Nell Doctrine (in relation to Corporation’s Power to Sell or Dispose its Assets

The 2017 Commercial Law Bar Examination made mention of this:

Under the Nell Doctrine, so called because it was first pronounced by the Supreme Court in the
1965 ruling in Nell v. Pacific Farms, Inc. (15 SCRA 415), the general rule is that where one
corporation sells or otherwise transfers all of its assets to another corporation, the latter is not
liable for the debts and liabilities of the transferor.

State the exceptions to the Nell Doctrine. (4%)

The answer, as provided by the Supreme Court in such case, is:

Generally where one corporation sells or otherwise transfers all of its assets to another
corporation, the latter is not liable for the debts and liabilities of the transferor, except:
(1) where the purchaser expressly or impliedly agrees to assume such debts; (2) where
the transaction amounts to a consolidation or merger of the corporations; (3) where the
purchasing corporation is merely a continuation of the selling corporation; and (4) where
the transaction is entered into fraudulently in order to escape liability for such debts.

Background of the case:

Nell Co. filed a civil case against Insular Farms, Inc. for a sum of money plus interest, attorney’s
fees, and costs. A writ of execution was issued by the court, but was returned unsatisfied,
stating that Insular Farms had no leviable property. Thereafter, Nell Co. filed another action
against Pacific Farms, Inc. for the collection of the same amount, upon the theory that the latter
is the alter ego of Insular Farms. Nell Co. supported its claim by alleging that Pacific Farms had
purchased all or substantially all of the shares, as well as the real and personal properties, of
Insular Farms.

The record shows that, on March 21, 1958, Pacific Farms purchased 1,000 shares of stock of
Insular Farms for P285,126.99; that, thereupon, Pacific Farms sold said shares of stock to
certain individuals, who forthwith reorganized said corporation; and that the board of directors
thereof, as reorganized, then caused its assets, including its leasehold rights over a public land
in Bolinao, Pangasinan, to be sold to Pacific Farms for P10,000.00.

The Supreme Court held that such facts do not prove that Pacific Farms is the alter ego of
Insular Farms. There was neither proof nor allegation that Pacific Farms had expressly or
impliedly agreed to assume the debt of Insular Farms, or that the Pacific Farms was a
continuation of Insular Farms, or that the sale of either the shares of stock or the assets of
Insular Farms to the Pacific Farms had been entered into fraudulently, in order to escape liability
for the debt of the Insular Farms.

In fact, such sales took place months before the rendition of the judgment in the previous case,
and a month before the filing of the present case. Moreover, Pacific Farms purchased the
shares as the highest bidder at an auction sale held at the instance of the bank, to which the
shares were originally pledged as a security for an obligation of Insular Farms.
Neither was it claimed that these transactions have resulted in the consolidation or merger of
the Insular Farms and Pacific Farms. On the contrary, Nell Co’s theory to the effect that Pacific
Farms was an alter ego of the Insular Farms negated such consolidation or merger, for a
corporation cannot be its own alter ego.

The case is generally related to the power of a corporation to sell or dispose its assets, as
provided in Sec. 40 of the Corporation Code. In essence, it can be also related with the
Doctrine of Piercing of Corporate Veil.

Sec. 39. Power to deny pre-emptive right. - All stockholders of a stock corporation shall enjoy
pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion to
their respective shareholdings, unless such right is denied by the articles of incorporation or an
amendment thereto: Provided, That such pre-emptive right shall not extend to shares to be
issued in compliance with laws requiring stock offerings or minimum stock ownership by the
public; or to shares to be issued in good faith with the approval of the stockholders representing
two-thirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate
purposes or in payment of a previously contracted debt.

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

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

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

Nothing in this section is intended to restrict the power of any corporation, without the
authorization by the stockholders or members, to sell, lease, exchange, mortgage, pledge or
otherwise dispose of any of its property and assets if the same is necessary in the usual and
regular course of business of said corporation or if the proceeds of the sale or other disposition
of such property and assets be appropriated for the conduct of its remaining business.

In non-stock corporations where there are no members with voting rights, the vote of at least a
majority of the trustees in office will be sufficient authorization for the corporation to enter into
any transaction authorized by this section. (28 1/2a)

Sec. 41. Power to acquire own shares. - A stock corporation shall have the power to purchase
or acquire its own shares for a legitimate corporate purpose or purposes, including but not
limited to the following cases: Provided, That the corporation has unrestricted retained earnings
in its books to cover the shares to be purchased or acquired:

1. To eliminate fractional shares arising out of stock dividends;

2. To collect or compromise an indebtedness to the corporation, arising out of unpaid

subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale;
and

3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the
provisions of this Code. (n)

Sec. 42. Power to invest corporate funds in another corporation or business or for any
other purpose. - Subject to the provisions of this Code, a private corporation may invest its
funds in any other corporation or business or for any purpose other than the primary purpose for
which it was organized when approved by a majority of the board of directors or trustees and
ratified by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock,
or by at least two thirds (2/3) of the members in the case of non-stock corporations, at a
stockholder's or member's meeting duly called for the purpose. Written notice of the proposed
investment and the time and place of the meeting shall be addressed to each stockholder or
member at his place of residence as shown on the books of the corporation and deposited to
the addressee in the post office with postage prepaid, or served personally: Provided, That any
dissenting stockholder shall have appraisal right as provided in this Code: Provided, however,
That where the investment by the corporation is reasonably necessary to accomplish its primary
purpose as stated in the articles of incorporation, the approval of the stockholders or members
shall not be necessary. (17 1/2a)

Sec. 43. Power to declare dividends. - The board of directors of a stock corporation may
declare dividends out of the unrestricted retained earnings which shall be payable in cash, in
property, or in stock to all stockholders on the basis of outstanding stock held by them:
Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid
balance on the subscription plus costs and expenses, while stock dividends shall be withheld
from the delinquent stockholder until his unpaid subscription is fully paid: Provided, further, That
no stock dividend shall be issued without the approval of stockholders representing not less
than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called
for the purpose. (16a)
Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%)
percent of their paid-in capital stock, except: (1) when justified by definite corporate expansion
projects or programs approved by the board of directors; or (2) when the corporation is
prohibited under any loan agreement with any financial institution or creditor, whether local or
foreign, from declaring dividends without its/his consent, and such consent has not yet been
secured; or (3) when it can be clearly shown that such retention is necessary under special
circumstances obtaining in the corporation, such as when there is need for special reserve for
probable contingencies. (n)

TITLE X

APPRAISAL RIGHT

Sec. 81. Instances of appraisal right.- Any stockholder of a corporation shall have the right to
dissent and demand payment of the fair value of his shares in the following instances:

1. In case any amendment to the articles of incorporation has the effect of changing or
restricting the rights of any stockholder or class of shares, or of authorizing preferences in any
respect superior to those of outstanding shares of any class, or of extending or shortening the
term of corporate existence;

2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
substantially all of the corporate property and assets as provided in the Code; and

3. In case of merger or consolidation. (n)

Sec. 82. How right is exercised. - The appraisal right may be exercised by any stockholder
who shall have voted against the proposed corporate action, by making a written demand on the
corporation within thirty (30) days after the date on which the vote was taken for payment of the
fair value of his shares: Provided, That failure to make the demand within such period shall be
deemed a waiver of the appraisal right. If the proposed corporate action is implemented or
affected, the corporation shall pay to such stockholder, upon surrender of the certificate or
certificates of stock representing his shares, the fair value thereof as of the day prior to the date
on which the vote was taken, excluding any appreciation or depreciation in anticipation of such
corporate action.

If within a period of sixty (60) days from the date the corporate action was approved by the
stockholders, the withdrawing stockholder and the corporation cannot agree on the fair value of
the shares, it shall be determined and appraised by three (3) disinterested persons, one of
whom shall be named by the stockholder, another by the corporation, and the third by the two
thus chosen. The findings of the majority of the appraisers shall be final, and their award shall
be paid by the corporation within thirty (30) days after such award is made: Provided, That no
payment shall be made to any dissenting stockholder unless the corporation has unrestricted
retained earnings in its books to cover such payment: and Provided, further, That upon payment
by the corporation of the agreed or awarded price, the stockholder shall forthwith transfer his
shares to the corporation. (n)
Sec. 83. Effect of demand and termination of right. - From the time of demand for payment
of the fair value of a stockholder's shares until either the abandonment of the corporate action
involved or the purchase of the said shares by the corporation, all rights accruing to such
shares, including voting and dividend rights, shall be suspended in accordance with the
provisions of this Code, except the right of such stockholder to receive payment of the fair value
thereof: Provided, That if the dissenting stockholder is not paid the value of his shares within 30
days after the award, his voting and dividend rights shall immediately be restored. (n)

Sec. 84. When right to payment ceases. - No demand for payment under this Title may be
withdrawn unless the corporation consents thereto. If, however, such demand for payment is
withdrawn with the consent of the corporation, or if the proposed corporate action is abandoned
or rescinded by the corporation or disapproved by the Securities and Exchange Commission
where such approval is necessary, or if the Securities and Exchange Commission determines
that such stockholder is not entitled to the appraisal right, then the right of said stockholder to be
paid the fair value of his shares shall cease, his status as a stockholder shall thereupon be
restored, and all dividend distributions which would have accrued on his shares shall be paid to
him. (n)

Sec. 85. Who bears costs of appraisal. - The costs and expenses of appraisal shall be borne
by the corporation, unless the fair value ascertained by the appraisers is approximately the
same as the price which the corporation may have offered to pay the stockholder, in which case
they shall be borne by the latter. In the case of an action to recover such fair value, all costs and
expenses shall be assessed against the corporation, unless the refusal of the stockholder to
receive payment was unjustified. (n)

Sec. 86. Notation on certificates; rights of transferee. - Within ten (10) days after demanding
payment for his shares, a dissenting stockholder shall submit the certificates of stock
representing his shares to the corporation for notation thereon that such shares are dissenting
shares. His failure to do so shall, at the option of the corporation, terminate his rights under this
Title. If shares represented by the certificates bearing such notation are transferred, and the
certificates consequently canceled, the rights of the transferor as a dissenting stockholder under
this Title shall cease and the transferee shall have all the rights of a regular stockholder; and all
dividend distributions which would have accrued on such shares shall be paid to the transferee.
(n)
JOSELITO MUSNI PUNO (as heir of the late Carlos Puno), Petitioner,
vs.
PUNO ENTERPRISES, INC., represented by JESUSA PUNO, Respondent.

DECISION

NACHURA, J.:

Upon the death of a stockholder, the heirs do not automatically become stockholders of the
corporation; neither are they mandatorily entitled to the rights and privileges of a stockholder.
This, we declare in this petition for review on certiorari of the Court of Appeals (CA)
Decision1 dated October 11, 2006 and Resolution dated March 6, 2007 in CA-G.R. CV No.
86137.

The facts of the case follow:

Carlos L. Puno, who died on June 25, 1963, was an incorporator of respondent Puno
Enterprises, Inc. On March 14, 2003, petitioner Joselito Musni Puno, claiming to be an heir of
Carlos L. Puno, initiated a complaint for specific performance against respondent. Petitioner
averred that he is the son of the deceased with the latter’s common-law wife, Amelia Puno. As
surviving heir, he claimed entitlement to the rights and privileges of his late father as stockholder
of respondent. The complaint thus prayed that respondent allow petitioner to inspect its
corporate book, render an accounting of all the transactions it entered into from 1962, and give
petitioner all the profits, earnings, dividends, or income pertaining to the shares of Carlos L.
Puno.2

Respondent filed a motion to dismiss on the ground that petitioner did not have the legal
personality to sue because his birth certificate names him as "Joselito Musni Muno." Apropos,
there was yet a need for a judicial declaration that "Joselito Musni Puno" and "Joselito Musni
Muno" were one and the same.

The court ordered that the proceedings be held in abeyance, ratiocinating that petitioner’s
certificate of live birth was no proof of his paternity and relation to Carlos L. Puno.

Petitioner submitted the corrected birth certificate with the name "Joselito M. Puno," certified by
the Civil Registrar of the City of Manila, and the Certificate of Finality thereof. To hasten the
disposition of the case, the court conditionally admitted the corrected birth certificate as genuine
and authentic and ordered respondent to file its answer within fifteen days from the order and
set the case for pretrial.3

On October 11, 2005, the court rendered a Decision, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered ordering Jesusa Puno and/or Felicidad Fermin to
allow the plaintiff to inspect the corporate books and records of the company from 1962 up to
the present including the financial statements of the corporation.

