Narra Nickel Mining and Dev’t Corp., et al. v. Redmont Consolidated Mines Corp., G.R.

No. 195580, 21 April 20148APR

FACTS
Redmont Consolidated Mines, Inc. (Redmont) filed before the Panel of Arbitrators (POA) of the
DENR separate petitions for denial of McArthur Mining, Inc. (McArthur), Tesoro and Mining and
Development, Inc. (Tesoro), and Narra Nickel Mining and Development Corporation (Narra)
applications Mineral Production Sharing Agreement (MPSA) on the ground that they are not
“qualified persons” and thus disqualified from engaging in mining activities through MPSAs
reserved only for Filipino citizens.
McArthur Mining, Inc., is composed, among others, by Madridejos Mining Corporation (Filipino)
owning 5,997 out of 10,000 shares, and MBMI Resources, Inc. (Canadian) owning 3,998 out of
10,000 shares; MBMI also owns 3,331 out of 10,000 shares of Madridejos Mining Corporation;
Tesoro and Mining and Development, Inc., is composed, among others, by Sara Marie Mining,
Inc. (Filipino) owning 5,997 out of 10,000 shares, and MBMI Resources, Inc. (Canadian) owning
3,998 out of 10,000 shares; MBMI also owns 3,331 out of 10,000 shares of Sara Marie Mining,
Inc.;
Narra Nickel Mining and Development Corporation, is composed, among others, by Patricia
Louise Mining & Development Corporation (Filipino) owning 5,997 out of 10,000 shares, and
MBMI Resources, Inc. (Canadian) owning 3,998 out of 10,000 shares; MBMI also owns 3,396
out of 10,000 shares of Patricia Louise Mining & Development Corporation;

ISSUES
(1) Is the Grandfather Rule applicable?
(2) Whether McArthur, Tesoro and Narra are Filipino nationals.

RULINGS
(1) YES.
The instant case presents a situation which exhibits a scheme employed by stockholders to
circumvent the law, creating a cloud of doubt in the Court’s mind. To determine, therefore, the
actual participation, direct or indirect, of MBMI, the grandfather rule must be used.
The Strict Rule or the Grandfather Rule pertains to the portion in Paragraph 7 of the 1967 SEC
Rules which states, “but if the percentage of Filipino ownership in the corporation or partnership
is less than 60%, only the number of shares corresponding to such percentage shall be counted
as of Philippine nationality.” Under the Strict Rule or Grandfather Rule Proper, the combined
totals in the Investing Corporation and the Investee Corporation must be traced (i.e.,
“grandfathered”) to determine the total percentage of Filipino ownership.
(2) NO.
[P]etitioners McArthur, Tesoro and Narra are not Filipino since MBMI, a 100% Canadian
corporation, owns 60% or more of their equity interests. Such conclusion is derived from
grandfathering petitioners’ corporate owners. xxx Noticeably, the ownership of the “layered”
corporations boils down to xxx group wherein MBMI has joint venture agreements with,
practically exercising majority control over the corporations mentioned. In effect, whether
looking at the capital structure or the underlying relationships between and among the
corporations, petitioners are NOT Filipino nationals and must be considered foreign since 60%
or more of their capital stocks or equity interests are owned by MBMI.

Gold Line Tours, Inc. vs. Heirs of Maria Concepcion Lacsa, 673 SCRA 399, G.R. No.
159108 June 18, 2012

FACTS:
On August 2, 1993, Ma. Concepcion Lacsa and her sister, Miriam Lacsa boarded
aGoldline passenger bus owned and operated by Travel &Tours Advisers, Inc. They were
enroute from Sorsogon to Cubao, Quezon City.At the time, Concepcion, having just obtained
her degree of Bachelor of Science in Nursing at the Ago Medical and Educational Center, was
proceeding to Manila to take the nursing licensure board examination. Upon reaching the
highway at Barangay San Agustin in Pili, Camarines Sur, the Goldline bus, driven by
Rene Abania collided with a passenger jeepney coming from the opposite direction
and driven by Alejandro Belbis. A s a result, a metal part of the jeepney was detached
and struck Concepcion in the chest, causing her instant death. Concepcion’s heirs,
represented by Teodoro Lacsa, instituted in the RTC a suit against Travel & Tours Advisers
Inc. and Abania to recover damages arising from breach of contract of carriage. The RTC
ruled in favor of the Respondents. On appeal, petitioner submitted a so-called verified third
party claim, claiming that the tourist bus that was levied, be returned to petitioner because
it was the owner and that petitioner had not been made a party to the civil case; and that
petitioner was a corporation entirely different from Travel & Tours Advisers, Inc., the
defendant in the Civil Case. This is the subject matter of the case at bar.

ISSUE:
Whether or not Petitioner Gold Line has a separate and distinct personality from its
members for its properties to be exempt from the levy.

RULING:
NO. This Court is not persuaded by the proposition of the third party claimant that a
corporation has an existence separate and/or distinct from its members insofar as this case
at baris concerned, for the reason that whenever necessary for the interest of the
public or for the protection of enforcement of their rights, the notion of legal entity
should not and is not to be used to defeat public convenience, justify wrong, protect fraud or
defend crime. The RTC had suff icient f act ual basis t o f ind that pet it ioner and
Tr avel and T ours Adviser s, I nc. wer e one and the sam e ent it y, specif ically: –
( a) document s subm it ted by petitioner in the RTC showing that William Cheng, who
claimed to be the operator of Travel and Tours Advisers, Inc., was also the
President/Manager and an incorporator of the petitioner; and(b) Travel and Tours Advisers,
Inc. had been known in Sorsogon as Goldline. Be that as it may, we concur in the trial
court’s finding that the two companies are actually one and the same, hence the levy of
the bus in question was proper.The RTC thus rightly ruled that petitioner might not be
shielded from liability under the final judgment through the use of the doctrine of separate
corporate identity. Truly, this fiction oflaw could not be employed to defeat the ends of justice.

PIONEER INSURANCE SURETY CORPORATION, Petitioner, vs. MORNING STAR TRAVEL

& TOURS

As a general rule, a corporation has a separate and distinct personality from those who
represent it.1 Its officers are solidarily liable only when exceptional circumstances exist, such as
cases enumerated in Section 31 of the Corporation Code.2The liability of the officers must be
proven by evidence sufficient to overcome the burden of proof borne by the plaintiff. This case
originated from a Complaint3 for Collection of Sum of Money and Damages filed by Pioneer
Insurance & Surety Corporation (Pioneer) against Morning Star Travel & Tours, Inc. (Morning
Star) for the amounts Pioneer paid the International Air Transport Association under its credit
insurance policy. Defendant: Morning Star is a travel and tours agency with Benny Wong,
Estelita Wong, Arsenio Chua, Sonny Chua, and Wong Yan Tak as shareholders and members
of the board of directors. 9 Plaintiff: International Air Transport Association is a Canadian
corporation licensed to do business in the Philippines "to promote safe, regular and economical
air transport for all people, among others."10 International Air Transport Association appointed
Morning Star as an accredited travel agent.11 Morning Star "avail[ed] of the privilege of getting
on credit . . . air transport tickets from various airline companies [to be sold] to passengers at
prices fixed by the airline companies[.]Morning Star and International Air Transport Association
entered a Passenger Sales Agency Agreement such that Morning Star must report all air
transport ticket sales to International Air Transport Association and account all payments
received through the centralized system called Billing and Settlement Plan.13 Morning Star only
holds in trust all monies collected as these belong to the airline companies.14 International Air
Transport Association obtained a Credit Insurance Policy from Pioneer to assure itself of
payments by accredited travel agents for ticket sales and monies due to the airline companies
under the Billing and Settlement Plan.15 The policy was for the period from November 1, 2001
to December 31, 2002, renewed for the period from January 1, 2003 to December 31, 2003.16
The policy was made known to the accredited travel agents. Morning Star, through its President,
Benny Wong, was among those that declared itself liable to indemnify Pioneer for any and all
claims under the policy. He executed a registration form under the Credit Insurance Program for
BSP-Philippines Agents.17 Morning Star had an accrued billing of P49,051,641.80 and
US$325,865.35 for the period from December 16, 2002 to December 31, 2002. It failed to remit
these amounts. Morning Star, Benny Wong, and Estelita Wong were served with summons and
a copy of the Complaint on November 22, 2005, while Arsenio Chua, Sonny Chua, and Wong
Yan Tak were unserved.24 RTC: ruled in favor of Pioneer and ordered respondents to jointly
and severally pay Pioneer: CA: affirmed the trial court with modification in that only Morning Star
was liable to pay petitioner:

ISSUE:
WON the doctrine of piercing the corporate veil applies to hold the individual respondents
solidarily liable with respondent Morning Star Travel and Tours, Inc. to pay the award in favor of
petitioner Pioneer Insurance & Surety Corporation. H

HELD:
NO. respondents not solidarily liable. SC affirmed CA with modification as to legal interest. The
law vests corporations with a separate and distinct personality from those that represent these
corporations. A separate corporate personality shields corporate officers acting in good faith and
within their scope of authority from personal liability except for situations enumerated by law and
jurisprudence,64 thus: Personal liability of a corporate director, trustee or officer along (although
not necessarily) with the corporation may so validly attach, as a rule, only when — ‘1. He
assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence
in directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its
stockholders or other persons; ‘2. He consents to the issuance of watered stocks or who, having
knowledge thereof, does not forthwith file with the corporate secretary his written objection
thereto; ‘3. He agrees to hold himself personally and solidarily liable with the corporation; or ‘4.
He is made, by a specific provision of law, to personally answer for his corporate action.’65 The
first exception comes from Section 31 of the Corporation Code: SECTION 31. Liability of
Directors, Trustees or Officers. — Directors or trustees who wilfully and knowingly vote for or
assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad
faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in
conflict with their duty as such directors or trustees shall be liable jointly and severally for all
damages resulting therefrom suffered by the corporation, its stockholders or members and other
persons. (Emphasis supplied) Petitioner imputes gross negligence and bad faith on the part of
the individual respondents for incurring the huge indebtedness to International Air Transport
Association. Bad faith "imports a dishonest purpose or some moral obliquity and conscious
doing of a wrong, not simply bad judgment or negligence."67 "[I]t means breach of a known duty
through some motive or interest or ill will; it partakes of the nature of fraud."68 The trial court
gave weight to its finding that respondent Morning Star still availed itself of loans and/or
obligations with International Air Transport Association despite its financial standing of operating
at a loss: On the other hand, the Court of Appeals ruled that the general rule on separate
corporate personality and against personal liability by corporate officers applies since petitioner
failed to prove bad faith amounting to fraud by the corporate officers: The mere fact that
Morning Star has been incurring huge losses and that it has no assets at the time it contracted
large financial obligations to IATA, cannot be considered that its officers, Defendants-Appellants
Estelita Co Wong, Benny H. Wong, Arsenio Chua, Sonny Chua and Wong Yan Tak, acted in
bad faith or such circumstance would amount to fraud, warranting personal and solidary liability
of its corporate officers. Piercing the corporate veil in order to hold corporate officers personally
liable for the corporation’s debts requires that "the bad faith or wrongdoing of the director must
be established clearly and convincingly [as] [b]ad faith is never presumed."71 First, petitioner
failed to substantiate the fourth badge of fraud on "[e]vidence of large indebtedness or complete
insolvency." Second, petitioner failed to substantiate the fifth badge of fraud on the "transfer of
all or nearly all of his property by a debtor, especially when he is insolvent or greatly
embarrassed financially."85 Mere allegations that Morning Star Management Ventures
Corporation and Pic ‘N Pac Mart, Inc. "were doing relatively well during the time that respondent
Morning Star was incurring huge losses"86 do not establish bad faith or fraud by the individual
respondents. Neither does the allegation that Morning Star Management Ventures Corporation
has title over the land and building where the offices can be found establish bad faith or fraud.
Petitioner did not show that this title was originally in respondent Morning Star’s name and was
later transferred to respondent Morning Star. This court has held that the "existence of
interlocking directors, corporate officers and shareholders is not enough justification to pierce
the veil of corporate fiction in the absence of fraud or other public policy considerations." Third,
petitioner also failed to substantiate the sixth badge of fraud that "the transfer is made between
father and son, when there are present other of the above circumstances.” IMPORTANT: In any
event, petitioner failed to plead and prove the circumstances that would pass the following
control test for the operation of the alter ego doctrine: (1) Control, not mere majority or complete
stock control, but complete domination, not only of finances but of policy and business practice
in respect to the transaction attacked so that the corporate entity as to this transaction had at
the time no separate mind, will or existence of its own; (2) Such control must have been used by
the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other
positive legal duty, or dishonest and unjust act in contravention of plaintiff’s legal right; and (3)
The aforesaid control and breach of duty must [have] proximately caused the injury or unjust
loss complained of.91 The records do not show that the individual respondents controlled
Morning Star Tour Planners, Inc. and that such control was used to commit fraud against
petitioner. Neither does this suspicion support petitioner’s position that the individual
respondents were in bad faith or gross negligence in directing the affairs of respondent Morning
Star. WHEREFORE, the Petition is DENIED. The Court of Appeals Decision is AFFIRMED with
MODIFICATION in that legal interest is 6% per annum from September 23, 2003 until fully paid.

JOSE M. ROY III v. CHAIRPERSON TERESITA HERBOSA, GR No. 207246, 2016-11-22

Facts:
On June 28, 2011, the Court issued the Gamboa Decision,... that the term "capital" in Section
11, Article XII of the 1987 Constitution refers only to shares of stock entitled to vote in the
election of directors, and thus in the present case only to common shares, and not to the total
outstanding capital stock (common and non-voting preferred shares).
The Gamboa Decision attained finality on October 18, 2012, and Entry of Judgment was
thereafter issued on December 11, 2012 On May 20, 2013, the SEC, through respondent
Chairperson Teresita J. Herbosa, issued SEC-MC No. 8 Section 2. All covered corporations
shall, at all times, observe the constitutional or statutory ownership requirement. For purposes
of determining compliance therewith, the required percentage of Filipino ownership shall be
applied to BOTH (a) the total number of outstanding shares of stock entitled to vote in the
election of directors; AND (b) the total number of outstanding shares of stock, whether or not
entitled to vote in the election of directors. On June 10, 2013, petitioner Roy, as a lawyer and
taxpayer, filed the Petition,[15] assailing the validity of SEC-MC No. 8 for not conforming to the
letter and spirit of the Gamboa Decision and Resolution and for having been issued by the SEC
with grave abuse of discretion.

