
fabricates and distributes food processing equipment. CMCI leased from ATSI a propodak
machine used to pack products in 20ml pouches for P98k monthly rental. ATSI filed a complaint
for sum of money against CMCI to collect unpaid rentals for June-September 2003.

CMCI alleged that ATSI is one and the same with Processing Partners and Packaging Corporation
(PPPC), a toll packer of CMCI products. ATSI was even a stockholder of PPPC. PPPC had agreed
to transfer the processing of CMCI’s product line from its factory in Meycauayan to Malolos,
Bulacan. Upon request of PPPC thru its EVP Felicisima, CMCI advanced P4M as mobilization
fund. PPPC allegedly committed to pay in 12 equal monthly installments. Also, in a letter,
Felicisima proposed to set off PPPC’s obligation to pay the mobilization fund with rentals for the
Propodak machine. CMCI claims that this proposal binds both PPPC and ATSI since Felicisima
was an officer and majority stockholder of both corporations. CMCI thus argues that legal
compensation had set in and ATSI is even liable for the balance of PPPC’s unpaid obligation.
When ATSI filed suit in Nov. 2003, PPPC’s debt allegedly amounted to P10.7M.

RTC ruled for ATSI. CA affirmed, also refusing to pierce corporate veil. Hence this petition.

ISSUE:
Contention: CMCI argues for piercing of corporate veil due to 1) interlocking board of directors,
incorporators, and majority stockholder of PPPC and ATSI, 2) control of both corporations by Sps.
Celones, 3) the two corporations are mere alter egos of each other.
HELD:
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.

Here, mere ownership by a single stockholder of even all or nearly all of the capital stocks of a
corporation, by itself, is not sufficient ground to disregard corporate veil. The
instrumentality/control test of the alter ego doctrine requires not mere majority or complete
stock control, but complete domination of finances, policy, and business practice. The
corporate entity must be shown to have no separate mind, will, or existence of its own at the
time of the transaction.

While Sps. Celones are incorporators, directors, and majority stockholders of ATSI and PPPC, this
is all that CMCI has proven. There is no proof that PPPC controlled the financial policies and
business practices of ATSI either when Felicisima proposed to set off the unpaid mobilization
fund with CMCI’s rental of propodak machines, or when the lease agreement between CMCI and
ATSI commenced.

The fraud test, which is the second of the three-prong test to determine the application of the alter
ego doctrine, requires that the parent corporation's conduct in using the subsidiary corporation be
unjust, fraudulent or wrongful. Under the third prong, or the harm test, a causal connection
between the fraudulent conduct committed through the instrumentality of the subsidiary and the
injury suffered or the damage incurred by the plaintiff has to be established. None of these are
shown. Thus, there is no mutuality of parties to justify legal compensation in Art. 1279 (bound
principally, principal creditor of the other).

15. Dutch Movers Inc. v. Lequin, GR 210032, April 25, 2017, Del Castillo, J., First Division.
FACTS:
Respondents Lequin et al. filed an illegal dismissal complaint against Dutch Movers, Inc. (DMI)
and Sps. Cesar and Yolanda Lee (petitioners), its alleged president and manager. They alleged that
Cesar Lee told them that DMI was closing for no reason, but it was not. NLRC ruled that they
were illegally dismissed. This decision became final and executory. Respondents moved for
execution. Pending resolution of this motion for execution, respondents filed a motion to implead
petitioners (Sps. Lee) and Sps. Smith, stating that DMI no longer operates but Sps. Lee, who
managed DMI, were not included in DMI’s articles of incorporation as officers. Sps. Smith are the
ones named therein. The creation of DMI was attended with fraud, making it convenient for Sps
Lee to evade their legal obligations to them.

Respondents moved to quash writ of execution. LA denied. NLRC quashed, holding that DMI has
a separate personality from the persons comprising it. CA reversed hence this petition.

ISSUE:
Whether petitioners are personally liable to pay the judgment awards in favor of respondents.
HELD: YES.
The separate personality of a corporation may be disregarded, attaching personal liability against
the responsible person, if the corporation’s personality is “used to defeat public convenience etc.”
By responsible person, we refer to an individual or entity responsible for and who acted in BF in
committing the illegal dismissal or violation of LC or who actively participated in the
management of the corporation. Piercing is also allowed where a corporation is a mere alter ego
or conduit of a person or another corporation.

