EN BANC

WILSON P. GAMBOA, G.R. No. 176579

Petitioner,
Present:
- versus -

CORONA, C.J.,

FINANCE SECRETARY MARGARITO CARPIO,

B. TEVES, FINANCE
UNDERSECRETARY JOHN P. VELASCO, JR.,
SEVILLA, AND COMMISSIONER
RICARDO ABCEDE OF THE LEONARDO-DE CASTRO,
PRESIDENTIAL COMMISSION ON
GOOD GOVERNMENT (PCGG) IN BRION,
THEIR CAPACITIES AS CHAIR AND
MEMBERS, RESPECTIVELY, OF THE PERALTA,
PRIVATIZATION COUNCIL,
BERSAMIN,
CHAIRMAN ANTHONI SALIM OF
FIRST PACIFIC CO., LTD. IN HIS DEL CASTILLO,
CAPACITY AS DIRECTOR OF
METRO PACIFIC ASSET HOLDINGS ABAD,
INC., CHAIRMAN MANUEL V.
PANGILINAN OF PHILIPPINE LONG VILLARAMA, JR.,
DISTANCE TELEPHONE COMPANY
(PLDT) IN HIS CAPACITY AS PEREZ,
MANAGING DIRECTOR OF FIRST
PACIFIC CO., LTD., PRESIDENT MENDOZA, and
NAPOLEON L. NAZARENO OF
PHILIPPINE LONG DISTANCE SERENO, JJ.
TELEPHONE COMPANY, CHAIR FE
BARIN OF THE SECURITIES
EXCHANGE COMMISSION, and
PRESIDENT FRANCIS LIM OF THE
PHILIPPINE STOCK EXCHANGE,
 Respondents.

PABLITO V. SANIDAD and Promulgated:

ARNO V. SANIDAD,

Petitioners-in-Intervention. June 28, 2011

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION
CARPIO, J.:

The Case

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

The Antecedents

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

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

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

Thereafter, First Pacific announced that it would exercise its right of first refusal as a PTIC
stockholder and buy the 111,415 PTIC shares by matching the bid price of Parallax. However,
First Pacific failed to do so by the 1 February 2007 deadline set by IPC and instead, yielded its
right to PTIC itself which was then given by IPC until 2 March 2007 to buy the PTIC shares. On
14 February 2007, First Pacific, through its subsidiary, MPAH, entered into a Conditional Sale
and Purchase Agreement of the 111,415 PTIC shares, or 46.125 percent of the outstanding
capital stock of PTIC, with the Philippine Government for the price of P25,217,556,000 or
US$510,580,189. The sale was completed on 28 February 2007.

Since PTIC is a stockholder of PLDT, the sale by the Philippine Government of 46.125 percent
of PTIC shares is actually an indirect sale of 12 million shares or about 6.3 percent of the
outstanding common shares of PLDT. With the sale, First Pacifics common shareholdings in
PLDT increased from 30.7 percent to 37 percent, thereby increasing the common
shareholdings of foreigners in PLDT to about 81.47 percent. This violates Section 11, Article
XII of the 1987 Philippine Constitution which limits foreign ownership of the capital of a public
utility to not more than 40 percent.3

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

On 9 November 1967, PTIC was incorporated and had since engaged in the business of
investment holdings. PTIC held 26,034,263 PLDT common shares, or 13.847 percent of the total
PLDT outstanding common shares. PHI, on the other hand, was incorporated in 1977, and
became the owner of 111,415 PTIC shares or 46.125 percent of the outstanding capital stock of
PTIC by virtue of three Deeds of Assignment executed by Ramon Cojuangco and
Luis Tirso Rivilla. In 1986, the 111,415 PTIC shares held by PHI were sequestered by the
PCGG, and subsequently declared by this Court as part of the ill-gotten wealth of former
President Ferdinand Marcos. The sequestered PTIC shares were reconveyed to the Republic of
the Philippines in accordance with this Courts decision4 which became final and executory on 8
August 2006.

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

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

On 31 January 2007, the House of Representatives (HR) Committee on Good Government

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

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

On 28 February 2007, petitioner filed the instant petition for prohibition, injunction, declaratory
relief, and declaration of nullity of sale of the 111,415 PTIC shares. Petitioner claims, among
others, that the sale of the 111,415 PTIC shares would result in an increase in First Pacifics
common shareholdings in PLDT from 30.7 percent to 37 percent, and this, combined with
Japanese NTT DoCoMos common shareholdings in PLDT, would result to a total foreign
common shareholdings in PLDT of 51.56 percent which is over the 40 percent constitutional
limit.6 Petitioner asserts:

If and when the sale is completed, First Pacifics equity in PLDT will go up from 30.7
percent to 37.0 percent of its common or voting- stockholdings, x x x. Hence, the
consummation of the sale will put the two largest foreign investors in PLDT First Pacific
and Japans NTT DoCoMo, which is the worlds largest wireless telecommunications firm,
owning 51.56 percent of PLDT common equity. x x x With the completion of the sale,
data culled from the official website of the New York Stock Exchange (www.nyse.com)
showed that those foreign entities, which own at least five percent of common equity,
will collectively own 81.47 percent of PLDTs common equity. x x x

x x x as the annual disclosure reports, also referred to as Form 20-K

reports x x x which PLDT submitted to the New York Stock Exchange for
the period 2003-2005, revealed that First Pacific and several other foreign
entities breached the constitutional limit of 40 percent ownership as early
as 2003. x x x7

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

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

Petitioners-in-intervention join petitioner Wilson Gamboa x x x in seeking, among others, to

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

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

The Ruling of the Court

The petition is partly meritorious.

Petition for declaratory relief treated as petition for mandamus

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

While direct resort to this Court may be justified in a petition for prohibition,11 the Court shall
nevertheless refrain from discussing the grounds in support of the petition for prohibition since
on 28 February 2007, the questioned sale was consummated when MPAH paid
IPC P25,217,556,000 and the government delivered the certificates for the 111,415 PTIC shares.
However, since the threshold and purely legal issue on the definition of the term capital in
Section 11, Article XII of the Constitution has far-reaching implications to the
national economy, the Court treats the petition for declaratory relief as one for mandamus.12

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

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

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

The Court has no original and exclusive jurisdiction over a petition for declaratory
relief. However, exceptions to this rule have been recognized. Thus, where the
petition has far-reaching implications and raises questions that should be resolved,
it may be treated as one for mandamus.15 (Emphasis supplied)
In the present case, petitioner seeks primarily the interpretation of the term capital in Section 11,
Article XII of the Constitution. He prays that this Court declare that the term capital refers to
common shares only, and that such shares constitute the sole basis in determining foreign equity
in a public utility. Petitioner further asks this Court to declare any ruling inconsistent with such
interpretation unconstitutional.

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

The Court first encountered the issue on the definition of the term capital in Section 11, Article
XII of the Constitution in the case of Fernandez v. Cojuangco, docketed as G.R. No.
157360.16 That case involved the same public utility (PLDT) and substantially the same private
respondents. Despite the importance and novelty of the constitutional issue raised therein and
despite the fact that the petition involved a purely legal question, the Court declined to resolve
the case on the merits, and instead denied the same for disregarding the hierarchy of
courts.17 There, petitioner Fernandez assailed on a pure question of law the Regional Trial Courts
Decision of 21 February 2003 via a petition for review under Rule 45. The Courts Resolution,
denying the petition, became final on 21 December 2004.

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

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

Petitioner has locus standi

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

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

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

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

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

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

Definition of the Term Capital in

Section 11, Article XII of the 1987 Constitution

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

Section 11. No franchise, certificate, or any other form of authorization for the
operation of a public utility shall be granted except to citizens of the Philippines or
to corporations or associations organized under the laws of the Philippines, at least
sixty per centum of whose capital is owned by such citizens; nor shall such franchise,
certificate, or authorization be exclusive in character or for a longer period than fifty
years. Neither shall any such franchise or right be granted except under the condition that
it shall be subject to amendment, alteration, or repeal by the Congress when the common
good so requires. The State shall encourage equity participation in public utilities by the
general public. The participation of foreign investors in the governing body of any public
utility enterprise shall be limited to their proportionate share in its capital, and all the
executive and managing officers of such corporation or association must be citizens of
the Philippines. (Emphasis supplied)
The above provision substantially reiterates Section 5, Article XIV of the 1973 Constitution,
thus:

Section 5. No franchise, certificate, or any other form of authorization for the

operation of a public utility shall be granted except to citizens of the Philippines or
to corporations or associations organized under the laws of the Philippines at least
sixty per centum of the capital of which is owned by such citizens, nor shall such
franchise, certificate, or authorization be exclusive in character or for a longer period than
fifty years. Neither shall any such franchise or right be granted except under the condition
that it shall be subject to amendment, alteration, or repeal by the National Assembly
when the public interest so requires. The State shall encourage equity participation in
public utilities by the general public. The participation of foreign investors in the
governing body of any public utility enterprise shall be limited to their proportionate
share in the capital thereof. (Emphasis supplied)

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

Section 8. No franchise, certificate, or any other form of authorization for the

operation of a public utility shall be granted except to citizens of the Philippines or
to corporations or other entities organized under the laws of the Philippines sixty
per centum of the capital of which is owned by citizens of the Philippines, nor shall
such franchise, certificate, or authorization be exclusive in character or for a longer
period than fifty years. No franchise or right shall be granted to any individual, firm, or
corporation, except under the condition that it shall be subject to amendment, alteration,
or repeal by the Congress when the public interest so requires. (Emphasis supplied)
Father Joaquin G. Bernas, S.J., a leading member of the 1986 Constitutional Commission,
reminds us that the Filipinization provision in the 1987 Constitution is one of the products of the
spirit of nationalism which gripped the 1935 Constitutional Convention.25 The 1987 Constitution
provides for the Filipinization of public utilities by requiring that any form of authorization for
the operation of public utilities should be granted only to citizens of the Philippines or to
corporations or associations organized under the laws of the Philippines at least sixty per centum
of whose capital is owned by such citizens. The provision is [an express] recognition of the
sensitive and vital position of public utilities both in the national economy and for national
security.26 The evident purpose of the citizenship requirement is to prevent aliens from assuming
control of public utilities, which may be inimical to the national interest.27 This specific
provision explicitly reserves to Filipino citizens control of public utilities, pursuant to an
overriding economic goal of the 1987 Constitution: to conserve and develop our patrimony28 and
ensure a self-reliant and independent national economy effectively controlled by Filipinos.29

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

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

Petitioner submits that the 40 percent foreign equity limitation in domestic public utilities refers
only to common shares because such shares are entitled to vote and it is through voting that
control over a corporation is exercised. Petitioner posits that the term capital in Section 11,
Article XII of the Constitution refers to the ownership of common capital stock subscribed and
outstanding, which class of shares alone, under the corporate set-up of PLDT, can vote and elect
members of the board of directors. It is undisputed that PLDTs non-voting preferred shares are
held mostly by Filipino citizens.30 This arose from Presidential Decree No. 217,31 issued on 16
June 1973 by then President Ferdinand Marcos, requiring every applicant of a PLDT telephone
line to subscribe to non-voting preferred shares to pay for the investment cost of installing the
telephone line.32

Petitioners-in-intervention basically reiterate petitioners arguments and adopt petitioners

definition of the term capital.33 Petitioners-in-intervention allege that the approximate foreign
ownership of common capital stock of PLDT x x x already amounts to at least 63.54% of the
total outstanding common stock, which means that foreigners exercise significant control over
PLDT, patently violating the 40 percent foreign equity limitation in public utilities prescribed by
the Constitution.

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

In particular, respondent Nazarenos Memorandum, consisting of 73 pages, harps mainly on the

procedural infirmities of the petition and the supposed violation of the due process rights of the
affected foreign common shareholders. Respondent Nazareno does not deny petitioners
allegation of foreigners dominating the common shareholdings of PLDT. Nazarenostressed
mainly that the petition seeks to divest foreign common shareholders purportedly exceeding
40% of the total common shareholdings in PLDT of their ownership over their shares.
Thus, the foreign natural and juridical PLDT shareholders must be impleaded in this suit so that
they can be heard.34 Essentially, Nazareno invokes denial of due process on behalf of the foreign
common shareholders.

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

Similarly, respondent Manuel V. Pangilinan does not define the term capital in Section 11,
Article XII of the Constitution. Neither does he refute petitioners claim of foreigners holding
more than 40 percent of PLDTs common shares. Instead, respondent Pangilinan focuses on the
procedural flaws of the petition and the alleged violation of the due process rights of foreigners.
Respondent Pangilinan emphasizes in his Memorandum (1) the absence of this Courts
jurisdiction over the petition; (2) petitioners lack of standing; (3) mootness of the petition; (4)
non-availability of declaratory relief; and (5) the denial of due process rights. Moreover,
respondent Pangilinan alleges that the issue should be whether owners of shares in PLDT as well
as owners of shares in companies holding shares in PLDT may be required to relinquish their
shares in PLDT and in those companies without any law requiring them to surrender their shares
and also without notice and trial.
Respondent Pangilinan further asserts that Section 11, [Article XII of the Constitution]
imposes no nationality requirement on the shareholders of the utility company as a
condition for keeping their shares in the utility company. According to him, Section 11 does
not authorize taking one persons property (the shareholders stock in the utility company) on the
basis of another partys alleged failure to satisfy a requirement that is a condition only for that
other partys retention of another piece of property (the utility company being at least 60%
Filipino-owned to keep its franchise).36

The OSG, representing public respondents Secretary Margarito Teves, Undersecretary John
P. Sevilla, Commissioner Ricardo Abcede, and Chairman Fe Barin, is likewise silent on the
definition of the term capital. In its Memorandum37 dated 24 September 2007, the OSG also
limits its discussion on the supposed procedural defects of the petition, i.e. lack of standing, lack
of jurisdiction, non-inclusion of interested parties, and lack of basis for injunction. The OSG
does not present any definition or interpretation of the term capital in Section 11, Article XII of
the Constitution. The OSG contends that the petition actually partakes of a collateral attack on
PLDTs franchise as a public utility, which in effect requires a full-blown trial where all the
parties in interest are given their day in court.38

Respondent Francisco Ed Lim, impleaded as President and Chief Executive Officer of the
Philippine Stock Exchange (PSE), does not also define the term capital and seeks the dismissal
of the petition on the following grounds: (1) failure to state a cause of action against Lim; (2) the
PSE allegedly implemented its rules and required all listed companies, including PLDT, to make
proper and timely disclosures; and (3) the reliefs prayed for in the petition would adversely
impact the stock market.

In the earlier case of Fernandez v. Cojuangco, petitioner Fernandez who claimed to be a

stockholder of record of PLDT, contended that the term capital in the 1987 Constitution refers to
shares entitled to vote or the common shares. Fernandez explained thus:

The forty percent (40%) foreign equity limitation in public utilities prescribed by the
Constitution refers to ownership of shares of stock entitled to vote, i.e., common shares,
considering that it is through voting that control is being exercised. x x x
Obviously, the intent of the framers of the Constitution in imposing limitations and
restrictions on fully nationalized and partially nationalized activities is for Filipino
nationals to be always in control of the corporation undertaking said activities. Otherwise,
if the Trial Courts ruling upholding respondents arguments were to be given credence, it
would be possible for the ownership structure of a public utility corporation to be divided
into one percent (1%) common stocks and ninety-nine percent (99%) preferred stocks.
Following the Trial Courts ruling adopting respondents arguments, the common shares
can be owned entirely by foreigners thus creating an absurd situation wherein foreigners,
who are supposed to be minority shareholders, control the public utility corporation.

xxxx

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

xxxx

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

Parenthetically, the Opinions dated February 15, 1988 and April 14, 1987 cited by the
Trial Court to support the proposition that the meaning of the word capital as used in
Section 11, Article XII of the Constitution allegedly refers to the sum total of the shares
subscribed and paid-in by the shareholder and it allegedly is immaterial how the stock is
classified, whether as common or preferred, cannot stand in the face of a clear legislative
policy as stated in the FIA which took effect in 1991 or way after said opinions were
rendered, and as clarified by the above-quoted Amendments. In this regard, suffice it to
state that as between the law and an opinion rendered by an administrative agency, the
law indubitably prevails. Moreover, said Opinions are merely advisory and cannot prevail
over the clear intent of the framers of the Constitution.
 In the same vein, the SECs construction of Section 11, Article XII of the Constitution is
at best merely advisory for it is the courts that finally determine what a law means.39

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

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

In this connection, the Corporation Code which was already in force at the time the
present (1987) Constitution was drafted defined outstanding capital stock as follows:

Section 137. Outstanding capital stock defined. The term outstanding capital stock, as
used in this Code, means the total shares of stock issued under binding subscription
agreements to subscribers or stockholders, whether or not fully or partially paid, except
treasury shares.