The costs of copying shall be shouldered by the plaintiff. Any expenses to be incurred by the
defendant to be able to comply with this order shall be the subject of a bill of costs.
SO ORDERED.4

On appeal, the CA ordered the dismissal of the complaint in its Decision dated October 11,
2006. According to the CA, petitioner was not able to establish the paternity of and his filiation to
Carlos L. Puno since his birth certificate was prepared without the intervention of and the
participatory acknowledgment of paternity by Carlos L. Puno. Accordingly, the CA said that
petitioner had no right to demand that he be allowed to examine respondent’s books. Moreover,
petitioner was not a stockholder of the corporation but was merely claiming rights as an heir of
Carlos L. Puno, an incorporator of the corporation. His action for specific performance therefore
appeared to be premature; the proper action to be taken was to prove the paternity of and his
filiation to Carlos L. Puno in a petition for the settlement of the estate of the latter. 5

Petitioner’s motion for reconsideration was denied by the CA in its Resolution6 dated March 6,
2007.

In this petition, petitioner raises the following issues:

I. THE HONORABLE COURT OF APPEALS ERRED IN NOT RULING THAT THE JOSELITO
PUNO IS ENTITLED TO THE RELIEFS DEMANDED HE BEING THE HEIR OF THE LATE
CARLOS PUNO, ONE OF THE INCORPORATORS [OF] RESPONDENT CORPORATION.

II. HONORABLE COURT OF APPEALS ERRED IN RULING THAT FILIATION OF JOSELITO

PUNO, THE PETITIONER[,] IS NOT DULY PROVEN OR ESTABLISHED.

III. THE HONORABLE COURT ERRED IN NOT RULING THAT JOSELITO MUNO AND
JOSELITO PUNO REFERS TO THE ONE AND THE SAME PERSON.

IV. THE HONORABLE COURT OF APPEALS ERRED IN NOT RULING THAT WHAT
RESPONDENT MERELY DISPUTES IS THE SURNAME OF THE PETITIONER WHICH WAS
MISSPELLED AND THE FACTUAL ALLEGATION E.G. RIGHTS OF PETITIONER AS HEIR
OF CARLOS PUNO ARE DEEMED ADMITTED HYPOTHETICALLY IN THE
RESPONDENT[’S] MOTION TO DISMISS.

V. THE HONORABLE COURT OF APPEALS THEREFORE ERRED I[N] DECREEING THAT

PETITIONER IS NOT ENTITLED TO INSPECT THE CORPORATE BOOKS OF DEFENDANT
CORPORATION.7

The petition is without merit. Petitioner failed to establish the right to inspect respondent
corporation’s books and receive dividends on the stocks owned by Carlos L. Puno.

Petitioner anchors his claim on his being an heir of the deceased stockholder. However, we
agree with the appellate court that petitioner was not able to prove satisfactorily his filiation to
the deceased stockholder; thus, the former cannot claim to be an heir of the latter.

Incessantly, we have declared that factual findings of the CA supported by substantial evidence,
are conclusive and binding.8 In an appeal via certiorari, the Court may not review the factual
findings of the CA. It is not the Court’s function under Rule 45 of the Rules of Court to review,
examine, and evaluate or weigh the probative value of the evidence presented.9
A certificate of live birth purportedly identifying the putative father is not competent evidence of
paternity when there is no showing that the putative father had a hand in the preparation of the
certificate. The local civil registrar has no authority to record the paternity of an illegitimate child
on the information of a third person.10 As correctly observed by the CA, only petitioner’s mother
supplied the data in the birth certificate and signed the same. There was no evidence that
Carlos L. Puno acknowledged petitioner as his son.

As for the baptismal certificate, we have already decreed that it can only serve as evidence of
the administration of the sacrament on the date specified but not of the veracity of the entries
with respect to the child’s paternity.11

In any case, Sections 74 and 75 of the Corporation Code enumerate the persons who are
entitled to the inspection of corporate books, thus —

Sec. 74. Books to be kept; stock transfer agent. — x x x.

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

xxxx

Sec. 75. Right to financial statements. — Within ten (10) days from receipt of a written request
of any stockholder or member, the corporation shall furnish to him its most recent financial
statement, which shall include a balance sheet as of the end of the last taxable year and a profit
or loss of statement for said taxable year, showing in reasonable detail its assets and liabilities
and the result of its operations.12

The stockholder’s right of inspection of the corporation’s books and records is based upon his
ownership of shares in the corporation and the necessity for self-protection. After all, a
shareholder has the right to be intelligently informed about corporate affairs.13 Such right rests
upon the stockholder’s underlying ownership of the corporation’s assets and property.14

Similarly, only stockholders of record are entitled to receive dividends declared by the
corporation, a right inherent in the ownership of the shares.151avvphi1

Upon the death of a shareholder, the heirs do not automatically become stockholders of the
corporation and acquire the rights and privileges of the deceased as shareholder of the
corporation. The stocks must be distributed first to the heirs in estate proceedings, and the
transfer of the stocks must be recorded in the books of the corporation. Section 63 of the
Corporation Code provides that no transfer shall be valid, except as between the parties, until
the transfer is recorded in the books of the corporation.16 During such interim period, the heirs
stand as the equitable owners of the stocks, the executor or administrator duly appointed by the
court being vested with the legal title to the stock.17 Until a settlement and division of the estate
is effected, the stocks of the decedent are held by the administrator or
executor.18 Consequently, during such time, it is the administrator or executor who is entitled to
exercise the rights of the deceased as stockholder.

Thus, even if petitioner presents sufficient evidence in this case to establish that he is the son of
Carlos L. Puno, he would still not be allowed to inspect respondent’s books and be entitled to
receive dividends from respondent, absent any showing in its transfer book that some of the
shares owned by Carlos L. Puno were transferred to him. This would only be possible if
petitioner has been recognized as an heir and has participated in the settlement of the estate of
the deceased.

Corollary to this is the doctrine that a determination of whether a person, claiming proprietary
rights over the estate of a deceased person, is an heir of the deceased must be ventilated in a
special proceeding instituted precisely for the purpose of settling the estate of the latter. The
status of an illegitimate child who claims to be an heir to a decedent’s estate cannot be
adjudicated in an ordinary civil action, as in a case for the recovery of property. 19 The doctrine
applies to the instant case, which is one for specific performance — to direct respondent
corporation to allow petitioner to exercise rights that pertain only to the deceased and his
representatives.

WHEREFORE, premises considered, the petition is DENIED. The Court of Appeals Decision
dated October 11, 2006 and Resolution dated March 6, 2007 are AFFIRMED.

SO ORDERED.

ENRIQUE RAZON, petitioner,

vs.
INTERMEDIATE APPELLATE COURT and VICENTE B. CHUIDIAN, in his capacity as
Administrator of the Estate of the Deceased JUAN T. CHUIDIAN, respondents.

G.R. No. 74315 March 16, 1992

VICENTE B. CHUIDIAN, petitioner,

vs.
INTERMEDIATE APPELLATE COURT, ENRIQUE RAZ0N, and E. RAZON,
INC., respondents.

GUTIERREZ, JR., J.:

The main issue in these consolidated petitions centers on the ownership of 1,500 shares of
stock in E. Razon, Inc. covered by Stock Certificate No. 003 issued on April 23, 1966 and
registered under the name of Juan T. Chuidian in the books of the corporation. The then Court
of First Instance of Manila, now Regional Trial Court of Manila, declared that Enrique Razon, the
petitioner in G.R. No. 74306 is the owner of the said shares of stock. The then Intermediate
Appellate Court, now Court of Appeals, however, reversed the trial court's decision and ruled
that Juan T. Chuidian, the deceased father of petitioner Vicente B. Chuidian in G.R. No. 74315
is the owner of the shares of stock. Both parties filed separate motions for reconsideration.
Enrique Razon wanted the appellate court's decision reversed and the trial court's decision
affirmed while Vicente Chuidian asked that all cash and stock dividends and all the pre-emptive
rights accruing to the 1,500 shares of stock be ordered delivered to him. The appellate court
denied both motions. Hence, these petitions.

The relevant Antecedent facts are as follows:

In his complaint filed on June 29, 1971, and amended on November 16, 1971, Vicente B.
Chuidian prayed that defendants Enrique B. Razon, E. Razon, Inc., Geronimo Velasco,
Francisco de Borja, Jose Francisco, Alfredo B. de Leon, Jr., Gabriel Llamas and Luis M. de
Razon be ordered to deliver certificates of stocks representing the shareholdings of the
deceased Juan T. Chuidian in the E. Razon, Inc. with a prayer for an order to restrain the
defendants from disposing of the said shares of stock, for a writ of preliminary attachment v.
properties of defendants having possession of shares of stock and for receivership of the
properties of defendant corporation . . .

xxx xxx xxx

In their answer filed on June 18, 1973, defendants alleged that all the shares of stock in the
name of stockholders of record of the corporation were fully paid for by defendant, Razon; that
said shares are subject to the agreement between defendants and incorporators; that the
shares of stock were actually owned and remained in the possession of Razon. Appellees also
alleged . . . that neither the late Juan T. Chuidian nor the appellant had paid any amount
whatsoever for the 1,500 shares of stock in question . . .

xxx xxx xxx

The evidence of the plaintiff shown that he is the administrator of the intestate estate of Juan
Telesforo Chuidian in Special Proceedings No. 71054, Court of First Instance of Manila.

Sometime in 1962, Enrique Razon organized the E. Razon, Inc. for the purpose of bidding for
the arrastre services in South Harbor, Manila. The incorporators consisted of Enrique Razon,
Enrique Valles, Luisa M. de Razon, Jose Tuason, Jr., Victor Lim, Jose F. Castro and Salvador
Perez de Tagle.

On April 23, 1966, stock certificate No. 003 for 1,500 shares of stock of defendant corporation
was issued in the name of Juan T. Chuidian.

On the basis of the 1,500 shares of stock, the late Juan T. Chuidian and after him, the plaintiff-
appellant, were elected as directors of E. Razon, Inc. Both of them actually served and were
paid compensation as directors of E. Razon, Inc.

From the time the certificate of stock was issued on April 1966 up to April 1971, Enrique Razon
had not questioned the ownership by Juan T. Chuidian of the shares of stock in question and
had not brought any action to have the certificate of stock over the said shares cancelled.
The certificate of stock was in the possession of defendant Razon who refused to deliver said
shares to the plaintiff, until the same was surrendered by defendant Razon and deposited in a
safety box in Philippine Bank of Commerce.

Defendants allege that after organizing the E. Razon, Inc., Enrique Razon distributed shares of
stock previously placed in the names of the withdrawing nominal incorporators to some friends
including Juan T. Chuidian

Stock Certificate No. 003 covering 1,500 shares of stock upon instruction of the late Chuidian on
April 23, 1986 was personally delivered by Chuidian on July 1, 1966 to the Corporate Secretary
of Attorney Silverio B. de Leon who was himself an associate of the Chuidian Law Office (Exhs.
C & 11). Since then, Enrique Razon was in possession of said stock certificate even during the
lifetime of the late Chuidian, from the time the late Chuidian delivered the said stock certificate
to defendant Razon until the time (sic) of defendant Razon. By agreement of the parties (sic)
delivered it for deposit with the bank under the joint custody of the parties as confirmed by the
trial court in its order of August 7, 1971.

Thus, the 1,500 shares of stook under Stock Certificate No. 003 were delivered by the late
Chuidian to Enrique because it was the latter who paid for all the subscription on the shares of
stock in the defendant corporation and the understanding was that he (defendant Razon) was
the owner of the said shares of stock and was to have possession thereof until such time as he
was paid therefor by the other nominal incorporators/stockholders (TSN., pp. 4, 8, 10, 24-25,
25-26, 28-31, 31-32, 60, 66-68, July 22, 1980, Exhs. "C", "11", "13" "14"). (Ro11o — 74306, pp.
66-68)

In G.R. No. 74306, petitioner Enrique Razon assails the appellate court's decision on its alleged
misapplication of the dead man's statute rule under Section 20(a) Rule 130 of the Rules of
Court. According to him, the "dead man's statute" rule is not applicable to the instant case.
Moreover, the private respondent, as plaintiff in the case did not object to his oral testimony
regarding the oral agreement between him and the deceased Juan T. Chuidian that the
ownership of the shares of stock was actually vested in the petitioner unless the deceased
opted to pay the same; and that the petitioner was subjected to a rigid cross examination
regarding such testimony.