Here, the veil of corporate fiction must be pierced because they controlled DMI. They actively
participated in its operation such that DMI existed not as a separate entity but only as business
conduit of petitioners. Petitioners controlled DMI by making it appear to have no mind of its
own and used DMI as a shield in evading legal liabilities, including payment of the judgment
awards to respondents:
1) Petitioners and DMI jointly filed their position papers. While petitioners argued that they were
not privy to DMI’s dealings, they disclosed circumstances as to respondents’ employment such as
their compensation, length of service. 2) Sps. Smith declared that they merely lent their names to
DMI and identified petitioners as owners of DMI. This was not refuted by petitioners. 3) Piercing
the veil is allowed and responsible persons impleaded and be held solidarily liable even after final
judgment and execution provided such persons deliberately used the corporate vehicle to
unjustly evade the judgment obligation or resorted to fraud, BF, or malice in evading their
obligation.
While one’s control does not by itself result in piercing, but considering the irregularity of DMI’s
incorporation, there is sufficient basis to hold that the corporation was used for an illegal
purpose, including evasion of legal duties to its employees.

16. Zambrano v. PH Carpet Manufacturing, GR 224099, June 21, 2017, Mendoza, J., Second
Division.
FACTS:
Petitioners filed complaints for illegal dismissal and ULP against PH Carpet. They claim that they
were employees of respondent PH Carpet. Their employment was terminated due to serious
business losses. They believe that their termination was merely a pretense for the transfer of PH
Carpet’s operations to Pacific Carpet Manufacturing Corporations because job orders of some
regular clients of PH Carpet were transferred to Pacific Carpet and several machines were moved
from the premises of PH Carpet to Pacific Carpet.

ISSUE:
Contention: The separate personality of Pacific Carpet must be disregarded and it must be liable
for the obligations of PH Carpet since Pacific Carpet is a subsidiary of PH Carpet.
HELD: No piercing.
SC found that the termination was for an authorized cause or for retrenchment due to serious
business losses and that there was no ULP.

1) SC cited the 3 basic areas in which piercing the veil doctrine applies: 1) defeat of public
convenience, 2) fraud cases, 3) alter ego cases. SC also cited the 3 pronged test to determine the
application of the alter ego theory or instrumentality theory: 1) Control/complete domination
(Control test), 2) Control is used to commit fraud (Fraud test), 3) proximate cause of injury (Harm
test).

Here, none of the three-pronged test has been met. Although ownership by one corporation of all
or a great majority of stocks of another corporation and their interlocking directorates may serve
as indicia of control, by themselves and without more, these are insufficient to establish an alter
ego relationship. 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 to disregard the separate
corporate personality. Interlocking directors, corporate officers, and shareholders is not enough
justification to pierce the corporate veil in the absence of fraud or other public policy
considerations.

Pacific Carpet was registered with SEC on January 29, 1999, such that it cannot be said that
Pacific Carpet was set up to evade PH Carpet’s liabilities.

2) As to the transfer of PH Carpet’s machines to Pacific Carpet, it is settled that where one
corporation sells or transfers all its assets to another corporation for value, the latter is NOT,
by that fact alone, liable for the debts of the transferor.

17. International Academy of Management and Economics v. Litton and Company, Inc., GR
191525, December 13, 2017, Sereno, CJ., First Division.
FACTS:
Atty. Santos, a lessee to 2 buildings owned by respondent Litton, owed Litton rental arrears and
his share of realty taxes. Later, Litton filed a complaint for unlawful detainer against Santos in
MeTC. MeTC ruled for Litton and ordered Santos to vacate and pay various sums of money. This
decision became final and executory.

On Nov. 11, 1996, MeTC’s sheriff levied on a real property covered by a TCT registered in the
name of petitioner IAME in order to execute the judgment against Santos. IAME filed in MeTC a
motion to lift, claiming that it has a separate and distinct personality from Santos and thus its
properties should not be made to answer for Santos’ liabilities. MeTC denied the motion in an
order dated Oct. 29, 2004. Upon MR, MeTC reversed itself and lifted the levy and writ of
execution.

RTC reversed. CA affirmed RTC. CA took note of how Santos used IAME to insulate the Makati
real property from execution: in a deed of absolute sale dated 1979, it is indicated that Santos,
being president, represented IAME as vendee, but IAME was organized only in 1985. Hence this
petition.