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

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

xxxx

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

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

The Corporation Code of the Philippines42 classifies shares as common or preferred, thus:

Sec. 6. Classification of shares. - The shares of stock of stock corporations may be

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

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

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

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

Except as otherwise provided in the articles of incorporation and stated in the certificate
of stock, each share shall be equal in all respects to every other share.

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

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;

3. Sale, lease, exchange, mortgage, pledge or other disposition of all or

substantially all of the corporate property;

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

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

corporations;

7. Investment of corporate funds in another corporation or business in accordance

with this Code; and

8. Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote necessary to

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

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

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

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

MR. VILLEGAS. That is right.

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

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

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

MR. VILLEGAS. That is right.

MR. NOLLEDO. Thank you.

With respect to an investment by one corporation in another corporation, say, a

corporation with 60-40 percent equity invests in another corporation which is permitted
by the Corporation Code, does the Committee adopt the grandfather rule?

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

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

MR. VILLEGAS. Yes.48

xxxx

MR. AZCUNA. May I be clarified as to that portion that was accepted by the Committee.
MR. VILLEGAS. The portion accepted by the Committee is the deletion of the phrase
voting stock or controlling interest.

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

MR. VILLEGAS. Yes.

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

MR. VILLEGAS. That is right.

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

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

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

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

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

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

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

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

b. Philippine national shall mean a citizen of the Philippines or a domestic partnership or

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

Compliance with the required Filipino ownership of a corporation shall be

determined on the basis of outstanding capital stock whether fully paid or not, but
only such stocks which are generally entitled to vote are considered.

For stocks to be deemed owned and held by Philippine citizens or Philippine

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

Individuals or juridical entities not meeting the aforementioned qualifications are

considered as non-Philippine nationals. (Emphasis supplied)

Mere legal title is insufficient to meet the 60 percent Filipino-owned capital required in the
Constitution. Full beneficial ownership of 60 percent of the outstanding capital stock, coupled
with 60 percent of the voting rights, is required. The legal and beneficial ownership of 60 percent
of the outstanding capital stock must rest in the hands of Filipino nationals in accordance with
the constitutional mandate. Otherwise, the corporation is considered as non-Philippine
national[s].
Under Section 10, Article XII of the Constitution, Congress may reserve to citizens of the
Philippines or to corporations or associations at least sixty per centum of whose capital is owned
by such citizens, or such higher percentage as Congress may prescribe, certain areas of
investments. Thus, in numerous laws Congress has reserved certain areas of investments to
Filipino citizens or to corporations at least sixty percent of the capital of which is owned by
Filipino citizens. Some of these laws are: (1) Regulation of Award of Government Contracts or
R.A. No. 5183; (2) Philippine Inventors Incentives Act or R.A. No. 3850; (3) Magna Carta for
Micro, Small and Medium Enterprises or R.A. No. 6977; (4) Philippine Overseas Shipping
Development Act or R.A. No. 7471; (5) Domestic Shipping Development Act of 2004 or R.A.
No. 9295; (6) Philippine Technology Transfer Act of 2009 or R.A. No. 10055; and (7) Ship
Mortgage Decree or P.D. No. 1521. Hence, the term capital in Section 11, Article XII of the
Constitution is also used in the same context in numerous lawsreserving certain areas of
investments to Filipino citizens.

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

We shall illustrate the glaring anomaly in giving a broad definition to the term capital. Let us
assume that a corporation has 100 common shares owned by foreigners and 1,000,000 non-
voting preferred shares owned by Filipinos, with both classes of share having a par value of one
peso (P1.00) per share. Under the broad definition of the term capital, such corporation would be
considered compliant with the 40 percent constitutional limit on foreign equity of public utilities
since the overwhelming majority, or more than 99.999 percent, of the total outstanding capital
stock is Filipino owned. This is obviously absurd.

In the example given, only the foreigners holding the common shares have voting rights in the
election of directors, even if they hold only 100 shares. The foreigners, with a minuscule equity
of less than 0.001 percent, exercise control over the public utility. On the other hand, the
Filipinos, holding more than 99.999 percent of the equity, cannot vote in the election of directors
and hence, have no control over the public utility. This starkly circumvents the intent of the
framers of the Constitution, as well as the clear language of the Constitution, to place the control
of public utilities in the hands of Filipinos. It also renders illusory the State policy of an
independent national economy effectively controlled by Filipinos.
The example given is not theoretical but can be found in the real world, and in fact exists in the
present case.

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

On the other hand, holders of common shares are granted the exclusive right to vote in the
election of directors. PLDTs Articles of Incorporation52 state that each holder of Common
Capital Stock shall have one vote in respect of each share of such stock held by him on all
matters voted upon by the stockholders, and the holders of Common Capital Stock shall have
the exclusive right to vote for the election of directors and for all other purposes.53

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

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

Moreover, the Dividend Declarations of PLDT for 2009,57 as submitted to the SEC, shows that
per share the SIP58 preferred shares earn a pittance in dividends compared to the common shares.
PLDT declared dividends for the common shares at P70.00 per share, while the declared
dividends for the preferred shares amounted to a measly P1.00 per share.59 So the preferred
shares not only cannot vote in the election of directors, they also have very little and obviously
negligible dividend earning capacity compared to common shares.

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

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

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

To repeat, (1) foreigners own 64.27% of the common shares of PLDT, which class of shares
exercises the sole right to vote in the election of directors, and thus exercise control over PLDT;
(2) Filipinos own only 35.73% of PLDTs common shares, constituting a minority of the voting
stock, and thus do not exercise control over PLDT; (3) preferred shares, 99.44% owned by
Filipinos, have no voting rights; (4) preferred shares earn only 1/70 of the dividends that
common shares earn;63 (5) preferred shares have twice the par value of common shares; and (6)
preferred shares constitute 77.85% of the authorized capital stock of PLDT and common shares
only 22.15%. This kind of ownership and control of a public utility is a mockery of the
Constitution.
Incidentally, the fact that PLDT common shares with a par value of P5.00 have a current stock
market value of P2,328.00 per share,64 while PLDT preferred shares with a par value of P10.00
per share have a current stock market value ranging from only P10.92 to P11.06 per share,65 is a
glaring confirmation by the market that control and beneficial ownership of PLDT rest with the
common shares, not with the preferred shares.

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

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

x x x Hence, unless it is expressly provided that a legislative act is necessary to enforce a

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

. . . in case of doubt, the Constitution should be considered self-executing rather than

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

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

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

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

Thus, in numerous cases,67 this Court, even in the absence of implementing legislation, applied
directly the provisions of the 1935, 1973 and 1987 Constitutions limiting land ownership to
Filipinos. In Soriano v. Ong Hoo,68 this Court ruled:
 x x x As the Constitution is silent as to the effects or consequences of a sale by a citizen
of his land to an alien, and as both the citizen and the alien have violated the law, none of
them should have a recourse against the other, and it should only be the State that should
be allowed to intervene and determine what is to be done with the property subject of the
violation. We have said that what the State should do or could do in such matters is a
matter of public policy, entirely beyond the scope of judicial authority. (Dinglasan, et al.
vs. Lee Bun Ting, et al., 6 G. R. No. L-5996, June 27, 1956.) While the legislature has
not definitely decided what policy should be followed in cases of violations against
the constitutional prohibition, courts of justice cannot go beyond by declaring the
disposition to be null and void as violative of the Constitution. x x x (Emphasis
supplied)

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

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

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

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

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

SO ORDERED.

ANTONIO T. CARPIO

Associate Justice
 FIRST DIVISION

[G.R. No. 129459. September 29, 1998]

SAN JUAN STRUCTURAL AND STEEL FABRICATORS, INC., petitioner, vs. COURT
OF APPEALS, MOTORICH SALES CORPORATION, NENITA LEE
GRUENBERG, ACL DEVELOPMENT CORP. and JNM REALTY AND
DEVELOPMENT CORP., respondents.

DECISION
PANGANIBAN, J.

May a corporate treasurer, by herself and without any authorization from the board of
directors, validly sell a parcel of land owned by the corporation? May the veil of corporate fiction
be pierced on the mere ground that almost all of the shares of stock of the corporation are owned
by said treasurer and her husband?

The Case

These questions are answered in the negative by this Court in resolving the Petition for Review
on Certiorari before us, assailing the March 18, 1997 Decision[1] of the Court of Appeals[2] in CA
GR CV No. 46801 which, in turn, modified the July 18, 1994 Decision of the Regional Trial Court
of Makati, Metro Manila, Branch 63[3] in Civil Case No. 89-3511. The RTC dismissed both the
Complaint and the Counterclaim filed by the parties. On the other hand, the Court of Appeals
ruled:
WHEREFORE, premises considered, the appealed decision is AFFIRMED WITH
MODIFICATION ordering defendant-appellee Nenita Lee Gruenberg to REFUND or
return to plaintiff-appellant the downpayment of P100,000.00 which she received from
plaintiff-appellant. There is no pronouncement as to costs.[4]
The petition also challenges the June 10, 1997 CA Resolution denying reconsideration.[5]

The Facts

The facts as found by the Court of Appeals are as follows:

Plaintiff-appellant San Juan Structural and Steel Fabricators, Inc.s amended complaint
alleged that on 14 February 1989, plaintiff-appellant entered into an agreement with
defendant-appellee Motorich Sales Corporation for the transfer to it of a parcel of land
identified as Lot 30, Block 1 of the Acropolis Greens Subdivision located in the District
of Murphy, Quezon City, Metro Manila, containing an area of Four Hundred Fourteen
(414) square meters, covered by TCT No. (362909) 2876; that as stipulated in the
Agreement of 14 February 1989, plaintiff-appellant paid the down payment in the sum
of One Hundred Thousand (P100,000.00) Pesos, the balance to be paid on or before
March 2, 1989; that on March 1, 1989, Mr. Andres T. Co, president of plaintiff-
appellant corporation, wrote a letter to defendant-appellee Motorich Sales Corporation
requesting for a computation of the balance to be paid; that said letter was coursed
through defendant-appellees broker, Linda Aduca, who wrote the computation of the
balance; that on March 2, 1989, plaintiff-appellant was ready with the amount
corresponding to the balance, covered by Metrobank Cashiers Check No. 004223,
payable to defendant-appellee Motorich Sales Corporation; that plaintiff-appellant and
defendant-appellee Motorich Sales Corporation were supposed to meet in the office of
plaintiff-appellant but defendant-appellees treasurer, Nenita Lee Gruenberg, did not
appear; that defendant-appellee Motorich Sales Corporation despite repeated demands
and in utter disregard of its commitments had refused to execute the Transfer of
Rights/Deed of Assignment which is necessary to transfer the certificate of title; that
defendant ACL Development Corp. is impleaded as a necessary party since Transfer
Certificate of Title No. (362909) 2876 is still in the name of said defendant; while
defendant JNM Realty & Development Corp. is likewise impleaded as a necessary
party in view of the fact that it is the transferor of right in favor of defendant-appellee
Motorich Sales Corporation; that on April 6, 1989, defendant ACL Development
Corporation and Motorich Sales Corporation entered into a Deed of Absolute Sale
whereby the former transferred to the latter the subject property; that by reason of said
transfer, the Registry of Deeds of Quezon City issued a new title in the name of
Motorich Sales Corporation, represented by defendant-appellee Nenita Lee Gruenberg
and Reynaldo L. Gruenberg, under Transfer Certificate of Title No. 3571; that as a
result of defendants-appellees Nenita Lee Gruenberg and Motorich Sales Corporations
bad faith in refusing to execute a formal Transfer of Rights/Deed of Assignment,
plaintiff-appellant suffered moral and nominal damages which may be assessed against
defendants-appellees in the sum of Five Hundred Thousand (500,000.00) Pesos; that as
a result of defendants-appellees Nenita Lee Gruenberg and Motorich Sales
Corporations unjustified and unwarranted failure to execute the required Transfer of
Rights/Deed of Assignment or formal deed of sale in favor of plaintiff-appellant,
defendants-appellees should be assessed exemplary damages in the sum of One
Hundred Thousand (P100,000.00) Pesos; that by reason of defendants-appellees bad
faith in refusing to execute a Transfer of Rights/Deed of Assignment in favor of
plaintiff-appellant, the latter lost the opportunity to construct a residential building in
the sum of One Hundred Thousand (P100,000.00) Pesos; and that as a consequence of
defendants-appellees Nenita Lee Gruenberg and Motorich Sales Corporations bad faith
in refusing to execute a deed of sale in favor of plaintiff-appellant, it has been
constrained to obtain the services of counsel at an agreed fee of One Hundred Thousand
(P100,000.00) Pesos plus appearance fee for every appearance in court hearings.
In its answer, defendants-appellees Motorich Sales Corporation and Nenita Lee
Gruenberg interposed as affirmative defense that the President and Chairman of
Motorich did not sign the agreement adverted to in par. 3 of the amended complaint;
that Mrs. Gruenbergs signature on the agreement (ref: par. 3 of Amended Complaint) is
inadequate to bind Motorich. The other signature, that of Mr. Reynaldo Gruenberg,
President and Chairman of Motorich, is required; that plaintiff knew this from the very
beginning as it was presented a copy of the Transfer of Rights (Annex B of amended
complaint) at the time the Agreement (Annex B of amended complaint) was signed;
that plaintiff-appellant itself drafted the Agreement and insisted that Mrs. Gruenberg
accept the P100,000.00 as earnest money; that granting, without admitting, the
enforceability of the agreement, plaintiff-appellant nonetheless failed to pay in legal
tender within the stipulated period (up to March 2, 1989); that it was the understanding
between Mrs. Gruenberg and plaintiff-appellant that the Transfer of Rights/Deed of
Assignment will be signed only upon receipt of cash payment; thus they agreed that if
the payment be in check, they will meet at a bank designated by plaintiff-appellant
where they will encash the check and sign the Transfer of Rights/Deed. However,
plaintiff-appellant informed Mrs. Gruenberg of the alleged availability of the check, by
phone, only after banking hours.
On the basis of the evidence, the court a quo rendered the judgment appealed from[,]
dismissing plaintiff-appellants complaint, ruling that:
'The issue to be resolved is: whether plaintiff had the right to compel defendants
to execute a deed of absolute sale in accordance with the agreement of February
14, 1989; and if so, whether plaintiff is entitled to damages.
As to the first question, there is no evidence to show that defendant Nenita Lee
Gruenberg was indeed authorized by defendant corporation, Motorich Sales, to
dispose of that property covered by T.C.T. No. (362909) 2876. Since the
property is clearly owned by the corporation, Motorich Sales, then its
disposition should be governed by the requirement laid down in Sec. 40, of the
Corporation Code of the Philippines, to wit:
Sec. 40, Sale or other disposition of assets. Subject to the provisions of
existing laws on illegal combination and monopolies, a corporation may
by a majority vote of its board of directors xxx sell, lease, exchange,
mortgage, pledge or otherwise dispose of all or substantially all of its
property and assets, including its goodwill xxx when authorized by the
vote of the stockholders representing at least two third (2/3) of the
outstanding capital stock x x x.
No such vote was obtained by defendant Nenita Lee Gruenberg for that
proposed sale[;] neither was there evidence to show that the supposed
transaction was ratified by the corporation.Plaintiff should have been on the
look out under these circumstances. More so, plaintiff himself [owns] several
corporations (tsn dated August 16, 1993, p. 3) which makes him knowledgeable
on corporation matters.
Regarding the question of damages, the Court likewise, does not find substantial
evidence to hold defendant Nenita Lee Gruenberg liable considering that she did
not in anyway misrepresent herself to be authorized by the corporation to sell
the property to plaintiff (tsn dated September 27, 1991, p. 8).
 In the light of the foregoing, the Court hereby renders judgment DISMISSING
the complaint at instance for lack of merit.
Defendants counterclaim is also DISMISSED for lack of basis. (Decision, pp. 7-
8; Rollo, pp. 34-35)
For clarity, the Agreement dated February 14, 1989 is reproduced hereunder:

AGREEMENT

KNOW ALL MEN BY THESE PRESENTS:

This Agreement, made and entered into by and between:

MOTORICH SALES CORPORATION, a corporation duly organized and existing under and by
virtue of Philippine Laws, with principal office address at 5510 South Super Hi-way cor.
Balderama St., Pio del Pilar, Makati, Metro Manila, represented herein by its Treasurer,
NENITA LEE GRUENBERG, hereinafter referred to as the TRANSFEROR;

- and --

SAN JUAN STRUCTURAL & STEEL FABRICATORS, a corporation duly organized and
existing under and by virtue of the laws of the Philippines, with principal office address at
Sumulong Highway, Barrio Mambungan, Antipolo, Rizal, represented herein by its President,
ANDRES T. CO, hereinafter referred to as the TRANSFEREE.