Issues:
whether the SEC gravely abused its discretion in issuing SEC-MC No. 8 in light of the Gamboa
Decision and Gamboa Resolution

Ruling:
SEC did not commit grave abuse of discretion amounting to lack or excess of jurisdiction when it
issued SEC-MC No. 8. To the contrary, the Court finds SEC-MC No. 8 to have been issued in
fealty to the Gamboa Decision and Resolution. Gamboa Decision "capital" in Section II, Article
XII of the I987 Constitution refers only to shares of stock entitled to vote in the election of
directors, and thus in the present case only to common shares, and not to the total outstanding
capital stock (common and non-voting preferred shares). the Gamboa Resolution Foreign
Investments Act of 1991 ("FIA") Gamboa Resolution put to rest the Court's interpretation of the
term "capital" Full beneficial ownership of stocks, coupled with appropriate voting rights is
essential... reiterates and confirms the interpretation that the term "capital" in Section 11, Article
XII of the 1987 Constitution refers to shares with voting rights, as well as with full beneficial
ownership. Section 2 of SEC-MC No. 8 clearly incorporates the Voting Control Test or the
controlling interest requirement. In fact, Section 2 goes beyond requiring a 60-40 ratio in favor of
Filipino nationals in the voting stocks; it moreover requires the 60-40 percentage ownership in
the total number of outstanding shares of stock, whether voting or not. The SEC formulated
SEC-MC No. 8 to adhere to the Court's unambiguous pronouncement that "[f]ull beneficial
ownership of 60 percent of the outstanding capital stock, coupled with 60 percent of the voting
rights is required."[79] Clearly, SEC-MC No. 8 cannot be said to have been issued with grave
abuse of discretion While SEC-MC No. 8 does not expressly mention the Beneficial Ownership
Test or full beneficial ownership of stocks requirement in the FIA, this will not, as it does not,
render it invalid meaning, it does not follow that the SEC will not apply this test in determining
whether the shares claimed to be owned by Philippine nationals are Filipino, i.e., are held by
them by mere title or in full beneficial ownership. To be sure, the SEC takes its guiding lights
also from the FIA and its implementing rules, the Securities Regulation Code

ANDAYA VS. RURAL BANK OF CABADBARAN, INC G.R. No. 188769. August 3,

FACTS:
Andaya bought from Chute 2,200 shares of stock in the Rural Bank of Cabadbaran
forP220,000 Chute duly endorsed and delivered the certificates of stock to Andaya and,
subsequently, requested the bank to register the transfer and issue new stock certificates in
favor of the latter. A few days later, the bank’s corporate secretary wrote Chute to inform her
that he could not register the transfer due to a previous’ stockholder’s Resolution where existing
stockholders were given priority to buy the shares of others in the event that the latter offered
those shares for sale He then asked Chute if she, instead, wished to have her shares offered
to existing stockholders

Mean while, the bank’s legal counsel, respondent Gonzalez, informed Andaya that the latter’s
request had been referred to the bank’s board of directors for evaluation.

Citing Section 98 of the Corporation Code, Andaya claimed that the purported restriction on the
transfer of shares of stock agreed upon during the 2001 stockholders’ meeting couldnot deprive
him of his right as a transferee.

The bank still refused the transfer arguing that it may refuse to accept a competitor as oneof its
stockholders

Andaya instituted an action for mandamus and damages against Rural Bank of Cabadbaran
which was dismissed by the RTC, hence this petition for review

ISSUE:
Whether Andaya, as a transferee of shares of stock, may initiate an action foR Mandamus
compelling the Rural Bank of Cabadbaran to record the transfer of shares in its stock and
transfer book, as well as issue new stock certificates in his name.

RULING:
Yes. According to Price vs Martin, A person who has purchased stock, and who desires to be
recognized as a stockholder, for the purpose of voting, must secure a standing by having the
transfer recorded upon the books. If the transfer is not duly made upon request, he has, as his
remedy, to compel it to be made. The registration of a transfer of shares of stock is a ministerial
duty on the part of the corporation. It is already settled jurisprudence that the registration of a
transfer of shares of stock is a ministerial duty on the part of the corporation. Aggrieved parties
may then resort to the remedy of Mandamus to compel corporations that wrongfully or
unjustifiably refuse to record the transfer or to issue new certificates of stock.

ANNA TENG, Petitionerv.

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

FACTS:

Respondent Ting Ping purchased 480 shares of TCL Sales Corporation (TCL) from Peter Chiu
(Chiu) 1,400 shares 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).

Upon Teng Ching's death, his son Henry Teng (Henry) took over the management of TCL. To
protect his shareholdings with TCL, Ting Ping 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. Lie 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. SEC granted
Ping’s petition.

TCL and Teng appealed to SEC en banc which affirmed the SEC decision. Not contented, TCL
and Teng filed a petition for review with the CA, however, it dismissed the petition. This
prompted TCL and Teng to come to the Court via a petition for review on certiorari under Rule
45.It was also denied.

After the finality of the decision, SEC issued a writ of execution addressed to the Sheriff of the
Regional Trial Court (RTC) of Manila. Teng, however, filed on a complaint for interpleader
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 the case. Subsequently, RTC Manila found Henry to have a better right to the
shares of stock formerly owned by Ching. Upon motion by Ping, SEC granted partial
enforcement and satisfaction of its decision.

Teng and TCL filed their motions to quash the alias writ of execution, which was opposed by
Ting Ping, 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. 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. SEC denied the motions to quash filed by Teng and TCL.

Unperturbed, Teng filed a petition for certiorari and prohibition under Rule 65. The CA
promulgated the assailed decision dismissing the petition and denying the motion to expunge
the SEC's comment. Hence, Teng filed the present petition.

ISSUE:

Whether or not CA erred in declaring that there was no need to surrender the stock certificates
representing the shares conveyed by Maluto to Ping to record the transfer in the corporate
books and issue new stock certificates.

RULING:

Under Section 63 of the Corporation Code, 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.

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. 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. "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."

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.

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.

Jose A. Bernas v. Jovencio F. Cinco, G.R. Nos. 163356-57/163368-69; July 10, 2015

Facts:
These are two consolidated Petitions for Review on Certiorari assailing the 28 April 2003
Decision and the 27 April 2004 Resolution of the Court of Appeals in CA-G.R. SP No.
62683,which declared the 17 December 1997 Special Stockholders' Meeting of the Makati
Sports Club invalid for having been improperly called but affirmed the actions taken during the
Annual Stockholders' Meeting held on 20 April 1998, 19 April 1999 and 17 April 2000.

The controversy arose between two groups of stockholders/members of Makati Sports Club
(MSC), the Bernas Group, which is composed of incumbent directors and officers and the Cinco
Group composed on the newly elected directors and officers of the said Club.

Alarmed with the rumored anomalies in handling the corporate funds, the MSC Oversight
Committee (MSCOC), composed of the past presidents of the club, demanded from the Bernas
Group, who were then incumbent officers of the corporation, to resign from their respective
positions to pave the way for the election of new set of officers. Resonating this clamor were the
stockholders of the corporation representing at least 100 shares who sought the assistance of
the MSCOC to call for a special stockholders meeting for the purpose of removing the sitting
officers and electing new ones. Pursuant to such request, the MSCOC called a Special
Stockholders' Meeting and sent out notices to all stockholders and members stating therein the
time, place and purpose of the meeting. For failure of the Bernas Group to secure an injunction
before the Securities Commission (SEC), the meeting proceeded wherein the Bernas Group
were removed from the office, and in their place the Cinco group were elected.

Agrrieved, the Bernas Group seek SICD of SEC to nullify 17 Dec 1997 meeting on the grounds
that Section 25of the MSC by-laws merely authorized the Corporate Secretary to issue notices
of meetings and nowhere does it state that such authority solely belongs to him. It was further
asseverated by the Cinco Group that it would be useless to course the request to call a meeting
thru the Corporate Secretary because he repeatedly refused to call a special stockholders'
meeting despite demands and even "filed a suit to restrain the holding of a special meeting.