HELD:
1) Contention: IAME claims that its right to due process was violated when it was dragged into
the case and its real property made an object of a writ of execution in a judgment against Santos.
It was not impleaded in the main case and thus MeTC has no jurisdiction over it.
Held:
The resistance of the Court to offend the right to due process of a corporation that is a nonparty in
a main case may disintegrate not only when its director, officer, shareholder etc. is a party to the
main case, but when it finds facts showing that piercing the corporate veil is merited. A party
whose corporation is vulnerable to piercing of its corporate veil cannot argue violation of
due process. Here, Santos used IAME as a means to defeat judicial processes and to evade his
obligation to Litton. Thus, while IAME was not impleaded in the main case and yet was named in
the writ of execution against Santos, it is vulnerable to piercing the corporate veil.

2) Contention: The doctrine of piercing corporate veil applies only to stock and not to non-stock
non profit corporations like IAME since there are no stockholders to hold liable but only members.
They do not have investments or shares to answer for possible liabilities.
Held: Doctrine of piercing can apply to nonstock corporations.
In a number of cases, in determining applicability of piercing corporate veil, SC did not put in
issue whether a corporation is a stock or nonstock corporation. SC cites Sulo ng Bayan v. Araneta.

Equitable remedy- In US, where we adopted our law on corporations, nonprofit corporations are
not immune from piercing. Piercing is viewed as an equitable remedy, which justifies courts to
scrutinize any organization however organized and in whatever manner it operates. Also, control
of ownership does not hinge on stock ownership. While it may appear impossible for a person
to exercise ownership control over a nonstock corporation, a person can be held personally
liable under the alter ego theory if evidence shows that the person controlling the corporation
did in fact exercise control even though there was no stock ownership.
Equitable ownership- The concept of equitable ownership for stock or nonstock corporations
may also be considered. An equitable owner is an individual who is a non-shareholder defendant,
who exercises sufficient control or considerable authority over the corporation to the point of
completely disregarding the corporate form and acting as though its assets are his or her
alone to manage and distribute.

3) Contention: Piercing cannot be applied to a natural person, here Santos, simply because as a
human being, he has no corporate veil covering his person.
Held: Reverse piercing applied here.
In Cease v. CA, we considered a deceased natural person as one and the same with his corporation
to protect the succession rights of his legal heirs. SC pierced the corporate veil of the decedent’s
corporation, finding that the corporation was his alter ego. Thus, the properties acquired by the
corporation were the properties of the decedent and should be inherited by his legitimate children.

In Arcilla v. CA, a complaint for sum of money was filed against Arcilla for failure to pay his loan.
Arcilla claimed that the loan was in the name of his family corporation CSAR and that it was not
impleaded as a party in the case. SC pierced corporate veil, holding that Arcilla used his capacity
as CSAR’s president to avoid complying with his adjudged liability and treated CSAR as his alter
ego.

The facts here are similar to those in Arcilla. We agree with CA that IAME is the alter ego of
Santos and Santos-the natural person- is the alter ego of IAME. Santos falsely represented
himself as IAME president in the deed of absolute sale when he bought the Makati real property
at a time when IAME had not yet existed. Also, 1) Santos contribution is P1.2M out of the P1.5M,
making him majority contributor of IAME and 2) the building occupied by IAME is named after
Santos using his nickname (Noli Santos International Tower).

3.1) Reverse piercing- We borrow from American parlance what is called reverse piercing or
reverse corporate piercing or piercing the corporate veil “in reverse.” Reverse piercing flows in
the opposite direction and makes the corporation liable for the debt of the shareholders. It has
2 types: 1) outsider reverse piercing- when a party with a claim against an individual or
corporation attempts to be repaid with assets of a corporation owned or substantially controlled by
the defendant, 2) insider reverse piercing- the controlling members will attempt to ignore the
corporate fiction in order to take advantage of a benefit available to the corporation, such as an
interest in a lawsuit or protection of personal assets.

Outsider reverse piercing is applicable. Litton seeks to make IAME’s Makati real property answer
for a judgment against Santos who formerly owned and still substantially controls IAME. We
applied reverse piercing in Cease and Arcilla.

3.2) But the equitable remedy of reverse piercing was not meant to encourage a creditor’s failure
to undertake such remedies that could have otherwise been available to the detriment of other
creditors. Ordinary judgment collection procedures are preferred over that which would risk
damage to third parties (like innocent stockholders) with unprotected interests in the assets of the
corporation. But here, if we recommend that Litton run after the other properties of Santos, we
will unwittingly condone Santos’ action in hiding behind the corporate form to evade paying his
obligation

The MeTC Oct. 29, 2004 decision was reinstated.