Section 20(a) Rule 130 of the Rules of Court (Section 23 of the Revised Rules on Evidence)
States:

Sec. 20. Disqualification by reason of interest or relationship — The following persons cannot
testify as to matters in which they are interested directly or indirectly, as herein enumerated.

(a) Parties or assignors of parties to a case, or persons in whose behalf a case is

prosecuted, against an executor or administrator or other representative of a deceased person,
or against a person of unsound mind, upon a claim or demand against the estate of such
deceased person or against such person of unsound mind, cannot testify as to any matter of
fact accruing before the death of such deceased person or before such person became of
unsound mind." (Emphasis supplied)
xxx xxx xxx

The purpose of the rule has been explained by this Court in this wise:

The reason for the rule is that if persons having a claim against the estate of the deceased or
his properties were allowed to testify as to the supposed statements made by him (deceased
person), many would be tempted to falsely impute statements to deceased persons as the latter
can no longer deny or refute them, thus unjustly subjecting their properties or rights to false or
unscrupulous claims or demands. The purpose of the law is to "guard against the temptation to
give false testimony in regard to the transaction in question on the part of the surviving party."
(Tongco v. Vianzon, 50 Phil. 698; Go Chi Gun, et al. v. Co Cho, et al., 622 [1955])

The rule, however, delimits the prohibition it contemplates in that it is applicable to a

case against the administrator or its representative of an estate upon a claim against the estate
of the deceased person. (See Tongco v. Vianzon, 50 Phil. 698 [1927])

In the instant case, the testimony excluded by the appellate court is that of the defendant
(petitioner herein) to the affect that the late Juan Chuidian, (the father of private respondent
Vicente Chuidian, the administrator of the estate of Juan Chuidian) and the defendant agreed in
the lifetime of Juan Chuidian that the 1,500 shares of stock in E. Razon, Inc. are actually owned
by the defendant unless the deceased Juan Chuidian opted to pay the same which never
happened. The case was filed by the administrator of the estate of the late Juan Chuidian to
recover shares of stock in E. Razon, Inc. allegedly owned by the late Juan T. Chuidian.

It is clear, therefore, that the testimony of the petitioner is not within the prohibition of the rule.
The case was not filed against the administrator of the estate, nor was it filed upon
claims against the estate.

Furthermore, the records show that the private respondent never objected to the testimony of
the petitioner as regards the true nature of his transaction with the late elder Chuidian. The
petitioner's testimony was subject to cross-examination by the private respondent's counsel.
Hence, granting that the petitioner's testimony is within the prohibition of Section 20(a), Rule
130 of the Rules of Court, the private respondent is deemed to have waived the rule. We ruled
in the case of Cruz v. Court of Appeals (192 SCRA 209 [1990]):

It is also settled that the court cannot disregard evidence which would ordinarily be incompetent
under the rules but has been rendered admissible by the failure of a party to object thereto.
Thus:

. . . The acceptance of an incompetent witness to testify in a civil suit, as well as the allowance
of improper questions that may be put to him while on the stand is a matter resting in the
discretion of the litigant. He may assert his right by timely objection or he may waive it,
expressly or by silence. In any case the option rests with him. Once admitted, the testimony is in
the case for what it is worth and the judge has no power to disregard it for the sole reason that it
could have been excluded, if it had been objected to, nor to strike it out on its own
motion (Emphasis supplied). (Marella v. Reyes, 12 Phil. 1.)
The issue as to whether or not the petitioner's testimony is admissible having been settled, we
now proceed to discuss the fundamental issue on the ownership of the 1,500 shares of stock in
E. Razon, Inc.

E. Razon, Inc. was organized in 1962 by petitioner Enrique Razon for the purpose of
participating in the bidding for the arrastre services in South Harbor, Manila. The incorporators
were Enrique Razon, Enrique Valles, Luisa M. de Razon, Jose Tuazon, Jr., Victor L. Lim, Jose
F. Castro and Salvador Perez de Tagle. The business, however, did not start operations until
1966. According to the petitioner, some of the incorporators withdrew from the said corporation.
The petitioner then distributed the stocks previously placed in the names of the withdrawing
nominal incorporators to some friends, among them the late Juan T. Chuidian to whom he gave
1,500 shares of stock. The shares of stock were registered in the name of Chuidian only as
nominal stockholder and with the agreement that the said shares of stock were owned and held
by the petitioner but Chuidian was given the option to buy the same. In view of this
arrangement, Chuidian in 1966 delivered to the petitioner the stock certificate covering the
1,500 shares of stock of E. Razon, Inc. Since then, the Petitioner had in his possession the
certificate of stock until the time, he delivered it for deposit with the Philippine Bank of
Commerce under the parties' joint custody pursuant to their agreement as embodied in the trial
court's order.

The petitioner maintains that his aforesaid oral testimony as regards the true nature of his
agreement with the late Juan Chuidian on the 1,500 shares of stock of E. Razon, Inc. is
sufficient to prove his ownership over the said 1,500 shares of stock.

The petitioner's contention is not correct.

In the case of Embassy Farms, Inc. v. Court of Appeals (188 SCRA 492 [1990]) we ruled:

. . . For an effective, transfer of shares of stock the mode and manner of transfer as prescribed
by law must be followed (Navea v. Peers Marketing Corp., 74 SCRA 65). As provided under
Section 3 of Batas Pambansa Bilang, 68 otherwise known as the Corporation Code of the
Philippines, shares of stock may be transferred by delivery to the transferee of the certificate
properly indorsed. Title may be vested in the transferee by the delivery of the duly indorsed
certificate of stock (18 C.J.S. 928, cited in Rivera v. Florendo, 144 SCRA 643). However, no
transfer shall be valid, except as between the parties until the transfer is properly recorded in
the books of the corporation (Sec. 63, Corporation Code of the Philippines; Section 35 of the
Corporation Law)

In the instant case, there is no dispute that the questioned 1,500 shares of stock of E. Razon,
Inc. are in the name of the late Juan Chuidian in the books of the corporation. Moreover, the
records show that during his lifetime Chuidian was ellected member of the Board of Directors of
the corporation which clearly shows that he was a stockholder of the corporation. (See Section
30, Corporation Code) From the point of view of the corporation, therefore, Chuidian was the
owner of the 1,500 shares of stock. In such a case, the petitioner who claims ownership over
the questioned shares of stock must show that the same were transferred to him by proving that
all the requirements for the effective transfer of shares of stock in accordance with the
corporation's by laws, if any, were followed (See Nava v. Peers Marketing Corporation, 74
SCRA 65 [1976]) or in accordance with the provisions of law.

The petitioner failed in both instances. The petitioner did not present any by-laws which could
show that the 1,500 shares of stock were effectively transferred to him. In the absence of the
corporation's by-laws or rules governing effective transfer of shares of stock, the provisions of
the Corporation Law are made applicable to the instant case.

The law is clear that in order for a transfer of stock certificate to be effective, the certificate must
be properly indorsed and that title to such certificate of stock is vested in the transferee by the
delivery of the duly indorsedcertificate of stock. (Section 35, Corporation Code) Since the
certificate of stock covering the questioned 1,500 shares of stock registered in the name of the
late Juan Chuidian was never indorsed to the petitioner, the inevitable conclusion is that the
questioned shares of stock belong to Chuidian. The petitioner's asseveration that he did not
require an indorsement of the certificate of stock in view of his intimate friendship with the late
Juan Chuidian can not overcome the failure to follow the procedure required by law or the
proper conduct of business even among friends. To reiterate, indorsement of the certificate of
stock is a mandatory requirement of law for an effective transfer of a certificate of stock.

Moreover, the preponderance of evidence supports the appellate court's factual findings that the
shares of stock were given to Juan T. Chuidian for value. Juan T. Chuidian was the legal
counsel who handled the legal affairs of the corporation. We give credence to the testimony of
the private respondent that the shares of stock were given to Juan T. Chuidian in payment of his
legal services to the corporation. Petitioner Razon failed to overcome this testimony.

In G.R. No. 74315, petitioner Vicente B. Chuidian insists that the appellate court's decision
declaring his deceased father Juan T. Chuidian as owner of the 1,500 shares of stock of E.
Razon, Inc. should have included all cash and stock dividends and all the pre-emptive rights
accruing to the said 1,500 shares of stock.

The petition is impressed with merit.

The cash and stock dividends and all the pre-emptive rights are all incidents of stock ownership.

The rights of stockholders are generally enumerated as follows:

xxx xxx xxx

. . . [F]irst, to have a certificate or other evidence of his status as stockholder issued to him;
second, to vote at meetings of the corporation; third, to receive his proportionate share of the
profits of the corporation; and lastly, to participate proportionately in the distribution of the
corporate assets upon the dissolution or winding up. (Purdy's Beach on Private Corporations,
sec. 554) (Pascual v. Del Saz Orozco, 19 Phil. 82, 87)

WHEREFORE, judgment is rendered as follows:

a) In G.R. No. 74306, the petition is DISMISSED. The questioned decision and resolution of the
then Intermediate Appellate Court, now the Court of Appeals, are AFFIRMED. Costs against the
petitioner.

b) In G.R. No. 74315, the petition is GRANTED. The questioned Resolution insofar as it denied
the petitioner's motion to clarify the dispositive portion of the decision of the then Intermediate
Appellate Court, now Court of Appeals is REVERSED and SET ASIDE. The decision of the
appellate court is MODIFIED in that all cash and stock dividends as, well as all pre-emptive
rights that have accrued and attached to the 1,500 shares in E. Razon, Inc., since 1966 are
declared to belong to the estate of Juan T. Chuidian.

SO ORDERED.

ANNA TENG, Petitioner,

vs.
SECURITIES AND EXCHANGE COMMISSION (SEC) and TING PING LAY, Respondents.

DECISION

REYES, J.:

This petition for review on certiorari1 under Rule 45 of the Rules of Court seeks the reversal of
the Decision2 dated April 29, 2008 and the Resolution3 dated August 28, 2008 rendered by the
Court of Appeals (CA) in CA-G.R. SP No. 99836. The CA affirmed the orders of the Securities
and Exchange Commission (SEC) granting the issuance of an alias writ of execution,
compelling petitioner Anna Teng (Teng) to register and issue new certificates of stock in favor of
respondent Ting Ping Lay (Ting Ping).

The Facts

This case has its origin in G.R. No. 1297774 entitled TCL Sales Corporation and Anna Teng v.
Hon. Court of Appeals and Ting Ping Lay. Herein respondent Ting Ping purchased 480 shares
of TCL Sales Corporation (TCL) from Peter Chiu (Chiu) on February 2, 1979; 1,400 shares on
September 22, 1985 from his brother Teng Ching Lay (Teng Ching), who was also the president
and operations manager of TCL; and 1,440 shares from Ismaelita Maluto (Maluto) on
September 2, 1989.5

Upon Teng Ching's death in 1989, his son Henry Teng (Henry) took over the management of
TCL. To protect his shareholdings with TCL, Ting Ping on August 31, 1989 requested TCL's
Corporate Secretary, herein petitioner Teng, to enter the transfer in the Stock and Transfer
Book of TCL for the proper recording of his acquisition. He also demanded the issuance of new
certificates of stock in his favor. TCL and Teng, however, refused despite repeated demands.
Because of their refusal, Ting Ping filed a petition for mandamus with the SEC against TCL and
Teng, docketed as SEC Case No. 3900.6

In its Decision7 dated July 20, 1994, the SEC granted Ting Ping's petition, ordering as follows:
WHEREFORE, in view of all the foregoing facts and circumstances, judgment is hereby
rendered.

A. Ordering [TCL and Teng] to record in the Books of the Corporation the following shares:

1. 480 shares acquired by [Ting Ping] from [Chiu] per Deed of Sales [sic] dated February 20,
1979;

2. 1,400 shares acquired by [Ting Ping] from [Teng Ching] per Deed of Sale dated September
22, 1985; and

3. 1,440 shares acquired by [Ting Ping] from [Maluto] per Deed of Assignment dated Sept 2,
1989 [sic].

B. Ordering [TCL and Teng] to issue corresponding new certificates of stocks (sic) in the name
of [Ting Ping].

C. Ordering [TCL and Teng] to pay [Ting Ping] moral damages in the amount of One Hundred
Thousand (P 100,000.00) Pesos and Fifty Thousand (P 50,000.00) Pesos for attorney's fees.

SO ORDERED. 8

TCL and Teng appealed to the SEC en banc, which, in its Order9 dated June 11, 1996, affirmed
the SEC decision with modification, in that Teng was held solely liable for the payment of moral
damages and attorney's fees.