Meanwhile, the newly elected directors initiated an investigation on the alleged anomalies in
administering the corporate affairs and after finding Bernas guilty of irregularities, the Board
resolved to expel him from the club by selling his shares at public auction. After the notice
requirement was complied with, Bernas' shares was accordingly sold for P902,000.00 to the
highest bidder.

Prior to the resolution of SEC Case No. 5840, an Annual Stockholders' Meeting was held on 20
April 1998 pursuant to Section 8 of the MSC bylaws. During the said meeting, which was
attended by 1,017 stockholders representing 2/3 of the outstanding shares, the majority
resolved to approve, confirm and ratify, among others, the calling and · holding of 17 December
1997 Special Stockholders' Meeting, the acts and resolutions adopted therein including the
removal of Bernas Group from the Board and the election of their replacements.

SICD Findings – 17 Dec 1997 meeting is null and void for being prematurely called, therefore
produces no legal effect. The April 20, 1998 meeting was not attended by a sufficient number of
valid proxies. No quorum could have been present at the said meeting. No corporate business
could have been validly completed and/or transacted during the said meeting.

SEC En Banc – Reversed SIDC Findings

CA – 17 December 1997 Meeting is void, but upheld the April 1998, 1999 and 2000 Annual
Stockholders Meeting.

ISSUE:
WON CA erred in failing to nullify the April 1998, 1999, and 200 Annual Stockholders Meeting.

RULING:
Relative to the powers of the Board of Directors, nowhere in the Corporation Code or in the
MSC by-laws can it be gathered that the Oversight Committee is authorized to step in wherever
there is breach of fiduciary duty and call a special meeting for the purpose of removing the
existing officers and electing their replacements even if such call was made upon the request of
shareholders. Needless to say, the MSCOC is neither · empowered by law nor the MSC by-laws
to call a meeting and the subsequent ratification made by the stockholders did not cure the
substantive infirmity, the defect having set in at the time the void act was done. The defect goes
into the very authority of the persons who made the call for the meeting. It is apt to recall that
illegal acts of a corporation which contemplate the doing of an act which is contrary to law,
morals or public order, or contravenes some rules of public policy or public duty, are, like similar
transactions between individuals, void.

They cannot serve as basis for a court action, nor acquire validity by performance, ratification or
estoppel. The same principle can apply in the present case. The void election of 17 December
1997 cannot be ratified by the subsequent Annual Stockholders' Meeting. Special Stockholders'
Meeting called by the Oversight Committee cannot have any legal effect. The removal of the
Bernas Group, as well as the election of the Cinco Group, effected by the assembly in that
improperly called meeting is void, and since the Cinco Group has no legal right to sit in the
board, their subsequent acts of expelling Bernas from the club and the selling of his shares. at
the public auction, are likewise invalid.

The Cinco Group cannot invoke the application of de facto officership doctrine to justify the
actions taken after the invalid election since the operation of the principle is limited to third
persons who were originally not part of the corporation but became such by reason of voting of
government-sequestered shares.

Considering that a new set of officers were already duly elected in 1998 and 1999 Annual
Stockholders Meetings, the Bernas Group cannot be permitted to use the holdover principle as
a shield to perpetuate in office. Members of the group had no right to continue as directors of
the corporation unless reelected by the stockholders in a meeting called for that purpose every
year.

WHEREFORE, premises considered, the petitions of Jose A. Bernas, Cecile. H. Cheng, Victor
Africa, Jesus B. Maramara, Jose T. Frondoso, Ignacio A. Macrohon and Paulino T. Lim in G.R.
Nos. 163356-57 and of Jovencio Cinco, Ricardo Librea and Alex Y. Pardo in G.R. Nos. 163368-
69 are hereby DEN~ED. The assailed Decision dated 28 April 2003 and Resolution dated 27
April 2004 of the Court of Appeals are hereby AFFIRMED.

PHILIPPINE ASSOCIATED SMELTING v. PABLITO O. LIM, GR No. 172948, 2016-10-05

Facts:
PASAR is a corporation... engaged in copper smelting and refining. collectively referred to as
petitioners) were former senior officers and presently shareholders of PASAR holding 500
shares each
Injunction... was filed by PASAR... seeking to restrain petitioners from demanding inspection of
its confidential and inexistent records. RTC issued an Order granting PASAR's prayer for a writ
of preliminary injunction Aggrieved, Lim, Agcaoili, and Padilla filed before the Court of Appeals a
Petition for Certiorari Court of Appeals held that there was no basis to issue an injunctive writ,...
Hence... this Petition
Respondents wrote another letter dated January 30, 2004 demanding again that they be
allowed to inspect, among others, the confidential records.[46] On March 31, 2006, respondents
wrote another letter threatening to file criminal charges if they were not allowed to inspect the
confidential records. They stated that they wanted to ensure that petitioner complied with
environmental laws in the operations of its plant in Leyte. respondents Lim and Padilla wrote to
demand that they be allowed to inspect the audited financial statements for 2004 and 2005; the
interim statements for the end of May 2006; and more detailed records on finance, production,
marketing, and purchasing.

Issues:
whether injunction properly lies to prevent respondents from invoking their right to inspect

Ruling:
We deny the Petition. Respondents wrote another letter dated January 30, 2004 demanding
again that they be allowed to inspect, among others, the confidential records.[46] On March 31,
2006, respondents wrote another letter threatening to file criminal charges if they were not
allowed to inspect the confidential records. They stated that they wanted to ensure that
petitioner complied with environmental laws in the operations of its plant in Leyte. For an action
for injunction to prosper, the applicant must show the existence of a right, as well as the actual
or threatened violation of this right Thus, an injunction must fail where there is no clear showing
of both an actual right to be protected and its threatened violation, which calls for the issuance
of an injunction. The Corporation Code provides that a stockholder has the right to inspect the
records of all business transactions of the corporation and the minutes of any meeting at
reasonable hours on business days. The stockholder may demand in writing for a copy of
excerpts from these records or minutes, at his or her expense: The right to inspect under
Section 74 of the Corporation Code is subject to certain limitations. However, these limitations
are expressly provided as defenses in actions filed under Section 74. Thus, this Court has held
that a corporation's objections to the right to inspect must be raised as a defense Terelay
Investment and Development Corp. v. Yulo[58] has held that although the corporation may deny
a stockholder's request to inspect corporate records, the corporation must show that the
purpose of the shareholder is improper by way of defense: The right of the shareholder to
inspect the books and records of the petitioner should not be made subject to the condition of a
showing of any particular dispute or of proving any mismanagement or other occasion rendering
an examination proper, but if the right is to be denied, the burden of proof is upon the
corporation to show that the purpose of the shareholder is improper, by way of defense. The
clear provision in Section 74 of the Corporation Code is sufficient authority to conclude that an
action for injunction and, consequently, a writ of preliminary injunction filed by a corporation is
generally unavailable to prevent stockholders from exercising their right to inspection.
Specifically, stockholders cannot be prevented from gaining access to the (a) records of all
business transactions of the corporation; and (b) minutes of any meeting of stockholders or the
board of directors, including their various committees and subcommittees.
Specifically, corporations may raise their objections to the right of inspection through affirmative
defense in an ordinary civil action for specific performance or damages, or through a comment
(if one is required) in a petition for mandamus.[64] The corporation or defendant or respondent
still carries the burden of proving (a) that the stockholder has improperly used information
before; (b) lack of good faith; or (c) lack of legitimate purpose.[65]

AGDAO LANDLESS RESIDENTS ASSOCIATION INC., ET. AL v. ROLANDO MARAMION,

ET. AL
G.R. No. 188642 & 189425, OCTOBER 17, 2016

Facts:
Petitioners are Agdao Landless Residents Association, Inc. (ALRAI), a non-stock, non-
profit corporation duly organized and existing under and by virtue of the laws of the Republic of
the Philippines; through its board it transferred 46 titled lots to different members and non-
members of the corporation. The respondent members of the corporation were removed as
members of the corporation by the board for absences in the meetings regarding the transfer of
said lots. Respondents question the validity of their removal as members and the transfer of
said lots through individual suits filed with the court.