18. The Missionary Sisters of Our Lady of Fatima v. Alzona et al., GR 224307, August 06,
2018, Reyes, Jr., J., Second Division. (Corporation by estoppel)
FACTS:
Purificacion, unmarried, is the registered owner of lands. Impelled by her desire to be a nun, she
decided to devote her life in helping others in 1996. In 1997, during a doctor’s appointment,
Purificacion, accompanied by Mother Concepcion, discovered that she was suffering from lung
cancer. Purificacoin requested Mother Concepcion to take care of her in her house to which Mother
agreed.

On Oct. 11, 1999, Purificacion called Mother Concepcion to her house and told her thru a
handwritten letter that she is donating her house and lot to petitioner Missionary thru Mother
Concepcion. Petitioner, upon advice of Atty. Arcillas, applied for registration with SEC on Aug.
28, 2001. On Aug. 29, 2001, Purificacion executed a deed of donation inter vivos in favor of
petitioner, notarized and witnessed by Purificacion’s nephews. Mother accepted on the same date
in behalf of petitioner. SEC issued petitioner’s certificate of registration on Aug. 31, 2001.
Purificacion died without issue.

ISSUE:
Contention: Amando Alzona, Purificacion’s brother, filed a complaint to annul the donation on
the ground that at the time the donation was made, petitioner was not registered with SEC and thus
had no juridical personality and cannot legally accept the donation.
HELD: Petitioner was a corporation by estoppel.
1) Under Art. 737, the donor’s capacity shall be determined as of the time of making the donation.
By analogy, the legal capacity of the donee or the authority of the latter’s representative is
determined at the time of acceptance of the donation.

2) Petitioner not a de facto corporation- The filing of articles of incorporation AND issuance
of certificate of incorporation are essential for the existence of a de facto corporation. The
issuance of certificate marks the beginning of an entity’s corporate existence. Here, petitioner
filed its articles of incorporation and by laws on Aug. 28, 2001. SEC issued its certificate of
incorporation only on Aug. 31, 2001, 2 days after Purificacion executed a deed of donation on
Aug. 29, 2001. Thus, at the time of the donation, petitioner cannot be a de facto corporation.

3) Corporation by estoppel- Rather, petitioner is a corporation by estoppel under (RCC, S20, 2nd
paragraph [assumes an obligation to an ostensible corporation]). The doctrine of corporation by
estoppel applies when a non-existent corporation enters into contracts with third persons. While
the doctrine is generally applied to protect the sanctity of dealings with the public, nothing prevents
its application in the reverse. In fact, the very wording of the law permits such interpretation,
such that a person who has assumed an obligation in favor of a non-existent corporation, having
transacted with the latter as if it was duly incorporated, is prevented from denying the
existence of the latter to avoid enforcement of the contract.
The doctrine of corporation by estoppel applies as long as there is no fraud and when the existence
of the association is attacked for causes attendant at the time the contract was entered into, and
not thereafter.

Here, Purificacion dealt with petitioner as if it were a corporation. She executed 2 documents
conveying the properties to petitioner- the Oct. 11, 1999 handwritten letter and the Aug. 29, 2001
deed of donation.

3.1) The doctrine rests on the idea that if the court were to disregard the existence of an entity
which transacted with a third person, unjust enrichment would result as some benefit has
already accrued on the part of one of the parties. Here, Purificacion’s benefit is the past services
rendered to her during her illness. Thus, the donation partakes of a remuneratory/compensatory
donation for the purpose of rewarding the done for past services which services do not amount to
a demandable debt. Although, strictly speaking, petitioner did not perform these services on
the expectation of something in return. The existence of petitioner is upheld to ensure that the
primary objective of the donation is achieved.

19. Narra Nickel Mining and Development Corporation v. Redmont Consolidated Mines
Corp., GR 195580, April 21, 2014, Velasco, Jr., J., Third Division. ***NOT ASSIGNED
FACTS:
In 2006, Redmont, a domestic corporation, took interest in mining certain areas in Palawan. It
found out that the areas it wanted to mine were already covered by Mineral Production Sharing
Agreement (MPSA) applications of petitioners Narra Mining, Tesoro Mining, and McArthur
Mining. Redmont filed before the DENR Panel of Arbitrators petitions for denial of petitioners’
applications for MPSA, alleging that at least 60% of the capital stock of petitioners are owned and
controlled by MBMI Resources Inc., a 100% Canadian Corporation.

