A. THEORIES TESTATE ESTATE OF IDONAH SLADE PERKINS, deceased.

RENATO D. TAYAG, ancillary administrator-appellee, v.

In March 1960, Idonah Perkins died in New York. She BENGUET CONSOLIDATED, INC., Oppositor-Appellant.
left behind properties here and abroad. One property
she left behind were two stock certificates covering Cirilo F. Asperillo, Jr., for ancillary administrator-appellee.
33,002 shares of stocks of the Benguet Consolidated,
Inc (BCI). Said stock certificates were in the
Ross, Salcedo, Del Rosario, Bito & Misa for Oppositor-
possession of the Country Trust Company of New York
(CTC-NY). CTC-NY was the domiciliary administrator of Appellant.
the estate of Perkins (obviously in the USA).
Meanwhile, in 1963, Renato Tayag was appointed as
the ancillary administrator (of the properties of SYLLABUS
Perkins she left behind in the Philippines).
A dispute arose between CTC-NY and Tayag as to who
between them is entitled to possess the stock 1. REMEDIAL LAW; SPECIAL PROCEEDINGS;
certificates. A case ensued and eventually, the trial SETTLEMENT OF ESTATE; WHEN ANCILLARY
court ordered CTC-NY to turn over the stock ADMINISTRATION IS PROPER. — The ancillary
certificates to Tayag. CTC-NY refused. Tayag then filed administration is proper, whenever a person dies, leaving in a
country other than that of his last domicile, property to be
with the court a petition to have said stock certificates
be declared lost and to compel BCI to issue new stock administered in the nature of assets of the deceased liable for his
certificates in replacement thereof. The trial court individual debts or to be distributed among his heirs (Johannes v.
granted Tayag’s petition. Harvey, 43 Phil. 175). Ancillary administration is necessary or
BCI assailed said order as it averred that it cannot the reason for such administration is because a grant of
possibly issue new stock certificates because the two administration does not ex proprio vigore have any effect beyond
stock certificates declared lost are not actually lost; the limits of the country in which it is granted. Hence, an
that the trial court as well Tayag acknowledged that administrator appointed in a foreign state has no authority in the
the stock certificates exists and that they are with Philippines.
CTC-NY; that according to BCI’s by laws, it can only
issue new stock certificates, in lieu of lost, stolen, or
destroyed certificates of stocks, only after court of law
2. ID.; ID.; ID.; SCOPE OF POWER AND AUTHORITY OF
has issued a final and executory order as to who really AN ANCILLARY ADMINISTRATOR. — No one could dispute
owns a certificate of stock. the power of an ancillary administrator to gain control and
possession of all assets of the decedent within the jurisdiction of
ISSUE: Whether or not the arguments of Benguet
the Philippines. Such a power is inherent in his duty to settle her
Consolidated, Inc. are correct.
estate and satisfy the claims of local creditors (Rule 84, Sec. 3,
HELD: No. Benguet Consolidated is a corporation who Rules of Court. Cf Pavia v. De la Rosa, 8 Phil. 70; Liwanag v.
owes its existence to Philippine laws. It has been Reyes, L-19159, Sept. 29, 1964; Ignacio v. Elchico, L-18937,
given rights and privileges under the law. Corollary, it
May 16, 1967; etc.). It is a general rule universally recognized
also has obligations under the law and one of those is
to follow valid legal court orders. It is not immune
that administration, whether principal or ancillary, certainly
from judicial control because it is domiciled here in extends to the assets of a decedent found within the state or
the Philippines. BCI is a Philippine corporation owing country where it was granted, the corollary being "that an
full allegiance and subject to the unrestricted administrator appointed in one state or country has no power
jurisdiction of local courts. Its shares of stock cannot over property in another state or country" (Leon and Ghezzi v.
therefore be considered in any wise as immune from Manufacturers Life Ins. Co., 90 Phil. 459).
lawful court orders. Further, to allow BCI’s opposition
is to render the court order against CTC-NY a mere 3. ID.; ID.; ID.; ID.; CASE AT BAR. — Since, in the case at bar,
scrap of paper. It will leave Tayag without any remedy there is a refusal, persistently adhered to by the domiciliary
simply because CTC-NY, a foreign entity refuses to
administrator in New York, to deliver the shares of stocks of
comply with a valid court order. The final recourse
then is for our local courts to create a legal fiction
appellant corporation owned by the decedent to the ancillary
such that the stock certificates in issue be declared administrator in the Philippines, there was nothing unreasonable
lost even though in reality they exist in the hands of or arbitrary in considering them as lost and requiring the
CTC-NY. This is valid. As held time and again, fictions appellant to issue new certificates in lieu thereof. Thereby, the
which the law may rely upon in the pursuit of task incumbent under the law on the ancillary administrator
legitimate ends have played an important part in its could be discharged and his responsibility fulfilled. Any other
development. view would result in the compliance to a valid judicial order
Further still, the argument invoked by BCI that it can being made to depend on the uncontrolled discretion of a party or
only issue new stock certificates in accordance with entity.
its bylaws is misplaced. It is worth noting that CTC-NY
did not appeal the order of the court – it simply 4. CORPORATION LAW; CORPORATIONS; CONCEPT AND
refused to turn over the stock certificates hence NATURE. — A corporation is an artificial being created by
ownership can be said to have been settled in favor of operation of law (Sec. 2, Act No. 1459). A corporation as known
estate of Perkins here. Also, assuming that there to Philippine jurisprudence is a creature without any existence
really is a conflict between BCI’s bylaws and the court
until it has received the imprimatur of the state acting according
order, what should prevail is the lawful court order. It
would be highly irregular if court orders would yield to to law. It is logically inconceivable therefore that it will have
the bylaws of a corporation. Again, a corporation is rights and privileges of a higher priority than that of its creator.
not immune from judicial orders. More than that, it cannot legitimately refuse to yield obedience to
acts of its state organs, certainly not excluding the judiciary,
whenever called upon to do so. A corporation is not in fact and in
reality a person, but the law treats it as though it were a person
EN BANC by process of fiction, or by regarding it as an artificial person
distinct and separate from its individual stockholders (1 Fletcher,
[G.R. No. L-23145. November 29, 1968.] Cyclopedia Corporations, pp. 19-20)
 administrator because the said stock certificates are in existence,
DECISION they are today in the possession of the domiciliary administrator,
the County Trust Company, in New York, U.S.A.. . . ." 4