Issues:
Whether or not the members were removed validly
Whether or not the individual suits are proper
Whether or not the transfer of the lots are valid

Held:
Section 91 58 of the Corporation Code of the Philippines (Corporation Code) provides that
membership in a non-stock, non-profit corporation (as in petitioner ALRAI in this case) shall be
terminated in the manner and for the cases provided in its articles of incorporation or the by-
laws. Agdao’s constitution provides that in the removal of members “The Secretary shall give or
cause to be given written notice of all meetings, regular or special to all members of the
association at least three (3) days before the date of each meetings either by mail or
personally.” For failing to meet said notice requirements the removal of the respondents as
members is invalid.

Individual suits are filed when the cause of action belongs to the stockholder personally, and not
to the stockholders as a group, or to the corporation, e.g. denial of right to inspection and denial
of dividends to a stockholder. If the cause of action belongs to a group of stockholders, such as
when the rights violated belong to preferred stockholders, a class or representative suit may be
filed to protect the stockholders in the group. A derivative suit, on the other hand, is one which is
instituted by a shareholder or a member of a corporation, for and in behalf of the corporation for
its protection from acts committed by directors, trustees, corporate officers, and even third
persons. Even though the action should have been brought up through a derivative suit, the
individual suits are treated as individual suits based on the following:

The RTC, where the case was originally filed, has jurisdiction over the controversy;
Petitioners did not object to the institution of the case (on the ground that a derivative suit
should have been lodged instead of an individual suit) in any of the proceedings before the court
a quo or before the CA.
a reading of the complaint shows that respondents do not pray for reliefs for their personal
benefit; but in fact, for the benefit of the corporation.

Javonillo, as a director, signed the Board Resolutions133 confirming the transfer of the
corporate properties to himself, and to Armentano. Petitioners cannot argue that the transfer of
the corporate properties to them is valid by virtue of the Resolution 134 by the general
membership of Agdao confirming the transfer for tJ-iree reasons.

“Sec. 32. Dealings of directors, trustees or officers with the corporation. - A contract of the
corporation with one or more of its directors or trustees or officers is voidable, at the option of
such corporation, unless all of the following conditions are present:

1. That the presence of such director or trustee in the board meeting in which the contract was
approved was not necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustee was not necessary for the approval of the contract;
3. That the contract is fair and reasonable under the circumstances; and
4. That in case of an officer, the contract has been previously authorized by the board of
directors.”
Section 32 requires that the contract should be ratified by a vote representing at least two-thirds
of the members in a meeting called for the purpose. Records of this case do not show whether
the Resolution was indeed voted by the required percentage of membership. There is also no
showing that there was full disclosure of the adverse interest of the directors involved when the
Resolution was approved. Full disclosure is required under the aforecited Section 32 of the
Corporation Code. Section 32 requires that the contract be fair and reasonable under the
circumstances. As previously discussed, the transfer of the corporate properties to the individual
petitioners is not fair and reasonable for ( 1) want of legitimate corporate purpose, and for (2)
the breach of the fiduciary nature of the positions held by Javonillo and Armentano. Lacking any
of these (full disclosure and a showing that the contract is fair and reasonable), ratification by
the two-thirds vote would be of no avail.

AGUIRRE v. FQB+7, INC.G.R. No. 170770; January 9, 2013

F AC TS :
Vitaliano filed a Complaint for intra-corporate dispute, injunction, inspection of corporate books and
records, and damages, against respondents Nathaniel, Priscila and Antonio for the usurpation of the
management powers and prerogatives of the "real" Board of Directors. The application was granted when the
respondents failed to attend the hearing. The respondents filed a Petition for Certiorari and Prohibition before
the CA seeking the annulment of all the proceedings The CA postulated that Section 122 of the
Corporation Code allows a dissolved corporation to continue as a body corporate for the limited
purpose of liquidating the corporate assets and distributing them to its creditors, stockholders,
and others in interest. It does not allow the dissolved corporation to continue its business. That
being the state of the law, the CA determined that Vitaliano’s Complaint, being geared
towards the continuation of FQB+7, Inc.’s business, should be dismissed because the corporation has
lost its juridical personality. Moreover, the CA held that the trial court does not have jurisdiction to
entertain an intra-corporate dispute when the corporation is already dissolved.

ISSUE:
Whether the RTC has jurisdiction over an intra-corporate disputeinvolving a dissolved corporation.

HELD:
Intra-corporate disputes remain even when the corporation is dissolved. Jurisdiction over the subject
matter is conferred by law. R.A. No. 8799 conferred jurisdiction over intra-corporate controversies on
courts of general jurisdiction or RTCs, to be designated by the Supreme Court. Thus, as long as the
nature of thec ontroversy is intra-corporate, the designated RTCs have the authority to exercise
jurisdiction over such cases.

LIM v. MOLDEX
Mary E. Lim Vs. Moldex Land, Inc., et al.G.R. No. 206038January 25, 2017

FACTS:
On July 21, 2012 Condocor (Condominium Corporation) a non-stock, non-profit corporation,
which is the registered condominium corporation for the Golden Empire Tower held its annual
general membership meeting. Moldex became a member of Condocor on the basis of its
ownership of the 220 unsold units in the Golden Empire Tower.

During the meeting, an existence of a quorum was declared even though only 29 of the 108 unit
buyers were present. The declaration was based on the presence of the majority of the voting
rights, including those pertaining to the 220 unsold units held by Moldex through its
representatives. Lim, through her attorney-in-fact, objected to the validity of the meeting. The
objection was denied. Thus, Lim and all the other unit owners present, except for one, walked
out and left the meeting.

Despite the walkout, the individual respondents and the other unit owner proceeded with the
meeting and elected the new members of the Board of Directors for 2012-2013. All four (4)
individual respondents (JAMINOLA, MACALINTAL, MILANES, and ROMAN) were voted as
members of the board, together with other 3 members.

Consequently, Lim filed an election protest before the RTC. Lim claimed that herein
respondents are not entitled to be members of the Board of Directors because they are non-unit
buyers. However, said court ruled in favor for the respondents. Not in conformity, Lim filed the
present petition.

ISSUES:
1) Whether or not the July 21, 2012 membership meeting was valid.
2) Whether or not Moldex can be deemed a member of Condocor.
3) Whether or not representatives of Moldex who are non-members can be elected as a
member of the Board of Directors of Condocor.

HELD:
No. The July 21, 2012 membership meeting was not valid. A stockholders' or members'
meeting must comply with the following requisites to be
valid:

1. The meeting must be held on the date fixed in the ByLaws or in accordance with law;
2. Prior written notice of such meeting must be sent to all stockholders/members of record;
3. It must be called by the proper party;
4. It must be held at the proper place; and
5. Quorum and voting requirements must be met.
Of these five ( 5) requirements, the existence of a quorum is crucial. Any act or transaction
made during a meeting without quorum is rendered of no force and effect, thus, not binding on
the corporation or parties concerned. In relation thereto, Section 52 of the Corporation Code of
the Philippines (Corporation Code) provides:

Section 52. Quorum in meetings. - Unless otherwise provided for in this Code or in the by-laws,
a quorum shall consist of the stockholders representing a majority of the outstanding capital
stock or a majority of the members in the case of non-stock corporations.