HELD:
1) There are 2 tests in determining the nationality of a corporation- control test and the
grandfather rule. DOJ Opinion 20, S.2005, adopting the 1967 SEC Rules, provides:
First part- control test or the liberal rule: “shares belonging to corporations or partnerships at least
60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine
nationality,"
Second part- stricter, more stringent grandfather rule- "if the percentage of the Filipino ownership
in the corporation or partnership is less than 60%, only the number of shares corresponding to such
percentage shall be counted as Philippine nationality,"

1.1) Contention: RA7042, as amended by RA 8179, Foreign Investments Act’s control test, rather
than the grandfather rule, should be applied. Since S3 of FIA does not provide for the grandfather
rule, said rule has no leg to stand on. S3 allows for a corporate layering scheme.
Held:
S3 of FIA provides:
Xxx That where a corporation and its non- Filipino stockholders own stocks in a Securities
and Exchange Commission (SEC) registered enterprise, at least sixty percent (60%) of the
capital stock outstanding and entitled to vote of each of both corporations must be owned
 and held by citizens of the Philippines and at least sixty percent (60%) of the members of
the Board of Directors, in order that the corporation shall be considered a Philippine
national.
Corporate layering is admittedly allowed by FIA. But if it is used to circumvent the constitution
and laws, it becomes illegal. Art. XII, S2 of the constitution provides that the state may undertake
development and utilization of natural resources directly or thru joint venture with Filipino citizens
or corporations at least 60% of whose capital is owned by such citizens. This case is centered on
the utilization of the country’s natural resources- mining. The framers intended also to apply the
grandfather rule in cases where corporate layering is present. The constitution prevails over
S3 of FIA.

2) The grandfather rule applies only when the 60-40 Filipino foreign equity ownership is in
DOUBT. If there is no doubt, the grandfather rule will not apply. Under grandfather rule, the
combined totals in the investing and the investee corporations must be traced (grandfathered) to
determine the total percentage of Filipino ownership. Here, there is doubt as to petitioners’
corporate ownership since their common investor, the 100% Canadian corporation MBMI, funded
them.

2.1) Contention: There is “doubt” only when the stockholdings of Filipinos are less than 60%.
Held:
It would be ludicrous to limit the application of the rule to instances where the stockholdings of
non-Filipino stockholders are more than 40% of the total stockholdings. The corporations
interested in circumventing our laws would clearly strive to have 60% Filipino ownership at face
value.

3) Applying Grandfather rule:

3.1) McArthur Mining, Inc. – owned by: Madridejos Mining (Filipino) – 59.97%; MBMI
(Canadian) 39.98%; Salazar (Filipino): 0.01% or 1/10,000 shares; Esguerra (Filipino): 0.01%;
Agcaoili (Filipino): 0.01%; Mason (American): 0.01%; Cawkell (Canadian): 0.01%.

Madridejos Mining Corporation – owned by: Olympic Mines (Filipino): 66.63%; MBMI: 33.31%;
etc.
Olympic Mines is owned by MBMI with 60% equity interest. Thus, McArthur, when it is
grandfathered, company layering was utilized by MBMI to gain control over McArthur. MBMI
has more than 60% equity interest in McArthur, making the latter a foreign corporation.

3.1.1) Tesoro Mining is owned by Sara Marie Mining (Filipino) at 59.97% and MBMI at 39.98%.
Sara Marie is owned by Olympic at 66.63% and MBMI at 33.31%. Olympic is owned by MBMI
at 60%. Thus, MBMI is in control of Tesoro and owns 60% or more equity interest in Tesoro.
This makes Tesoro a non-Filipino corporation and disqualifies it to participate in the exploitation
of our natural resources.

3.1.2) Narra Nickel Mining is owned by Patricia Louise Mining (Filipino) at 59.97% and MBMI
at 39.98%. Patricia Louise is owned by Palawan Alpha South Resources (Filipino) at 65.96% and
MBMI at 33.96%. MBMI owns Alpha at 60.4%.
Thus, McArthur, Tesoro, and Narra are not Filipino since MBMI, a 100% Canadian
corporation, owns 60% or more of their equity interests. This conclusion is derived from
grandfathering petitioners’ corporate owners. The ownership of the “layered” corporatiosn boils
down to MBMI, Olympic, or Alpha.

19.1 Narra Nickel and Mining Development Corp. v. Redmont Consolidated Mines Corp.,
GR 195580, January 28, 2015, Velasco, Jr., J., Special Third Division.
FACTS:
MR of Case 19.
HELD:
1) The grandfather rule implements the intent of Filipinization in the constitution. Art. XII, S2
reserves exploitation of natural resources to Filipino citizens and corporations 60% of whose
capital is owned by such citizens. PH Mining Act has a similar requirement. The GFather rule was
originally conceived to look into the citizenship of the individuals who ultimately own and
control the shares of a corporation.