WITNESSETH, That:

WHEREAS, the TRANSFEROR is the owner of a parcel of land identified as Lot 30 Block 1 of
the ACROPOLIS GREENS SUBDIVISION located at the District of Murphy, Quezon City,
Metro Manila, containing an area of FOUR HUNDRED FOURTEEN (414) SQUARE
METERS, covered by a TRANSFER OF RIGHTS between JNM Realty & Dev. Corp. as the
Transferor and Motorich Sales Corp. as the Transferee;

NOW, THEREFORE, for and in consideration of the foregoing premises, the parties have agreed
as follows:

1. That the purchase price shall be at FIVE THOUSAND TWO HUNDRED

PESOS (P5,200.00) per square meter; subject to the following terms:

a. Earnest money amounting to ONE HUNDRED THOUSAND PESOS

(P100,000.00), will be paid upon the execution of this agreement and shall
form part of the total purchase price;

b. Balance shall be payable on or before March 2, 1989;

 2. That the monthly amortization for the month of February 1989 shall be for the
account of the Transferor; and that the monthly amortization starting March 21,
1989 shall be for the account of the Transferee;

The transferor warrants that he [sic] is the lawful owner of the above-described property and that
there [are] no existing liens and/or encumbrances of whatsoever nature;

In case of failure by the Transferee to pay the balance on the date specified on 1. (b), the earnest
money shall be forfeited in favor of the Transferor.

That upon full payment of the balance, the TRANSFEROR agrees to execute a TRANSFER OF
RIGHTS/DEED OF ASSIGNMENT in favor of the TRANSFEREE.

IN WITNESS WHEREOF, the parties have hereunto set their hands this 14th day of February,
1989 at Greenhills, San Juan, Metro Manila, Philippines.

MOTORICH SALES CORPORATION SAN STRUCTURAL &

TRANSFEROR STEEL FABRICATORS
TRANSFEREE

[SGD.] [SGD.]
By: NENITA LEE GRUENBERG By: ANDRES T. CO
Treasurer President

Signed in the presence of:

[SGD.] [SGD.]
_________________________ _____________________[6]

In its recourse before the Court of Appeals, petitioner insisted:

1. Appellant is entitled to compel the appellees to execute a Deed of Absolute Sale in
accordance with the Agreement of February 14, 1989,
2. Plaintiff is entitled to damages.[7]
As stated earlier, the Court of Appeals debunked petitioners arguments and affirmed the
Decision of the RTC with the modification that Respondent Nenita Lee Gruenberg was ordered to
refund P100,000 to petitioner, the amount remitted as downpayment or earnest money. Hence, this
petition before us.[8]

The Issues

Before this Court, petitioner raises the following issues:

I. Whether or not the doctrine of piercing the veil of corporate fiction is applicable
in the instant case
 II. Whether or not the appellate court may consider matters which the parties failed
to raise in the lower court
III. Whether or not there is a valid and enforceable contract between the petitioner
and the respondent corporation
IV. Whether or not the Court of Appeals erred in holding that there is a valid
correction/substitution of answer in the transcript of stenographic note[s]
V. Whether or not respondents are liable for damages and attorneys fees[9]
The Court synthesized the foregoing and will thus discuss them seriatim as follows:
1. Was there a valid contract of sale between petitioner and Motorich?
2. May the doctrine of piercing the veil of corporate fiction be applied to
Motorich?
3. Is the alleged alteration of Gruenbergs testimony as recorded in the transcript of
stenographic notes material to the disposition of this case?
4. Are respondents liable for damages and attorneys fees?

The Courts Ruling

The petition is devoid of merit.

First Issue: Validity of Agreement

Petitioner San Juan Structural and Steel Fabricators, Inc. alleges that on February 14, 1989, it
entered through its president, Andres Co, into the disputed Agreement with Respondent Motorich
Sales Corporation, which was in turn allegedly represented by its treasurer, Nenita Lee
Gruenberg. Petitioner insists that [w]hen Gruenberg and Co affixed their signatures on the contract
they both consented to be bound by the terms thereof. Ergo, petitioner contends that the contract
is binding on the two corporations. We do not agree.
True, Gruenberg and Co signed on February 14, 1989, the Agreement according to which a
lot owned by Motorich Sales Corporation was purportedly sold. Such contract, however, cannot
bind Motorich, because it never authorized or ratified such sale.
A corporation is a juridical person separate and distinct from its stockholders or
members. Accordingly, the property of the corporation is not the property of its stockholders or
members and may not be sold by the stockholders or members without express authorization from
the corporations board of directors.[10] Section 23 of BP 68, otherwise known as the Corporation
Code of the Philippines, provides:
SEC. 23. The Board of Directors or Trustees. -- Unless otherwise provided in this
Code, the corporate powers of all corporations formed under this Code shall be
 exercised, all business conducted and all property of such corporations controlled and
held by the board of directors or trustees to be elected from among the holders of
stocks, or where there is no stock, from among the members of the corporation, who
shall hold office for one (1) year and until their successors are elected and qualified.
Indubitably, a corporation may act only through its board of directors, or, when authorized
either by its bylaws or by its board resolution, through its officers or agents in the normal course
of business.The general principles of agency govern the relation between the corporation and its
officers or agents, subject to the articles of incorporation, bylaws, or relevant provisions of
law.[11] Thus, this Court has held that a corporate officer or agent may represent and bind the
corporation in transactions with third persons to the extent that the authority to do so has been
conferred upon him, and this includes powers which have been intentionally conferred, and also
such powers as, in the usual course of the particular business, are incidental to, or may be implied
from, the powers intentionally conferred, powers added by custom and usage, as usually pertaining
to the particular officer or agent, and such apparent powers as the corporation has caused persons
dealing with the officer or agent to believe that it has conferred.[12]
Furthermore, the Court has also recognized the rule that persons dealing with an assumed
agent, whether the assumed agency be a general or special one, are bound at their peril, if they
would hold the principal liable, to ascertain not only the fact of agency but also the nature and
extent of authority, and in case either is controverted, the burden of proof is upon them to establish
it (Harry Keeler v. Rodriguez, 4 Phil. 19).[13] Unless duly authorized, a treasurer, whose powers
are limited, cannot bind the corporation in a sale of its assets.[14]
In the case at bar, Respondent Motorich categorically denies that it ever authorized Nenita
Gruenberg, its treasurer, to sell the subject parcel of land.[15] Consequently, petitioner had the
burden of proving that Nenita Gruenberg was in fact authorized to represent and bind Motorich in
the transaction. Petitioner failed to discharge this burden. Its offer of evidence before the trial court
contained no proof of such authority.[16] It has not shown any provision of said respondents articles
of incorporation, bylaws or board resolution to prove that Nenita Gruenberg possessed such power.
That Nenita Gruenberg is the treasurer of Motorich does not free petitioner from the
responsibility of ascertaining the extent of her authority to represent the corporation. Petitioner
cannot assume that she, by virtue of her position, was authorized to sell the property of the
corporation. Selling is obviously foreign to a corporate treasurers function, which generally has
been described as to receive and keep the funds of the corporation, and to disburse them in
accordance with the authority given him by the board or the properly authorized officers.[17]
Neither was such real estate sale shown to be a normal business activity of Motorich. The
primary purpose of Motorich is marketing, distribution, export and import in relation to a general
merchandising business.[18] Unmistakably, its treasurer is not cloaked with actual or apparent
authority to buy or sell real property, an activity which falls way beyond the scope of her general
authority.
Articles 1874 and 1878 of the Civil Code of the Philippines provides:
ART. 1874. When a sale of a piece of land or any interest therein is through an agent,
the authority of the latter shall be in writing; otherwise, the sale shall be void.
ART. 1878 Special powers of attorney are necessary in the following case:
 xxxxxxxxx
(5) To enter any contract by which the ownership of an immovable is transmitted or
acquired either gratuitously or for a valuable consideration;
x x x x x x x x x.
Petitioner further contends that Respondent Motorich has ratified said contract of sale because
of its acceptance of benefits, as evidenced by the receipt issued by Respondent
Gruenberg.[19] Petitioner is clutching at straws.
As a general rule, the acts of corporate officers within the scope of their authority are binding
on the corporation. But when these officers exceed their authority, their actions cannot bind the
corporation, unless it has ratified such acts or is estopped from disclaiming them.[20]
In this case, there is a clear absence of proof that Motorich ever authorized Nenita Gruenberg,
or made it appear to any third person that she had the authority, to sell its land or to receive the
earnest money. Neither was there any proof that Motorich ratified, expressly or impliedly, the
contract. Petitioner rests its argument on the receipt, which, however, does not prove the fact of
ratification. The document is a hand-written one, not a corporate receipt, and it bears only Nenita
Gruenbergs signature. Certainly, this document alone does not prove that her acts were authorized
or ratified by Motorich.
Article 1318 of the Civil Code lists the requisites of a valid and perfected contract: (1) consent
of the contracting parties; (2) object certain which is the subject matter of the contract; (3) cause
of the obligation which is established. As found by the trial court[21] and affirmed by the Court of
Appeals,[22] there is no evidence that Gruenberg was authorized to enter into the contract of sale,
or that the said contract was ratified by Motorich. This factual finding of the two courts is binding
on this Court.[23] As the consent of the seller was not obtained, no contract to bind the obligor was
perfected. Therefore, there can be no valid contract of sale between petitioner and Motorich.
Because Motorich had never given a written authorization to Respondent Gruenberg to sell
its parcel of land, we hold that the February 14, 1989 Agreement entered into by the latter with
petitioner is void under Article 1874 of the Civil Code. Being inexistent and void from the
beginning, said contract cannot be ratified.[24]

Second Issue:
Piercing the Corporate Veil Not Justified

Petitioner also argues that the veil of corporate fiction of Motorich should be pierced, because
the latter is a close corporation. Since Spouses Reynaldo L. Gruenberg and Nenita R. Gruenberg
owned all or almost all or 99.866% to be accurate, of the subscribed capital stock[25] of Motorich,
petitioner argues that Gruenberg needed no authorization from the board to enter into the subject
contract.[26] It adds that, being solely owned by the Spouses Gruenberg, the company can be treated
as a close corporation which can be bound by the acts of its principal stockholder who needs no
specific authority. The Court is not persuaded.
 First, petitioner itself concedes having raised the issue belatedly,[27] not having done so during
the trial, but only when it filed its sur-rejoinder before the Court of Appeals.[28] Thus, this Court
cannot entertain said issue at this late stage of the proceedings. It is well-settled that points of law,
theories and arguments not brought to the attention of the trial court need not be, and ordinarily
will not be, considered by a reviewing court, as they cannot be raised for the first time on
appeal.[29] Allowing petitioner to change horses in midstream, as it were, is to run roughshod over
the basic principles of fair play, justice and due process.
Second, even if the above-mentioned argument were to be addressed at this time, the Court
still finds no reason to uphold it. True, one of the advantages of a corporate form of business
organization is the limitation of an investors liability to the amount of the investment.[30] This
feature flows from the legal theory that a corporate entity is separate and distinct from its
stockholders. However, the statutorily granted privilege of a corporate veil may be used only for
legitimate purposes.[31] On equitable considerations, the veil can be disregarded when it is utilized
as a shield to commit fraud, illegality or inequity; defeat public convenience; confuse legitimate
issues; or serve as a mere alter ego or business conduit of a person or an instrumentality, agency
or adjunct of another corporation.[32]
Thus, the Court has consistently ruled that [w]hen the fiction is used as a means of perpetrating
a fraud or an illegal act or as a vehicle for the evasion of an existing obligation, the circumvention
of statutes, the achievement or perfection of a monopoly or generally the perpetration of knavery
or crime, the veil with which the law covers and isolates the corporation from the members or
stockholders who compose it will be lifted to allow for its consideration merely as an aggregation
of individuals.[33]
We stress that the corporate fiction should be set aside when it becomes a shield against
liability for fraud, illegality or inequity committed on third persons. The question of piercing the
veil of corporate fiction is essentially, then, a matter of proof. In the present case, however, the
Court finds no reason to pierce the corporate veil of Respondent Motorich. Petitioner utterly failed
to establish that said corporation was formed, or that it is operated, for the purpose of shielding
any alleged fraudulent or illegal activities of its officers or stockholders; or that the said veil was
used to conceal fraud, illegality or inequity at the expense of third persons, like petitioner.
Petitioner claims that Motorich is a close corporation. We rule that it is not. Section 96 of the
Corporation Code defines a close corporation as follows:
SEC. 96. Definition and Applicability of Title. -- A close corporation, within the
meaning of this Code, is one whose articles of incorporation provide that: (1) All of the
corporations issued stock of all classes, exclusive of treasury shares, shall be held of
record by not more than a specified number of persons, not exceeding twenty (20); (2)
All of the issued stock of all classes shall be subject to one or more specified
restrictions on transfer permitted by this Title; and (3) The corporation shall not list in
any stock exchange or make any public offering of any of its stock of any
class.Notwithstanding the foregoing, a corporation shall be deemed not a close
corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned
or controlled by another corporation which is not a close corporation within the
meaning of this Code. xxx.
 The articles of incorporation[34] of Motorich Sales Corporation does not contain any provision
stating that (1) the number of stockholders shall not exceed 20, or (2) a preemption of shares is
restricted in favor of any stockholder or of the corporation, or (3) listing its stocks in any stock
exchange or making a public offering of such stocks is prohibited. From its articles, it is clear that
Respondent Motorich is not a close corporation.[35] Motorich does not become one either, just
because Spouses Reynaldo and Nenita Gruenberg owned 99.866% of its subscribed capital
stock. The [m]ere ownership by a single stockholder or by another corporation of all or nearly all
of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate
corporate personalities.[36] So too, a narrow distribution of ownership does not, by itself, make a
close corporation.
Petitioner cites Manuel R. Dulay Enterprises, Inc. v. Court of Appeals[37] wherein the Court
ruled that xxx petitioner corporation is classified as a close corporation and, consequently, a board
resolution authorizing the sale or mortgage of the subject property is not necessary to bind the
corporation for the action of its president.[38] But the factual milieu in Dulay is not on all fours with
the present case. In Dulay, the sale of real property was contracted by the president of a close
corporation with the knowledge and acquiescence of its board of directors.[39] In the present case,
Motorich is not a close corporation, as previously discussed, and the agreement was entered into
by the corporate treasurer without the knowledge of the board of directors.
The Court is not unaware that there are exceptional cases where an action by a director, who
singly is the controlling stockholder, may be considered as a binding corporate act and a board
action as nothing more than a mere formality.[40] The present case, however, is not one of them.
As stated by petitioner, Spouses Reynaldo and Nenita Gruenberg own almost 99.866% of
Respondent Motorich.[41] Since Nenita is not the sole controlling stockholder of Motorich, the
aforementioned exception does not apply. Granting arguendo that the corporate veil of Motorich
is to be disregarded, the subject parcel of land would then be treated as conjugal property of
Spouses Gruenberg, because the same was acquired during their marriage. There being no
indication that said spouses, who appear to have been married before the effectivity of the Family
Code, have agreed to a different property regime, their property relations would be governed by
conjugal partnership of gains.[42] As a consequence, Nenita Gruenberg could not have effected a
sale of the subject lot because [t]here is no co-ownership between the spouses in the properties of
the conjugal partnership of gains. Hence, neither spouse can alienate in favor of another his or her
interest in the partnership or in any property belonging to it; neither spouse can ask for a partition
of the properties before the partnership has been legally dissolved.[43]
Assuming further, for the sake of argument, that the spouses property regime is the absolute
community of property, the sale would still be invalid. Under this regime, alienation of community
property must have the written consent of the other spouse or the authority of the court without
which the disposition or encumbrance is void.[44] Both requirements are manifestly absent in the
instant case.