Thus, for stock corporations, the quorum is based on the number of outstanding voting stocks
while for non-stock corporations, only those who are actual, living members with voting rights
shall be counted in determining the existence of a quorum.

The By-Laws of Condocor has no rule different from that provided in the Corporation Code with
respect the determination of the existence of a quorum. The quorum during the July 21, 2012
meeting should have been majority of Condocor's members in good standing. Accordingly,
there was no quorum during the July 21, 2012 meeting considering that only 29 of the 108 unit
buyers were present. As there was no quorum, any resolution passed during the July 21,2012
annual membership meeting was null and void and, therefore, notbinding upon the corporation
or its members. The meeting being null andvoid, the resolution and disposition of other legal
issues emanating from the null and void July 21, 2012 membership meeting has been rendered
unnecessary.

II

Yes. Moldex can be deemed a member of Condocor.

Lim asserted that only unit buyers are entitled to become members of Condocor. Respondents,
for their part, countered that a registered owner of a unit in a condominium project or the holders
of duly issued condominium certificate of title (CCT), automatically becomes a member of the
condominium corporation, relying on Sections 2 and 10 of the Condominium Act, the Master
Deed and Declaration of Restrictions, as well as the By-Laws of Condocor. For said reason,
respondents averred that as Moldex is the owner of 220 unsold units and the parking slots and
storage areas attached thereto, it automatically became a member of Condocor upon the latter's
creation.

On this point, respondents are correct. Section 2 of the Condominium Act states:

Sec. 2. A condominium is an interest in real property consisting of separate interest in a unit in a

residential, industrial or commercial building and an undivided interest in common, directly or
indirectly, in the land on which it is located and in other common areas of the building. A
condominium may include, in addition, a separate interest in other portions of such real
property. Title to the common areas, including the land, or the appurtenant interests in such
areas, may be held by a corporation specially formed for the purpose (hereinafter known as the
"condominium corporation") in which the holders of separate interest shall automatically be
members or shareholders, to the exclusion of others, in proportion to the appurtenant interest of
their respective units in the common areas . It is erroneous to argue that the ownership
must result from a sale transaction between the owner-developer and the purchaser. Such
interpretation would mean that persons who inherited a unit, or have been donated one, and
properly transferred title in their names cannot become members of a condominium corporation.
III

No. Representatives of Moldex who are non-members cannot be elected as a member of the
Board of Directors of Condocor.

A corporation can act only through natural persons duly authorized for the purpose or by a
specific act of its board of directors.45 Thus, in order for

Moldex to exercise its membership rights and privileges, it necessarily has to appoint its
representatives. However, individual respondents who are non-members cannot be elected as
directors and officers of the Condocor.

While Moldex may rightfully designate proxies or representatives, the latter, however, cannot be
elected as directors or trustees of Condocor. First, the Corporation Code clearly provides that a
director or trustee must be a member of record of the corporation. Further, the power of the
proxy is merely to vote. If said proxy is not a member in his own right, he cannot be elected as a
director or proxyndominium corporation.

AIR CANADA v. CIR G.R. 169507January 11, 2016

FACTS:
Air Canada is a foreign corporation organized and existing under the laws of Canada. On
April 24, 2000, it was granted an authority to operate as an offline carrier by the Civil
Aeronautics Board, subject to certain conditions, which authority would expire on April
24, 2005. As an off-line carrier, Air Canada does not have flights originating from or coming to
the Philippines and does not operate any airplane in the Philippines. On July 1, 1999, Air
Canada engaged the services of Aerotel Ltd., Corp. (Aerotel) as its general sales agent in the
Philippines. Aerotel sells Air Canada’s passage documents in the Philippines. For the period
ranging from the third quarter of 2000 to the second quarter of 2002, Air Canada, through
Aerotel, filed quarterly and annual income tax returns and paid the income tax on Gross
Philippine Billings in the total amount of ₱5,185,676.77. On November 28, 2002, Air Canada
filed a written claim for refund of alleged erroneously paid income taxes amounting to
₱5,185,676.77 before the Bureau of Internal Revenue (BIR). It’s basis was found in the revised
definition of GrossPhilippine Billings under Section 28(A)(3)(a) of the 1997 National
InternalRevenue Code (NIRC)
1
.
To prevent the running of the prescriptive period, Air Canada filed a Petition for Review before
the Court of Tax Appeals (CTA). The CTA denied the petition. It found that Air Canada was
engaged in business in
the Philippines through a local agent that sells airline tickets on its behalf. As such, it held that
while Air Canada was not liable for tax on its Gross Philippine Billings under Section
28(A)(3), it was nevertheless liable to pay the 32% corporate income tax on income
derived from the sale of airline tickets within the Philippines pursuant to Section 28(A)(1). On
appeal, the CTA En Banc affirmed the ruling of the CTA First Division.

ISSUES & HELD:

1
SEC. 28. Rates of Income Tax on Foreign Corporations.
-(A)
Tax on Resident
Foreign Corporations.-
....
(3) International Carrier. - An international carrier doing business in the Philippines shall pay a
tax of two and one-half percent (2 1/2%) on its ‘Gross Philippine Billings’ as defined hereunder:
(a) International Air Carrier. - ‘Gross Philippine Billings’ refers to the amount of gross revenue
derived from carriage of persons, excess baggage, cargo and mail originating from the
Philippines in a continuous and
uninterrupted flight , irrespective of the place of sale or issue and the place of payment of the
ticket or passage document : Provided, That tickets revalidated, exchanged and/or indorsed to
another international airline form part of the Gross Philippine Billings if the passenger boards a
plane in a port or point in the Philippines: Provided, further, That for a flight which
originates from the Philippines, but transshipment of passenger takes place at any port outside
the Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding
to the leg flown from the Philippines to the point of transshipment shall form part of Gross
Philippine Billings. (Emphasis supplied)
1)
Whether Air Canada is subject to the 2½% tax on Gross Philippine Billings pursuant to Section
28(A)(3).
NO. Air Canada is not is not liable to tax on Gross Philippine Billings under Section 28(A)(3).
The tax attaches only when the carriage of persons, excess baggage, cargo, and mail
originated from the Philippines in a continuous and uninterrupted flight, regardless of where the
passage documents were sold. Not having flights to and from the Philippines, petitioner is
clearly not liable for the Gross Philippine Billings tax.
2)
If not, whether Air Canada is a resident foreign corporation engaged in trade or business
and thus, can be subject to the regular corporate income tax of 32% pursuant to Section
28(A)(1); YES. Petitioner falls within the definition of resident foreign corporation under Section
28(A)(1) , thus, it may be subject to 32% tax on its taxable income. The Court in
Commissioner of Internal Revenue v. British Overseas Airways Corporation declared British
Overseas Airways Corporation, an international air carrier with no landing rights in the
Philippines, as a resident foreign corporation engaged in business in the Philippines through its
local sales agent that sold and issued tickets for the airline company. According to said case,
there is no specific criterion as to what constitutes “doing” or “engaging in” or
“transacting” business. Each case must be judged in the light of its peculiar environmental
circumstances. The term implies a continuity of commercial dealings and arrangements,
and contemplates, to that extent, the performance of acts or works or the exercise of some of
the functions normally incident to, and in progressive prosecution of commercial gain or for the
purpose and object of the business organization. An offline carrier is “any foreign air carrier not
certificated by the Civil Aeronautics Board, but who maintains office or who has
designated or appointed agents or employees in the Philippines, who sells or offers for sale
any air transportation in behalf of said foreign air carrier and/or others, or negotiate for, or holds
itself out by solicitation, advertisement, or otherwise
sells, provides, furnishes, contracts, or arranges for such transportation.” Petitioner is
undoubtedly “doing business” or “engaged in trade or business” in the Philippines. In the case at
hand, Aerotel performs acts or works or exercises functions that are incidental and
beneficial to the purpose of petitioner’s business. The activities of Aerotel bring direct
receipts or profits to petitioner. Further, petitioner was issued by the Civil Aeronautics Board an
authority to operate as an offline carrier in the Philippines for a period of five
2
SEC. 28. Rates of Income Tax on Foreign Corporations. -
(A)
Tax on Resident
Foreign Corporations
.-
(1) In General. -
Except as otherwise provided in this Code a corporation organized, authorized, or existing
under the laws of any foreign country, engaged in trade or business within the Philippines,
shall be subject to an income tax equivalent to thirty-five percent (35%) of the taxable income
derived in the preceding taxable year from all sources within the Philippines : Provided, That
effective January 1, 1998, the rate of
income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-
three percent (33%); and effective January 1, 2000 and thereafter, the rate shall be thirty-two
percent (32%). (Emphasis supplied) years. Petitioner is, therefore, a resident foreign corporation
that is taxable on its income derived from sources within the Philippines.
3)
Whether the Republic of the Philippines-Canada Tax Treaty is enforceable; YES.
While petitioner is taxable as a resident foreign corporation under Section 28(A)(1) on
its taxable income from sale of airline tickets in the Philippines, it could only be taxed at a
maximum of 1½% of gross revenues, pursuant to Article VIII of the Republic of the Philippines-
Canada Tax Treaty that applies to petitioner as a “foreign corporation organized and existing
under the laws of Canada.” The second paragraph of Article VIII states that “profits from
sources within a Contracting State derived by an enterprise of the other Contracting State from
the operation of ships or aircraft in international traffic may be taxed in the first-mentioned State
but the tax so charged shall not exceed the lesser of a) one and one-half per cent of the gross
revenues derived from sources in that State; and b) the lowest rate of Philippine tax imposed on
such profits derived by an enterprise of a third State.” “By reason of our bilateral negotiations
with Canada, we have agreed to have our right to tax limited to a certain extent.” Thus, we are
bound to extend to a Canadian air carrier doing business in the Philippines through a local sales
agent the benefit of a lower tax equivalent to 1½% on business profits derived from sale of
international air transportation. Our Constitution provides for adherence to the general
principles of international law as part of the law of the land. The time-honored
international principle of pacta sunt servanda demands the performance in good faith of treaty
obligations on the part of the states that enter into the agreement. Every treaty in force is
binding upon the parties, and obligations under the treaty must be performed by them in good
faith. More importantly,
treaties have the force and effect of law in this jurisdiction. ( Deutsche Bank AG Manila Branch
v. Commissioner of Internal Revenue ).
4)
Whether the appointment of a local general sales agent in the Philippines falls under the
definition of “permanent establishment” under Article V(2)(i) of the Republic of the Philippines-
Canada Tax Treaty;
Article V of the Republic of the Philippines-Canada Tax Treaty defines “permanent
establishment” as a “fixed place of business in which the business of the enterprise
is wholly or partly carried on.” Specifically, Article V(4) of the Republic of the Philippines-Canada
Tax Treaty states that “a person acting in a Contracting State on behalf of an enterprise of the
other Contracting State shall be deemed to be a permanent establishment in the first-mentioned
State if . . . he has and habitually exercises in that State an authority to conclude contracts
on behalf of the enterprise, unless his activities are limited to the purchase of
goods or merchandise for that enterprise.”
Section 3 of The Civil Aeronautics Act of the Philippines, defines a general sales agent as “a
person, not a bonafide employee of an air carrier, who pursuant to an authority from an airline,
by itself or through an agent, sells or offers for sale any air transportation, or negotiates for, or
holds himself out by solicitation, advertisement or otherwise as one who sells,
provides, furnishes, contracts or arranges for, such air transportation.” Through the
appointment of Aerotel as its local sales agent, petitioner is deemed to have created a
“permanent establishment” in the Philippines as defined under the Republic of the Philippines-
Canada Tax Treaty. Aerotel is a dependent agent of petitioner pursuant to the terms
of the Passenger General Sales Agency Agreement executed between the parties. It has the
authority or power to conclude contracts or bind petitioner to contracts entered into in the
Philippines. A third-party liability on contracts of Aerotel is to petitioner as the principal, and not
to Aerotel, and liability to such third
party is enforceable against petitioner. While Aerotel maintains a certain independence and its
activities may not be devoted wholly to petitioner, nonetheless, when representing petitioner
pursuant to the Agreement, it must carry out its functions solely for the benefit of petitioner and
according to the latter’s Manual and written instructions. Aerotel is required to submit its annual
sales plan for petitioner’s approval. In essence, Aerotel extends to the Philippines the
transportation business of petitioner. It is a conduit or outlet through which petitioner’s airline
tickets are sold. Under Article VII of the Republic of the Philippines-Canada Tax Treaty, the
“business profits” of an enterprise of a Contracting State is “taxable only in that State, unless the
enterprise carries on business in the other Contracting State through a permanent
establishment.” Thus, income attributable to Aerotel or from business activities effected by
petitioner through Aerotel may be taxed in the Philippines.
5)
Whether petitioner Air Canada is entitled to the refund. NO. As discussed in South African
Airways,
the grant of a refund is founded on the assumption that the tax return is valid, that is, the facts
stated therein are true and correct. The deficiency assessment, although not yet final, created a
doubt as to and constitutes a challenge against the truth and accuracy of the facts stated in said
return which, by itself and without unquestionable evidence, cannot be the basis for the grant of
the refund. In this case, the P5,185,676.77 Gross Philippine Billings tax paid by petitioner was
computed at the rate of 1 ½% of its gross revenues a ounting to
P345,711,806.08149 from the third quarter of 2000 to the second quarter of 2002. It is quite
apparent that the tax imposable under Section 28(A)(l) of the 1997 NIRC 32% of taxable
income, that is, gross income less deductions will exceed the maximum ceiling of 1 ½% of gross
revenues as decreed in Article VIII of the Republic of the Philippines-Canada Tax
Treaty. Hence, no refund is forthcoming

Steelcase, Inc. v. Design International Selections, Inc. (DISI), G.R. No. 171995, 18
April 2012

Facts:
Petitioner Steelcase, Inc. is a foreign corporation existing under the laws of Michigan, USA and
is engaged in the manufacture of office furniture with dealers worldwide. Design International
Selections, Inc. (DISI) is a corporation existing under Philippine Laws and engaged in the
furniture business, including the distribution of furniture. Steelcase and DISI orally entered into a
dealership agreement whereby Steelcase granted DISI the right to market, sell, distribute, install
and service its products to end-user customers within the Philippines. The business relationship
continued smoothly until it was terminated after the agreement was breached in 1999.
Steelcase filed a complaint for sum of money against DISI alleging that DISI had an unpaid
account of $600,000. It also prayed that DISI be ordered to pay actual or compensatory
damages, exemplary damages, attorney’s fees and costs of suit. Meanwhile, DISI alleged that
the complaint failed to state a cause of action and that the complaint should be dismissed
because of Steelcase’s lack of legal capacity to sue in Philippine courts due to that fact that it
doesn’t have a license to operate in the country. The RTC dismissed Steelcase’s complaint. It
has likewise concluded that Steelcase was “doing business” in the Philippines as contemplated
by RA 7042 (The Foreign Investments Act of 1991) and since it did not have the license to do
business in the country, it was barred from seeking redress from Philippine courts until it
obtained the requisite license to do so. The CA affirmed the ruling of the RTC. Steelcase
contends that DISI is an independent distributor of Steelcase products and not an agent or
conduit of Steelcase.
Moreover, DISI is acting as Steelcase’s appointed local distributor, and is transacting business
in its own name and for its own account.