FERNANDO, J.: It is its view, therefore, that under the circumstances, the stock
certificates cannot be declared or considered as lost. Moreover, it
would allege that there was a failure to observe certain
Confronted by an obstinate and adamant refusal of the requirements of its by-laws before new stock certificates could
domiciliary administrator, the County Trust Company of New be issued. Hence, its appeal.
York, United States of America, of the estate of the deceased
Idonah Slade Perkins, who died in New York City on March As was made clear at the outset of this opinion, the appeal lacks
27, 1960, to surrender to the ancillary administrator in the merit. The challenged order constitutes an emphatic affirmation
Philippines the stock certificates owned by her in a of judicial authority sought to be emasculated by the willful
Philippine corporation, Benguet Consolidated, Inc., to satisfy conduct of the domiciliary administrator in refusing to accord
the legitimate claims of local creditors, the lower court, then obedience to a court decree. How, then, can this order be
presided by the Honorable Arsenio Santos, now retired, stigmatized as illegal?
issued on May 18, 1964, an order of this tenor: "After
considering the motion of the ancillary administrator, dated As is true of many problems confronting the judiciary, such a
February 11, 1964, as well as the opposition filed by the response was called for by the realities of the situation. What
Benguet Consolidated, Inc., the Court hereby (1) considers as cannot be ignored is that conduct bordering on willful defiance,
lost for all purposes in connection with the administration if it had not actually reached it, cannot without undue loss of
and liquidation of the Philippine estate of Idonah Slade judicial prestige, be condoned or tolerated. For the law is not so
Perkins the stock certificates covering the 33,002 shares of lacking in flexibility and resourcefulness as to preclude such a
stock standing in her name in the books of the Benguet solution, the more so as deeper reflection would make clear its
Consolidated, Inc., (2) orders said certificates cancelled, and being buttressed by indisputable principles and supported by the
(3) directs said corporation to issue new certificates in lieu strongest policy considerations.
thereof, the same to be delivered by said corporation to either
the incumbent ancillary administrator or to the Probate It can truly be said then that the result arrived at upheld and
Division of this Court." 1 vindicated the honor of the judiciary no less than that of the
country. Through this challenged order, there is thus dispelled the
From such an order, an appeal was taken to this Court not by atmosphere of contingent frustration brought about by the
the domiciliary administrator, the County Trust Company of persistence of the domiciliary administrator to hold on to the
New York, but by the Philippine corporation, the Benguet stock certificates after it had, as admitted, voluntarily submitted
Consolidated, Inc. The appeal cannot possibly prosper. The itself to the jurisdiction of the lower court by entering its
order challenged represents a response and expresses a appearance through counsel on June 27, 1963, and filing a
policy, to paraphrase Frankfurter, arising out of a specific petition for relief from a previous order of March 15, 1963. Thus
problem, addressed to the attainment of specific ends by the did the lower court, in the order now on appeal, impart vitality
use of specific remedies, with full and ample support from and effectiveness to what was decreed. For without it, what it had
legal doctrines of weight and significance. been decided would be set at naught and nullified. Unless such a
blatant disregard by the domiciliary administrator, with residence
The facts will explain why. As set forth in the brief of abroad, of what was previously ordained by a court order could
appellant Benguet Consolidated, Inc., Idonah Slade Perkins, be thus remedied, it would have entailed, insofar as this matter
who died on March 27, 1960 in New York City, left among was concerned, not a partial but a well-nigh complete paralysis
others, two stock certificates covering 33,002 shares of of judicial authority.
appellant, the certificates being in the possession of the
County Trust Company of New York, which as noted, is the 1. Appellant Benguet Consolidated, Inc. did not dispute the
domiciliary administrator of the estate of the deceased 2 Then power of the appellee ancillary administrator to gain control and
came this portion of the appellant’s brief: "On August 12, possession of all assets of the decedent within the jurisdiction of
1960, Prospero Sanidad instituted ancillary administration the Philippines. Nor could it. Such a power is inherent in his duty
proceedings in the Court of First Instance of Manila; Lazaro to settle her estate and satisfy the claims of local creditors. 5 As
A. Marquez was appointed ancillary administrator; and on Justice Tuason speaking for this Court made clear, it is a "general
January 22, 1963, he was substituted by the appellee Renato rule universally recognized" that administration, whether
D. Tayag. A dispute arose between the domiciliary principal or ancillary, certainly "extends to the assets of a
administrator in New York and the ancillary administrator in decedent found within the state or country where it was granted,"
the Philippines as to which of them was entitled to the the corollary being "that an administrator appointed in one state
possession of the stock certificates in question. On January or country has no power over property in another state or
27, 1964, the Court of First Instance of Manila ordered the country." 6
domiciliary administrator, County Trust Company, to
`produce and deposit’ them with the ancillary administrator It is to be noted that the scope of the power of the ancillary
or with the Clerk of Court. The domiciliary administrator did administrator was, in an earlier case, set forth by Justice
not comply with the order, and on February 11, 1964, the Malcolm. Thus: "It is often necessary to have more than one
ancillary administrator petitioned the court to "issue an order administration of an estate. When a person dies intestate owning
declaring the certificate or certificates of stocks covering the property in the country of his domicile as well as in a foreign
33,002 shares issued in the name of Idonah Slade Perkins by country, administration is had in both countries. That which is
Benguet Consolidated, Inc. be declared [or] considered as granted in the jurisdiction of decedent’s last domicile is termed
lost." 3 the principal administration, while any other administration is
termed the ancillary administration. The reason for the latter is
It is to be noted further that appellant Benguet Consolidated, because a grant of administration does not ex proprio vigore have
Inc. admits that "it is immaterial" as far as it is concerned as any effect beyond the limits of the country in which it is granted.
to "who is entitled to the possession of the stock certificates Hence, an administrator appointed in a foreign state has no
in question; appellant opposed the petition of the ancillary authority in the [Philippines]. The ancillary administration is
proper, whenever a person dies, leaving in a country other
than that of his last domicile, property to be administered in
the nature of assets of the deceased liable for his individual
debts or to be distributed among his heirs." 7
It would follow then that the authority of the probate court to
require that ancillary administrator’s right to "the stock
certificates covering the 33,002 shares .. standing in her name
in the books of [appellant] Benguet Consolidated, Inc.." be
respected is equally beyond question. For appellant is a
Philippine corporation owing full allegiance and subject to
the unrestricted jurisdiction of local courts. Its shares of stock
cannot therefore be considered in any wise as immune from
lawful court orders.
Our holding in Wells Fargo Bank and Union v. Collector of
Internal Revenue 8 finds application. "In the instant case, the
actual situs of the shares of stock is in the Philippines, the
corporation being domiciled [here]." To the force of the
above undeniable proposition, not even appellant is
insensible. It does not dispute it. Nor could it successfully do
so even if it were so minded.
2. In the face of such incontrovertible doctrines that argue in
a rather conclusive fashion for the legality of the challenged
order, how does appellant Benguet Consolidated, Inc.
propose to carry the extremely heavy burden of persuasion of
precisely demonstrating the contrary? It would assign as the
basic error allegedly committed by the lower court its
"considering as lost the stock certificates covering 33,002
shares of Benguet belonging to the deceased Idonah Slade
Perkins, . . ." 9 More specifically, appellant would stress that
the "lower court could not `consider as lost’ the stock
certificates in question when, as a matter of fact, his Honor
the trial Judge knew, and does know, and it is admitted by the
appellee, that the said stock certificates are in existence and
are today in the possession of the domiciliary administrator
in New York." 10
There may be an element of fiction in the above view of the
lower court. That certainly does not suffice to call for the
reversal of the appealed order. Since there is a refusal,
persistently adhered to by the domiciliary administrator in
New York, to deliver the shares of stocks of appellant
corporation owned by the decedent to the ancillary
administrator in the Philippines, there was nothing
unreasonable or arbitrary in considering them as lost and
requiring the appellant to issue new certificates in lieu
thereof. Thereby, the task incumbent under the law on the
ancillary administrator could be discharged and his
responsibility fulfilled.
Any other view would result in the compliance to a valid
judicial order being made to depend on the uncontrolled
discretion of the party or entity, in this case domiciled
abroad, which thus far has shown the utmost persistence in
refusing to yield obedience. Certainly, appellant would not be
heard to contend in all seriousness that a judicial decree
could be treated as a mere scrap of paper, the court issuing it
being powerless to remedy its flagrant disregard.
It may be admitted of course that such alleged loss as found
by the lower court did not correspond exactly with the facts.
To be more blunt, the quality of truth may be lacking in such
a conclusion arrived at. It is to be remembered however,
again to borrow from Frankfurter, "that fictions which the
law may rely upon in the pursuit of legitimate ends have
played an important part in its development." 11
Speaking of the common law in its earlier period, Cardozo
could state that fictions "were devices to advance the ends of
justice, [even if] clumsy and at times offensive." 12 Some of
them have persisted even to the present, that eminent jurist,
noting "the quasi contract, the adopted child, the constructive
trust, all of flourishing vitality, to attest the empire of `as if’
today." 13 He likewise noted "a class of fictions of another order,
the fiction which is a working tool of thought, but which at times
hides itself from view till reflection and analysis have brought it
to the light." 14
What cannot be disputed, therefore, is the at times indispensable
role that fictions as such played in the law. There should be then
on the part of the appellant a further refinement in the catholicity
of its condemnation of such judicial technique. If ever an
occasion did call for the employment of a legal fiction to put an
end to the anomalous situation of a valid judicial order being
disregarded with apparent impunity, this is it. What is thus most
obvious is that this particular alleged error does not carry
persuasion.
3. Appellant Benguet Consolidated, Inc. would seek to bolster
the above contention by its invoking one of the provisions of its
by-laws which would set forth the procedure to be followed in
case of a lost, stolen or destroyed stock certificate; it would stress
that in the event of a contest or the pendency of an action
regarding ownership of such certificate or certificates of stock
allegedly lost, stolen or destroyed, the issuance of a new
certificate or certificates would await the "final decision by [a]
court regarding the ownership [thereof]." 15
Such reliance is misplaced. In the first place, there is no such
occasion to apply such a by-law. It is admitted that the foreign
domiciliary administrator did not appeal from the order now in
question. Moreover, there is likewise the express admission of
appellant that as far as it is concerned, "it is immaterial . . . who
is entitled to the possession of the stock certificates . . ." Even if
such were not the case, it would be a legal absurdity to impart to
such a provision conclusiveness and finality. Assuming that a
contrariety exists between the above by-law and the command of
a court decree, the latter is to be followed.
It is understandable, as Cardozo pointed out, that the
Constitution overrides a statute, to which, however, the judiciary
must yield deference, when appropriately invoked and deemed
applicable. It would be most highly unorthodox, however, if a
corporate by-law would be accorded such a high estate in the
jural order that a court must not only take note of it but yield to
its alleged controlling force.
The fear of appellant of a contingent liability with which it could
be saddled unless the appealed order be set aside for its
inconsistency with one of its by-laws does not impress us. Its
obedience to a lawful court order certainly constitutes a valid
defense, assuming that such apprehension of a possible court
action against it could possibly materialize. Thus far, nothing in
the circumstances as they have developed gives substance to
such a fear. Gossamer possibilities of a future prejudice to
appellant do not suffice to nullify the lawful exercise of judicial
authority.
4. What is more the view adopted by appellant Benguet
Consolidated, Inc. is fraught with implications at war with the
basic postulates of corporate theory.
We start with the undeniable premise that, "a corporation is an
artificial being created by operation of law . . ." 16 It owes its life
to the state, its birth being purely dependent on its will. As Berle
so aptly stated: "Classically, a corporation was conceived as an
artificial person, owing its existence through creation by a
sovereign power. 17 As a matter of fact, the statutory language
employed owes much to Chief Justice Marshall, who in the
Dartmouth College decision, defined a corporation precisely as
"an artificial being invisible, intangible, and existing only in Veterans’ Act, including the exclusive review by United States
contemplation of law." 18 courts), and those actions where the Veterans’ Administrator
seeks a remedy from our courts and submits to their jurisdiction
The well-known authority Fletcher could summarize the by filing actions therein. Our attention has not been called to any
matter thus: "A corporation is not in fact and in reality a law or treaty that would make the findings of the Veterans’
person, but the law treats it as though it were a person by Administrator, in actions where he is a party, conclusive on our
process of fiction, or by regarding it as an artificial person courts. That, in effect, would deprive our tribunals of judicial
distinct and separate from its individual stockholders.. It discretion and render them mere subordinate instrumentalities of
owes its existence to law. It is an artificial person created by the Veterans’ Administrator."cralaw virtua1aw library
law for certain specific purposes, the extent of whose
existence, powers and liberties is fixed by its charter." 19 It is bad enough as the Viloria decision made patent for our
Dean Pound’s terse summary, a juristic person, resulting from judiciary to accept as final and conclusive, determinations made
an association of human beings granted legal personality by by foreign governmental agencies. It is infinitely worse if
the state, puts the matter neatly. 20 through the absence of any coercive power by our courts over
juridical persons within our jurisdiction, the force and effectivity
There is thus a rejection of Gierke’s genosssenchaft theory, of their orders could be made to depend on the whim or caprice
the basic theme of which to quote from Friedmann, "is the of alien entities. It is difficult to imagine of a situation more
reality of the group as a social and legal entity, independent offensive to the dignity of the bench or the honor of the country.
of state recognition and concession." 21 A corporation as
known to Philippine jurisprudence is a creature without any Yet that would be the effect, even if unintended, of the
existence until it has received the imprimatur of the state proposition to which appellant Benguet Consolidated seems to be
acting according to law. It is logically inconceivable therefore firmly committed as shown by its failure to accept the validity of
that it will have rights and privileges of a higher priority than the order complained of; it seeks its reversal. Certainly we must
that of its creator. More than that, it cannot legitimately at all pains see to it that it does not succeed. The deplorable
refuse to yield obedience to acts of its state organs, certainly consequences attendant on appellant prevailing attest to the
not excluding the judiciary, whenever called upon to do so. necessity of a negative response from us. That is what appellant
will get.
As a matter of fact, a corporation once it comes into being,
following American law still of persuasive authority in our That is all then that this case presents. It is obvious why the
jurisdiction, comes more often within the ken of the judiciary appeal cannot succeed. It is always easy to conjure extreme and
than the other two coordinate branches. It institutes the even oppressive possibilities. That is not decisive. It does not
appropriate Court Action to enforce its rights. Correlatively, settle the issue. What carries weight and conviction is the result
it is not immune from judicial control in those instances, arrived at, the just solution obtained, grounded in the soundest of
where a duty under the law as ascertained in an appropriate legal doctrines and distinguished by its correspondence with
legal proceeding is cast upon it. what a sense of realism requires. For through the appealed order,
the imperative requirement of justice according to law is satisfied
To assert that it can choose which court order to follow and and national dignity and honor maintained.
which to disregard is to confer upon it not autonomy which
may be conceded but license which cannot be tolerated. It is WHEREFORE, the appealed order of the Honorable Arsenio
to argue that it may, when so minded, overrule the state, the Santos, the Judge of the Court of First Instance, dated May 18,
source of its very existence; it is to contend that what any of 1964, is affirmed. With costs against oppositor-appellant Benguet
its governmental organs may lawfully require could be Consolidated, Inc.
ignored at will. So extravagant a claim cannot possibly merit
approval. Makalintal, Zaldivar, and Capistrano, JJ., concur.