Third Issue: Challenged Portion of TSN Immaterial

Petitioner calls our attention to the following excerpt of the transcript of stenographic
notes(TSN):
 Q Did you ever represent to Mr. Co that you were authorized by the corporation to sell the
property?
A Yes, sir.[45]
Petitioner claims that the answer Yes was crossed out, and, in its place was written a No with
an initial scribbled above it.[46] This, however, is insufficient to prove that Nenita Gruenberg was
authorized to represent Respondent Motorich in the sale of its immovable property. Said excerpt
should be understood in the context of her whole testimony. During her cross-examination,
Respondent Gruenberg testified:
Q So, you signed in your capacity as the treasurer?
[A] Yes, sir.
Q Even then you kn[e]w all along that you [were] not authorized?
A Yes, sir.
Q You stated on direct examination that you did not represent that you were authorized to sell
the property?
A Yes, sir.
Q But you also did not say that you were not authorized to sell the property, you did not tell
that to Mr. Co, is that correct?
A That was not asked of me.
Q Yes, just answer it.
A I just told them that I was the treasurer of the corporation and it [was] also the president
who [was] also authorized to sign on behalf of the corporation.
Q You did not say that you were not authorized nor did you say that you were authorized?
A Mr. Co was very interested to purchase the property and he offered to put up a P100,000.00
earnest money at that time. That was our first meeting.[47]
Clearly then, Nenita Gruenberg did not testify that Motorich had authorized her to sell its
property. On the other hand, her testimony demonstrates that the president of Petitioner
Corporation, in his great desire to buy the property, threw caution to the wind by offering and
paying the earnest money without first verifying Gruenbergs authority to sell the lot.

Fourth Issue:
Damages and Attorneys Fees

Finally, petitioner prays for damages and attorneys fees, alleging that [i]n an utter display of
malice and bad faith, [r]espondents attempted and succeeded in impressing on the trial court and
[the] Court of Appeals that Gruenberg did not represent herself as authorized by Respondent
Motorich despite the receipt issued by the former specifically indicating that she was signing on
behalf of Motorich Sales Corporation. Respondent Motorich likewise acted in bad faith when it
claimed it did not authorize Respondent Gruenberg and that the contract [was] not binding,
[insofar] as it [was] concerned, despite receipt and enjoyment of the proceeds of Gruenbergs
act.[48] Assuming that Respondent Motorich was not a party to the alleged fraud, petitioner
maintains that Respondent Gruenberg should be held liable because she acted fraudulently and in
bad faith [in] representing herself as duly authorized by [R]espondent [C]orporation.[49]
As already stated, we sustain the findings of both the trial and the appellate courts that the
foregoing allegations lack factual bases. Hence, an award of damages or attorneys fees cannot be
justified. The amount paid as earnest money was not proven to have redounded to the benefit of
Respondent Motorich. Petitioner claims that said amount was deposited to the account of
Respondent Motorich, because it was deposited with the account of Aren Commercial c/o
Motorich Sales Corporation.[50] Respondent Gruenberg, however, disputes the allegations of
petitioner. She testified as follows:
Q You voluntarily accepted the P100,000.00, as a matter of fact, that was encashed, the check
was encashed.
A Yes, sir, the check was paid in my name and I deposit[ed] it . . .
Q In your account?
A Yes, sir. [51]
In any event, Gruenberg offered to return the amount to petitioner xxx since the sale did not push
through.[52]
Moreover, we note that Andres Co is not a neophyte in the world of corporate business. He
has been the president of Petitioner Corporation for more than ten years and has also served as
chief executive of two other corporate entities.[53] Co cannot feign ignorance of the scope of the
authority of a corporate treasurer such as Gruenberg. Neither can he be oblivious to his duty to
ascertain the scope of Gruenbergs authorization to enter into a contract to sell a parcel of land
belonging to Motorich.
Indeed, petitioners claim of fraud and bad faith is unsubstantiated and fails to persuade the
Court. Indubitably, petitioner appears to be the victim of its own officers negligence in entering
into a contract with and paying an unauthorized officer of another corporation.
As correctly ruled by the Court of Appeals, however, Nenita Gruenberg should be ordered to
return to petitioner the amount she received as earnest money, as no one shall enrich himself at the
expense of another,[54] a principle embodied in Article 2154 of the Civil Code.[55] Although there
was no binding relation between them, petitioner paid Gruenberg on the mistaken belief that she
had the authority to sell the property of Motorich.[56] Article 2155 of the Civil Code provides that
[p]ayment by reason of a mistake in the construction or application of a difficult question of law
may come within the scope of the preceding article.
WHEREFORE, the petition is hereby DENIED and the assailed Decision is AFFIRMED.
SO ORDERED.
Davide Jr. (Chairman), Bellosillo, Vitug, and Quisumbing, JJ., concur.
 THIRD DIVISION

[G.R. No. 131680. September 14, 2000]

SUBIC BAY METROPOLITAN AUTHORITY, RICHARD J. GORDON, FERDINAND M.

ARISTORENAS, MANUEL W. QUIJANO and RAYMOND P.
VENTURA, petitioners, vs. UNIVERSAL INTERNATIONAL GROUP OF
TAIWAN, UIG INTERNATIONAL DEVELOPMENT CORPORATION and SUBIC
BAY GOLF AND COUNTRY CLUB, Inc., respondents.

DECISION
PANGANIBAN, J.:

A stipulation authorizing a party to extrajudicially rescind a contract and to recover

possession of the property in case of contractual breach is lawful. But when a valid
objection is raised, a judicial determination of the issue is still necessary before a takeover
may be allowed. In the present case, however, respondents do not deny that there was
such a breach of the Agreement; they merely argue that the stipulation allowing a
rescission and a recovery of possession is void. Hence, the other party may validly
enforce such stipulation.

The Case

Before us is a Petition[1] under Rule 45 of the Rules of Court assailing the December
3, 1997 Decision[2]of the Court of Appeals (CA) in CA-GR SP No. 45501. The decretal
portion of the CA Decision reads as follows:

WHEREFORE, premises considered, the Petition is, as it is hereby, DISMISSED for lack of
merit, and certiorari DENIED. The Orders of the respondent court both dated 03 October 1997
hereby STAND.[3]

The first Order[4] of the Regional Trial Court (RTC) of Olongapo City (Branch
73),[5] which was affirmed by the appellate court, granted herein respondents application
for a writ of preliminary mandatory and prohibitory injunction in this wise: [6]

WHEREFORE, premises considered, the defendants, their agents, officers and employees, and
all persons acting in their behalf are directed to restore peacefully to the plaintiffs all possession
of the golf course, clubhouse, offices and other appurtenances subject of the Lease and
Development Agreement between UIG Taiwan and the SBMA; and the said defendants, and
their agents, officers [and] employees to refrain [from] obstructing or meddling in the operation
and management thereof or x x x otherwise committing acts inimical to the interest of plaintiffs
in the management or operation of the same, until the parties may be heard on the merits of the
case.

The Injunction bond is fixed at One Million Pesos (P1,000,000.00) in cash or surety bond
provided by a surety company of reputable solvency.

The second RTC Order, also dated October 3, 1997, disposed of petitioners Motion
to Dismiss as follows:[7]

WHEREFORE, and the foregoing p[re]mises considered, Defendants Amended and

Consolidated Motion To Dismiss is hereby DENIED for lack of merit.

The Motion to Dismiss filed by Richard J. Gordon is [g]ranted insofar as the suit against him is
concerned in his private or personal capacity. He shall, however, remain as defendant in his
official capacity.

The Facts

The undisputed facts are summarized by the Court of Appeals as follows: [8]

On 25 May 1995, a Lease and Development Agreement was executed by respondent UIG and
petitioner SBMA under which respondent UIG shall lease from petitioner SBMA the Binictican
Golf Course and appurtenant facilities thereto to be transformed into a world class 18-hole golf
course, golf club/resort, commercial tourism and residential center. The contract in pertinent part
contains pre-termination clauses, which provide:

Section 22. Default

(a) The following acts and omissions shall constitute default by Tenant (each an Event of
Default):

xxxxxxxxx

(ii) Tenant or any of its Subsidiaries shall commit a material breach or violation of any of the
conditions, covenants or agreements herein made by Tenant or such Subsidiary (other than those
described in Sections 22.2 [a] [l] and such violation or failure shall continue for thirty (30) days
after notice from the Landlord, or, at Landlords sole discretion, sixty (60) days if such violations
or failure is reasonably susceptible of cure during such 60 day period and Tenant or such
Subsidiary begins and diligently pursues to completion such cure within thirty (30) days of the
initial notice from Landlord;

xxxxxxxxx

(b) If an event of default shall have occurred and be continuing, Landlord may, in its sole
discretion;
(i) Terminate this Lease thirty (30) days after the expiration of any period granted hereunder to
cure any Event of Default and retain all rent and other amounts previously paid by tenant and its
Subsidiaries.Thereafter, Landlord may immediately reenter, renovate or relet all or part of the
Property to others, and cancel all rights and privileges granted to Tenant and its Subsidiaries
without any restriction on recovery by Landlord for rents, fees and damages owned by Tenant
and its Subsidiaries.

On 4 February 1997, Petitioner SBMA sent a letter to private respondent UIG calling its
attention to its alleged several contractual violations in view of private respondent UIGs failure
to deliver its various contractual obligations, primarily its failure to complete the rehabilitation of
the Golf Course in time for the APEC Leaders Summit, and to pay accumulated lease rentals and
utilities, and to post the required performance bond. Respondent UIG, in its letter of 7 February
1997, interposed as an excuse the alleged default of its main contractor FF Cruz, resulting in
their filing of suit against the latter, and committed itself to comply with its obligations within a
few days. Private respondent UIG, however, failed to comply with its undertakings. On 7 March
1997, petitioner SBMA sent a letter to private respondent UIG declaring the latter in default of
its contractual obligations to SBMA under Section 22.1 of the Lease and Development
Agreement and required it to show cause why petitioner SBMA should not pre-terminate the
agreement. Private respondents paid the rental arrearages but the other obligations remained
unsatisfied.

On 8 September 1997, a letter of pre-termination was served by petitioner SBMA requiring

private respondent UIG to vacate the premises. On 12 September 1997, petitioner served the
formal notice of closure of Subic Bay Golf Course and took over possession of the subject
premises. On even date, private respondent filed a complaint against petitioner SBMA for
Injunction and Damages with prayer for a writ of temporary restraining order and writ of
preliminary injunction. On 3 October 1997, respondent court issued the two assailed orders
subject of the petition.

Ruling of the Court of Appeals

The Court of Appeals upheld the capacity to sue of Respondent Universal

International Group of Taiwan (UIG) because petitioners, having entered into a Lease
Development Agreement (LDA) with it, were estopped from questioning its standing. It
also held that Respondents UIG International Development Corporation (UIGDC) and
Subic Bay Golf and Country Club, Inc., (SBGCCI) were real parties in interest because
they had made substantial investments in the venture and had been in possession of the
property when Subic Bay Metropolitan Authority (SBMA) rescinded the LDA.
Likewise, it debunked petitioners submission that Section 21 of RA 7227 [9] was a
blanket proscription against the issuance of any and all injunctive relief[s] against
SBMA. It said that those actions which are removed from the stated objectives of the
corporate entity x x x cannot be placed beyond the pale of prohibitory writs. [10]
While it conceded that the law allowed extrajudicial rescission of a contract, it ruled
that no rationalization was possible for the extrajudicial taking of possession. It reasoned
that no one may take the law into his own hands. To hold otherwise would be productive
of nothing but mischief and chaos.
It also rejected petitioners reliance on Consing v. Jamandre,[11] in which the Supreme
Court allowed a contractual stipulation giving the lessor the right to take possession of
the leased property without need of court order. It explained that Consing was a judicial
aberration, not common but not unknown in the body of our jurisprudence, which lays
down a ruling contrary to the teaching of the greater mass of cases. [12]
Furthermore, it held that the issuance of the Writ of Preliminary Injunction did not
dispose of the main issue. Concluding, it observed that we cannot and should not send
the message to foreigners who do business here that we are a group of jingoists who
cannot look beyond our narrow interests and must look at every stranger with a wary eye
and treat them with uneven hands.
Disagreeing with the above judgment, petitioners elevated the matter to this Court.[13]

The Issues

In its Memorandum, Petitioner SBMA submits the following issues for our
consideration:[14]
I.

Whether or not the respondent court committed a reversible error in ruling that petitioners
action of extra-judicially recovering the possession of the subject premises is supposedly
illegal [as it] runs counter to the established law and [the] applicable decisions of the
Supreme Court on the matter.

II.

Whether or not the respondent court committed a reversible error in ruling that:

(a) The trial court ha[d] jurisdiction over the nature and subject matter of the case despite the
fact that the suit filed by private respondents is essentially an ejectment case, and

(b) The trial court ha[d] authority to issue the questioned injunctive relief despite the express
prohibition under Section 21 of R.A. 7227

III.

Whether or not respondent court committed a reversible error in ruling that private
respondents ha[d] the capacity to sue and possess material interest to institute an action
against petitioners.

IV.
 Whether or not the respondent court committed a reversible error by sanctioning departure
by the trial court from the accepted and usual course of judicial proceedings by failing to
make any ruling on the essential elements of injunctive relief consisting of: (1) a
clear and unmistakable right and (2) irreparable damage on the part of the private
respondents.

V.

Whether or not respondent court committed a reversible error in departing from the accepted
and usual course of judicial proceedings by sanctioning the illegal procedure of taking
possession of the subject premises from petitioner SBMA and transferring it into the hands
of the private respondents, although the rights of the latter ha[d] not yet been clearly
established.

VI.

Whether or not respondent court committed a reversible error by departing from the
accepted and usual course of judicial proceedings by sustaining the grant of injunctive relief
which effectively prejudged the merits of the main case.

VII.

Whether or not respondent court committed a reversible error by departing from the
accepted and usual course of judicial proceedings by sustaining the grant of injunctive relief
in favor of the private respondents although the latter [we]re clearly not entitled thereto as
they came before the courts with unclean hands.

VIII.

Whether or not in the event of a no reversible error judgment on the questioned decision of
the respondent court, this Honorable Division of the Supreme Court might modify or
even reverse the doctrines and principles of law laid down by the Supreme Court in several
leading cases, in violation of Section 4, Article VIII of the 1987 Philippine Constitution.

IX.

Whether or not in the event of a no reversible error judgment, this Honorable Division of the
Supreme Court might unwittingly cause great loss or irreparable damage to the government
because such a ruling tend[ed] to send a wrong signal that Philippine Courts [would] reward
rather than punish foreign investors who miserably failed to comply with their contractual
commitments to develop vital government assets.

Distilling the above-quoted assignment of errors, we find two main issues before
us: (a) whether the denial of petitioners Motion to Dismiss was correct, and (b) whether
the issuance of the Writ of Preliminary Mandatory and Prohibitory Injunction was proper.
 Under the first issue, the Court shall resolve (1) whether Respondent UIG has the
capacity to sue, (2) whether Respondents UIGDC and SBGCCI are real parties in interest,
and (3) whether the RTC has jurisdiction over the suit.
Under the second issue, the Court shall determine these questions: (1) whether the
Writ of Injunction against SBMA issued by the trial court contravenes Section 21 of RA
7227; (2)whether respondents have established their entitlement to the Writ; and (3)
whether SBMAs rescission of the LDA and takeover of the property are allowed by law.