Not contented, TCL and Teng filed a petition for review with the CA, docketed as CA-G.R. SP.
No. 42035. On January 31, 1997, the CA, however, dismissed the petition for having been filed
out of time and for finding no cogent and justifiable grounds to disturb the findings of the SEC en
banc. 10 This prompted TCL and Teng to come to the Court via a petition for review
on certiorari under Rule 45.

On January 5, 2001, the Court promulgated its Decision in G.R. No. 129777, the dispositive
portion of which states:

WHEREFORE, the petition is DENIED, and the Decision dated January 31, 1997, as well as the
Resolution dated July 3, 1997 of [the CA] are hereby AFFIRMED. Costs against [TCL and
Teng].

SO ORDERED.11

After the finality of the Court's decision, the SEC issued a writ of execution addressed to the
Sheriff of the Regional Trial Court (RTC) of Manila. Teng, however, filed on February 4, 2004 a
complaint for interpleader with the RTC of Manila, Branch 46, docketed as Civil Case No. 02-
102776, where Teng sought to compel Henry and Ting Ping to interplead and settle the issue of
ownership over the 1,400 shares, which were previously owned by Teng Ching. Thus, the
deputized sheriff held in abeyance the further implementation of the writ of execution pending
outcome of Civil Case No. 02-102776. 12
On March 13, 2003, the RTC of Manila, Branch 46, rendered its Decision13 in Civil Case No. 02-
102776, finding Henry to have a better right to the shares of stock formerly owned by Teng
Ching, except as to those covered by Stock Certificate No. 011 covering 262.5 shares, among
others. 14

Thereafter, an Ex Parte Motion for the Issuance of Alias Writ of Execution15 was filed by Ting
Ping where he sought the partial satisfaction of SEC en banc Order dated June 11, 1996
ordering TCL and Teng to record the 480 shares he acquired from Chiu and the 1,440 shares
he acquired from Maluto, and for Teng's payment of the damages awarded in his favor.

Acting upon the motion, the SEC issued an Order16 dated August 9, 2006 granting partial
enforcement and satisfaction of the Decision dated July 20, 1994, as modified by the SEC en
banc's Order dated June 11, 1996.17 On the same date, the SEC issued an alias writ of
execution. 18

Teng and TCL filed their respective motions to quash the alias writ of execution, 19 which was
opposed by Ting Ping,20 who also expressed his willingness to surrender the original stock
certificates of Chiu and Maluto to facilitate and expedite the transfer of the shares in his favor.
Teng pointed out, however, that the annexes in Ting Ping's opposition did not include the
subject certificates of stock, surmising that they could have been lost or destroyed. 21Ting Ping
belied this, claiming that his counsel Atty. Simon V. Lao already communicated with TCL's
counsel regarding the surrender of the said certificates of stock. 22 Teng then filed a counter
manifestation where she pointed out a discrepancy between the total shares of Maluto based on
the annexes, which is only 1305 shares, as against the 1440 shares acquired by Ting Ping
based on the SEC Order dated August 9, 2006.23

On May 25, 2007, the SEC denied the motions to quash filed by Teng and TCL, and affinned its
Order dated August 9, 2006.24

Unperturbed, Teng filed a petition for certiorari and prohibition under Rule 65 of the Rules of
Court, docketed as CA-G.R. SP No. 99836.25 The SEC, through the Office of the Solicitor
General (OSG), filed a Comment dated June 30, 2008,26 which, subsequently, Teng moved to
expunge.27

On April 29, 2008, the CA promulgated the assailed decision dismissing the petition and
denying the motion to expunge the SEC's comment.28

Hence, Teng filed the present petition, raising the following grounds:

I. THE RESPONDENT [CA] GRAVELY ERRED IN DECLARING THAT THERE WAS NO NEED
TO SURRENDER THE STOCK CERTIFICATES (REPRESENTING THE SHARES
CONVEYED BY [MALUTO] TO [TING PING] TO RECORD THE TRANSFER THEREOF IN
THE CORPORATE BOOKS AND ISSUE NEW STOCK CERTIFICATES[;]

II. THE RESPONDENT [CA] GRAVELY ERRED IN UPHOLDING THE POSE THAT THERE
WAS NEITHER AMENDMENT NOR ALTERATION OF THE FINAL DECISION OF THE
SUPREME COURT IN "TCL SALE[S] CORP., ET AL. VS. CA, ET AL.", G.R. NO. 129777,
DESPITE THE CONTRARY RECORD THERETO[;]

III. THE RESPONDENT [CA] GRAVELY ERRED IN DECLARING THAT THE [OSG] WAS
ALREADY REQUIRED TO COMMENT ON [TENG'S] MOTION FOR RECONSIDERATION. 29

The core question before the Court is whether the surrender of the certificates of stock is a
requisite before registration of the transfer may be made in the corporate books and for the
issuance of new certificates in its stead. Note at this juncture that the present dispute involves
the execution of the Court's decision in G.R. No. 129777 but only with regard to Chiu's and
Maluto's respective shares. The subject of the orders of execution issued by the SEC pertained
only to these shares and the Court's decision will revolve only on these shares.

Teng argues, among others, that the CA erred when it held that the surrender of Maluto's stock
certificates is not necessary before their registration in the corporate books and before the
issuance of new stock certificates. She contends that prior to registration of stocks in the
corporate books, it is mandatory that the stock certificates are first surrendered because a
corporation will be liable to a bona fide holder of the old certificate if, without demanding the said
certificate, it issues a new one. She also claims that the CA's reliance on Tan v. SEC30 is
misplaced since therein subject stock certificate was allegedly surrendered.31

On the other hand, Ting Ping contends that Section 63 of the Corporation Code does not
require the surrender of the stock certificate to the corporation, nor make such surrender an
indispensable condition before any transfer of shares can be registered in the books of the
corporation. Ting Ping considers Section 63 as a permissive mode of transferring shares in the
corporation. Citing Rural Bank of Salinas, Inc. v. CA,32 he claims that the only limitation imposed
by Section 63 is when the corporation holds any unpaid claim against the shares intended to be
transferred. Thus, for as long as the shares of stock are validly transferred, the corporate
secretary has the ministerial duty to register the transfer of such shares in the books of the
corporation, especially in this case because no less than this Court has affirmed the validity of
the transfer of the shares in favor of Ting Ping. 33

Ruling of the Court

To restate the basics -

A certificate of stock is a written instrument signed by the proper officer of a corporation stating
or acknowledging that the person named in the document is the owner of a designated number
of shares of its stock. It is prima facie evidence that the holder is a shareholder of a
corporation. 34 A certificate, however, is merely a tangible evidence of ownership of shares of
stock. 35 It is not a stock in the corporation and merely expresses the contract between the
corporation and the stockholder. 36 The shares of stock evidenced by said certificates,
meanwhile, are regarded as property and the owner of such shares may, as a general rule,
dispose of them as he sees fit, unless the corporation has been dissolved, or unless the right to
do so is properly restricted, or the owner's privilege of disposing of his shares has been
hampered by his own action. 37
Section 63 of the Corporation Code prescribes the manner by which a share of stock may be
transferred. Said provision is essentially the same as Section 35 of the old Corporation Law,
which, as held in Fleisher v. Botica Nolasco Co.,38 defines the nature, character and
transferability of shares of stock. Fleisher also stated that the provision on the transfer of shares
of stocks contemplates no restriction as to whom they may be transferred or sold. As owner of
personal property, a shareholder is at liberty to dispose of them in favor of whomsoever he
pleases, without any other limitation in this respect, than the general provisions of law. 39

Section 63 provides:

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

No shares of stock against which the corporation holds any unpaid claim shall be transferable in
the books of the corporation. (Emphasis and underscoring ours)

Under the provision, certain minimum requisites must be complied with for there to be a valid
transfer of stocks, to wit: (a) there must be delivery of the stock certificate; (b) the certificate
must be endorsed by the owner or his attorney-in-fact or other persons legally authorized to
make the transfer; and (c) to be valid against third parties, the transfer must be recorded in the
books of the corporation.40

It is the delivery of the certificate, coupled with the endorsement by the owner or his duly
authorized representative that is the operative act of transfer of shares from the original owner
to the transferee.41 The Court even emphatically declared. in Fil-Estate Golf and Development,
Inc., et al. v. Vertex Sales and Trading, Inc. 42 that in "a sale of shares of stock, physical delivery
of a stock certificate is one of the essential requisites for the transfer of ownership of the stocks
purchased."43 The delivery contemplated in Section 63, however, pertains to the delivery of the
certificate of shares by the transferor to the transferee, that is, from the original stockholder
named in the certificate to the person or entity the stockholder was transferring the shares to,
whether by sale or some other valid form of absolute conveyance of ownership.44 "[S]hares of
stock may be transferred by delivery to the transferee of the certificate properly indorsed. Title
may be vested in the transferee by the delivery of the duly indorsed certificate of stock." 45

It is thus clear that Teng's position - that Ting Ping must first surrender Chiu's and Maluto's
respective certificates of stock before the transfer to Ting Ping may be registered in the books of
the corporation - does not have legal basis. The delivery or surrender adverted to by
Teng, i.e., from Ting Ping to TCL, is not a requisite before the conveyance may be recorded in
its books. To compel Ting Ping to deliver to the corporation the certificates as a condition for the
registration of the transfer would amount to a restriction on the right of Ting Ping to have the
stocks transferred to his name, which is not sanctioned by law. The only limitation imposed by
Section 63 is when the corporation holds any unpaid claim against the shares intended to be
transferred.

In Rural Bank of Salinas,46 the Court ruled that the right of a transferee/assignee to have stocks
transferred to his name is an inherent right flowing from his ownership of the stocks.47 In said
case, the private respondent presented to the bank the deeds of assignment for registration,
transfer of the shares assigned in the bank's books, cancellation of the stock certificates, and
issuance of new stock certificates, which the bank refused. In ruling favorably for the private
respondent, the Court stressed that a corporation, either by its board, its by-laws, or the act of
its officers, cannot create restrictions in stock transfers. In transferring stock, the secretary
of a corporation acts in purely ministerial capacity, and does not try to decide the question of
ownership. 48 If a corporation refuses to make such transfer without good cause, it may, in fact,
even be compelled to do so by mandamus.49 With more reason in this case where the Court, in
G.R. No. 129777, already upheld Ting Ping's definite and uncontested titles to the subject
shares, viz:

Respondent Ting Ping Lay was able to establish prima facie ownership over the shares of
stocks in question, through deeds of transfer of shares of stock of TCL Corporation. Petitioners
could not repudiate these documents. Hence, the transfer of shares to him must be
recorded on the corporation's stock and transfer book.50(Emphasis and underscoring ours)

In the same vein, Teng cannot refuse registration of the transfer on the pretext that the
photocopies of Maluto 's certificates of stock submitted by Ting Ping covered only 1,305 shares
and not 1,440. As earlier stated, the respective duties of the corporation and its secretary to
transfer stock are purely ministerial.51 Aside from this, Teng's argument on this point was
adequately explained by both the SEC and CA in this wise:

In explaining the alleged discrepancy, the public respondent, in its 25 May 2007 order, cited the
order of the Commission En Banc, thus:

"An examination of this decision, however, reveals, no categorical pronouncements of fraud.