The Grandfather Rule is "the method by which the percentage of Filipino equity in a corporation
engaged in nationalized and/or partly nationalized areas of activities, provided for under the
Constitution and other nationalization laws, is computed, in cases where corporate shareholders
are present, by attributing the nationality of the second or even subsequent tier of ownership to
determine the nationality of the corporate shareholder. Thus, both direct and indirect shareholdings
in the corporation are determined.

BIR applies the grandfather rule to determine ultimate ownership in a corporation in applying
NIRC, S127(B) on taxes imposed on close corporations. BIR Ruling 148-10:
In the case of a multi-tiered corporation, the stock attribution rule must be allowed to run
continuously along the chain of ownership until it finally reaches the individual
stockholders. This is in consonance with the "grandfather rule" adopted in the Philippines
under Section 96 of the Corporation Code (**S95[c], RCC) xxx.
2) Grandfather rule may apply even if 60-40 rule is satisfied- The method employed in the
Grandfather Rule of attributing the shareholdings of a given corporate shareholder to the second
or even the subsequent tier of ownership hews with the rule that the "beneficial ownership" of
corporations engaged in nationalized activities must reside in the hands of Filipino citizens. Thus,
EVEN IF the 60-40 Filipino equity requirement appears to have been satisfied, an agreement
that may distort the actual economic or beneficial ownership of a mining corporation may
be struck down as violative of the constitutional requirement. It is implicit that even if Art.
XII, S12 refers to ownership of stock, beneficial ownership of the right to dispose, exploit etc.
natural resources shall pertain to Filipino citizens, and that the nationality requirement is not
satisfied unless Filipinos are the principal beneficiaries in the exploitation of the country’s natural
resources.

2.1) Situs of control + beneficial ownership- The beneficial ownership requirement was used in
tandem with situs of control to determine the nationality of a corporation thru the GFather rule
despite the fact that both investee and investor corporations satisfy the 60-40 Filipino equity
requirement. The nationality requirement is not satisfied unless it meets the criterion of beneficial
ownership, i.e. Filipinos are the principal beneficiaries in the exploration of natural resources,
and in applying the same, the primordial consideration is situs of control. Any arrangement
which attempts to defeat the constitutional purpose should be eschewed.

The GFather rule is applied where the corporation has corporate stockholders with alien
stockholdings. The presence of such corporate stockholders could diminish the effective control
of Filipinos.

3) Contention: The application of the grandfather rule is without basis in the constitution, FIA, PH
Mining Act, and SEC Rules. These laws and rules espouse the application of the control test to
determine compliance with Art. XII, S2.
Held:
But the grandfather rule does not eschew the control test. The control test is still the prevailing
mode of determining whether a corporation is a Filipino corporation under Art. XII, S2. When
in the mind of the court, there is DOUBT based on the facts in the 60-40 Filipino equity ownership
in the corporation, THEN it may apply the grandfather rule. Thus, the use of the grandfather
rule as a supplement to the control test is not proscribed by the constitution or PH Mining Act.

3.1) The control test and GFather rule can be used cumulatively. It is only when the control test
is first complied with that the GFather rule may be applied. If the corporation’s Filipino equity
falls below the 60% threshold, the corporation is immediately considered foreign-owned and the
need to resort to the GFather rule disappears.

A corporation that complies with the 60-40 requirement can be considered a Filipino corporation
if there is no DOUBT as to who has “beneficial ownership” and control of the corporation.
There would be no need for further inquiry on corporate ownership or the application of the
GFather rule. Corollarily, even if the 60-40 requirement is met, a resort to GFather rule is necessary
if DOUBT exists as to the locus of the “beneficial ownership” and control.

3.2) Indicators of doubt- “Doubt” refers to various INDICIA that the beneficial ownership and
control of a corporation do not in fact reside in Filipino shareholders but in foreign stakeholders.
In DOJ Opinoin 165, S.1984, applying the Anti-Dummy Law, “significant indicators of the
dummy status” have been recognized. These are:
1. That the foreign investors provide practically all the funds for the joint investment
undertaken by these Filipino businessmen and their foreign partner;
2. That the foreign investors undertake to provide practically all the technological support
for the joint venture;
3. That the foreign investors, while being minority stockholders, manage the company and
prepare all economic viability studies.