The Courts Ruling

The Petition is partly meritorious. The CA correctly affirmed the denial of the Motion
to Dismiss, but erred in sustaining the Writ of Preliminary Mandatory and Prohibitory
Injunction.

First Issue:

Denial of the Motion to Dismiss

In its amended Motion to Dismiss filed before the RTC, petitioners contended that
UIG had no capacity to sue, and that UIGDC and SBGCCI had no material interest in the
present case. Both the appellate and the trial courts rejected these
contentions. Reiterating the arguments before us, petitioners add that the RTC had no
jurisdiction over the nature of the case.

(a) Respondents Capacity to Sue

Petitioners contend that UIG does not have the capacity to sue because it is a foreign
non-resident corporation not licensed by the Securities and Exchange Commission to do
business in the Philippines. They contend that the capacity to sue is conferred by law and
not by the parties.
As a general rule, unlicensed foreign non-resident corporations cannot file suits in the
Philippines. Section 133 of the Corporation Code specifically provides:

Sec. 133. No foreign corporation transacting business in the Philippines without a license, or its
successors or assigns, shall be permitted to maintain or intervene in any action, suit or
proceeding in any court or administrative agency of the Philippines, but such corporation may be
sued or proceeded against before Philippine courts or administrative tribunals on any valid cause
of action recognized under Philippine laws.
 A corporation has legal status only within the state or territory in which it was
organized. For this reason, a corporation organized in another country has no personality
to file suits in the Philippines. In order to subject a foreign corporation doing business in
the country to the jurisdiction of our courts, it must acquire a license from the SEC and
appoint an agent for service of process.[15] Without such license, it cannot institute a suit
in the Philippines.
It should be stressed, however, that the licensing requirement was never intended to
favor domestic corporations who enter into solitary transactions with unwary foreign firms
and then repudiate their obligations simply because the latter are not licensed to do
business in this country.[16] After contracting with a foreign corporation, a domestic firm is
estopped from denying the formers capacity to sue. Hence, in Merril Lynch Futures v.
CA,[17] the Court ruled:

The rule is that a party is estopped to challenge the personality of a corporation after having
acknowledged the same by entering into a contract with it. And the doctrine of estoppel to deny
corporate existence applies to foreign as well as to domestic corporations; one who has dealt
with a corporation of foreign origin as a corporate entity is estopped to deny its existence and
capacity. The principle will be applied to prevent a person contracting with a foreign corporation
from later taking advantage of its noncompliance with the statutes, chiefly in cases where such
person has received the benefits of the contract x x x.

This doctrine was initiated as early as 1924 in Asia Banking Corporation v. Standard
Products[18] and reiterated in Georg Grotjahn GMBH v. Isnani[19] and Communication
Materials and Design v. CA.[20] In Antam Consolidated v. CA,[21] the Court also rejected a
similar argument and noted that it is a common ploy of defaulting local companies which
are sued by unlicensed foreign companies not engaged in business in the Philippines to
invoke lack of capacity to sue.
In this case, SBMA is estopped from questioning the capacity to sue of UIG. In
entering into the LDA with UIG, SBMA effectively recognized its personality and capacity
to institute the suit before the trial court.

(b) Material Interest of

SBGCCI and UIGDC

Section 2, Rule 3 of the 1997 Rules of Court, defines a real party in interest in this
manner:

Sec. 2. Parties in Interest. - A real party in interest is the party who stands to be benefited or
injured by the judgment of the suit, or the party entitled to the avails of the suit. Unless otherwise
authorized by law or these Rules, every action must be prosecuted or defended in the name of the
real party in interest.[22]

SBMA contends that UIGDC is not a real party in interest because it was not privy to
the LDA between UIG and SBMA. It further alleges that it did not approve the assignment
to UIGDC of UIGs rights thereunder. In like manner, SBGCCI had no interest in the LDA
because it only derived its rights from the Development Agreement it had entered into
with UIGDC.
We are not persuaded. The CA made a factual finding that UIGDC and SBGCCI were
in possession of the property when SBMA took over. Moreover, it also found that they
had already made substantial investments in the project. We find no reason at this time
to justify a different conclusion. In view of these circumstances, we agree with the CA that
UIGDC and SBGCCI stand to be benefitted or injured by the present suit and should be
deemed real parties in interest.[23]
SBMAs contention -- that it had not approved UIGs assignment of rights to UIGDC -
- is not necessarily bereft of merit, however. SBMA should raise this issue, not now but in
appropriate proceedings before the trial court.

(c) Jurisdiction Over the Subject Matter

Petitioners also argue that the RTC had no jurisdiction over the case, which was
allegedly an ejectment suit cognizable by municipal trial courts. They add that the
Complaint demanded that respondents be restored to the possession of the subject
leased premises.
We disagree. A close scrutiny of the amended Complaint reveals that it sought to
enjoin petitioners from rescinding the contract and taking over the property. While
possession was a necessary consequence of the suit, it was merely incidental. The main
issue was whether SBMA could rescind the Agreement. Because it was a dispute that
was incapable of pecuniary estimation, it was within the jurisdiction of the RTC.[24]

Second Issue:

Issuance of the Writ of Injunction

(a) Present Writ of Injunction Not Barred by RA 7227

Petitioners contend that the RTC was barred from issuing a writ of injunction in this
case, pursuant to Section 21 of RA 7227 which provides as follows:

Sec. 21. Injunction and Restraining Order. -- The implementation of the projects for the
conversion into alternative productive uses of the military reservations is urgent and necessary
and shall not be restrained or enjoined except by an order issued by the Supreme Court of the
Philippines.[25]
 We are not persuaded. We agree with the CA that the present provision is not a
blanket prohibition of the issuance of an injunctive relief against any SBMA
action. Section 21 of RA 7227 prohibits only such court orders which restrain the
implementation of the projects for the conversion into alternative productive uses of the
military reservations.
The Writ issued in this case did not restrain or enjoin the implementation of any of
SBMAs conversion projects. In fact, it allowed UIG to proceed with the development of
the golf course pursuant to the LDA. It merely restrained SBMA from taking over the golf
course. Clearly, the assailed RTC Order did not seek to delay or hamper the conversion
of the former naval base into civilian uses.
Moreover, the assailed Writ of Preliminary Injunction was issued in connection with a
dispute pertaining to the correct interpretation of the LDA. To divest the trial court of that
authority is to give SBMA unhampered discretion to disregard its contractual obligations
under the guise of implementing its projects. Indeed, Section 21 of RA 7227 should not
bar judicial scrutiny of irregularities allegedly committed by SBMA.[26]

(b) Right of Respondents to Injunctive Relief

A writ of mandatory injunction requires the performance of a particular act [27] and is
granted only upon a showing of the following requisites:

1. The invasion of the right is material and substantial;

2. The right of a complainant is clear and unmistakable.

3. There is an urgent and permanent necessity for the writ to prevent serious damage.[28]

Because it commands the performance of an act, a mandatory injunction does not

preserve the status quo[29] and is thus more cautiously regarded than a mere prohibitive
injunction.Accordingly, the issuance of the former is justified only in a clear case, free
from doubt and dispute. Necessarily, the applicant has the burden of showing that it is
entitled to the writ.
In this case, the first assailed RTC Order dated October 3, 1997 was effectively a
preliminary mandatory injunction because it directed [herein petitioners] to restore
peacefully to the [herein respondents] possession of the golf course, clubhouse, offices
and other appurtenances subject of the Lease and Development Agreement between
UIG Taiwan and the SBMA. In addition, it was also a prohibitive injunction because it
restrained petitioners from obstructing or meddling in the operation and management of
the disputed property.
The records, however, do not show that herein respondents were indubitably entitled
to a mandatory writ. Under the LDA, we find no proof of a clear and unmistakable right on
their part to continue the operation and the development of the golf course. Indeed, the
RTC based its assailed Order mainly on the ground that SBMAs takeover was not legally
justifiable. Thus, it ruled in this wise:[30]

From all the foregoing, the Court is of the considered view that the forcible take over [by] the
[petitioners] of the golf course and its appurtenances is not legally justifiable. Based on the
evidence adduced during the hearing, the [respondents] have established a clear right to continue
the operation and management of the golf course, and x x x continued withholding of the
premises by the [petitioners] will result to irreparable damages to [respondents].

Furthermore, the CA did not make any categorical ruling that respondents established
a clear and unmistakable right to the Writ. Like the RTC, it emphasized that there was no
rationalization for SBMAs extrajudicial takeover of the disputed property. In other words,
both the CA and the trial court effectively ruled that respondents are entitled to the Writ
of Mandatory Injunction because SBMAs action was not in accordance with law.
On this point, we disagree with the trial and the appellate courts. As we will now show,
there is legal basis for petitioners rescission of the contract and takeover of the property
without any court order.

(c) Legality of SBMAs Rescission of the LDA and Takeover of the Property

Because of UIGs failure to comply with several of its contractual undertakings, SBMA
rescinded the LDA and took over the possession, the operation and the management of
the property without any judicial imprimatur. In doing so, it relied on the provisions of the
LDA, which we quoted earlier.
The Court of Appeals held that the extrajudicial rescission of the LDA was lawful, but
that the extrajudicial takeover of the property was not. It relied on Nera v. Vacante,[31] in
which the Supreme Court held:

x x x. A stipulation entitling one party to take possession of the land and building if the other
party violates the contract does not ex proprio vigore confer upon the former the right to take
possession thereof if objected to without judicial intervention and determination.

It also cited Zulueta v. Mariano,[32] which reiterated the above-quoted ruling. That
case was purportedly applicable because it involved a similar contractual stipulation,
which reads as follows:

12. That upon failure of the BUYER to fulfill any of the conditions herein stipulated, BUYER
automatically and irrevocably authorizes OWNER to recover extra-judicially, physical
possession of the land, building and other improvements which are subject of this contract, and
to take possession also extra-judicially whatever personal properties may be found within the
aforesaid premises from the date of said failure to answer for whatever unfulfilled monetary
obligations BUYER may have with OWNER; and this contract shall be considered as without
force and effect also from said date; x x x.
 Because Zulueta was a subsequent Decision, it supposedly overturned the
diametrically opposed earlier ruling in Consing v. Jamandre,[33] in which the Supreme
Court upheld a contractual stipulation authorizing the sub-lessor to take possession of the
leased premises in case of contractual breach. As earlier noted, the CA also
ruled that Consing was a judicial aberration.
We disagree. At the outset, it should be underscored that these cases are not
diametrically opposed to each other. In fact, they coexist. It should be noted also that the
CA erred in holding that Zulueta, being a later case, overturned Consing. The CA logic is
flawed, because after the promulgation of Zulueta, Consing was reiterated in 1991
in Viray v. IAC.[34]
Moreover, Zulueta and Nera recognized the validity and the effectivity of a
contractual provision authorizing the extrajudicial rescission of a contract and the
concomitant recovery of possession. Like Nera, Zulueta merely added the qualification
that the stipulation has legal effect x x x where the other party does not oppose it. Where
it is objected to, a judicial determination of the issues is still necessary. Significantly, they
did not categorically rule that such stipulation was void.
In fact, the stipulation is lawful. In Consing, the Court held that this kind of contractual
stipulation is not illegal, there being nothing in the law proscribing such kind of
agreement.[35]Affirming this ruling, the Court in Viray v. IAC[36] reiterated that the
stipulation was in the nature of a resolutory condition, for upon the exercise by the sub-
lessor of his right to take possession of the leased property, the contract is deemed
terminated.
UP v. De los Angeles[37] is instructive on this point. Pursuant to a stipulation similar to
that in the present case, the University of the Philippines (UP) rescinded its Logging
Agreement with ALUMCO and subsequently appointed another concessionaire to take
over the logging operation. Hence, the issue was whether [P]etitioner UP can treat its
contract with ALUMCO rescinded, and may disregard the same before any judicial
pronouncement to that effect. Ruling in favor of UP, the Court held that a party could
enforce such stipulation:

[T]he party who deems the contract violated may consider it resolved or rescinded, and act
accordingly, without previous court action, but it proceeds at its own risk. For it is only the final
judgment of the corresponding court that will conclusively and finally settle whether the action
taken was or was not correct in law. But the law definitely does not require that the contracting
party who believes itself injured must first file suit and wait for a judgment before taking
extrajudicial steps to protect its interest. Otherwise, the party injured by the others breach will
have to passively sit and watch its damages accumulateduring the pendency of the suit until the
final judgment of rescission is rendered when the law itself requires that he should exercise due
diligence to minimize its own damages. (Emphasis supplied.)

The Court also noted that the rescission was provisional and subject to scrutiny and
review by the proper court. It further noted that if the other party denies that rescission is
justified, it is free to resort to judicial action in its own behalf, and bring the matter to court.
It observed that the practical effect of the stipulation [was] to transfer to the defaulter the
initiative of instituting suit, instead of the rescinder.
In the present case, it is clear that the subject stipulation is allowed by law. Moreover,
a party is free to enforce it by rescinding the contract and recovering possession of the
property even without court intervention. Where it is objected to, however, a judicial
determination of the issue is still necessary.[38] Force or bloodshed cannot be justified in
the enforcement of the stipulation. Where the lessees offer physical resistance, the
lessors may apply for a writ of preliminary mandatory injunction, to which they have a
clear and unmistakable right. Indeed, courts are the final arbiters.
Thus, contrary to the ruling of the CA and the RTC, there is a rationalization and a
legal justification for the stipulation authorizing SBMA to rescind the contract and to take
over the property.

No Valid Objection on the Part of Respondents

As earlier observed, there were several violations[39] of the LDA, which were duly
reported by SBMA to UIG. Respondents, however, did not deny or controvert
them. Effectively, therefore, they offered no valid or sufficient objection to SBMAs
exercise of its stipulated right to extrajudicially rescind the LDA and take over the property
in case of material breach.
First, the Amended Complaint merely argued that the takeover was grounded upon
a void provision of the agreement.[40] It did not controvert the grounds for SBMAs exercise
of its rights under the subject stipulation. Indeed, glaring was respondents failure to deny
the alleged violations of the LDA.
Second, Respondent UIG was given several opportunities by SBMA to explain the
alleged violations. Instead of controverting them, UIG instead indicated its willingness to
comply with all its undertakings. Hence, in its February 4, 1997 letter,[41] SBMA called its
attention to several instances showing contractual breach. In response, UIGs counsel did
not deny the violations and instead apologized for the delay. [42]
Finding the response and the explanation unsatisfactory, SBMA, in a letter dated
March 7, 1997, declared UIG in default and required it to explain why the LDA should not
be terminated. UIG did not submit any written explanation. Instead, its counsel called the
SBMA chief operating officer[43] to inform him of its commitment to undertake anew the
remedial measures regarding the matter.[44]
In its letter dated September 8, 1997, SBMA directed UIG to vacate the premises and
to settle its outstanding accounts. Finally, on September 12, 1997, SBMA served UIG a
Notice of Closure.[45] It should be underscored that during all these exchanges, UIG did
not controvert its alleged noncompliance with the LDA.
Third, in the hearing for the application for a writ of mandatory injunction, respondents
presented two witnesses: Orlando de la Masa, operations manager of SBGCCI; and
Danilo Alabado, comptroller of UIGDC. De la Masa testified on the alleged forcible
takeover by SBMA, while Alabado testified that respondents had invested $12 million in
the rehabilitation of the golf course. Respondents, however, did not deny the violations of
their undertaking, which were explained by Atty. Raymond P. Ventura. [46]
Most significant, neither the CA nor the RTC made any finding that there was no
breach on the part of UIG. Likewise, they did not even make any observation that
respondents had controverted SBMAs claim.
Clearly, respondents stand was not a valid or sufficient objection to SBMAs exercise
of its right. Indeed, sustaining their claim would unduly diminish the force of such lawful
stipulation and allow parties to disregard it at will without any valid reason. In this case,
respondents miserably failed to give any semblance of objection to the merits of SBMAs
allegations. Moreover, we find no adequate showing of resistance to SBMAs
implementation of the subject stipulation.
Under the circumstances, SBMA showed that it had a right not only to rescind the
contract, but also to take over the property. On the other hand, respondents have not
shown any clear and unmistakable right to restrain SBMA from enforcing the contractual
stipulation. Indeed, they have offered no objection to SBMAs allegations of contractual
breach. Without prejudging their right to offer controverting evidence during the trial on
the merits, the Court holds that they failed to do so in their application for a writ of
preliminary injunction.