The refusal to credit in [Ting Ping's] favor five hundred eighty-five (585) shares in excess of
what [Maluto] owned and the two hundred forty (240) shares that [Ting Ping] bought from the
corporation, is a mere product of the failure of the corporation to register with the [SEC] the
increase in the subscribed capital stock by 4000 shares last 1981. Surely, [Ting Ping] cannot be
faulted for this." 52

Nevertheless, to be valid against third parties and the corporation, the transfer must be recorded
or registered in the books of corporation. There are several reasons why registration of the
transfer is necessary: one, to enable the transferee to exercise all the rights of a
stockholder;53 two, to inform the corporation of any change in share ownership so that it can
ascertain the persons entitled to the rights and subject to the liabilities of a stockholder; 54and
three, to avoid fictitious or fraudulent transfers, 55 among others. Thus, in Chua Guan v.
Samahang Mags as aka, Inc., 56 the Court stated that the only safe way to accomplish the
hypothecation of share of stock is for the transferee [a creditor, in this case] to insist on the
assignment and delivery of the certificate and to obtain the transfer of the legal title to him on
the books of the corporation by the cancellation of the certificate and the issuance of a new one
to him.57 In this case, given the Court's decision in GR. No. 129777, registration of the transfer
of Chiu's and Maluto's shares in Ting Ping's favor is a mere formality in confirming the latter's
status as a stockholder of TCL. 58

Upon registration of the transfer in the books of the corporation, the transferee may now then
exercise all the rights of a stockholder, which include the right to have stocks transferred to his
name. 59 In Ponce v. Alsons Cement Corporation,60 the Court stated that "[f]rom the
corporation's point of view, the transfer is not effective until it is recorded. Unless and until such
recording is made[,] the demand for the issuance of stock certificates to the alleged transferee
has no legal basis. x x x [T]he stock and transfer book is the basis for ascertaining the persons
entitled to the rights and subject to the liabilities of a stockholder. Where a transferee is not yet
recognized as a stockholder, the corporation is under no specific legal duty to issue stock
certificates in the transferee's name."61

The manner of issuance of certificates of stock is generally regulated by the corporation's by-
laws. Section 47 of the Corporation Code states: "a private corporation may provide in its by-
laws for x x x the manner of issuing stock certificates." Section 63, meanwhile, provides that
"[t]he capital stock of stock corporations shall be divided into shares for which certificates signed
by the president or vice president, countersigned by the secretary or assistant secretary, and
sealed with the seal of the corporation shall be issued in accordance with the by-laws." In Bitong
v. CA,62 the Court outlined the procedure for the issuance of new certificates of stock in the
name of a transferee:

First, the certificates must be signed by the president or vice-president, countersigned by the
secretary or assistant secretary, and sealed with the seal of the corporation. x x
x Second, delivery of the certificate is an essential element of its issuance. x x x Third, the par
value, as to par value shares, or the full subscription as to no par value shares, must first be
fully paid. Fourth, the original certificate must be surrendered where the person
requesting the issuance of a certificate is a transferee from a stockholder. 63 (Emphasis
ours and citations omitted)

The surrender of the original certificate of stock is necessary before the issuance of a new one
so that the old certificate may be cancelled. A corporation is not bound and cannot be required
to issue a new certificate unless the original certificate is produced and
surrendered.64 Surrender and cancellation of the old certificates serve to protect not only the
corporation but the legitimate shareholder and the public as well, as it ensures that there is only
one document covering a particular share of stock.

In the case at bench, Ting Ping manifested from the start his intention to surrender the subject
certificates of stock to facilitate the registration of the transfer and for the issuance of new
certificates in his name. It would be sacrificing substantial justice if the Court were to grant the
petition simply because Ting Ping is yet to surrender the subject certificates for cancellation
instead of ordering in this case such surrender and cancellation, and the issuance of new ones
in his name. 65

On the other hand, Teng, and TCL for that matter, have already deterred for so long Ting Ping's
enjoyment of his rights as a stockholder. As early as 1989, Ting Ping already requested Teng to
enter the transfer of the subject shares in TCL's Stock and Transfer Book; in 2001, the Court, in
G.R. No. 129777, resolved Ting Ping's rights as a valid transferee and shareholder; in 2006, the
SEC ordered partial execution of the judgment; and in 2008, tμe CA affirmed the SEC's order of
execution. The Court will not allow Teng and TCL to frustrate Ting Ping's rights any longer. Also,
the Court will not dwell on the other issues raised by Teng as it becomes irrelevant in light of the
Court's disquisition.

WHEREFORE, the petition is DENIED. The Decision dated April 29, 2008 and Resolution dated
August 28, 2008 of the Court of Appeals in CA-G.R. SP No. 99836 are AFFIRMED.

Respondent Ting Ping Lay is hereby ordered to surrender the certificates of stock covering the
shares respectively transferred by Ismaelita Maluto and Peter Chiu. Petitioner Anna Teng or the
incumbent corporate secretary of TCL Sales Corporation, on the other hand, is hereby
ordered, under pain of contempt, to immediately cancel Ismaelita Maluto's and Peter Chiu's
certificates of stock and to issue new ones in the name of Ting Ping Lay, which shall include
Ismaelita Maluto's shares not covered by any existing certificate of stock but otherwise validly
transferred to Ting Ping Lay.

Costs against petitioner Anna Teng.

SO ORDERED.

F & S VELASCO COMPANY, INC., IRWIN J. SEVA, ROSINA B. VELASCO-SCRIBNER,

MERCEDEZ SUNICO, AND JOSE SATURNINO O. VELASCO*, Petitioners, v. DR. ROMMEL
L. MADRID, PETER PAUL L. DANAO, MANUEL L. ARIMADO, AND MAUREEN R.
LABALAN, Respondents.

DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 are the Decision2 dated March 1, 2013 and the
Resolution3 dated August 7, 2013 of the Court of Appeals (CA) in CA-G.R. SP No. 113279,
which modified the Decision4 dated March 3, 2010 of the Regional Trial Court of Legazpi City,
Branch 5 (RTC) in SR-09-007: (a) declaring the Special Stockholders' and Re-Organizational
Meeting of petitioner F & S Velasco Company, Inc. (FSVCI) held on November 18, 2009 legal
and valid; and (b) remanding the case to the court a quo and directing it to appoint or constitute
a. Management Committee to take over the corporate and business affairs of FSVCI.

The Facts

On June 8, 1987, FSVCI was duly organized and registered as a corporation with Francisco O.
Velasco (Francisco), Simona J. Velasco (Simona), Angela V. Madrid (Angela), herein
respondent Dr. Rommel L. Madrid (Madrid), and petitioner Saturnino O. Velasco (Saturnino) as
its incorporators. When Simona and Francisco died on June 12, 1998 and June 22, 1999,
respectively, their daughter, Angela, inherited their shares, thereby giving her control of 70.82%
of FSVCI's total shares of stock. As of May 11, 2009, the distribution of FSVCI's 24,000 total
shares of stock is as follows: (a) Angela with 16,998 shares; (b) Madrid with 1,000 shares; (c)
petitioner Rosina B. Velasco-Scribner (Scribner) with 6,000 shares; and (d) petitioners Irwin J.
Seva (Seva) and Mercedez Sunico (Sunico) with one (1) share each.5

On September 20, 2009 and during her tenure as Chairman of the Board of Directors of FSVCI
(the other members of the Board of Directors being Madrid, Scribner, Seva, and Sunico),
Angela died intestate and without issue. On October 8, 2009, Madrid, as Angela's spouse,
executed an Affidavit of Self-Adjudication covering the latter's estate which includes her 70.82%
ownership of FSVCI's shares of stock. Believing that he is already the controlling stockholder of
FSVCI by virtue of such self-adjudication, Madrid called for a Special Stockholders' and Re-
Organizational Meeting to be held on November 18, 2009. On November 10, 2009 and in
preparation for said meeting, Madrid executed separate deeds of assignment transferring one
share each to Vitaliano B. Ricafort and to respondents Peter Paul L. Danao (Danao), Maureen
R. Labalan (Labalan), and Manuel L. Arimado (Arimado; collectively, Madrid Group).6

Meanwhile, as Madrid was performing the aforesaid acts, Seva, in his then-capacity as FSVCI
corporate secretary, sent a Notice of an Emergency Meeting to FSVCI's remaining stockholders
for the purpose of electing a new president and vice-president, as well as the opening of a bank
account. Such meeting was held on November 6, 2009 which was attended by Saturnino, Seva,
and Sunico (November 6, 2009 Meeting), during which, Saturnino was recognized as a member
of the FSVCI Board of Directors and thereafter, as FSVCI President, while Scribner was elected
FSVCI Vice-President (Saturnino Group).7

Despite the election conducted by the Saturnino Group, the Madrid Group proceeded with the
Special Stockholders' and Re-Organizational Meeting on November 18, 2009, wherein: (a) the
current members of FSVCI Board of Directors (save for Madrid) were ousted and replaced by
the members of the Madrid Group; and (b) Madrid, Danao, Arimado, and Labalan were elected
President, Vice-President, Corporate Secretary, and Treaurer, respectively, of FSVCI
(November 18, 2009 Meeting).8

In view of the November 18, 2009 Meeting, the Saturnino Group filed a petition for Declaration
of Nullity of Corporate Election with Preliminary Injunction and Temporary Restraining
Order9 (TRO) against the Madrid Group before the RTC, which was acting as a Special
Commercial Court.10

After the RTC denied the Saturnino Groups' prayer for TRO, the Madrid Group filed its Answer
(with Compulsory Counterclaims)11 which prayed for, among others, the declaration of nullity of
the November 6, 2009 Meeting conducted by the Saturnino Group. The Madrid Group likewise
applied for the Appointment of a Management Committee for FSVCI, which was denied by the
RTC in an Order12 dated January 12, 2010.13

The RTC Ruling

In a Decision14 dated March 3, 2010, the RTC declared both the November 6, 2009 and
November 18, 2009 Meetings null and void.15 It found the November 6, 2009 Meeting invalid
because: (a) it was conducted without a quorum as only two (2) FSVCI Board Members (i.e.,
Seva and Sunico) attended the same, and that Scribner cannot attend by proxy as the
Corporation Code expressly prohibits proxy attendance in Board meetings; and (b) merely
recognizing Saturnino as an additional member of the FSVCI Board of Directors - and not
electing him to take the position vacated by Angela upon her death - had the effect of increasing
FSVCI's number of Directors to six (6), thus, exceeding the number of Directors explicitly stated
in the FSVCI Articles of Incorporation.16

On the other hand, in ruling on the invalidity of the November 18, 2009 Meeting, the RTC held
that until a probate court conducting the settlement proceedings of Angela's estate determines
the rightful owner of Angela's properties, Madrid only has an equitable right over Angela's
70.82% ownership of FSVCI's shares of stock. As such, Madrid cannot exercise the rights
accorded to such ownership, hence, making his call for a meeting, as well as the actual conduct
of the November 18, 2009 Meeting, invalid.17

Aggrieved, the Madrid Group appealed18 before the CA contesting the RTC's declaration of
invalidity of the November 18, 2009 Meeting, as well as the denial of the appointment of a
Management Committee for FSVCI.19 Meanwhile, records do not show that the Saturnino Group
appealed the declaration of invalidity of the November 6, 2009 Meeting to the CA.

The CA Ruling

In a Decision20 dated March 1, 2013, the CA modified the RTC ruling: (a) declaring the
November 18, 2009 Meeting conducted by the Madrid Group valid; and (b) remanding the case
to the court a quo and directing it to appoint or constitute a Management Committee to take over
the corporate and business affairs of FSVCI.21

Contrary to the RTC findings, the CA held that Madrid's execution of the Affidavit of Self-
Adjudication already conferred upon him the ownership of Angela's 70.82% ownership of
FSVCI's shares of stock, resulting in total ownership of 74.98% shares of stock inclusive of his
original 4.16% ownership.22 In this relation, the CA found that Madrid had already complied with
the registration requirement of such transfer in the books of the corporation through the
November 18, 2009 General Information Sheet (GIS) of the corporation duly filed with the
Securities and Exchange Commission (SEC). As such, he validly made the call for the
November 18, 2009 Meeting, and accordingly, the matters resolved therein - such as the
reorganization of the FSVCI Board of Directors and the election of corporate officers — should
bind the corporation.23

Further, the CA ruled that the creation of a Management Committee is appropriate in view of the
persisting conflict between the Saturnino and Madrid Groups, the allegations of embezzlement
of corporate funds among the parties, and the uncertainty in the leadership and direction of the
corporation which had created an imminent danger of dissipation, loss, and wastage of FSVCI's
assets and the paralyzation of its business operations which may be prejudicial to the minority
stockholders, parties-litigants, or the general public.24

Dissatisfied, the Saturnino Group moved for reconsideration25 which was, however, denied in a
Resolution26 dated August 7, 2013; hence, the instant petition.

The Issues Before the Court

The core issues for the Court's resolution are whether or not the CA correctly ruled that: (a) the
November 18, 2009 Meeting organized by Madrid is legal and valid; and (b) a Management
Committee should be appointed or constituted to take over the corporate and business affairs of
FSVCI.

The Court's Ruling

The petition is partly meritorious.