5. One last point. In Viloria v. Administrator of Veterans
Affairs, 22 it was shown that in a guardianship proceeding
then pending in a lower court, the United States Veterans
Administration filed a motion for the refund of a certain sum
of money paid to the minor under guardianship, alleging that
the lower court had previously granted its petition to consider
the deceased father as not entitled to guerilla benefits
according to a determination arrived at by its main office in
the United States. The motion was denied. In seeking a
reconsideration of such order, the Administrator relied on an
American federal statute making his decisions "final and
conclusive on all questions of law or fact" precluding any
other American official to examine the matter anew, "except
a judge or judges of the United States court." 23
Reconsideration was denied, and the Administrator appealed.
In an opinion by Justice J.B.L. Reyes, we sustained the lower
court. Thus: "We are of the opinion that the appeal should be
rejected. The provisions of the U.S. Code, invoked by the
appellant, make the decisions of U.S. Veteran Administrator
final and conclusive when made on claims properly
submitted to him for resolution; but they are not applicable to
the present case, where the Administrator is not acting as a
judge but as a litigant. There is a great difference between
actions against the Administrator (which must be filed strictly
in accordance with the conditions that are imposed by the
Concepcion, C.J., Reyes, J.B.L., Dizon, Sanchez and Ruiz
Castro, JJ., concur in the result.
Endnotes:
1. Statement of the Case and Issues Involved, Brief for the oppositor-
appellant., p. 2.
2. Ibid, p. 3 .
3. Ibid, pp. 3 to 4.
4. Ibid, p. 4.
5. Rule 84, Sec. 3, Rules of Court. Cf. Pavia v. de la Rosa, 8 Phil. 70
(1907); Suiliong and Co. v. Chio-Taysan, 12 Phil. 13 (1908); Malahacan
v. Ignacio, 19 Phil. 434 (1911); McMicking v. Sy Conbieng, 21 Phil. 211
(1912); In re Estate of De Dios, 24 Phil. 573 (1913); Santos v.
Manarang, 27 Phil. 209 (1914); Jaucian v. Querol, 38 Phil. 707 (1918);
Buenaventura v. Ramos, 43 Phil. 704 (1922); Roxas v. Pecson, 82 Phil.
407 (1948); De Borja v. De Borja, 83 Phil. 405 (1949); Barraca v.
Zayco, 88 Phil. 774 (1951); Pabilonia v. Santiago, 93 Phil. 516 (1953);
Sison v. Teodoro, 98 Phil. 680 (1956); Ozaeta v. Palanca, 101 Phil. 976
(1957); Natividad Castelvi de Raquiza v. Castelvi, Et Al., L-17630, Oct.
31, 1963; Habana v. Imbo, L-15598 & 15726, March 31, 1964; Gliceria
Liwanag v. Hon. Luis Reyes, L-19159, Sept. 29, 1964; Ignacio v.
Elchico, L-18937, May 16, 1967.
6. Leon and Ghezzi v. Manuf. Life Ins. Co., 90 Phil. 459 (1951).
7. Johannes v. Harvey, 43 Phil. 175, 177-178 (1922).
8. 70 Phil. 325 (1940), Cf. Perkins v. Dizon, 69 Phil. 186 (1939).
9. Brief for oppositor-appellant, p. 5. The Assignment of Error reads:
"The lower court erred in entering its order of May 18, 1964, (1)
considering as lost the stock certificates covering 33,002 shares of
Benguet belonging to the deceased Idonah Slade Perkins, (2)
ordering the said certificates cancelled, and (3) ordering appellant to
issue new certificates in lieu thereof and to deliver them to the
ancillary administrator of the deceased Idonah Slade Perkins or to
the probate division of the lower court."cralaw virtua1aw library
10. Ibid, pp. 5 to 6.
11. Nashville C. St. Louis Ry v. Browning, 310 US 362 (1940)
12. Cardozo, The Paradoxes of Legal Science, 34 (1928)
13. Ibid, p. 34.
14. Ibid, p. 34. The late Professor Gray in his The Nature and
Sources of the Law, distinguished, following Ihering, historic
fictions from dogmatic fictions, the former being devices to allow
the addition of new law to old without changing the form of the old
law and the latter being intended to arrange recognized and
established doctrines under the most convenient forms. pp. 30, 36
(1909) Speaking of historic fictions, Gray added: "Such fictions
have had their field of operation largely in the domain of procedure,
and have consisted in pretending that a person or thing was other
than that which he or it was in truth (or that an event had occurred
which had not in fact occurred) for the purpose of thereby giving an
action at law to or against a person who did not really come within
the class to or against which the old action was confined." Ibid, pp.
30-31 See also Pound, The Philosophy of Law, pp. 179, 180, 274
(1922)
15. This is what the particular by-law provides: Section 10. Lost,
Stolen or Destroyed Certificates. — Any registered stockholder
claiming a certificate or certificates of stock to be lost, stolen or
destroyed shall file an affidavit in triplicate with the Secretary of the
Company or with one of its Transfer Agents, setting forth, if
possible, the circumstances as to how, when and where said
certificate or certificates was or were lost, stolen or destroyed, the
number of shares represented by the certificate or by each of the
certificates, the serial number or numbers of the certificate or
certificates and the name of this Company. The registered
stockholder shall also submit such other information and evidence
which he may deem necessary.
x x x
If a contest is presented to the Company, or if an action is pending
in court regarding the ownership of said certificate or certificates of
stock which have been claimed to have been lost, stolen or
destroyed, the issuance of the new certificate or certificates in lieu
of that or those claimed to have been lost, stolen or destroyed, shall
be suspended until final decision by the court regarding the
ownership of said certificate or certificates. Brief for oppositor-
appellant, pp. 8-10.
16. Sec. 2, Act No. 1459 (1906)
17. Berle, The Theory of Enterprise Entity, 47 Co. Law Rev. 343
(1907)
18. Dartmouth College v. Woodward, 4 Wheat. 518 (1819). Cook
would trace such a concept to Lord Coke. See 1 Cook on
Corporations, p. 2 (1923)
19. 1 Fletcher, Cyclopedia Corporations, pp. 19-20 (193l).
Chancellor Kent and Chief Justice Baldwin of Connecticut were
likewise cited to the same effect. At pp. 12-13.
20. 4 Pound on Jurisprudence, pp. 207-209 (1959)
21. Friedmann, Legal Theory, pp. 164-168 (1947). See also
Holdsworth, English Corporation Law, 31 Yale Law Journal, 382
(1922)
22. 101 Phil. 762 (1957)
23. 38 USCA, Sec. 808.
b. PSE VS CA (281 SCRA 232)
Philippine Stock Exchange Inc. vs Court of Appeals
281 SCRA 232 [GR No. 125469 October 27,
1997]
Facts: The Puerto Azul Land Inc. (PALI), a domestic
real estate corporation, had sought to offer its shares
to the public in order to raise funds allegedly to
develop its properties and pay its loans with several
banking institutions. In January, 1995, PALI was issued
a permit to sell its shares to the public by the
Securities and Exchange Commission (SEC). To
facilitate the trading of its shares among investors,
PALI sought to course the trading of its shares through
the Philippine Stock Exchange Inc. (PSEi), for which
purpose it filed with the said stock exchange an
application to list its shares, with supporting documents
attached pending the approval of the PALI’s listing
application, a letter was received by PSE from the heirs of
Ferdinand Marcos to which the latter claims to be the
legal and beneficial owner of some of the properties
forming part of PALI’s assets. As a result, PSE denied
PALI’s application which caused the latter to file a
complaint before the SEC. The SEC issued an order to PSE
to grant listing application of PALI on the ground that PALI
have certificate of title over its assets and properties and
that PALI have complied with all the requirements to
enlist with PSE.
Issue: Whether or not the denial of PALI’s application is
proper.
Held: Yes. This is in accord with the “Business Judgement
Rule” whereby the SEC and the courts are barred from
intruding into business judgements of corporations, when
the same are made in good faith. The same rule
precludes the reversal of the decision of the PSE, to
which PALI had previously agreed to comply, the PSE
retains the discretion to accept of reject applications for
listing. Thus, even if an issuer has complied with the PSE
listing rules and requirements, PSE retains the discretion
to accept or reject the issuer’s listing application if the
PSE determines that the listing shall not serve the
interests of the investing public.
It is undeniable that the petitioner PSE is not an ordinary
corporation, in that although it is clothed with the
markings of a corporate entity, it functions as the primary
channel through which the vessels of capital trade ply.
The PSEi’s relevance to the continued operation and
filtration of the securities transaction in the country gives
it a distinct color of importance such that government
intervention in its affairs becomes justified, if not
necessarily. Indeed, as the only operational stock
exchange in the country today, the PSE enjoys monopoly
of securities transactions, and as such it yields a
monopoly of securities transactions, and as such, it yields
an immerse influence upon the country’s economy.
The SEC’s power to look into the subject ruling of the
PSE, therefore, may be implied from or be considered as
necessary or incidental to the carrying out of the SEC’s
express power to insure fair dealing in securities traded