Epilogue

The Court of Appeals expressed its apprehension that a ruling against UIG would
send a message to foreign investors that we are a group of jingoists. We do not share
that view.Jingoism is not an issue here. Far from it. In partially reversing the CA, this Court
is merely performing its mandate to do justice and to apply the law to the facts of the
case. It is merely affirming the message that in this country, the rule of law prevails; and
contracts freely entered into, whether by foreign or by local investors, must be complied
with. Indeed, rule of law and faithfulness in the performance of contracts are cherished
values everywhere.
WHEREFORE, the Petition is partially GRANTED, and the assailed Decision of the
Court of Appeals REVERSED and SET ASIDE insofar as it affirmed the Writ of
Preliminary Injunction issued by the trial court. The said Writ is hereby LIFTED and the
case REMANDED to the RTC for trial on the merits. In the meantime, respondents shall,
upon finality of this Decision, yield the possession, the operation and the management of
the subject property to SBMA. No costs.
SO ORDERED.
Melo, (Chairman), Vitug, Purisima, and Gonzaga-Reyes, JJ., concur.
 FIRST DIVISION

[G.R. No. 142616. July 31, 2001]

PHILIPPINE NATIONAL BANK, petitioner, vs. RITRATO GROUP INC., RIATTO

INTERNATIONAL, INC., and DADASAN GENERAL
MERCHANDISE, respondent.

DECISION
KAPUNAN, J.:

In a petition for review on certiorari under Rule 45 of the Revised Rules of Court, petitioner
seeks to annul and set aside the Court of Appeals' decision in C.A. G.R. S.P. No. 55374 dated
March 27, 2000, affirming the Order issuing a writ of preliminary injunction of the Regional Trial
Court of Makati, Branch 147, dated June 30, 1999, and its Order dated October 4, 1999, which
denied petitioner's motion to dismiss.
The antecedents of this case are as follows:
Petitioner Philippine National Bank is a domestic corporation organized and existing under
Philippine law. Meanwhile, respondents Ritratto Group, Inc., Riatto International, Inc. and
Dadasan General Merchandise are domestic corporations, likewise, organized and existing under
Philippine law.
On May 29, 1996, PNB International Finance Ltd. (PNB-IFL), a subsidiary company of PNB,
organized and doing business in Hong Kong, extended a letter of credit in favor of the respondents
in the amount of US$300,000.00 secured by real estate mortgages constituted over four (4) parcels
of land in Makati City. This credit facility was later increased successively to US$1,140,000.00 in
September 1996; to US$1,290,000.00 in November 1996; to US$1,425,000.00 in February 1997;
and decreased to US$1,421,316.18 in April 1998. Respondents made repayments of the loan
incurred by remitting those amounts to their loan account with PNB-IFL in Hong Kong.
However, as of April 30, 1998, their outstanding obligations stood at
US$1,497,274.70. Pursuant to the terms of the real estate mortgages, PNB-IFL, through its
attorney-in-fact PNB, notified the respondents of the foreclosure of all the real estate mortgages
and that the properties subject thereof were to be sold at a public auction on May 27, 1999 at the
Makati City Hall.
On May 25, 1999, respondents filed a complaint for injunction with prayer for the issuance of
a writ of preliminary injunction and/or temporary restraining order before the Regional Trial Court
of Makati. The Executive Judge of the Regional Trial Court of Makati issued a 72-hour temporary
restraining order. On May 28, 1999, the case was raffled to Branch 147 of the Regional Trial Court
of Makati.The trial judge then set a hearing on June 8, 1999. At the hearing of the application for
preliminary injunction, petitioner was given a period of seven days to file its written opposition to
the application. On June 15, 1999, petitioner filed an opposition to the application for a writ of
preliminary injunction to which the respondents filed a reply. On June 25, 1999, petitioner filed a
motion to dismiss on the grounds of failure to state a cause of action and the absence of any privity
between the petitioner and respondents. On June 30, 1999, the trial court judge issued an Order for
the issuance of a writ of preliminary injunction, which writ was correspondingly issued on July
14, 1999. On October 4, 1999, the motion to dismiss was denied by the trial court judge for lack
of merit.
Petitioner, thereafter, in a petition for certiorari and prohibition assailed the issuance of the
writ of preliminary injunction before the Court of Appeals. In the impugned decision,[1] the
appellate court dismissed the petition. Petitioner thus seeks recourse to this Court and raises the
following errors:
1.
THE COURT OF APPEALS PALPABLY ERRED IN NOT DISMISSING THE
COMPLAINT A QUO, CONSIDERING THAT BY THE ALLEGATIONS OF THE
COMPLAINT, NO CAUSE OF ACTION EXISTS AGAINST PETITIONER, WHICH
IS NOT A REAL PARTY IN INTEREST BEING A MERE ATTORNEY-IN-FACT
AUTHORIZED TO ENFORCE AN ANCILLARY CONTRACT.
2.
THE COURT OF APPEALS PALPABLY ERRED IN ALLOWING THE TRIAL
COURT TO ISSUE IN EXCESS OR LACK OF JURISDICTION A WRIT OF
PRELIMINARY INJUNCTION OVER AND BEYOND WHAT WAS PRAYED FOR
IN THE COMPLAINT A QUO CONTRARY TO CHIEF OF STAFF, AFP VS.
GUADIZ, JR., 101 SCRA 827.[2]
Petitioner prays, inter alia, that the Court of Appeals' Decision dated March 27, 2000 and the
trial court's Orders dated June 30, 1999 and October 4, 1999 be set aside and the dismissal of the
complaint in the instant case.[3]
In their Comment, respondents argue that even assuming arguendo that petitioner and PNB-
IFL are two separate entities, petitioner is still the party-in-interest in the application for
preliminary injunction because it is tasked to commit acts of foreclosing respondents'
properties.[4] Respondents maintain that the entire credit facility is void as it contains stipulations
in violation of the principle of mutuality of contracts.[5] In addition, respondents justified the act
of the court a quo in applying the doctrine of "Piercing the Veil of Corporate Identity" by stating
that petitioner is merely an alter ego or a business conduit of PNB-IFL.[6]
The petition is impressed with merit.
Respondents, in their complaint, anchor their prayer for injunction on alleged invalid
provisions of the contract:

GROUNDS

I
 THE DETERMINATION OF THE INTEREST RATES BEING LEFT TO THE SOLE
DISCRETION OF THE DEFENDANT PNB CONTRAVENES THE PRINICIPAL OF
MUTUALITY OF CONTRACTS.
II
THERE BEING A STIPULATION IN THE LOAN AGREEMENT THAT THE RATE
OF INTEREST AGREED UPON MAY BE UNILATERALLY MODIFIED BY
DEFENDANT, THERE WAS NO STIPULATION THAT THE RATE OF INTEREST
SHALL BE REDUCED IN THE EVENT THAT THE APPLICABLE MAXIMUM
RATE OF INTEREST IS REDUCED BY LAW OR BY THE MONETARY BOARD.[7]
Based on the aforementioned grounds, respondents sought to enjoin and restrain PNB from
the foreclosure and eventual sale of the property in order to protect their rights to said property by
reason of void credit facilities as bases for the real estate mortgage over the said property.[8]
The contract questioned is one entered into between respondent and PNB-IFL, not PNB. In
their complaint, respondents admit that petitioner is a mere attorney-in-fact for the PNB-IFL with
full power and authority to, inter alia, foreclose on the properties mortgaged to secure their loan
obligations with PNB-IFL. In other words, herein petitioner is an agent with limited authority and
specific duties under a special power of attorney incorporated in the real estate mortgage. It is not
privy to the loan contracts entered into by respondents and PNB-IFL.
The issue of the validity of the loan contracts is a matter between PNB-IFL, the petitioner's
principal and the party to the loan contracts, and the respondents. Yet, despite the recognition that
petitioner is a mere agent, the respondents in their complaint prayed that the petitioner PNB be
ordered to re-compute the rescheduling of the interest to be paid by them in accordance with the
terms and conditions in the documents evidencing the credit facilities, and crediting the amount
previously paid to PNB by herein respondents.[9]
Clearly, petitioner not being a party to the contract has no power to re-compute the interest
rates set forth in the contract. Respondents, therefore do not have any cause of action against
petitioner.
The trial court, however, in its Order dated October 4, 1994, ruled that since PNB-IFL is a
wholly owned subsidiary of defendant Philippine National Bank, the suit against the defendant
PNB is a suit against PNB-IFL.[10] In justifying its ruling, the trial court, citing the case of Koppel
Phil Inc. vs. Yatco,[11] reasoned that the corporate entity may be disregarded where a corporation
is the mere alter ego, or business conduit of a person or where the corporation is so organized and
controlled and its affairs are so conducted, as to make it merely an instrumentality, agency, conduit
or adjunct of another corporation.[12]
We disagree.
The general rule is that as a legal entity, a corporation has a personality distinct and separate
from its individual stockholders or members, and is not affected by the personal rights, obligations
and transactions of the latter.[13] The mere fact that a corporation owns all of the stocks of another
corporation, taken alone is not sufficient to justify their being treated as one entity. If used to
perform legitimate functions, a subsidiary's separate existence may be respected, and the liability
of the parent corporation as well as the subsidiary will be confined to those arising in their
respective business. The courts may in the exercise of judicial discretion step in to prevent the
abuses of separate entity privilege and pierce the veil of corporate entity.
We find, however, that the ruling in Koppel finds no application in the case at bar. In said
case, this Court disregarded the separate existence of the parent and the subsidiary on the ground
that the latter was formed merely for the purpose of evading the payment of higher taxes. In the
case at bar, respondents failed to show any cogent reason why the separate entities of the PNB and
PNB-IFL should be disregarded.
While there exists no definite test of general application in determining when a subsidiary
may be treated as a mere instrumentality of the parent corporation, some factors have been
identified that will justify the application of the treatment of the doctrine of the piercing of the
corporate veil. The case of Garrett vs. Southern Railway Co[14] is enlightening. The case involved
a suit against the Southern Railway Company. Plaintiff was employed by Lenoir Car Works and
alleged that he sustained injuries while working for Lenoir. He, however, filed a suit against
Southern Railway Company on the ground that Southern had acquired the entire capital stock of
Lenoir Car Works, hence, the latter corporation was but a mere instrumentality of the former. The
Tennessee Supreme Court stated that as a general rule the stock ownership alone by one
corporation of the stock of another does not thereby render the dominant corporation liable for the
torts of the subsidiary unless the separate corporate existence of the subsidiary is a mere sham, or
unless the control of the subsidiary is such that it is but an instrumentality or adjunct of the
dominant corporation. Said court then outlined the circumstances which may be useful in the
determination of whether the subsidiary is but a mere instrumentality of the parent-corporation:

The Circumstances rendering the subsidiary an instrumentality. It is manifestly impossible to

catalogue the infinite variations of fact that can arise but there are certain common circumstances
which are important and which, if present in the proper combination, are controlling.

These are as follows:

(a) The parent corporation owns all or most of the capital stock of the subsidiary.

(b) The parent and subsidiary corporations have common directors or officers.

(c) The parent corporation finances the subsidiary.

(d) The parent corporation subscribes to all the capital stock of the subsidiary or otherwise
causes its incorporation.

(e) The subsidiary has grossly inadequate capital.

(f) The parent corporation pays the salaries and other expenses or losses of the subsidiary.

(g) The subsidiary has substantially no business except with the parent corporation or no assets
except those conveyed to or by the parent corporation.
(h) In the papers of the parent corporation or in the statements of its officers, the subsidiary is
described as a department or division of the parent corporation, or its business or financial
responsibility is referred to as the parent corporation's own.

(i) The parent corporation uses the property of the subsidiary as its own.

(j) The directors or executives of the subsidiary do not act independently in the interest of the
subsidiary but take their orders from the parent corporation.

(k) The formal legal requirements of the subsidiary are not observed.

The Tennessee Supreme Court thus ruled:

In the case at bar only two of the eleven listed indicia occur, namely, the ownership of most of
the capital stock of Lenoir by Southern, and possibly subscription to the capital stock of
Lenoir The complaint must be dismissed.

Similarly, in this jurisdiction, we have held that the doctrine of piercing the corporate veil is
an equitable doctrine developed to address situations where the separate corporate personality of
a corporation is abused or used for wrongful purposes. The doctrine applies when the corporate
fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime, or when
it is made as a shield to confuse the legitimate issues, or where a corporation is the mere alter
ego or business conduit of a person, or where the corporation is so organized and controlled and
its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of
another corporation.[15]
In Concept Builders, Inc. v. NLRC,[16] we have laid the test in determining the applicability of
the doctrine of piercing the veil of corporate fiction, to wit:

1. Control, not mere majority or complete control, but complete domination, not only of finances
but of policy and business practice in respect to the transaction attacked so that the corporate
entity as to this transaction had at the time no separate mind, will or existence of its own.

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

3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss
complained of.

The absence of any one of these elements prevents "piercing the corporate veil." In applying the
"instrumentality" or "alter ego" doctrine, the courts are concerned with reality and not form, with
how the corporation operated and the individual defendant's relationship to the operation.[17]

Aside from the fact that PNB-IFL is a wholly owned subsidiary of petitioner PNB, there is
now showing of the indicative factors that the former corporation is a mere instrumentality of the
latter are present. Neither is there a demonstration that any of the evils sought to be prevented by
the doctrine of piercing the corporate veil exist. Inescapably, therefore, the doctrine of piercing the
corporate veil based on the alter ego or instrumentality doctrine finds no application in the case at
bar.
In any case, the parent-subsidiary relationship between PNB and PNB-IFL is not the
significant legal relationship involved in this case since the petitioner was not sued because it is
the parent company of PNB-IFL. Rather, the petitioner was sued because it acted as an attorney-
in-fact of PNB-IFL in initiating the foreclosure proceedings. A suit against an agent cannot without
compelling reasons be considered a suit against the principal. Under the Rules of Court, every
action must be prosecuted or defended in the name of the real party-in-interest, unless otherwise
authorized by law or these Rules.[18] In mandatory terms, the Rules require that "parties-in-interest
without whom no final determination can be had, an action shall be joined either as plaintiffs or
defendants."[19] In the case at bar, the injunction suit is directed only against the agent, not the
principal.
Anent the issuance of preliminary injunction, the same must be lifted as it is a mere provisional
remedy but adjunct to the main suit.[20] A writ of preliminary injunction is an ancillary or
preventive remedy that may only be resorted to by a litigant to protect or preserve his rights or
interests and for no other purpose during the pendency of the principal action. The dismissal of the
principal action thus results in the denial of the prayer for the issuance of the writ. Further, there
is no showing that respondents are entitled to the issuance of the writ. Section 3, Rule 58, of the
1997 Rules of Civil Procedure provides:

SEC. 3. Grounds for issuance of preliminary injunction.- A preliminary injunction may be

granted when it is established:

(a) That the applicant is entitled to the relief demanded, and the whole or part of such relief
consists in restraining the commission or continuance of the act or acts complained of, or in
requiring the performance of an act or acts, either for a limited period or perpetually;

(b) That the commission, continuance or non-performance of the acts or acts complained of
during the litigation would probably work injustice to the applicant; or

(c) That a party, court, agency or a person is doing, threatening, or is attempting to do, or is
procuring or suffering to be done, some act or acts probably in violation of the rights of the
applicant respecting the subject of the action or proceeding, and tending to render the
judgment ineffectual.