In In the matter of the petition for revocation of the certificate of registration of Linear Works
Realty Development Corporation, SEC held that the fact that Japanese shareholders holding shares
with greater par value have similar rights as PH citizens holding shares with lower par value is
highly suspicious, indicating secret arrangements where Japanese nationals actually have greater
control and economic rights than the Filipino shareholders.

4) Here, petitioners’ corporate structure are:

4.1) Tesoro:

Sara Marie holds 59.97% of 10,000 common shares while MBMI (Canadian) owns 39.98%. In
turn, Olympic owns 66.63% of Sara Marie’s shares while MBMI holds 33.31%.

Olympic did not pay a single centavo for its shares; MBMI paid 99% of Sara Marie’s paid up
capital. That MBMI had provided practically all of Sara Marie and Tesoro’s funds creates serious
doubt as to the true extent of MBMI’s control over both Sara Marie and Tesoro since a reasonable
investor would expect to have greater control and economic rights than other investors who
invested less capital than him.

Thus, Filipino participation in Tesoro is 40.01% only:

(Filipino equity in Sara Marie) 66.67% x 59.97% (Sara Marie’s share in Tesoro) = 39.98%
39.98% + 0.03% (shares of individual Filipino shareholders (SH) in Tesoro) = 40.01%

Foreign participation: 59.99%

(Foreign equity in Sara Marie) 33.33% x 59.97 (Sara Marie’s share in Tesoro) = 19.99%
19.99% + 39.98% (MBMI’s direct participation in Tesoro) + 0.02%(shares of foreign individuals
in Tesoro) = 59.99%.

4.2) For McArthur, SC, doing the same formula, also found that MBMI had practically provided
all the funds in McArthur and Madridejos (59.97% Filipino shareholder in McArthur) and thus
there is doubt. SC found that Filipino participation in McArthur is only 40.01% and Foreign
participation is 59.99%.

4.3) For Narra MBMI also paid almost all (99.75%) of PLMDC’s (59.97% Filipino shareholder of
Narra) of PLMDC’s paid up capital. This creates serious doubt. SC found that Filipino
participation in Narra is 39.64% and foreign participation is 60.36%.

Thus, the 3 petitioners did not comply with Art. XII, S2.

5) SEC MC 8, S.2013, S2 provides:

Section 2. All covered corporations shall, at all times, observe the constitutional or
statutory requirement. For purposes of determining compliance therewith, the required
percentage of Filipino ownership shall be applied to BOTH (a) the total outstanding shares
of stock entitled to vote in the election of directors; AND (b) the total number of
outstanding shares of stock, whether or not entitled to vote in the election of directors.
Here, there is no indication that petitioners issued any other class of shares besides the 10,000
common shares and there is no suggestion that such shares were divided into voting or non-voting
common shares. Thus, for the purposes of this case, items (a) and (b) in S2 both refer to the 10,000
common shares of petitioners and there is no need to separately apply the 60-40 ratio to any
segment of said common shares.

20. Roy III v. Herbosa, GR 207246, November 22, 2016, Caguioa, J., En Banc.
FACTS:
SC’s ruling in Gamboa v. Finance Secretary Teves attained finality on Oct. 18, 2012, interpreting
Art. XII, S11 of the constitution. SEC posted a notice in its website soliciting public comments
and suggestions on a draft memorandum circular on the guidelines to be followed in determining
compliance with Filipino ownership requirement in public utilities in Art. XII, S11. Atty. Roy
submitted his written comments on the draft guidelines. The SEC, thru respondent Chairperson
Herbosa issued SEC-MC No. 8, which provides:
Section 2. All covered corporations shall, at all times, observe the constitutional or
statutory ownership requirement. For purposes of determining compliance therewith, the
required percentage of Filipino ownership shall be applied to BOTH (a) the total number
of outstanding shares of stock entitled to vote in the election of directors; AND (b) the total
number of outstanding shares of stock, whether or not entitled to vote in the election of
directors.
Petitioner Roy assails the validity of SEC-MC No.8 for not conforming to the letter of Gamboa.