upon a stock exchange or to ensure the fair
administration of such exchange. It is likewise, observed
that the principal function of the SEC is the supervision
and control over corporations, partnerships and
associations with the end in view that investment in
these entities may be encouraged and protected and
their activities for the promotion of economic
development.
A corporation is but an association of individuals, allowed
to transact under an assumed corporate name, and with
a distinct legal personality. In organizing itself as a
collective body, it waives no constitutional immunities
and requisites appropriate to such a body as to its
corporate and management decisions, therefore, the
state will generally not interfere with the same. Questions
of policy and management are left to the honest decision
of the officers and directors of a corporation, and the
courts are without authority to substitute their
judgements for the judgement of the board of directors.
The board is the business manager of the corporation and
so long as it acts in good faith, its orders are not
reviewable by the courts.
In matters of application for listing in the market the SEC
may exercise such power only if the PSE’s judgement is
attended by bad faith.
The petitioner was in the right when it refused application
of PALI, for a contrary ruling was not to the best interest
of the general public.
SECOND DIVISION
[G.R. No. 125469. October 27, 1997.]
PHILIPPINE STOCK EXCHANGE, INC., Petitioner, v. THE
HONORABLE COURT OF APPEALS, SECURITIES AND
EXCHANGE COMMISSION and PUERTO AZUL LAND,
INC., Respondents.
DECISION
TORRES, JR., J.:
The Securities and Exchange Commission is the
government agency, under the direct general
supervision of the Office of the President, 1 with the
immense task of enforcing the Revised Securities Act,
and all other duties assigned to it by pertinent laws.
Among its innumerable functions, and one of the most
important, is the supervision of all corporations,
partnerships or associations, who are grantees of
primary franchise and/or a license or permit issued by
the government to operate in the Philippines. 2 Just
how far this regulatory authority extends, particularly,
with regard to the Petitioner Philippine Stock
Exchange, Inc. is the issue in the case at bar.
In this Petition for Review on Certiorari, petitioner
assails the resolution of the respondent Court of
Appeals, dated June 27, 1996, which affirmed the
decision of the Securities and Exchange Commission
ordering the petitioner Philippine Stock Exchange, Inc.
to allow the private respondent Puerto Azul Land, Inc.
to be listed in its stock market, thus paving the way
for the public offering of PALI’s shares.
The facts of the case are undisputed, and are hereby
restated in sum.
The Puerto Azul Land, Inc. (PALI), a domestic real
estate corporation, had sought to offer its shares to
the public in order to raise funds allegedly to develop
its properties and pay its loans with several banking
institutions. In January, 1995, PALI was issued a Permit
to Sell its shares to the public by the Securities and
Exchange Commission (SEC). To facilitate the trading
of its shares among investors, PALI sought to course
the trading of its shares through the Philippine Stock
Exchange, Inc. (PSE), for which purpose it filed with
the said stock exchange an application to list its
shares, with supporting documents attached.
On February 8, 1996, the Listing Committee of the
PSE, upon a perusal of PALI’s application,
recommended to the PSE’s Board of Governors the
approval of PALI’s listing application.
On February 14, 1996, before it could act upon PALI’s
application, the Board of Governors of the PSE
received a letter from the heirs of Ferdinand E.
Marcos, claiming that the late President Marcos was
the legal and beneficial owner of certain properties
forming part of the Puerto Azul Beach Hotel and
Resort Complex which PALI claims to be among its
assets and that the Ternate Development Corporation,
which is among the stockholders of PALI, likewise
appears to have been held and continue to be held in
trust by one Rebecco Panlilio for then President
Marcos and now, effectively for his estate, and
requested PALI’s application to be deferred. PALI was
requested to comment upon the said letter.
PALI’s answer stated that the properties forming part
of the Puerto Azul Beach Hotel and Resort Complex
were not claimed by PALI as its assets. On the
contrary, the resort is actually owned by Fantasia
Filipina Resort, Inc. and the Puerto Azul Country Club,
entities distinct from PALI. Furthermore, the Ternate
Development Corporation owns only 1.20% of PALI.
The Marcoses responded that their claim is not confined
to the facilities forming part of the Puerto Azul Hotel and
Resort Complex, thereby implying that they are also
asserting legal and beneficial ownership of other
properties titled under the name of
PALI.chanroblesvirtual|awlibrary
On February 20, 1996, the PSE wrote Chairman
Magtanggol Gunigundo of the Presidential Commission on
Good Government (PCGG) requesting for comments on
the letters of the PALI and the Marcoses. On March 4,
1996, the PSE was informed that the Marcoses received a
Temporary Restraining Order on the same date, enjoining
the Marcoses from, among others, "further impeding,
obstructing, delaying or interfering in any manner by or
any means with the consideration, processing and
approval by the PSE of the initial public offering of PALI."
The TRO was issued by Judge Martin S. Villarama,
Executive Judge of the RTC of Pasig City in Civil Case No.
65561, pending in Branch 69 thereof.
In its regular meeting held on March 27, 1996, the Board
of Governors of the PSE reached its decision to reject
PALI’s application, citing the existence of serious claims,
issues and circumstances surrounding PALI’s ownership
over its assets that adversely affect the suitability of
listing PALI’s shares in the stock exchange.
On April 11, 1996, PALI wrote a letter to the SEC
addressed to the then Acting Chairman, Perfecto R.
Yasay, Jr., bringing to the SEC’s attention the action taken
by the PSE in the application of PALI for the listing of its
shares with the PSE, and requesting that the SEC in the
exercise of its supervisory and regulatory powers over
stock exchanges under Section 6(j) of P.D. No. 902-A,
review the PSE’s action on PALI’s listing application and
institute such measures as are just and proper under the
circumstances.
On the same date, or on April 11, 1996, the SEC wrote to
the PSE, attaching thereto the letter of PALI and directing
the PSE to file its comments thereto within five days from
its receipt and for its authorized representative to appear
for an "inquiry" on the matter. On April 22, 1996, the PSE
submitted a letter to the SEC containing its comments to
the April 11, 1996 letter of PALI.
On April 24, 1996, the SEC rendered its Order, reversing
the PSE’s decision. The dispositive portion of the said
order reads:jgc:chanrobles.com.ph
"WHEREFORE, premises considered, and invoking the
Commissioner’s authority and jurisdiction under Section 3
of the Revised Securities Act, in conjunction with Section
3, 6(j) and 6(m) of Presidential Decree No. 902-A, the
decision of the Board of Governors of the Philippine Stock
Exchange denying the listing of shares of Puerto Azul
Land, Inc., is hereby set aside, and the PSE is hereby
ordered to immediately cause the listing of the PALI
shares in the Exchange, without prejudice to its authority
to require PALI to disclose such other material information
it deems necessary for the protection of the investing
public.
This Order shall take effect immediately.
SO ORDERED."cralaw virtua1aw library
PSE filed a motion for reconsideration of the said order on
April 29, 1996, which was, however denied by the
Commission in its May 9, 1996 Order which
states:jgc:chanrobles.com.ph
"WHEREFORE, premises considered, the Commission
finds no compelling reason to reconsider its order dated
April 24, 1996, and in the light of recent developments on
the adverse claim against the PALI properties, PSE should
require PALI to submit full disclosure of material facts and
information to protect the investing public. In this
regard, PALI is hereby ordered to amend its
registration statements filed with the Commission to
incorporate the full disclosure of these material facts
and information."cralaw virtua1aw library
Dissatisfied with this ruling, the PSE filed with the
Court of Appeals on May 17, 1996 a Petition for
Review (with Application for Writ of Preliminary
Injunction and Temporary Restraining Order), assailing
the above mentioned orders of the SEC, submitting
the following as errors of the SEC:chanrob1es virtual
1aw library
I. SEC COMMITTED SERIOUS ERROR AND GRAVE
ABUSE OF DISCRETION IN ISSUING THE ASSAILED
ORDERS WITHOUT POWER, JURISDICTION, OR
AUTHORITY; SEC HAS NO POWER TO ORDER THE
LISTING AND SALE OF SHARES OF PALI WHOSE
ASSETS ARE SEQUESTERED AND TO REVIEW AND
SUBSTITUTE DECISIONS OF PSE ON LISTING
APPLICATIONS;
II. SEC COMMITTED SERIOUS ERROR AND GRAVE
ABUSE OF DISCRETION IN FINDING THAT PSE ACTED
IN AN ARBITRARY AND ABUSIVE MANNER IN
DISAPPROVING PALI’S LISTING APPLICATION;
III. THE ASSAILED ORDERS OF SEC ARE ILLEGAL
AND VOID FOR ALLOWING FURTHER DISPOSITION OF