At the outset, the Court notes that after Madrid executed his Affidavit of Self-Adjudication, he
then filed a petition for letters of administration regarding Angela's estate, docketed as S.P. No.
M-7025, before the Regional Trial Court of Makati City, Branch 5927 (RTC-Makati Br. 59).
Through Orders dated December 29, 201028 and March 29, 2011,29 the RTC-Makati Br. 59
already recognized Madrid as Angela's sole heir to the exclusion of others - i.e., Angela's
purported biological sister, Lourdita J. Estevez (Estevez) - and, thus, appointed him as Special
Administrator of Angela's estate.30 Estevez then belatedly challenged such Orders of the RTC-
Makati Br. 59 via a petition for annulment of judgment before the CA, docketed as CA-G.R. SP
No. 128979, which was dismissed through Resolutions dated April 3, 201331 and November 4,
2013.32 Undaunted, Estevez made a further appeal33 to the Court, which was denied in the
Minute Resolutions dated February 26, 201434 and June 16, 2014.35 Such ruling of the Court
had already attained finality as evidenced by an Entry of Judgment36 dated June 16, 2014. In
view of the foregoing, the Court is constrained to view that Madrid is indeed Angela's sole heir
and her death caused the immediate transfer of her properties, including her 70.82% ownership
of FSVCI's shares of stock, to Madrid.37 As such, Madrid may compel the issuance of
certificates of stock in his favor, as well as the registration of Angela's stocks in his name in
FSVCI's Stock and Transfer Book.

Be that as it may, it must be clarified that Madrid's inheritance of Angela's shares of stock does
not ipso facto afford him the rights accorded to such majority ownership of FSVCI's shares of
stock. Section 63 of the Corporation Code governs the rule on transfers of shares of stock. It
reads:

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

No shares of stock against which the corporation holds any unpaid claim shall be transferable in
the books of the corporation. (Emphasis and underscoring supplied)

Verily, all transfers of shares of stock must be registered in the corporate books in order to be
binding on the corporation. Specifically, this refers to the Stock and Transfer Book, which is
described in Section 74 of the same Code as follows:

SEC. 74. Books to be kept; stock transfer agent. - x x x.

xxxx

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

xxxx

In this regard, the case of Batangas Laguna Tayabas Bus Co., Inc. v. Bitanga38 instructs that an
owner of shares of stock cannot be accorded the rights pertaining to a stockholder - such as the
right to call for a meeting and the right to vote, or be voted for - if his ownership of such shares
is not recorded in the Stock and Transfer Book, viz.:

Indeed, until registration is accomplished, the transfer, though valid between the parties, cannot
be effective as against the corporation. Thus, the unrecorded transferee, the Bitanga group in
this case, cannot vote nor be voted for. The purpose of registration, therefore, is two-fold: to
enable the transferee to exercise all the rights of a stockholder, including the right to
vote and to be voted for, and to inform the corporation of any change in share ownership
so that it can ascertain the persons entitled to the rights and subject to the liabilities of a
stockholder. Until challenged in a proper proceeding, a stockholder of record has a right to
participate in any meeting; his vote can be properly counted to determine whether a
stockholders' resolution was approved, despite the claim of the alleged transferee. On the other
hand, a person who has purchased stock, and who desires to be recognized as a
stockholder for the purpose of voting, must secure such a standing by having the
transfer recorded on the corporate books. Until the transfer is registered, the transferee
is not a stockholder but an outsider.39 (Emphases and underscoring supplied)

In the case at bar, records reveal that at the time Madrid called for the November 18, 2009
Meeting, as well as the actual conduct thereof, he was already the owner of 74.98% shares of
stock of FSVCI as a result of his inheritance of Angela's 70.82% ownership thereof. However,
records are bereft of any showing that the transfer of Angela's shares of stock to Madrid had
been registered in FSVCFs Stock and Transfer Book when he made such call and when the
November 18, 2009 Meeting was held. Thus, the CA erred in holding that Madrid complied with
the required registration of transfers of shares of stock through mere reliance on FSVCI's GIS
dated November 18, 2009.

In this relation, it is noteworthy to point out that the submission of a GIS of a corporation before
the SEC is pursuant to the objective sought by Section 2640 of the Corporation Code which is to
give the public information, under sanction of oath of responsible officers, of the nature of
business, financial condition, and operational status of the company, as well as its key officers
or managers, so that those dealing and who intend to do business with it may know or have the
means of knowing facts concerning the corporation's financial resources and business
responsibility.41 The contents of the GIS, however, should not be deemed conclusive as to the
identities of the registered stockholders of the corporation, as well as their respective ownership
of shares of stock, as the controlling document should be the corporate books, specifically the
Stock and Transfer Book. Jurisprudence in Lao v. Lao42 is instructive on this matter, to wit:

The mere inclusion as shareholder of petitioners in the General Information Sheet of

PFSC is insufficient proof that they are shareholders of the company.

Petitioners bank heavily on the General Information Sheet submitted by PFSC to the SEC in
which they were named as shareholders of PFSC. They claim that respondent is now estopped
from contesting the General Information Sheet.

While it may be true that petitioners were named as shareholders in the General
Information Sheet submitted to the SEC, that document alone does not conclusively
prove that they are shareholders of PFSC. The information in the document will still have
to be correlated with the corporate books of PFSC. As between the General Information
Sheet and the corporate books, it is the latter that is controlling. As correctly ruled by the
CA:

We agree with the trial court that mere inclusion in the General Information Sheets as
stockholders and officers does not make one a stockholder of a corporation, for this may
have come to pass by mistake, expediency or negligence. As professed by respondent-
appellee, this was done merely to comply with the reportorial requirements with the
SEC. This maybe against the law but "practice, no matter how long continued, cannot give rise
to any vested right."

If a transferee of shares of stock who failed to register such transfer in the Stock and Transfer
Book of the Corporation could not exercise the rights granted unto him by law as stockholder,
with more reason that such rights be denied to a person who is not a stockholder of a
corporation. Petitioners-appellants never secured such a standing as stockholders of PFSC and
consequently, their petition should be denied.43 (Emphases and underscoring supplied)

In light of the foregoing, Madrid could not have made a valid call of the November 18, 2009
Meeting as his stock ownership of FSVCI as registered in the Stock and Transfer Book is only
4.16% in view of the nonregistration of Angela's shares of stock in the FSVCI Stock and
Transfer Book in his favor. As there was no showing that he was able to remedy the situation by
the time the meeting was held, the conduct of such meeting, as well as the matters resolved
therein, including the reorganization of the FSVCI Board of Directors and the election of new
corporate officers, should all be declared null and void.

Thus, in view of the nullity of the November 6, 2009 Meeting conducted by the Saturnino Group
which ruling of the RTC had already attained finality, as well as the November 18, 2009 Meeting
conducted by the Madrid Group - both of which attempted to wrest control of FSVCI by
reorganizing the Board of Directors and electing a new set of corporate officers - the FSVCI
Board of Directors at the time of Angela's death (i.e. Madrid, Seva, Scribner, and Sunico) should
be reconstituted, and thereafter, fill the vacant seat left by Angela in accordance with Section
2944 of the Corporation Code. Such Board of Directors shall only act in a hold-over capacity until
their successors are elected and qualified, pursuant to Section 2345 of the Corporation Code.

Finally, on the issue of the propriety of appointing/constituting a Management Committee to

manage FSVCI's affairs, the Court recognizes that a corporation may be placed under the care
of a Management Committee specifically created by a court and, thus, under the latter's control
and supervision, for the purpose of preserving properties involved in a suit and protecting the
rights of the parties.46 However, case law is quick to point out that "the creation and appointment
of a management committee x x x is an extraordinary and drastic remedy to be exercised with
care and caution; and only when the requirements under the Interim Rules [of Procedure
Governing Intra-Corporate Controversies] are shown. It is a drastic course for the benefit of the
minority stockholders, the parties-litigants or the general public [and is] allowed only under
pressing circumstances and when there is inadequacy, ineffectual or exhaustion of legal or
other remedies. x x x The power of the court to continue a business of a corporation x x x must
be exercised with the greatest care and caution. There should be a full consideration of all the
attendant facts, including the interest of all the parties concerned.47 In view of the extraordinary
nature of such a remedy, Section 1, Rule 9 of the Interim Rules of Procedure Governing Intra-
Corporate Controversies48provides the elements needed for the creation of a Management
Committee:
SEC. 1. Creation of a management committee. - As an incident to any of the cases filed under
these Rules or the Interim Rules on Corporate Rehabilitation, a party may apply for the
appointment of a management committee for the corporation, partnership or association, when
there is imminent danger of:chanRoblesvirtualLawlibrary

(1) Dissipation, loss, wastage or destruction of assets or other properties; and

(2) Paralyzation of its business operations which may be prejudicial to the interest of the
minority stockholders, parties-litigants or the general public.

Thus, applicants for the appointment of a management committee need to establish the
confluence of these two (2) requisites. This is because appointed management committees will
immediately take over the management of the corporation and exercise the management
powers specified in the law. This may have a negative effect on the operations and affairs of the
corporation with third parties, as persons who are more familiar with its operations are
necessarily dislodged from their positions in favor of appointees who are strangers to the
corporation's operations and affairs.49

In the case at bar, the CA merely based its directive of creating a Management Committee for
FSVCI on its finding of "the persisting conflict between [the Saturn ino and Madrid Groups], the
allegations of embezzlement of corporate funds among the parties, and the uncertainty in the
leadership and direction of the corporation had created an imminent danger of dissipation,
loss[,] and wastage of FSVCI's assets and the paralyzation of its business operations which
may be prejudicial to the minority stockholders, parties-litigants or the general
public."50 However, absent any actual evidence from the records showing such imminent
danger, the CA's findings have no legal or factual basis to support the appointment/constitution
of a Management Committee for FSVCI. Accordingly, the CA erred in ordering the creation of a
Management Committee in this case. Hence, in the event a Management Committee had
already been constituted pursuant to the CA ruling, as what herein respondents point out,51 then
it should be immediately dissolved for the reasons aforestated.

WHEREFORE, the petition is PARTLY GRANTED. The Decision dated March 1, 2013 and the
Resolution dated August 7, 2013 of the Court of Appeals (CA) in CA-G.R. SP No. 113279 are
hereby REVERSED and SET ASIDE. The Special Stockholders' and Re-Organizational Meeting
of petitioner F & S Velasco Company, Inc. called by respondent Rommel L. Madrid and held on
November 18, 2009 is declared NULLand VOID and the Management Committee constituted
pursuant to the aforementioned CA Decision and Resolution is hereby DISSOLVED.

Accordingly, the Board of Directors of petitioner F & S Velasco Company, Inc. prior to the death
of Angela V. Madrid - consisting of the remaining members petitioners Rosina B. Velasco-
Scribner, Irwin J. Seva, and Mercedez Sunico and respondent Dr. Rommel L. Madrid - is
hereby ORDERED reconstituted. The Board of Directors is ORDERED to fill the vacant seat left
by Angela V. Madrid and, thereafter, act in a hold-over capacity until their successors are
elected and qualified, in accordance with prevailing laws, rules, and jurisprudence.
SO ORDERED.chanroblesvirtuallawlibrar

PHILIP TURNER and ELNORA TURNER, Petitioners,

vs.
LORENZO SHIPPING CORPORATION, Respondent.

DECISION

BERSAMIN, J.:

This case concerns the right of dissenting stockholders to demand payment of the value of their
shareholdings.

In the stockholders’ suit to recover the value of their shareholdings from the corporation, the
Regional Trial Court (RTC) upheld the dissenting stockholders, herein petitioners, and ordered
the corporation, herein respondent, to pay. Execution was partially carried out against the
respondent. On the respondent’s petition for certiorari, however, the Court of Appeals (CA)
corrected the RTC and dismissed the petitioners’ suit on the ground that their cause of action for
collection had not yet accrued due to the lack of unrestricted retained earnings in the books of
the respondent.

Thus, the petitioners are now before the Court to challenge the CA’s decision promulgated on
March 4, 2003 in C.A.-G.R. SP No. 74156 entitled Lorenzo Shipping Corporation v. Hon.
Artemio S. Tipon, in his capacity as Presiding Judge of Branch 46 of the Regional Trial Court of
Manila, et al.1

Antecedents

The petitioners held 1,010,000 shares of stock of the respondent, a domestic corporation
engaged primarily in cargo shipping activities. In June 1999, the respondent decided to amend
its articles of incorporation to remove the stockholders’ pre-emptive rights to newly issued
shares of stock. Feeling that the corporate move would be prejudicial to their interest as
stockholders, the petitioners voted against the amendment and demanded payment of their
shares at the rate of ₱2.276/share based on the book value of the shares, or a total of
₱2,298,760.00.

The respondent found the fair value of the shares demanded by the petitioners unacceptable. It
insisted that the market value on the date before the action to remove the pre-emptive right was
taken should be the value, or ₱0.41/share (or a total of ₱414,100.00), considering that its
shares were listed in the Philippine Stock Exchange, and that the payment could be made only
if the respondent had unrestricted retained earnings in its books to cover the value of the
shares, which was not the case.