Thus, an injunctive remedy may only be resorted to when there is a pressing necessity to avoid
injurious consequences which cannot be remedied under any standard
compensation.[21] Respondents do not deny their indebtedness. Their properties are by their own
choice encumbered by real estate mortgages. Upon the non-payment of the loans, which were
secured by the mortgages sought to be foreclosed, the mortgaged properties are properly subject
to a foreclosure sale. Moreover, respondents questioned the alleged void stipulations in the
contract only when petitioner initiated the foreclosure proceedings.Clearly, respondents have
failed to prove that they have a right protected and that the acts against which the writ is to be
directed are violative of said right.[22] The Court is not unmindful of the findings of both the trial
court an the appellate court that there may be serious grounds to nullify the provisions of the loan
agreement. However, as earlier discussed, respondents committed the mistake of filing the case
against the wrong party, thus, they must suffer the consequences of their error.
All told, respondents do not have a cause of action against the petitioner as the latter is not
privy to the contract the provisions of which private respondents seek to declare void. Accordingly
the case before the Regional Trial Court must be dismissed and the preliminary injunction issued
in connection therewith, must be lifted.
IN VIEW OF THE FOREGOING, the petition is hereby GRANTED. The assailed decision
of the Court of Appeals is hereby REVERSED. The Orders dated June 30, 1999 and October 4,
1999 of the Regional Trial Court of Makati, Branch 147 in Civil Case No. 99-1037 are hereby
ANNULLED and SET ASIDE and the complaint in said case DISMISSED.
SO ORDERED.
Pardo, and Ynares-Santiago, JJ., concur.
Davide, Jr., C.J., (Chairman), on official leave.
Puno, J., no part.
 FIRST DIVISION

[G.R. No. 142616. July 31, 2001]

PHILIPPINE NATIONAL BANK, petitioner, vs. RITRATO GROUP INC., RIATTO

INTERNATIONAL, INC., and DADASAN GENERAL
MERCHANDISE, respondent.

DECISION
KAPUNAN, J.:

In a petition for review on certiorari under Rule 45 of the Revised Rules of Court, petitioner
seeks to annul and set aside the Court of Appeals' decision in C.A. G.R. S.P. No. 55374 dated
March 27, 2000, affirming the Order issuing a writ of preliminary injunction of the Regional Trial
Court of Makati, Branch 147, dated June 30, 1999, and its Order dated October 4, 1999, which
denied petitioner's motion to dismiss.
The antecedents of this case are as follows:
Petitioner Philippine National Bank is a domestic corporation organized and existing under
Philippine law. Meanwhile, respondents Ritratto Group, Inc., Riatto International, Inc. and
Dadasan General Merchandise are domestic corporations, likewise, organized and existing under
Philippine law.
On May 29, 1996, PNB International Finance Ltd. (PNB-IFL), a subsidiary company of PNB,
organized and doing business in Hong Kong, extended a letter of credit in favor of the respondents
in the amount of US$300,000.00 secured by real estate mortgages constituted over four (4) parcels
of land in Makati City. This credit facility was later increased successively to US$1,140,000.00 in
September 1996; to US$1,290,000.00 in November 1996; to US$1,425,000.00 in February 1997;
and decreased to US$1,421,316.18 in April 1998. Respondents made repayments of the loan
incurred by remitting those amounts to their loan account with PNB-IFL in Hong Kong.
However, as of April 30, 1998, their outstanding obligations stood at
US$1,497,274.70. Pursuant to the terms of the real estate mortgages, PNB-IFL, through its
attorney-in-fact PNB, notified the respondents of the foreclosure of all the real estate mortgages
and that the properties subject thereof were to be sold at a public auction on May 27, 1999 at the
Makati City Hall.
On May 25, 1999, respondents filed a complaint for injunction with prayer for the issuance of
a writ of preliminary injunction and/or temporary restraining order before the Regional Trial Court
of Makati. The Executive Judge of the Regional Trial Court of Makati issued a 72-hour temporary
restraining order. On May 28, 1999, the case was raffled to Branch 147 of the Regional Trial Court
of Makati.The trial judge then set a hearing on June 8, 1999. At the hearing of the application for
preliminary injunction, petitioner was given a period of seven days to file its written opposition to
the application. On June 15, 1999, petitioner filed an opposition to the application for a writ of
preliminary injunction to which the respondents filed a reply. On June 25, 1999, petitioner filed a
motion to dismiss on the grounds of failure to state a cause of action and the absence of any privity
between the petitioner and respondents. On June 30, 1999, the trial court judge issued an Order for
the issuance of a writ of preliminary injunction, which writ was correspondingly issued on July
14, 1999. On October 4, 1999, the motion to dismiss was denied by the trial court judge for lack
of merit.
Petitioner, thereafter, in a petition for certiorari and prohibition assailed the issuance of the
writ of preliminary injunction before the Court of Appeals. In the impugned decision,[1] the
appellate court dismissed the petition. Petitioner thus seeks recourse to this Court and raises the
following errors:
1.
THE COURT OF APPEALS PALPABLY ERRED IN NOT DISMISSING THE
COMPLAINT A QUO, CONSIDERING THAT BY THE ALLEGATIONS OF THE
COMPLAINT, NO CAUSE OF ACTION EXISTS AGAINST PETITIONER, WHICH
IS NOT A REAL PARTY IN INTEREST BEING A MERE ATTORNEY-IN-FACT
AUTHORIZED TO ENFORCE AN ANCILLARY CONTRACT.
2.
THE COURT OF APPEALS PALPABLY ERRED IN ALLOWING THE TRIAL
COURT TO ISSUE IN EXCESS OR LACK OF JURISDICTION A WRIT OF
PRELIMINARY INJUNCTION OVER AND BEYOND WHAT WAS PRAYED FOR
IN THE COMPLAINT A QUO CONTRARY TO CHIEF OF STAFF, AFP VS.
GUADIZ, JR., 101 SCRA 827.[2]
Petitioner prays, inter alia, that the Court of Appeals' Decision dated March 27, 2000 and the
trial court's Orders dated June 30, 1999 and October 4, 1999 be set aside and the dismissal of the
complaint in the instant case.[3]
In their Comment, respondents argue that even assuming arguendo that petitioner and PNB-
IFL are two separate entities, petitioner is still the party-in-interest in the application for
preliminary injunction because it is tasked to commit acts of foreclosing respondents'
properties.[4] Respondents maintain that the entire credit facility is void as it contains stipulations
in violation of the principle of mutuality of contracts.[5] In addition, respondents justified the act
of the court a quo in applying the doctrine of "Piercing the Veil of Corporate Identity" by stating
that petitioner is merely an alter ego or a business conduit of PNB-IFL.[6]
The petition is impressed with merit.
Respondents, in their complaint, anchor their prayer for injunction on alleged invalid
provisions of the contract:

GROUNDS

I
 THE DETERMINATION OF THE INTEREST RATES BEING LEFT TO THE SOLE
DISCRETION OF THE DEFENDANT PNB CONTRAVENES THE PRINICIPAL OF
MUTUALITY OF CONTRACTS.
II
THERE BEING A STIPULATION IN THE LOAN AGREEMENT THAT THE RATE
OF INTEREST AGREED UPON MAY BE UNILATERALLY MODIFIED BY
DEFENDANT, THERE WAS NO STIPULATION THAT THE RATE OF INTEREST
SHALL BE REDUCED IN THE EVENT THAT THE APPLICABLE MAXIMUM
RATE OF INTEREST IS REDUCED BY LAW OR BY THE MONETARY BOARD.[7]
Based on the aforementioned grounds, respondents sought to enjoin and restrain PNB from
the foreclosure and eventual sale of the property in order to protect their rights to said property by
reason of void credit facilities as bases for the real estate mortgage over the said property.[8]
The contract questioned is one entered into between respondent and PNB-IFL, not PNB. In
their complaint, respondents admit that petitioner is a mere attorney-in-fact for the PNB-IFL with
full power and authority to, inter alia, foreclose on the properties mortgaged to secure their loan
obligations with PNB-IFL. In other words, herein petitioner is an agent with limited authority and
specific duties under a special power of attorney incorporated in the real estate mortgage. It is not
privy to the loan contracts entered into by respondents and PNB-IFL.
The issue of the validity of the loan contracts is a matter between PNB-IFL, the petitioner's
principal and the party to the loan contracts, and the respondents. Yet, despite the recognition that
petitioner is a mere agent, the respondents in their complaint prayed that the petitioner PNB be
ordered to re-compute the rescheduling of the interest to be paid by them in accordance with the
terms and conditions in the documents evidencing the credit facilities, and crediting the amount
previously paid to PNB by herein respondents.[9]
Clearly, petitioner not being a party to the contract has no power to re-compute the interest
rates set forth in the contract. Respondents, therefore do not have any cause of action against
petitioner.
The trial court, however, in its Order dated October 4, 1994, ruled that since PNB-IFL is a
wholly owned subsidiary of defendant Philippine National Bank, the suit against the defendant
PNB is a suit against PNB-IFL.[10] In justifying its ruling, the trial court, citing the case of Koppel
Phil Inc. vs. Yatco,[11] reasoned that the corporate entity may be disregarded where a corporation
is the mere alter ego, or business conduit of a person or where the corporation is so organized and
controlled and its affairs are so conducted, as to make it merely an instrumentality, agency, conduit
or adjunct of another corporation.[12]
We disagree.
The general rule is that as a legal entity, a corporation has a personality distinct and separate
from its individual stockholders or members, and is not affected by the personal rights, obligations
and transactions of the latter.[13] The mere fact that a corporation owns all of the stocks of another
corporation, taken alone is not sufficient to justify their being treated as one entity. If used to
perform legitimate functions, a subsidiary's separate existence may be respected, and the liability
of the parent corporation as well as the subsidiary will be confined to those arising in their
respective business. The courts may in the exercise of judicial discretion step in to prevent the
abuses of separate entity privilege and pierce the veil of corporate entity.
We find, however, that the ruling in Koppel finds no application in the case at bar. In said
case, this Court disregarded the separate existence of the parent and the subsidiary on the ground
that the latter was formed merely for the purpose of evading the payment of higher taxes. In the
case at bar, respondents failed to show any cogent reason why the separate entities of the PNB and
PNB-IFL should be disregarded.
While there exists no definite test of general application in determining when a subsidiary
may be treated as a mere instrumentality of the parent corporation, some factors have been
identified that will justify the application of the treatment of the doctrine of the piercing of the
corporate veil. The case of Garrett vs. Southern Railway Co[14] is enlightening. The case involved
a suit against the Southern Railway Company. Plaintiff was employed by Lenoir Car Works and
alleged that he sustained injuries while working for Lenoir. He, however, filed a suit against
Southern Railway Company on the ground that Southern had acquired the entire capital stock of
Lenoir Car Works, hence, the latter corporation was but a mere instrumentality of the former. The
Tennessee Supreme Court stated that as a general rule the stock ownership alone by one
corporation of the stock of another does not thereby render the dominant corporation liable for the
torts of the subsidiary unless the separate corporate existence of the subsidiary is a mere sham, or
unless the control of the subsidiary is such that it is but an instrumentality or adjunct of the
dominant corporation. Said court then outlined the circumstances which may be useful in the
determination of whether the subsidiary is but a mere instrumentality of the parent-corporation:

The Circumstances rendering the subsidiary an instrumentality. It is manifestly impossible to

catalogue the infinite variations of fact that can arise but there are certain common circumstances
which are important and which, if present in the proper combination, are controlling.

These are as follows:

(a) The parent corporation owns all or most of the capital stock of the subsidiary.

(b) The parent and subsidiary corporations have common directors or officers.

(c) The parent corporation finances the subsidiary.

(d) The parent corporation subscribes to all the capital stock of the subsidiary or otherwise
causes its incorporation.

(e) The subsidiary has grossly inadequate capital.

(f) The parent corporation pays the salaries and other expenses or losses of the subsidiary.

(g) The subsidiary has substantially no business except with the parent corporation or no assets
except those conveyed to or by the parent corporation.
(h) In the papers of the parent corporation or in the statements of its officers, the subsidiary is
described as a department or division of the parent corporation, or its business or financial
responsibility is referred to as the parent corporation's own.

(i) The parent corporation uses the property of the subsidiary as its own.

(j) The directors or executives of the subsidiary do not act independently in the interest of the
subsidiary but take their orders from the parent corporation.

(k) The formal legal requirements of the subsidiary are not observed.

The Tennessee Supreme Court thus ruled:

In the case at bar only two of the eleven listed indicia occur, namely, the ownership of most of
the capital stock of Lenoir by Southern, and possibly subscription to the capital stock of
Lenoir The complaint must be dismissed.

Similarly, in this jurisdiction, we have held that the doctrine of piercing the corporate veil is
an equitable doctrine developed to address situations where the separate corporate personality of
a corporation is abused or used for wrongful purposes. The doctrine applies when the corporate
fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime, or when
it is made as a shield to confuse the legitimate issues, or where a corporation is the mere alter
ego or business conduit of a person, or where the corporation is so organized and controlled and
its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of
another corporation.[15]
In Concept Builders, Inc. v. NLRC,[16] we have laid the test in determining the applicability of
the doctrine of piercing the veil of corporate fiction, to wit:

1. Control, not mere majority or complete control, but complete domination, not only of finances
but of policy and business practice in respect to the transaction attacked so that the corporate
entity as to this transaction had at the time no separate mind, will or existence of its own.

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

3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss
complained of.

The absence of any one of these elements prevents "piercing the corporate veil." In applying the
"instrumentality" or "alter ego" doctrine, the courts are concerned with reality and not form, with
how the corporation operated and the individual defendant's relationship to the operation.[17]

Aside from the fact that PNB-IFL is a wholly owned subsidiary of petitioner PNB, there is
now showing of the indicative factors that the former corporation is a mere instrumentality of the
latter are present. Neither is there a demonstration that any of the evils sought to be prevented by
the doctrine of piercing the corporate veil exist. Inescapably, therefore, the doctrine of piercing the
corporate veil based on the alter ego or instrumentality doctrine finds no application in the case at
bar.
In any case, the parent-subsidiary relationship between PNB and PNB-IFL is not the
significant legal relationship involved in this case since the petitioner was not sued because it is
the parent company of PNB-IFL. Rather, the petitioner was sued because it acted as an attorney-
in-fact of PNB-IFL in initiating the foreclosure proceedings. A suit against an agent cannot without
compelling reasons be considered a suit against the principal. Under the Rules of Court, every
action must be prosecuted or defended in the name of the real party-in-interest, unless otherwise
authorized by law or these Rules.[18] In mandatory terms, the Rules require that "parties-in-interest
without whom no final determination can be had, an action shall be joined either as plaintiffs or
defendants."[19] In the case at bar, the injunction suit is directed only against the agent, not the
principal.
Anent the issuance of preliminary injunction, the same must be lifted as it is a mere provisional
remedy but adjunct to the main suit.[20] A writ of preliminary injunction is an ancillary or
preventive remedy that may only be resorted to by a litigant to protect or preserve his rights or
interests and for no other purpose during the pendency of the principal action. The dismissal of the
principal action thus results in the denial of the prayer for the issuance of the writ. Further, there
is no showing that respondents are entitled to the issuance of the writ. Section 3, Rule 58, of the
1997 Rules of Civil Procedure provides:

SEC. 3. Grounds for issuance of preliminary injunction.- A preliminary injunction may be

granted when it is established:

(a) That the applicant is entitled to the relief demanded, and the whole or part of such relief
consists in restraining the commission or continuance of the act or acts complained of, or in
requiring the performance of an act or acts, either for a limited period or perpetually;

(b) That the commission, continuance or non-performance of the acts or acts complained of
during the litigation would probably work injustice to the applicant; or

(c) That a party, court, agency or a person is doing, threatening, or is attempting to do, or is
procuring or suffering to be done, some act or acts probably in violation of the rights of the
applicant respecting the subject of the action or proceeding, and tending to render the
judgment ineffectual.