PROPERTIES IN CUSTODIA LEGIS AND WHICH FORM
PART OF NAVAL/MILITARY RESERVATION; AND
IV. THE FULL DISCLOSURE OF THE SEC WAS NOT
PROPERLY PROMULGATED AND ITS IMPLEMENTATION
AND APPLICATION IN THIS CASE VIOLATES THE DUE
PROCESS CLAUSE OF THE CONSTITUTION.
On June 4, 1996, PALI filed its Comment to the Petition
for Review and subsequently, a Comment and Motion
to Dismiss. On June 10, 1996, PSE filed its Reply to
Comment and Opposition to Motion to
Dismiss.chanroblesvirtuallawlibrary:red
On June 27, 1996, the Court of Appeals promulgated
its Resolution dismissing the PSE’s Petition for Review.
Hence, this Petition by the PSE.
The appellate court had ruled that the SEC had both
jurisdiction and authority to look into the decision of
the petitioner PSE, pursuant to Section 3 3 of the
Revised Securities Act in relation to Section 6(j) and
6(m) 4 of P.D. No. 902-A, and Section 38(b) 5 of the
Revised Securities Act, and for the purpose of
ensuring fair administration of the exchange. Both as
a corporation and as a stock exchange, the petitioner
is subject to public respondent’s jurisdiction,
regulation and control. Accepting the argument that
the public respondent has the authority merely to
supervise or regulate, would amount to serious
consequences, considering that the petitioner is a
stock exchange whose business is impressed with
public interest. Abuse is not remote if the public
respondent is left without any system of control. If the
securities act vested the public respondent with
jurisdiction and control over all corporations; the
power to authorize the establishment of stock
exchanges; the right to supervise and regulate the
same; and the power to alter and supplement rules of
the exchange in the listing or delisting of securities,
then the law certainly granted to the public
respondent the plenary authority over the petitioner;
and the power of review necessarily comes within its
authority.
All in all, the court held that PALI complied with all the
requirements for public listing, affirming the SEC’s
ruling to the effect that:jgc:chanrobles.com.ph
". . . the Philippine Stock Exchange has acted in an
arbitrary and abusive manner in disapproving the
application of PALI for listing of its shares in the face of
the following considerations:chanrob1es virtual 1aw
library
1. PALI has clearly and admittedly complied with the
Listing Rules and full disclosure requirements of the
Exchange;
2. In applying its clear and reasonable standards on
the suitability for listing of shares, PSE has failed to justify
why it acted differently on the application of PALI, as
compared to the IPOs of other companies similarly
situated that were allowed listing in the Exchange;
3. It appears that the claims and issues on the title
to PALI’s properties were even less serious than the
claims against the assets of the other companies in that,
the assertions of the Marcoses that they are owners of
the disputed properties were not substantiated enough to
overcome the strength of a title to properties issued
under the Torrens System as evidence of ownership
thereof;
4. No action has been filed in any court of
competent jurisdiction seeking to nullify PALI’s ownership
over the disputed properties, neither has the government
instituted recovery proceedings against these properties.
Yet the import of PSE’s decision in denying PALI’s
application is that it would be PALI, not the Marcoses, that
must go to court to prove the legality of its ownership on
these properties before its shares can be listed."cralaw
virtua1aw library
In addition, the argument that the PALI properties belong
to the Military/Naval Reservation does not inspire belief.
The point is, the PALI properties are now titled. A property
loses its public character the moment it is covered by a
title. As a matter of fact, the titles have long been settled
by a final judgment; and the final decree having been
registered, they can no longer be re-opened considering
that the one year period has already passed. Lastly, the
determination of what standard to apply in allowing
PALI’s application for listing, whether the discretion
method or the system of public disclosure adhered to by
the SEC, should be addressed to the Securities
Commission, it being the government agency that
exercises both supervisory and regulatory authority over
all corporations.
On August 15, 1996, the PSE, after it was granted an
extension, filed the instant Petition for Review on
Certiorari, taking exception to the rulings of the SEC and
the Court of Appeals. Respondent PALI filed its Comment
to the petition on October 17, 1996. On the same date,
the PCGG filed a Motion for Leave to file a Petition for
Intervention. This was followed up by the PCGG’s Petition
for Intervention on October 21, 1996. A supplemental
Comment was filed by PALI on October 25, 1997. The
Office of the Solicitor General, representing the SEC and
the Court of Appeals, likewise filed its Comment on
December 26, 1996. In answer to the PCGG’s motion for
leave to file petition for intervention, PALI filed its
Comment thereto on January 17, 1997, whereas the PSE
filed its own Comment on January 20, 1997.
On February 25, 1996, the PSE filed its Consolidated
Reply to the comments of respondent PALI (October 17,
1996) and the Solicitor General (December 26, 1996). On
May 16, 1997, PALI filed its Rejoinder to the said
consolidated reply of PSE.
PSE submits that the Court of Appeals erred in ruling that
the SEC had authority to order the PSE to list the shares
of PALI in the stock exchange. Under Presidential Decree
No. 902-A, the powers of the SEC over stock exchanges
are more limited as compared to its authority over
ordinary corporations. In connection with this, the
powers of the SEC over stock exchanges under the
Revised Securities Act are specifically enumerated,
and these do not include the power to reverse the
decisions of the stock exchange. Authorities are in
abundance even in the United States, from which the
country’s security policies are patterned, to the effect
of giving the Securities Commission less control over
stock exchanges, which in turn are given more leeway
in making the decision whether or not to allow
corporations to offer their stock to the public through
the stock exchange. This is in accord with the
"business judgment rule" whereby the SEC and the
courts are barred from intruding into business
judgments of corporations, when the same are made
in good faith. The said rule precludes the reversal of
the decision of the PSE to deny PALI’s listing
application, absent a showing of bad faith on the part
of the PSE. Under the listing rules of the PSE, to which
PALI had previously agreed to comply, the PSE retains
the discretion to accept or reject applications for
listing. Thus, even if an issuer has complied with the
PSE listing rules and requirements, PSE retains the
discretion to accept or reject the issuer’s listing
application if the PSE determines that the listing shall
not serve the interests of the investing public.
Moreover, PSE argues that the SEC has no jurisdiction
over sequestered corporations, nor with corporations
whose properties are under sequestration. A reading
of Republic of the Philippines v. Sandiganbayan, G.R.
No. 105205, 240 SCRA 376, would reveal that the
properties of PALI, which were derived from the
Ternate Development Corporation (TDC) and the
Monte del Sol Development Corporation (MSDC), are
under sequestration by the PCGG, and subject of
forfeiture proceedings in the Sandiganbayan. This
ruling of the Court is the "law of the case" between
the Republic and TDC and MSDC. It categorically
declares that the assets of these corporations were
sequestered by the PCGG on March 10, 1986 and April
4, 1988.
It is, likewise, intimated that the Court of Appeals’
sanction that PALI’s ownership over its properties can
no longer be questioned, since certificates of title
have been issued to PALI and more than one year has
since lapsed, is erroneous and ignores well settled
jurisprudence on land titles. That a certificate of title
issued under the Torrens System is a conclusive
evidence of ownership is not an absolute rule and
admits certain exceptions. It is fundamental that
forest lands or military reservations are non-alienable.
Thus, when a title covers a forest reserve or a
government reservation, such title is void.
PSE, likewise, assails the SEC’s and the Court of
Appeals’ reliance on the alleged policy of "full
disclosure" to uphold the listing of PALI’s shares with
the PSE, in the absence of a clear mandate for the
effectivity of such policy. As it is, the case records
reveal the truth that PALI did not comply with the
listing rules and disclosure requirements. In fact,
PALI’s documents supporting its application contained
misrepresentations and misleading statements, and
concealed material information. The matter of
sequestration of PALI’s properties and the fact that
the same form part of military/naval/forest
reservations were not reflected in PALI’s application.
It is undeniable that the petitioner PSE is not an
ordinary corporation, in that although it is clothed with
the markings of a corporate entity, it functions as the
primary channel through which the vessels of capital
trade ply. The PSE’s relevance to the continued