The disagreement on the valuation of the shares led the parties to constitute an appraisal
committee pursuant to Section 82 of the Corporation Code, each of them nominating a
representative, who together then nominated the third member who would be chairman of the
appraisal committee. Thus, the appraisal committee came to be made up of Reynaldo Yatco,
the petitioners’ nominee; Atty. Antonio Acyatan, the respondent’s nominee; and Leo Anoche of
the Asian Appraisal Company, Inc., the third member/chairman.

On October 27, 2000, the appraisal committee reported its valuation of ₱2.54/share, for an
aggregate value of ₱2,565,400.00 for the petitioners.2

Subsequently, the petitioners demanded payment based on the valuation of the appraisal
committee, plus 2%/month penalty from the date of their original demand for payment, as well
as the reimbursement of the amounts advanced as professional fees to the appraisers.3

In its letter to the petitioners dated January 2, 2001,4 the respondent refused the petitioners’
demand, explaining that pursuant to the Corporation Code, the dissenting stockholders
exercising their appraisal rights could be paid only when the corporation had unrestricted
retained earnings to cover the fair value of the shares, but that it had no retained earnings at the
time of the petitioners’ demand, as borne out by its Financial Statements for Fiscal Year 1999
showing a deficit of ₱72,973,114.00 as of December 31, 1999.

Upon the respondent’s refusal to pay, the petitioners sued the respondent for collection and
damages in the RTC in Makati City on January 22, 2001. The case, docketed as Civil Case No.
01-086, was initially assigned to Branch 132.5

On June 26, 2002, the petitioners filed their motion for partial summary judgment, claiming that:

7) xxx the defendant has an accumulated unrestricted retained earnings of ELEVEN MILLION
NINE HUNDRED SEVENTY FIVE THOUSAND FOUR HUNDRED NINETY (P11,975,490.00)
PESOS, Philippine Currency, evidenced by its Financial Statement as of the Quarter Ending
March 31, 2002; xxx

8) xxx the fair value of the shares of the petitioners as fixed by the Appraisal Committee is final,
that the same cannot be disputed xxx

9) xxx there is no genuine issue to material fact and therefore, the plaintiffs are entitled, as a
matter of right, to a summary judgment. xxx 6

The respondent opposed the motion for partial summary judgment, stating that the
determination of the unrestricted retained earnings should be made at the end of the fiscal year
of the respondent, and that the petitioners did not have a cause of action against the
respondent.

During the pendency of the motion for partial summary judgment, however, the Presiding Judge
of Branch 133 transmitted the records to the Clerk of Court for re-raffling to any of the RTC’s
special commercial courts in Makati City due to the case being an intra-corporate dispute.
Hence, Civil Case No. 01-086 was re-raffled to Branch 142.

Nevertheless, because the principal office of the respondent was in Manila, Civil Case No. 01-
086 was ultimately transferred to Branch 46 of the RTC in Manila, presided by Judge Artemio
Tipon,7 pursuant to the Interim Rules of Procedure on Intra-Corporate Controversies (Interim
Rules) requiring intra-corporate cases to be brought in the RTC exercising jurisdiction over the
place where the principal office of the corporation was found.

After the conference in Civil Case No. 01-086 set on October 23, 2002, which the petitioners’
counsel did not attend, Judge Tipon issued an order,8 granting the petitioners’ motion for partial
summary judgment, stating:

As to the motion for partial summary judgment, there is no question that the 3-man committee
mandated to appraise the shareholdings of plaintiff submitted its recommendation on October
27, 2000 fixing the fair value of the shares of stocks of the plaintiff at P2.54 per share. Under
Section 82 of the Corporation Code:

"The findings of the majority of the appraisers shall be final, and the award shall be paid by the
corporation within thirty (30) days after the award is made."

"The only restriction imposed by the Corporation Code is–"

"That no payment shall be made to any dissenting stockholder unless the corporation has
unrestricted retained earning in its books to cover such payment."

The evidence submitted by plaintiffs shows that in its quarterly financial statement it submitted
to the Securities and Exchange Commission, the defendant has retained earnings of
P11,975,490 as of March 21, 2002. This is not disputed by the defendant. Its only argument
against paying is that there must be unrestricted retained earning at the time the demand for
payment is made.

This certainly is a very narrow concept of the appraisal right of a stockholder. The law does not
say that the unrestricted retained earnings must exist at the time of the demand. Even if there
are no retained earnings at the time the demand is made if there are retained earnings later, the
fair value of such stocks must be paid. The only restriction is that there must be sufficient funds
to cover the creditors after the dissenting stockholder is paid. No such allegations have been
made by the defendant.9

On November 12, 2002, the respondent filed a motion for reconsideration.

On the scheduled hearing of the motion for reconsideration on November 22, 2002, the
petitioners filed a motion for immediate execution and a motion to strike out motion for
reconsideration. In the latter motion, they pointed out that the motion for reconsideration was
prohibited by Section 8 of the Interim Rules. Thus, also on November 22, 2002, Judge Tipon
denied the motion for reconsideration and granted the petitioners’ motion for immediate
execution.10

Subsequently, on November 28, 2002, the RTC issued a writ of execution.11

Aggrieved, the respondent commenced a special civil action for certiorari in the CA to challenge
the two aforecited orders of Judge Tipon, claiming that:

A.
JUDGE TIPON GRAVELY ABUSED HIS DISCRETION IN GRANTING SUMMARY
JUDGMENT TO THE SPOUSES TURNER, BECAUSE AT THE TIME THE "COMPLAINT"
WAS FILED, LSC HAD NO RETAINED EARNINGS, AND THUS WAS COMPLYING WITH THE
LAW, AND NOT VIOLATING ANY RIGHTS OF THE SPOUSES TURNER, WHEN IT
REFUSED TO PAY THEM THE VALUE OF THEIR LSC SHARES. ANY RETAINED
EARNINGS MADE A YEAR AFTER THE "COMPLAINT" WAS FILED ARE IRRELEVANT TO
THE SPOUSES TURNER’S RIGHT TO RECOVER UNDER THE "COMPLAINT", BECAUSE
THE WELL-SETTLED RULE, REPEATEDLY BROUGHT TO JUDGE TIPON’S ATTENTION, IS
"IF NO RIGHT EXISTED AT THE TIME (T)HE ACTION WAS COMMENCED THE SUIT
CANNOT BE MAINTAINED, ALTHOUGH SUCH RIGHT OF ACTION MAY HAVE ACCRUED
THEREAFTER.

B.

JUDGE TIPON IGNORED CONTROLLING CASE LAW, AND THUS GRAVELY ABUSED HIS
DISCRETION, WHEN HE GRANTED AND ISSUED THE QUESTIONED "WRIT OF
EXECUTION" DIRECTING THE EXECUTION OF HIS PARTIAL SUMMARY JUDGMENT IN
FAVOR OF THE SPOUSES TURNER, BECAUSE THAT JUDGMENT IS NOT A FINAL
JUDGMENT UNDER SECTION 1 OF RULE 39 OF THE RULES OF COURT AND
THEREFORE CANNOT BE SUBJECT OF EXECUTION UNDER THE SUPREME COURT’S
CATEGORICAL HOLDING IN PROVINCE OF PANGASINAN VS. COURT OF APPEALS.

Upon the respondent’s application, the CA issued a temporary restraining order (TRO),
enjoining the petitioners, and their agents and representatives from enforcing the writ of
execution. By then, however, the writ of execution had been partially enforced.

The TRO lapsed without the CA issuing a writ of preliminary injunction to prevent the execution.
Thereupon, the sheriff resumed the enforcement of the writ of execution.

The CA promulgated its assailed decision on March 4, 2003,12 pertinently holding:

However, it is clear from the foregoing that the Turners’ appraisal right is subject to the legal
condition that no payment shall be made to any dissenting stockholder unless the corporation
has unrestricted retained earnings in its books to cover such payment. Thus, the Supreme Court
held that:

The requirement of unrestricted retained earnings to cover the shares is based on the trust fund
doctrine which means that the capital stock, property and other assets of a corporation are
regarded as equity in trust for the payment of corporate creditors. The reason is that creditors of
a corporation are preferred over the stockholders in the distribution of corporate assets. There
can be no distribution of assets among the stockholders without first paying corporate creditors.
Hence, any disposition of corporate funds to the prejudice of creditors is null and void. Creditors
of a corporation have the right to assume that so long as there are outstanding debts and
liabilities, the board of directors will not use the assets of the corporation to purchase its own
stock.
In the instant case, it was established that there were no unrestricted retained earnings when
the Turners filed their Complaint. In a letter dated 20 August 2000, petitioner informed the
Turners that payment of their shares could only be made if it had unrestricted earnings in its
books to cover the same. Petitioner reiterated this in a letter dated 2 January 2001 which further
informed the Turners that its Financial Statement for fiscal year 1999 shows that its retained
earnings ending December 31, 1999 was at a deficit in the amount of ₱72,973,114.00, a matter
which has not been disputed by private respondents. Hence, in accordance with the second
paragraph of sec. 82, BP 68 supra, the Turners’ right to payment had not yet accrued when they
filed their Complaint on January 22, 2001, albeit their appraisal right already existed.

In Philippine American General Insurance Co. Inc. vs. Sweet Lines, Inc., the Supreme Court
declared that:

Now, before an action can properly be commenced all the essential elements of the cause of
action must be in existence, that is, the cause of action must be complete. All valid conditions
precedent to the institution of the particular action, whether prescribed by statute, fixed by
agreement of the parties or implied by law must be performed or complied with before
commencing the action, unless the conduct of the adverse party has been such as to prevent or
waive performance or excuse non-performance of the condition.

It bears restating that a right of action is the right to presently enforce a cause of action, while a
cause of action consists of the operative facts which give rise to such right of action. The right of
action does not arise until the performance of all conditions precedent to the action and may be
taken away by the running of the statute of limitations, through estoppel, or by other
circumstances which do not affect the cause of action. Performance or fulfillment of all
conditions precedent upon which a right of action depends must be sufficiently alleged,
considering that the burden of proof to show that a party has a right of action is upon the person
initiating the suit.

The Turners’ right of action arose only when petitioner had already retained earnings in the
amount of ₱11,975,490.00 on March 21, 2002; such right of action was inexistent on January
22, 2001 when they filed the Complaint.

In the doctrinal case of Surigao Mine Exploration Co. Inc., vs. Harris, the Supreme Court ruled:

Subject to certain qualifications, and except as otherwise provided by law, an action

commenced before the cause of action has accrued is prematurely brought and should be
dismissed. The fact that the cause of action accrues after the action is commenced and while it
is pending is of no moment. It is a rule of law to which there is, perhaps, no exception, either at
law or in equity, that to recover at all there must be some cause of action at the commencement
of the suit. There are reasons of public policy why there should be no needless haste in bringing
up litigation, and why people who are in no default and against whom there is as yet no cause of
action should not be summoned before the public tribunals to answer complaints which are
groundless. An action prematurely brought is a groundless suit. Unless the plaintiff has a valid
and subsisting cause of action at the time his action iscommenced, the defect cannot be cured
or remedied by the acquisition or accrual of one while the action is pending, and a supplemental
complaint or an amendment setting up such after-accrued cause of action is not permissible.

The afore-quoted ruling was reiterated in Young vs Court of Appeals and Lao vs. Court of
Appeals.

The Turners’ apprehension that their claim for payment may prescribe if they wait for the
petitioner to have unrestricted retained earnings is misplaced. It is the legal possibility of
bringing the action that determines the starting point for the computation of the period of
prescription. Stated otherwise, the prescriptive period is to be reckoned from the accrual of their
right of action.

Accordingly, We hold that public respondent exceeded its jurisdiction when it entertained the
herein Complaint and issued the assailed Orders. Excess of jurisdiction is the state of being
beyond or outside the limits of jurisdiction, and as distinguished from the entire absence of
jurisdiction, means that the act although within the general power of the judge, is not authorized
and therefore void, with respect to the particular case, because the conditions which authorize
the exercise of his general power in that particular case are wanting, and hence, the judicial
power is not in fact lawfully invoked.

We find no necessity to discuss the second ground raised in this petition.

WHEREFORE, upon the premises, the petition is GRANTED. The assailed Orders and the
corresponding Writs of Garnishment are NULLIFIED. Civil Case No. 02-104692 is hereby
ordered DISMISSED without prejudice to refiling by the private respondents of the action for
enforcement of their right to payment as withdrawing stockholders.