Thus, an injunctive remedy may only be resorted to when there is a pressing necessity to avoid
injurious consequences which cannot be remedied under any standard
compensation.[21] Respondents do not deny their indebtedness. Their properties are by their own
choice encumbered by real estate mortgages. Upon the non-payment of the loans, which were
secured by the mortgages sought to be foreclosed, the mortgaged properties are properly subject
to a foreclosure sale. Moreover, respondents questioned the alleged void stipulations in the
contract only when petitioner initiated the foreclosure proceedings.Clearly, respondents have
failed to prove that they have a right protected and that the acts against which the writ is to be
directed are violative of said right.[22] The Court is not unmindful of the findings of both the trial
court an the appellate court that there may be serious grounds to nullify the provisions of the loan
agreement. However, as earlier discussed, respondents committed the mistake of filing the case
against the wrong party, thus, they must suffer the consequences of their error.
All told, respondents do not have a cause of action against the petitioner as the latter is not
privy to the contract the provisions of which private respondents seek to declare void. Accordingly
the case before the Regional Trial Court must be dismissed and the preliminary injunction issued
in connection therewith, must be lifted.
IN VIEW OF THE FOREGOING, the petition is hereby GRANTED. The assailed decision
of the Court of Appeals is hereby REVERSED. The Orders dated June 30, 1999 and October 4,
1999 of the Regional Trial Court of Makati, Branch 147 in Civil Case No. 99-1037 are hereby
ANNULLED and SET ASIDE and the complaint in said case DISMISSED.
SO ORDERED.
Pardo, and Ynares-Santiago, JJ., concur.
Davide, Jr., C.J., (Chairman), on official leave.
Puno, J., no part.
 SECOND DIVISION

[G.R. No. 100812. June 25, 1999]

FRANCISCO MOTORS CORPORATION, petitioner, vs. COURT OF APPEALS and

SPOUSES GREGORIO and LIBRADA MANUEL, respondents.

DECISION
QUISUMBING, J.:

This petition for review on certiorari, under Rule 45 of the Rules of Court, seeks to annul the
decision[1] of the Court of Appeals in C.A. G.R. CV No. 10014 affirming the decision rendered by
Branch 135, Regional Trial Court of Makati, Metro Manila. The procedural antecedents of this
petition are as follows:
On January 23, 1985, petitioner filed a complaint[2] against private respondents to recover
three thousand four hundred twelve and six centavos (P3,412.06), representing the balance of the
jeep body purchased by the Manuels from petitioner; an additional sum of twenty thousand four
hundred fifty-four and eighty centavos (P20,454.80) representing the unpaid balance on the cost
of repair of the vehicle; and six thousand pesos (P6,000.00) for cost of suit and attorneys fees.[3] To
the original balance on the price of jeep body were added the costs of repair. [4] In their answer,
private respondents interposed a counterclaim for unpaid legal services by Gregorio Manuel in the
amount of fifty thousand pesos (P50,000) which was not paid by the incorporators, directors and
officers of the petitioner. The trial court decided the case on June 26, 1985, in favor of petitioner
in regard to the petitioners claim for money, but also allowed the counter-claim of private
respondents. Both parties appealed. On April 15, 1991, the Court of Appeals sustained the trial
courts decision.[5] Hence, the present petition.
For our review in particular is the propriety of the permissive counterclaim which private
respondents filed together with their answer to petitioners complaint for a sum of money. Private
respondent Gregorio Manuel alleged as an affirmative defense that, while he was petitioners
Assistant Legal Officer, he represented members of the Francisco family in the intestate estate
proceedings of the late Benita Trinidad. However, even after the termination of the proceedings,
his services were not paid. Said family members, he said, were also incorporators, directors and
officers of petitioner. Hence to counter petitioners collection suit, he filed a permissive
counterclaim for the unpaid attorneys fees.[6]
For failure of petitioner to answer the counterclaim, the trial court declared petitioner in
default on this score, and evidence ex-parte was presented on the counterclaim. The trial court
ruled in favor of private respondents and found that Gregorio Manuel indeed rendered legal
services to the Francisco family in Special Proceedings Number 7803- In the Matter of Intestate
Estate of Benita Trinidad. Said court also found that his legal services were not compensated
despite repeated demands, and thus ordered petitioner to pay him the amount of fifty thousand
(P50,000.00) pesos.[7]
 Dissatisfied with the trial courts order, petitioner elevated the matter to the Court of Appeals,
posing the following issues:
I.

WHETHER OR NOT THE DECISION RENDERED BY THE LOWER COURT IS NULL

AND VOID AS IT NEVER ACQUIRED JURISDICTION OVER THE PERSON OF THE
DEFENDANT.

II.

WHETHER OR NOT PLAINTIFF-APPELLANT NOT BEING A REAL PARTY IN THE

ALLEGED PERMISSIVE COUNTERCLAIM SHOULD BE HELD LIABLE TO THE CLAIM
OF DEFENDANT-APPELLEES.

III.

WHETHER OR NOT THERE IS FAILURE ON THE PART OF PLAINTIFF-APPELLANT

TO ANSWER THE ALLEGED PERMISSIVE COUNTERCLAIM.[8]

Petitioner contended that the trial court did not acquire jurisdiction over it because no
summons was validly served on it together with the copy of the answer containing the permissive
counterclaim.Further, petitioner questions the propriety of its being made party to the case because
it was not the real party in interest but the individual members of the Francisco family concerned
with the intestate case.
In its assailed decision now before us for review, respondent Court of Appeals held that a
counterclaim must be answered in ten (10) days, pursuant to Section 4, Rule 11, of the Rules of
Court; and nowhere does it state in the Rules that a party still needed to be summoned anew if a
counterclaim was set up against him. Failure to serve summons, said respondent court, did not
effectively negate trial courts jurisdiction over petitioner in the matter of the counterclaim. It
likewise pointed out that there was no reason for petitioner to be excused from answering the
counterclaim. Court records showed that its former counsel, Nicanor G. Alvarez, received the copy
of the answer with counterclaim two (2) days prior to his withdrawal as counsel for
petitioner. Moreover when petitioners new counsel, Jose N. Aquino, entered his appearance, three
(3) days still remained within the period to file an answer to the counterclaim. Having failed to
answer, petitioner was correctly considered in default by the trial court.[9] Even assuming that the
trial court acquired no jurisdiction over petitioner, respondent court also said, but having filed a
motion for reconsideration seeking relief from the said order of default, petitioner
was estopped from further questioning the trial courts jurisdiction.[10]
On the question of its liability for attorneys fees owing to private respondent Gregorio Manuel,
petitioner argued that being a corporation, it should not be held liable therefor because these fees
were owed by the incorporators, directors and officers of the corporation in their personal capacity
as heirs of Benita Trinidad. Petitioner stressed that the personality of the corporation, vis--vis the
individual persons who hired the services of private respondent, is separate and distinct,[11] hence,
the liability of said individuals did not become an obligation chargeable against petitioner.
 Nevertheless, on the foregoing issue, the Court of Appeals ruled as follows:

However, this distinct and separate personality is merely a fiction created by law for convenience
and to promote justice. Accordingly, this separate personality of the corporation may be
disregarded, or the veil of corporate fiction pierced, in cases where it is used as a cloak or cover
for found (sic) illegality, or to work an injustice, or where necessary to achieve equity or when
necessary for the protection of creditors. (Sulo ng Bayan, Inc. vs. Araneta, Inc., 72 SCRA
347) Corporations are composed of natural persons and the legal fiction of a separate corporate
personality is not a shield for the commission of injustice and inequity. (Chemplex Philippines,
Inc. vs. Pamatian, 57 SCRA 408)

In the instant case, evidence shows that the plaintiff-appellant Francisco Motors Corporation is
composed of the heirs of the late Benita Trinidad as directors and incorporators for whom
defendant Gregorio Manuel rendered legal services in the intestate estate case of their deceased
mother. Considering the aforestated principles and circumstances established in this case, equity
and justice demands plaintiff-appellants veil of corporate identity should be pierced and the
defendant be compensated for legal services rendered to the heirs, who are directors of the
plaintiff-appellant corporation.[12]

Now before us, petitioner assigns the following errors:

I.

THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE OF PIERCING THE

VEIL OF CORPORATE ENTITY.

II.

THE COURT OF APPEALS ERRED IN AFFIRMING THAT THERE WAS JURISDICTION

OVER PETITIONER WITH RESPECT TO THE COUNTERCLAIM.[13]

Petitioner submits that respondent court should not have resorted to piercing the veil of
corporate fiction because the transaction concerned only respondent Gregorio Manuel and the heirs
of the late Benita Trinidad. According to petitioner, there was no cause of action by said respondent
against petitioner; personal concerns of the heirs should be distinguished from those involving
corporate affairs.Petitioner further contends that the present case does not fall among the instances
wherein the courts may look beyond the distinct personality of a corporation. According to
petitioner, the services for which respondent Gregorio Manuel seeks to collect fees from petitioner
are personal in nature. Hence, it avers the heirs should have been sued in their personal capacity,
and not involve the corporation.[14]
With regard to the permissive counterclaim, petitioner also insists that there was no proper
service of the answer containing the permissive counterclaim. It claims that the counterclaim is a
separate case which can only be properly served upon the opposing party through
summons. Further petitioner states that by nature, a permissive counterclaim is one which does not
arise out of nor is necessarily connected with the subject of the opposing partys claim. Petitioner
avers that since there was no service of summons upon it with regard to the counterclaim, then the
court did not acquire jurisdiction over petitioner.Since a counterclaim is considered an action
independent from the answer, according to petitioner, then in effect there should be two
simultaneous actions between the same parties: each party is at the same time both plaintiff and
defendant with respect to the other,[15] requiring in each case separate summonses.
In their Comment, private respondents focus on the two questions raised by petitioner. They
defend the propriety of piercing the veil of corporate fiction, but deny the necessity of serving
separate summonses on petitioner in regard to their permissive counterclaim contained in the
answer.
Private respondents maintain both trial and appellate courts found that respondent Gregorio
Manuel was employed as assistant legal officer of petitioner corporation, and that his services were
solicited by the incorporators, directors and members to handle and represent them in Special
Proceedings No. 7803, concerning the Intestate Estate of the late Benita Trinidad. They assert that
the members of petitioner corporation took advantage of their positions by not compensating
respondent Gregorio Manuel after the termination of the estate proceedings despite his repeated
demands for payment of his services. They cite findings of the appellate court that support piercing
the veil of corporate identity in this particular case. They assert that the corporate veil may be
disregarded when it is used to defeat public convenience, justify wrong, protect fraud, and defend
crime. It may also be pierced, according to them, where the corporate entity is being used as an
alter ego, adjunct, or business conduit for the sole benefit of the stockholders or of another
corporate entity. In these instances, they aver, the corporation should be treated merely as an
association of individual persons.[16]
Private respondents dispute petitioners claim that its right to due process was violated when
respondents counterclaim was granted due course, although no summons was served upon it. They
claim that no provision in the Rules of Court requires service of summons upon a defendant in a
counterclaim. Private respondents argue that when the petitioner filed its complaint before the trial
court it voluntarily submitted itself to the jurisdiction of the court. As a consequence, the issuance
of summons on it was no longer necessary. Private respondents say they served a copy of their
answer with affirmative defenses and counterclaim on petitioners former counsel, Nicanor G.
Alvarez. While petitioner would have the Court believe that respondents served said copy upon
Alvarez after he had withdrawn his appearance as counsel for the petitioner, private respondents
assert that this contention is utterly baseless. Records disclose that the answer was received two
(2) days before the former counsel for petitioner withdrew his appearance, according to private
respondents. They maintain that the present petition is but a form of dilatory appeal, to set off
petitioners obligations to the respondents by running up more interest it could recover from
them. Private respondents therefore claim damages against petitioner.[17]
To resolve the issues in this case, we must first determine the propriety of piercing the veil of
corporate fiction.
Basic in corporation law is the principle that a corporation has a separate personality distinct
from its stockholders and from other corporations to which it may be connected.[18] However,
under the doctrine of piercing the veil of corporate entity, the corporations separate juridical
personality may be disregarded, for example, when the corporate identity is used to defeat public
convenience, justify wrong, protect fraud, or defend crime. Also, where the corporation 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, then its distinct personality may be ignored.[19] In these circumstances, the
courts will treat the corporation as a mere aggrupation of persons and the liability will directly
attach to them. The legal fiction of a separate corporate personality in those cited instances, for
reasons of public policy and in the interest of justice, will be justifiably set aside.
In our view, however, given the facts and circumstances of this case, the doctrine of piercing
the corporate veil has no relevant application here. Respondent court erred in permitting the trial
courts resort to this doctrine. The rationale behind piercing a corporations 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, in the case at bar, 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 Trinidads estate. These
estate proceedings did not involve any business of petitioner.
Note also that he sought to collect legal fees not just from certain Francisco family members
but also from petitioner corporation on the claims that its management had requested his services
and he acceded thereto as an employee of petitioner from whom it could be deduced he was also
receiving a salary. His move to recover unpaid legal fees through a counterclaim against Francisco
Motors Corporation, to offset the unpaid balance of the purchase and repair of a jeep body could
only result from an obvious misapprehension that petitioners corporate assets could be used to
answer for the liabilities of its individual directors, officers, and incorporators. Such result if
permitted could easily prejudice the corporation, its own creditors, and even other stockholders;
hence, clearly inequitous to petitioner.
Furthermore, considering the nature of the legal services involved, whatever obligation said
incorporators, directors and officers of the corporation had incurred, it was incurred in their
personal capacity.When directors and officers of a corporation are unable to compensate a party
for a personal obligation, it is far-fetched to allege that the corporation is perpetuating fraud or
promoting injustice, and be thereby held liable therefor by piercing its corporate veil. While there
are no hard and fast rules on disregarding separate corporate identity, we must always be mindful
of its function and purpose. A court should be careful in assessing the milieu where the doctrine
of piercing the corporate veil may be applied. Otherwise an injustice, although unintended, may
result from its erroneous application.
The personality of the corporation and those of its incorporators, directors and officers in their
personal capacities ought to be kept separate in this case. The claim for legal fees against the
concerned individual incorporators, officers and directors could not be properly directed against
the corporation without violating basic principles governing corporations. Moreover, every action
including a counterclaim must be prosecuted or defended in the name of the real party in
interest.[20] It is plainly an error to lay the claim for legal fees of private respondent Gregorio
Manuel at the door of petitioner (FMC) rather than individual members of the Francisco family.
However, with regard to the procedural issue raised by petitioners allegation, that it needed to
be summoned anew in order for the court to acquire jurisdiction over it, we agree with respondent
courts view to the contrary. Section 4, Rule 11 of the Rules of Court provides that a counterclaim
or cross-claim must be answered within ten (10) days from service. Nothing in the Rules of Court
says that summons should first be served on the defendant before an answer to counterclaim must
be made. The purpose of a summons is to enable the court to acquire jurisdiction over the person
of the defendant. Although a counterclaim is treated as an entirely distinct and independent action,
the defendant in the counterclaim, being the plaintiff in the original complaint, has already
submitted to the jurisdiction of the court. Following Rule 9, Section 3 of the 1997 Rules of Civil
Procedure,[21] if a defendant (herein petitioner) fails to answer the counterclaim, then upon motion
of plaintiff, the defendant may be declared in default.This is what happened to petitioner in this
case, and this Court finds no procedural error in the disposition of the appellate court on this
particular issue. Moreover, as noted by the respondent court, when petitioner filed its motion
seeking to set aside the order of default, in effect it submitted itself to the jurisdiction of the
court. As well said by respondent court:

Further on the lack of jurisdiction as raised by plaintiff-appellant[,] [t]he records show that upon
its request, plaintiff-appellant was granted time to file a motion for reconsideration of the
disputed decision.Plaintiff-appellant did file its motion for reconsideration to set aside the order
of default and the judgment rendered on the counterclaim.

Thus, even if the court acquired no jurisdiction over plaintiff-appellant on the counterclaim, as it
vigorously insists, plaintiff-appellant is considered to have submitted to the courts jurisdiction
when it filed the motion for reconsideration seeking relief from the court. (Soriano vs. Palacio,
12 SCRA 447). A party is estopped from assailing the jurisdiction of a court after voluntarily
submitting himself to its jurisdiction. (Tejones vs. Gironella, 159 SCRA 100). Estoppel is a bar
against any claims of lack of jurisdiction. (Balais vs. Balais, 159 SCRA 37).[22]

WHEREFORE, the petition is hereby GRANTED and the assailed decision is hereby
REVERSED insofar only as it held Francisco Motors Corporation liable for the legal obligation
owing to private respondent Gregorio Manuel; but this decision is without prejudice to his filing
the proper suit against the concerned members of the Francisco family in their personal
capacity. No pronouncement as to costs.
SO ORDERED.
Bellosillo, (Chairman), Puno, Mendoza, and Buena, JJ., concur.