operation and filtration of the securities transactions
in the country gives it a distinct color of importance
such that government intervention in its affairs becomes
justified, if not necessary. Indeed, as the only operational
stock exchange in the country today, the PSE enjoys a
monopoly of securities transactions, and as such, it yields
an immense influence upon the country’s economy.
Due to this special nature of stock exchanges, the
country’s lawmakers have seen it wise to give special
treatment to the administration and regulation of stock
exchanges. 6
These provisions, read together with the general grant of
jurisdiction, and right of supervision and control over all
corporations under Sec. 3 of P.D. 902-A, give the SEC the
special mandate to be vigilant in the supervision of the
affairs of stock exchanges so that the interests of the
investing public may be fully safeguarded.
Section 3 of Presidential Decree 902-A, standing alone, is
enough authority to uphold the SEC’s challenged control
authority over the petitioner PSE even as it provides that
"the Commission shall have absolute jurisdiction,
supervision, and control over all corporations,
partnerships or associations, who are the grantees of
primary franchises and/or a license or permit issued by
the government to operate in the Philippines . . ." The
SEC’s regulatory authority over private corporations
encompasses a wide margin of areas, touching nearly all
of a corporation’s concerns. This authority springs from
the fact that a corporation owes its existence to the
concession of its corporate franchise from the state.
The SEC’s power to look into the subject ruling of the
PSE, therefore, may be implied from or be considered as
necessary or incidental to the carrying out of the SEC’s
express power to insure fair dealing in securities traded
upon a stock exchange or to ensure the fair
administration of such exchange. 7 It is, likewise,
observed that the principal function of the SEC is the
supervision and control over corporations, partnerships
and associations with the end in view that investment in
these entities may be encouraged and protected, and
their activities pursued for the promotion of economic
development. 8
Thus, it was in the alleged exercise of this authority that
the SEC reversed the decision of the PSE to deny the
application for listing in the stock exchange of the private
respondent PALI. The SEC’s action was affirmed by the
Court of Appeals.
We affirm that the SEC is the entity with the primary say
as to whether or not securities, including shares of stock
of a corporation, may be traded or not in the stock
exchange. This is in line with the SEC’s mission to ensure
proper compliance with the laws, such as the Revised
Securities Act and to regulate the sale and disposition of
securities in the country. 9 As the appellate court
explains:jgc:chanrobles.com.ph
"Paramount policy also supports the authority of the
public respondent to review petitioner’s denial of the
listing. Being a stock exchange, the petitioner performs a
function that is vital to the national economy, as the
business is affected with public interest. As a matter of
fact, it has often been said that the economy moves on
the basis of the rise and fall of stocks being traded. By its
economic power, the petitioner certainly can dictate
which and how many users are allowed to sell securities
thru the facilities of a stock exchange, if allowed to
interpret its own rules liberally as it may please.
Petitioner can either allow or deny the entry to the
market of securities. To repeat, the monopoly, unless
accompanied by control, becomes subject to abuse;
hence, considering public interest, then it should be
subject to government regulation."cralaw virtua1aw
library
The role of the SEC in our national economy cannot be
minimized. The legislature, through the Revised
Securities Act, Presidential Decree No. 902-A, and
other pertinent laws, has entrusted to it the serious
responsibility of enforcing all laws affecting
corporations and other forms of associations not
otherwise vested in some other government office. 10
This is not to say, however, that the PSE’s
management prerogatives are under the absolute
control of the SEC. The PSE is, after all, a corporation
authorized by its corporate franchise to engage in its
proposed and duly approved business. One of the
PSE’s main concerns, as such, is still the generation of
profit for its stockholders. Moreover, the PSE has all
the rights pertaining to corporations, including the
right to sue and be sued, to hold property in its own
name, to enter (or not to enter) into contracts with
third persons, and to perform all other legal acts
within its allocated express or implied powers.
A corporation is but an association of individuals,
allowed to transact under an assumed corporate
name, and with a distinct legal personality. In
organizing itself as a collective body, it waives no
constitutional immunities and perquisites appropriate
to such a body. 11 As to its corporate and
management decisions, therefore, the state will
generally not interfere with the same. Questions of
policy and of management are left to the honest
decision of the officers and directors of a corporation,
and the courts are without authority to substitute their
judgment for the judgment of the board of directors.
The board is the business manager of the corporation,
and so long as it acts in good faith, its orders are not
reviewable by the courts. 12
Thus, notwithstanding the regulatory power of the
SEC over the PSE, and the resultant authority to
reverse the PSE’s decision in matters of application for
listing in the market, the SEC may exercise such
power only if the PSE’s judgment is attended by bad
faith. In Board of Liquidators v. Kalaw, 13 it was held
that bad faith does not simply connote bad judgment
or negligence. It imports a dishonest purpose or some
moral obliquity and conscious doing of wrong. It
means a breach of a known duty through some motive
or interest of ill will, partaking of the nature of
fraud.chanrobles.com : virtual lawlibrary
In reaching its decision to deny the application for
listing of PALI, the PSE considered important facts,
which, in the general scheme, brings to serious
question the qualification of PALI to sell its shares to
the public through the stock exchange. During the
time for receiving objections to the application, the
PSE heard from the representative of the late
President Ferdinand E. Marcos and his family who
claim the properties of the private respondent to be
part of the Marcos estate. In time, the PCGG
confirmed this claim. In fact, an order of sequestration
has been issued covering the properties of PALI, and
suit for reconveyance to the state has been filed in
the Sandiganbayan Court. How the properties were
effectively transferred, despite the sequestration
order, from the TDC and MSDC to Rebecco Panlilio,
and to the private respondent PALI, in only a short
span of time, are not yet explained to the Court, but it
is clear that such circumstances give rise to serious
doubt as to the integrity of PALI as a stock issuer. The
petitioner was in the right when it refused application
of PALI, for a contrary ruling was not to the best
interest of the general public. The purpose of the
Revised Securities Act, after all, is to give adequate
and effective protection to the investing public against
fraudulent representations, or false promises, and the
imposition of worthless ventures. 14
It is to be observed that the U.S. Securities Act
emphasized its avowed protection to acts detrimental to
legitimate business, thus:jgc:chanrobles.com.ph
"The Securities Act, often referred to as the "truth in
securities" Act, was designed not only to provide
investors with adequate information upon which to base
their decisions to buy and sell securities, but also to
protect legitimate business seeking to obtain capital
through honest presentation against competition from
crooked promoters and to prevent fraud in the sale of
securities. (Tenth Annual Report, U.S. Securities &
Exchange Commission, p. 14).
As has been pointed out, the effects of such an act are
chiefly (1) prevention of excesses and fraudulent
transactions, merely by requirement of that their details
be revealed; (2) placing the market during the early
stages of the offering of a security a body of information,
which operating indirectly through investment services
and expert investors, will tend to produce a more
accurate appraisal of a security. . . . Thus, the
Commission may refuse to permit a registration
statement to become effective if it appears on its face to
be incomplete or inaccurate in any material respect, and
empower the Commission to issue a stop order
suspending the effectiveness of any registration
statement which is found to include any untrue
statement of a material fact or to omit to state any
material fact required to be stated therein or necessary
to make the statements therein not misleading.
(Idem)."cralaw virtua1aw library
Also, as the primary market for securities, the PSE has
established its name and goodwill, and it has the right to
protect such goodwill by maintaining a reasonable
standard of propriety in the entities who choose to