SO ORDERED.

The petitioners now come to the Court for a review on certiorari of the CA’s decision, submitting
that:

I.

THE COURT OF APPEALS COMMITTED SERIOUS ERRORS OF LAW WHEN IT GRANTED

THE PETITION FOR CERTIORARI WHEN THE REGIONAL TRIAL COURT OF MANILA DID
NOT ACT BEYOND ITS JURISDICTION AMOUNTING TO LACK OF JURISDICTION IN
GRANTING THE MOTION FOR PARTIAL SUMMARY JUDGMENT AND IN GRANTING THE
MOTION FOR IMMEDIATE EXECUTION OF JUDGMENT;

II.

THE COURT OF APPEALS COMMITTED SERIOUS ERRORS OF LAW WHEN IT ORDERED

THE DISMISSAL OF THE CASE, WHEN THE PETITION FOR CERTIORARI MERELY
SOUGHT THE ANNULMENT OF THE ORDER GRANTING THE MOTION FOR PARTIAL
SUMMARY JUDGMENT AND OF THE ORDER GRANTING THE MOTION FOR IMMEDIATE
EXECUTION OF THE JUDGMENT;
III.

THE HONORABLE COURT OF APPEALS HAS DECIDED QUESTIONS OF SUBSTANCE

NOT THEREFORE DETERMINED BY THIS HONORABLE COURT AND/OR DECIDED IT IN A
WAY NOT IN ACCORD WITH LAW OR WITH JURISPRUDENCE.

Ruling

The petition fails.

The CA correctly concluded that the RTC had exceeded its jurisdiction in entertaining the
petitioners’ complaint in Civil Case No. 01-086, and in rendering the summary judgment and
issuing writ of execution.

A.

Stockholder’s Right of Appraisal, In General

A stockholder who dissents from certain corporate actions has the right to demand payment of
the fair value of his or her shares. This right, known as the right of appraisal, is expressly
recognized in Section 81 of the Corporation Code, to wit:

Section 81. Instances of appraisal right. - Any stockholder of a corporation shall have the right to
dissent and demand payment of the fair value of his shares in the following instances:

1. In case any amendment to the articles of incorporation has the effect of changing or
restricting the rights of any stockholder or class of shares, or of authorizing preferences in any
respect superior to those of outstanding shares of any class, or of extending or shortening the
term of corporate existence;

2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
substantially all of the corporate property and assets as provided in the Code; and

3. In case of merger or consolidation. (n)

Clearly, the right of appraisal may be exercised when there is a fundamental change in the
charter or articles of incorporation substantially prejudicing the rights of the stockholders. It does
not vest unless objectionable corporate action is taken.13 It serves the purpose of enabling the
dissenting stockholder to have his interests purchased and to retire from the
corporation.141avvphil

Under the common law, there were originally conflicting views on whether a corporation had the
power to acquire or purchase its own stocks. In England, it was held invalid for a corporation to
purchase its issued stocks because such purchase was an indirect method of reducing capital
(which was statutorily restricted), aside from being inconsistent with the privilege of limited
liability to creditors.15 Only a few American jurisdictions adopted by decision or statute the strict
English rule forbidding a corporation from purchasing its own shares. In some American states
where the English rule used to be adopted, statutes granting authority to purchase out of
surplus funds were enacted, while in others, shares might be purchased even out of capital
provided the rights of creditors were not prejudiced.16 The reason underlying the limitation of
share purchases sprang from the necessity of imposing safeguards against the depletion by a
corporation of its assets and against the impairment of its capital needed for the protection of
creditors.17

Now, however, a corporation can purchase its own shares, provided payment is made out of
surplus profits and the acquisition is for a legitimate corporate purpose.18 In the Philippines, this
new rule is embodied in Section 41 of the Corporation Code, to wit:

Section 41. Power to acquire own shares. - A stock corporation shall have the power to
purchase or acquire its own shares for a legitimate corporate purpose or purposes, including but
not limited to the following cases: Provided, That the corporation has unrestricted retained
earnings in its books to cover the shares to be purchased or acquired:

1. To eliminate fractional shares arising out of stock dividends;

2. To collect or compromise an indebtedness to the corporation, arising out of unpaid

subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale;
and

3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the
provisions of this Code. (n)

The Corporation Code defines how the right of appraisal is exercised, as well as the implications
of the right of appraisal, as follows:

1. The appraisal right is exercised by any stockholder who has voted against the proposed
corporate action by making a written demand on the corporation within 30 days after the date on
which the vote was taken for the payment of the fair value of his shares. The failure to make the
demand within the period is deemed a waiver of the appraisal right.19

2. If the withdrawing stockholder and the corporation cannot agree on the fair value of the
shares within a period of 60 days from the date the stockholders approved the corporate action,
the fair value shall be determined and appraised by three disinterested persons, one of whom
shall be named by the stockholder, another by the corporation, and the third by the two thus
chosen. The findings and award of the majority of the appraisers shall be final, and the
corporation shall pay their award within 30 days after the award is made. Upon payment by the
corporation of the agreed or awarded price, the stockholder shall forthwith transfer his or her
shares to the corporation.20

3. All rights accruing to the withdrawing stockholder’s shares, including voting and dividend
rights, shall be suspended from the time of demand for the payment of the fair value of the
shares until either the abandonment of the corporate action involved or the purchase of the
shares by the corporation, except the right of such stockholder to receive payment of the fair
value of the shares.21
4. Within 10 days after demanding payment for his or her shares, a dissenting stockholder shall
submit to the corporation the certificates of stock representing his shares for notation thereon
that such shares are dissenting shares. A failure to do so shall, at the option of the corporation,
terminate his rights under this Title X of the Corporation Code. If shares represented by the
certificates bearing such notation are transferred, and the certificates are consequently
canceled, the rights of the transferor as a dissenting stockholder under this Title shall cease and
the transferee shall have all the rights of a regular stockholder; and all dividend distributions that
would have accrued on such shares shall be paid to the transferee.22

5. If the proposed corporate action is implemented or effected, the corporation shall pay to such
stockholder, upon the surrender of the certificates of stock representing his shares, the fair
value thereof as of the day prior to the date on which the vote was taken, excluding any
appreciation or depreciation in anticipation of such corporate action.23

Notwithstanding the foregoing, no payment shall be made to any dissenting stockholder unless
the corporation has unrestricted retained earnings in its books to cover the payment. In case the
corporation has no available unrestricted retained earnings in its books, Section 83 of the
Corporation Code provides that if the dissenting stockholder is not paid the value of his shares
within 30 days after the award, his voting and dividend rights shall immediately be restored.

The trust fund doctrine backstops the requirement of unrestricted retained earnings to fund the
payment of the shares of stocks of the withdrawing stockholders. Under the doctrine, the capital
stock, property, and other assets of a corporation are regarded as equity in trust for the payment
of corporate creditors, who are preferred in the distribution of corporate assets. 24 The creditors
of a corporation have the right to assume that the board of directors will not use the assets of
the corporation to purchase its own stock for as long as the corporation has outstanding debts
and liabilities.25 There can be no distribution of assets among the stockholders without first
paying corporate debts. Thus, any disposition of corporate funds and assets to the prejudice of
creditors is null and void.26

B.

Petitioners’ cause of action was premature

That the respondent had indisputably no unrestricted retained earnings in its books at the time
the petitioners commenced Civil Case No. 01-086 on January 22, 2001 proved that the
respondent’s legal obligation to pay the value of the petitioners’ shares did not yet arise. Thus,
the CA did not err in holding that the petitioners had no cause of action, and in ruling that the
RTC did not validly render the partial summary judgment.

A cause of action is the act or omission by which a party violates a right of another. 27 The
essential elements of a cause of action are: (a) the existence of a legal right in favor of the
plaintiff; (b) a correlative legal duty of the defendant to respect such right; and (c) an act or
omission by such defendant in violation of the right of the plaintiff with a resulting injury or
damage to the plaintiff for which the latter may maintain an action for the recovery of relief from
the defendant.28 Although the first two elements may exist, a cause of action arises only upon
the occurrence of the last element, giving the plaintiff the right to maintain an action in court for
recovery of damages or other appropriate relief.29

Section 1, Rule 2, of the Rules of Court requires that every ordinary civil action must be based
on a cause of action. Accordingly, Civil Case No. 01-086 was dismissible from the beginning for
being without any cause of action.

The RTC concluded that the respondent’s obligation to pay had accrued by its having the
unrestricted retained earnings after the making of the demand by the petitioners. It based its
conclusion on the fact that the Corporation Code did not provide that the unrestricted retained
earnings must already exist at the time of the demand.

The RTC’s construal of the Corporation Code was unsustainable, because it did not take into
account the petitioners’ lack of a cause of action against the respondent. In order to give rise to
any obligation to pay on the part of the respondent, the petitioners should first make a valid
demand that the respondent refused to pay despite having unrestricted retained earnings.
Otherwise, the respondent could not be said to be guilty of any actionable omission that could
sustain their action to collect.

Neither did the subsequent existence of unrestricted retained earnings after the filing of the
complaint cure the lack of cause of action in Civil Case No. 01-086. The petitioners’ right of
action could only spring from an existing cause of action. Thus, a complaint whose cause of
action has not yet accrued cannot be cured by an amended or supplemental pleading alleging
the existence or accrual of a cause of action during the pendency of the action.30For, only when
there is an invasion of primary rights, not before, does the adjective or remedial law become
operative.31 Verily, a premature invocation of the court’s intervention renders the complaint
without a cause of action and dismissible on such ground.32 In short, Civil Case No. 01-086,
being a groundless suit, should be dismissed.

Even the fact that the respondent already had unrestricted retained earnings more than
sufficient to cover the petitioners’ claims on June 26, 2002 (when they filed their motion for
partial summary judgment) did not rectify the absence of the cause of action at the time of the
commencement of Civil Case No. 01-086. The motion for partial summary judgment, being a
mere application for relief other than by a pleading,33 was not the same as the complaint in Civil
Case No. 01-086. Thereby, the petitioners did not meet the requirement of the Rules of Court
that a cause of action must exist at the commencement of an action, which is "commenced by
the filing of the original complaint in court."34

The petitioners claim that the respondent’s petition for certiorari sought only the annulment of
the assailed orders of the RTC (i.e., granting the motion for partial summary judgment and the
motion for immediate execution); hence, the CA had no right to direct the dismissal of Civil Case
No. 01-086.

The claim of the petitioners cannot stand.

Although the respondent’s petition for certiorari targeted only the RTC’s orders granting the
motion for partial summary judgment and the motion for immediate execution, the CA’s directive
for the dismissal of Civil Case No. 01-086 was not an abuse of discretion, least of all grave,
because such dismissal was the only proper thing to be done under the circumstances.
According to Surigao Mine Exploration Co., Inc. v. Harris:35

Subject to certain qualification, and except as otherwise provided by law, an action

commenced before the cause of action has accrued is prematurely brought and should
be dismissed. The fact that the cause of action accrues after the action is commenced and
while the case is pending is of no moment. It is a rule of law to which there is, perhaps no
exception, either in law or in equity, that to recover at all there must be some cause of action at
the commencement of the suit. There are reasons of public policy why there should be no
needless haste in bringing up litigation, and why people who are in no default and against whom
there is as yet no cause of action should not be summoned before the public tribunals to answer
complaints which are groundless. An action prematurely brought is a groundless suit. Unless
the plaintiff has a valid and subsisting cause of action at the time his action is
commenced, the defect cannot be cured or remedied by the acquisition or accrual of one
while the action is pending, and a supplemental complaint or an amendment setting up such
after-accrued cause of action is not permissible.

Lastly, the petitioners argue that the respondent’s recourse of a special action for certiorari was
the wrong remedy, in view of the fact that the granting of the motion for partial summary
judgment constituted only an error of law correctible by appeal, not of jurisdiction.

The argument of the petitioners is baseless. The RTC was guilty of an error of jurisdiction, for it
exceeded its jurisdiction by taking cognizance of the complaint that was not based on an
existing cause of action.

WHEREFORE, the petition for review on certiorari is denied for lack of merit.

We affirm the decision promulgated on March 4, 2003 in C.A.-G.R. SP No. 74156 entitled
Lorenzo Shipping Corporation v. Hon. Artemio S. Tipon, in his capacity as Presiding Judge of
Branch 46 of the Regional Trial Court of Manila, et al.

Costs of suit to be paid by the petitioners.

SO ORDERED.