ISSUE:
Contention: Roy contends that the 60-40 Filipino ownership requirement applies separately to each
class of shares of a public utility corporation, whether common, preferred nonvoting, preferred
voting, or any other class of shares.
HELD: Only to voting and non-voting.
Art. XII, S11 provides:
Sec. 11. No franchise, certificate, or any other foam of authorization for the operation of a
public utility shall be granted except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines at least sixty per centum of whose
 capital is owned by such citizens, nor shall such franchise, certificate or authorization be
exclusive in character or for a longer period than fifty years. Neither shall any such
franchise or right be granted except under the condition that it shall be subject to
amendment, alteration, or repeal by the Congress when the common good so requires. The
State shall encourage equity participation in public utilities by the general public. The
participation of foreign investors in the governing body of any public utility enterprise shall
be limited to their proportionate share in its capital, and all the executive and managing
officers of such corporation or association must be citizens of the Philippines.

1) Voting Control Test- In Gamboa, SC held that the term “capital” in Art. XII, S11 refers only to
shares of stock entitled to vote in the election of directors and thus only to common shares, and
not to total outstanding capital stock (consisting of common and nonvoting preferred shares). This
interpretation was in furtherance of the intent of the constitution that the state shall develop an
independent national economy “effectively controlled” by Filipinos because voting stock equates
to control of the public utility. Mere legal title is insufficient to meet the 60%. Full beneficial
ownership of 60% of the outstanding capital stock coupled with 60% of the voting rights is
required.

2) S2 of SEC-MC 8 incorporates the voting control test or the controlling interest requirement. In
fact, S2 goes beyond requiring 60-40 in the voting stocks. It requires 60-40 in the total number
of outstanding shares of stock, whether voting or not. SEC formulated this to adhere to SC’s
pronouncement that “full beneficial ownership of 60% of the outstanding capital stock, coupled
with 60% of the voting rights is required.” Clearly, SEC did not commit gadalej; SEC-MC8 simply
implemented Gamboa.

For example, Company X’s outstanding capital stock is as follows:

100 common shares
100 Class A preferred shares (with right to elect directors)
100 Class B preferred shares (without right to elect directors)
Voting Control Test: if at least a total of 120 of common shares and class A preferred shares (in
any combination) are owned and controlled by Filipinos, Company X complies with the 60%
requirement.
Full beneficial ownership of 60% of both outstanding and voting- If at least 180 shares of all the
outstanding capital stock of Company X are owned and controlled by Filipinos, provided that
among those 180 shares a total of 120 common and class A preferred shares (in any
combination) are owned and controlled by Filipinos, then Company X complies with SEC-MC
8 and Gamboa.

3) Full beneficial ownership test- Mere legal title is not enough to meet the required Filipino
equity, which means that it is not sufficient that a share is registered in the name of a Filipino
citizen or national, i.e., he should also have full beneficial ownership of the share. If the voting
right of a share held in the name of a Filipino citizen or national is assigned or transferred to an
alien, that share is not to be counted in the determination of the required Filipino equity. In the
same vein, if the dividends and other fruits and accessions of the share do not accrue to a Filipino
citizen or national, then that share is also to be excluded or not counted.
4) Effective control by Filipino citizens of a public utility is already assured in Art. XII, S11 in its
3 safeguards: (1) 60% of its capital must be owned by Filipino citizens; (2) participation of foreign
investors in its board of directors is limited to their proportionate share in its capital; and (3) all its
executive and managing officers must be citizens of the Philippines.

5) The application of the 60-40 requirement to each class of shares, whether common, preferred
nonvoting, preferred voting, or any other class fails to appreciate the nature of stocks as financial
instruments. There are basically only two types of shares of stocks: 1) common stock and 2)
preferred stock. The variety of shares that a corporation may issue are dictated by the
corporation’s financial position and needs, short and long term targets, risks, etc. They can also be
reclassified from time to time.

Given the innumerable permutations of the classes of stocks may take, requiring SEC to keep track
of the ever-changing capital classes of corporations will be impossible. The law does not require
the impossible.

Going back to the example in (*par.2 of this digest), the term “capital” will be complied with only
if 60% of each of the three classes of shares of Company X (common, class A, and class B) is
owned by Filipinos. However, what if the 60% is not fully subscribed or achieved because there
are not enough Filipino takers? X will be deprived of capital that would otherwise be accessible to
it were it not for this unwarranted “restrictive” meaning of “capital.”

5.1) All shares have the right to vote in 8 specific corporate actions under S6 of the Corporation
Code (Amendment of AoI, of by-laws, sale etc. of corporate property, increase/decrease bonded
debt, of capital stock, etc.), but this does not justify the restrictive interpretation of “capital”
petitioner insists. These 8 corporate matters is more in furtherance of the stockholder’s right of
ownership rather than as a mode of control.