transact through its facilities. It was reasonable for the
PSE, therefore, to exercise its judgment in the manner it
deems appropriate for its business identity, as long as no
rights are trampled upon, and public welfare is
safeguarded.
In this connection, it is proper to observe that the
concept of government absolutism is a thing of the past,
and should remain so.
The observation that the title of PALI over its properties is
absolute and can no longer be assailed is of no moment.
At this juncture, there is the claim that the properties
were owned by TDC and MSDC and were transferred in
violation of sequestration orders, to Rebecco Panlilio and
later on to PALI, besides the claim of the Marcoses that
such properties belong to the Marcos estate, and were
held only in trust by Rebecco Panlilio. It is also alleged by
the petitioner that these properties belong to naval and
forest reserves, and therefore beyond private dominion. If
any of these claims is established to be true, the
certificates of title over the subject properties now held
by PALI may be disregarded, as it is an established rule
that a registration of a certificate of title does not confer
ownership over the properties described therein to the
person named as owner. The inscription in the registry, to
be effective, must be made in good faith. The defense of
indefeasibility of a Torrens Title does not extend to a
transferee who takes the certificate of title with notice of
a flaw.
In any case, for the purpose of determining whether PSE
acted correctly in refusing the application of PALI, the
true ownership of the properties of PALI need not be
determined as an absolute fact. What is material is that
the uncertainty of the properties’ ownership and
alienability exists, and this puts to question the
qualification of PALI’s public offering. In sum, the Court
finds that the SEC had acted arbitrarily in arrogating unto
itself the discretion of approving the application for listing
in the PSE of the private respondent PALI, since this is a
matter addressed to the sound discretion of the PSE, a
corporate entity, whose business judgments are
respected in the absence of bad faith.
The question as to what policy is, or should be relied
upon in approving the registration and sale of
securities in the SEC is not for the Court to determine,
but is left to the sound discretion of the Securities and
Exchange Commission. In mandating the SEC to
administer the Revised Securities Act, and in
performing its other functions under pertinent laws,
the Revised Securities Act, under Section 3 thereof,
gives the SEC the power to promulgate such rules and
regulations as it may consider appropriate in the
public interest for the enforcement of the said laws.
The second paragraph of Section 4 of the said law, on
the other hand, provides that no security, unless
exempt by law, shall be issued, endorsed, sold,
transferred or in any other manner conveyed to the
public, unless registered in accordance with the rules
and regulations that shall be promulgated in the
public interest and for the protection of investors by
the Commission. Presidential Decree No. 902-A, on the
other hand, provides that the SEC, as regulatory
agency, has supervision and control over all
corporations and over the securities market as a
whole, and as such, is given ample authority in
determining appropriate policies. Pursuant to this
regulatory authority, the SEC has manifested that it
has adopted the policy of "full material disclosure"
where all companies, listed or applying for listing, are
required to divulge truthfully and accurately, all
material information about themselves and the
securities they sell, for the protection of the investing
public, and under pain of administrative, criminal and
civil sanctions. In connection with this, a fact is
deemed material if it tends to induce or otherwise
effect the sale or purchase of its securities. 15 While
the employment of this policy is recognized and
sanctioned by the laws, nonetheless, the Revised
Securities Act sets substantial and procedural
standards which a proposed issuer of securities must
satisfy. 16 Pertinently, Section 9 of the Revised
Securities Act sets forth the possible Grounds for the
Rejection of the registration of a supplanted by mere administrative issuance.
security:jgc:chanrobles.com.ph
". . . The Commission may reject a registration
statement and refuse to issue a permit to sell the
securities included in such registration statement if it
finds that —
(1) The registration statement is on its face
incomplete or inaccurate in any material respect or
includes any untrue statement of a material fact or
omits to state a material fact required to be stated
therein or necessary to make the statements therein
not misleading; or
(2) The issuer or registrant —
(i) is not solvent or not in sound financial
condition;
(ii) has violated or has not complied with the
provisions of this Act, or the rules promulgated
pursuant thereto, or any order of the Commission;
(iii) has failed to comply with any of the applicable
requirements and conditions that the Commission
may, in the public interest and for the protection of
investors, impose before the security can be
registered;
(iv) has been engaged or is engaged or is about to
engage in fraudulent transactions;
(v) is in any way dishonest or is not of good repute;
or
(vi) does not conduct its business in accordance with
law or is engaged in a business that is illegal or contrary
to government rules and regulations.
(3) The enterprise or the business of the issuer is not
shown to be sound or to be based on sound business
principles;
(4) An officer, member of the board of directors, or
principal stockholder of the issuer is disqualified to be
such officer, director or principal stockholder; or
(5) The issuer or registrant has not shown to the
satisfaction of the Commission that the sale of its
security would not work to the prejudice of the public
interest or as a fraud upon the purchasers or investors."
(Emphasis ours)
A reading of the foregoing grounds reveals the intention
of the lawmakers to make the registration and issuance
of securities dependent, to a certain extent, on the merits
of the securities themselves, and of the issuer, to be
determined by the Securities and Exchange Commission.
This measure was meant to protect the interests of the
investing public against fraudulent and worthless
securities, and the SEC is mandated by law to safeguard
these interests, following the policies and rules therefore
provided. The absolute reliance on the full disclosure
method in the registration of securities is, therefore,
untenable. As it is, the Court finds that the private
respondent PALI, on at least two points (nos. 1 and 5) has
failed to support the propriety of the issue of its shares
with unfailing clarity, thereby lending support to the
conclusion that the PSE acted correctly in refusing the
listing of PALI in its stock exchange. This does not
discount the effectivity of whatever method the SEC, in
the exercise of its vested authority, chooses in setting the
standard for public offerings of corporations wishing to do
so. However, the SEC must recognize and implement the
mandate of the law, particularly the Revised Securities
Act, the provisions of which cannot be amended or
In resumé, the Court finds that the PSE has acted with
justified circumspection, discounting, therefore, any
imputation of arbitrariness and whimsical animation on
its part. Its action in refusing to allow the listing of PALI in
the stock exchange is justified by the law and by the
circumstances attendant to this
case.chanroblesvirtuallawlibrary:red
ACCORDINGLY, in view of the foregoing considerations,
the Court hereby GRANTS the Petition for Review on
Certiorari. The Decisions of the Court of Appeals and the
Securities and Exchange Commission dated July 27, 1996
and April 24, 1996, respectively, are hereby REVERSED
and SET ASIDE, and a new Judgment is hereby ENTERED,
affirming the decision of the Philippine Stock Exchange to
deny the application for listing of the private respondent
Puerto Azul Land, Inc.
SO ORDERED.
Regalado and Puno, JJ., concur.
Mendoza, J., concurs in the result.
Endnotes:
1. Section 1, Presidential Decree No. 902-A.
2. Section 3, Ibid.
3. Sec. 3. Administrative Agency. — This Act shall be administered
by the (Securities and Exchange) Commission which shall continue to
have the organization, powers, and functions provided by Presidential
Decree Numbered 902-A, 1653, 1758, and 1799 and Executive Order No.
708. The Commission shall, except as otherwise expressly provided,
have the power to promulgate such rules and regulations as it may
consider appropriate in the public interest for the enforcement of the
provisions hereof.
4. Sec. 6. In order to effectively exercise such jurisdiction, the
(Securities and Exchange) Commission shall possess the following
powers:chanrob1es virtual 1aw library
15. See SEC Rules Requiring Disclosure of Material Facts by
Corporations Whose Securities are Listed in Any Stock Exchange or
Registered/Licensed under the Revised Securities Act. (Approved by the
SEC Chairman on February 8, 1973, and published in the Bulletin Today on
February 19, 1973).
16. See Sections 4, 8, 9, 10, and 11, Revised Securities Act.

x x x

(j) To authorize the establishment and operation of stock

exchanges, commodity exchanges and such other similar
organizations and to supervise and regulate the same; including the
authority to determine their number, size and location, in the light of
national or regional requirements for such activities with the view to
promote, conserve or rationalize investment;

x x x

(m) To exercise such other powers as may be provided by law

as well as those which may be implied from, or which are necessary
or incidental to the carrying out of, the express powers granted to the
Commission or to achieve the objectives and purposes of this Decree.

5. Sec. 38. Powers with respect to exchanges and securities.

— (a) . . .

(b) The Commission is further authorized, if after making

appropriate request in writing to a securities exchange that such
exchange effect on its own behalf specified changes in the rules and
practices and, after appropriate notice and opportunity for hearing, it
determines that such exchange has not made the changes so
requested, and that such changes are necessary or appropriate for
the protection of investors or to insure fair dealing in securities traded
upon such exchange, by rules or regulations or by order, to alter or
supplement the rules of such exchange (insofar as necessary or
appropriate to effect such changes) in respect of such matters as —

(1) Safeguards in respect of the financial responsibility of

members and adequate provision against the evasion of financial
responsibility through the use of corporate forms or special
partnerships;

(2) The limitation or prohibition of the registration or trading in

any security within a specified period after the issuance or primary
distribution thereof;

(3) The listing or striking from listing of any security;

(4) Hours of trading;

(5) The manner, method, and place of soliciting business;

(6) Fictitious accounts;

(7) The time and method of making settlements, payments,

and deliveries, and of closing accounts;

(8) The reporting of transactions on the exchange upon tickets

maintained by or with the consent of the exchange, including the
method of reporting short sales, stopped sales, sales of securities of
issuers in default, bankruptcy or receivership, and sales involving
other special circumstances;

(9) The fixing of reasonable rates of commission, interests,

listing, and other charges;

(10) Minimum units of trading;

(11) Odd-lot purchases and sales; and

(12) Minimum deposits on margin accounts.

6. See Sec. 6(j), PD 902-A; Sec. 8, Revised Securities Act.

7. Section 6(m), Presidential Decree No. 902-A.

8. Abad v. CFI of Pangasinan, Branch VIII, et. al., G.R. Nos.

58507-08, February 26, 1992, 206 SCRA 567.

9. Securities and Exchange Commission v. Court of Appeals,

G.R. Nos. 106425 & 106431-32, July 21, 1995, 246 SCRA 738.

10. Pineda v. Lantin, No. L-15350, November 30, 1962, 6 SCRA

757.

11. Bache & Co. (Phil.), Inc. v. Hon. Judge Ruiz, et. al., No. L-
32409, February 27, 1971, 37 SCRA 823.

12. Sales v. Securities and Exchange Commission, G.R. No.

54330, January 13, 1989, 169 SCRA 109.

13. No. L-18805, August 14, 1967, 20 SCRA 987.

14. Makati Stock Exchange, Inc. v. Securities and Exchange

Commission, No. L-23004, June 30, 1965, 14 SCRA 620.