Issue:
Whether or not Steelcase had been “doing business” in the Philippines without a license

Ruling:
The phrase “doing business” is clearly defined in Section 3(d) of RA 7042 (Foreign Investments
Act of 1991) which states that “the phrase ‘doing business’ shall include soliciting orders,
service contracts, opening offices, whether called ‘liaison’ offices or branches; appointing
representatives or distributors domiciled in the Philippines… totaling 180 days or more;
participating in the management, supervision or control of any domestic business, firm, entity or
corporation in the Philippines; and any other act or acts that imply a continuity of commercial
dealings or arrangements, and contemplate to that extent the performance of acts or works, or
the exercise of some of the functions normally incident to, and in the progressive prosecution of,
commercial gain or of the purpose and object of the business organization.” The second
sentence of Section 3(d) states that “the phrase ‘doing business’ shall not be deemed to include
mere investment as a shareholder by a foreign entity in domestic corporations duly registered to
do business… nor appointing a representative or distributor domiciled in the Philippines which
transacts business in its own name and for its own account.”
On such account, the appointment of a distributor in the Philippines is not sufficient to constitute
“doing business” unless it is under the full control of the foreign corporation. Steelcase,
therefore, is foreign corporation not doing business in the Philippines by its act of appointing a
distributor falls under one of the exceptions under RA 7042.

Dutch Movers, Inc., Cesar and Yolanda Lee vs. Edilberto Lequin, Christopher R.
Salvador,

DOCTRINE: A corporation has a separate and distinct personality from its stockholders, and
from other corporations it may be connected with. However, such personality may be
disregarded, or the veil of corporate fiction may be pierced attaching personal liability against
responsible person if the corporation's personality is used to defeat public convenience, justify
wrong, protect fraud or defend crime, or is used as a device to defeat the labor laws.

Facts: Edilberto Lequin, Christopher Salvador, Reynaldo Singsing, and Raffy Mascardo
(respondents) filed an Illegal Dismissal case against Dutch Movers, Inc. (DMI), and/or spouses
Cesar Lee and Yolanda Lee (petitioners), its alleged President/Owner, and Manager
respectively. DMI employed Lequin as truck driver and the rest of the respondents as helpers.
Cesar Lee informed them that DMI would cease its hauling operation for no reason; as such,
they requested DMI to issue a formal notice regarding the matter but to no avail. Later, upon
respondents' request, the DOLE NCR issued a certification revealing that DMI did not file any
notice of business closure. Thus, respondents argued that they were illegally dismissed as their
termination was without cause and only on the pretext of closure. The Labor Arbiter dismissed
the complaint for lack of cause of action. This was reversed by the NLRC. It ruled that
respondents were illegally dismissed because DMI simply placed them on standby, and no
longer provide them with work. The dispositive portion of the judgment only made Dutch Movers
liable and never mentioned Spouses Lee’s liability. This decision became final and executory.
Consequently, respondents filed a Motion for Writ of Execution. Later, they submitted a
Reiterating Motion for Writ of Execution with Updated Computation of Full Backwages. Pending
resolution of these motions, respondents filed a Manifestation and Motion to Implead stating that
upon investigation, they discovered that DMI no longer operates. They, nonetheless, insisted
that petitioners - who managed and operated DMI, and consistently represented to respondents
that they were the owners of DMI - continue to work at Toyota Alabang, which they also own
and operate. They further averred that the Articles of Incorporation (AOI) of DMI ironically did
not include petitioners as its directors or officers; and those named directors and officers were
persons unknown to them. Given these developments, respondents prayed that petitioners, and
the officers named in DMI's AOI, be impleaded, and be held solidarity liable with DMI in paying
the judgment awards.

The LA issued an Order holding petitioners liable for the judgment awards and issued a Writ of
Execution against Dutch Movers and Spouses Lee. Petitioners moved to quash the Writ to
Execution. This was denied by the LA. The NLRC quashed the writ insofar as it holds individual
respondents Cesar Lee and Yolanda Lee liable for the judgment award against the
complainants. The NLRC ruled that the Writ of Execution should only pertain to DMI since
petitioners were not held liable to pay the awards under the final and executory NLRC Decision.
It added that petitioners could not be sued personally for the acts of DMI because the latter had
a separate and distinct personality from the persons comprising it; and, there was no showing
that petitioners were stockholders or officers of DMI; or even granting that they were, they were
not shown to have acted in bad faith against respondents. The CA reversed the NLRC and
accordingly affirmed the Writ of Execution impleading petitioners as party-respondents liable to
answer for the judgment awards. Hence, this present petition filed by Spouses Lee.

Issue: Whether or not Spouses Lee are personally liable to pay the judgment awards in favor of
respondents?

Held: Yes. A corporation has a separate and distinct personality from its stockholders, and from
other corporations it may be connected with. However, such personality may be disregarded, or
the veil of corporate fiction may be pierced attaching personal liability against responsible
person if the corporation's personality is used to defeat public convenience, justify wrong,
protect fraud or defend crime, or is used as a device to defeat the labor laws.

Here, the veil of corporate fiction must be pierced and accordingly, petitioners should be held
personally liable for judgment awards because the peculiarity of the situation shows that they
controlled DMI; they actively participated in its operation such that DMI existed not as a
separate entity but only as business conduit of petitioners. Petitioners controlled DMI by making
it appear to have no mind of its own, and used DMI as shield in evading legal liabilities,
including payment of the judgment awards in favor of respondents.

First, petitioners and DMI jointly filed their Position Paper, Reply, and Rejoinder in contesting
respondents' illegal dismissal. Perplexingly, petitioners argued that they were not part of DMI
and were not privy to its dealings; yet, petitioners, along with DMI, collectively raised arguments
on the illegal dismissal case against them.
Second, petitioners were identified as the owners and managers of DMI. In their Motion to
Quash, however, petitioners neither denied these allegations nor adduced evidence to establish
that they were not the owners and managers of DMI.

Third, piercing the veil of corporate fiction is allowed, and responsible persons may be
impleaded, and be held solidarily liable even after final judgment and on execution, provided
that such persons deliberately used the corporate vehicle to unjustly evade the judgment
obligation, or resorted to fraud, bad faith, or malice in evading their obligation.

FEDERATED LPG DEALERS ASSOCIATION, Petitioner, v. MA. CRISTINA L. DEL

ROSARIO, CELSO

Facts
Petitioner, through counsel Atty. Genesis M. Adarlo (Atty. Adarlo) of Joaquin Adarlo and Caoile,
sought assistance from the Criminal Investigation and Detection Group, Anti-Fraud and
Commercial Crimes Division (CIDG-AFCCD) of the Philippine National Police3 in the
surveillance, investigation, apprehension, and prosecution of certain persons and
establishments within Metro Manila reportedly committing acts violative of Batas Pambansa Blg.
33.

A few days later Atty. Adarlo again wrote the CIDG-AFCCD informing the latter of its
confirmation that ACCS Ideal Gas Corporation (ACCS), which allegedly has been refilling
branded LPG cylinders in its refilling plant at 882 G. Araneta Avenue, Quezon City, has no
authority to refill per certifications from gas companies owning the branded LPG cylinders.
Acting upon the same, they conducted a test-buy operation.

Having reasonable grounds to believe that ACCS was in violation of BP 33, P/Supt. Esguerra
filed with the Regional Trial Court (RTC) of Manila applications for search warrant against the
officers of ACCS. Pursuant to search warrant , a search and seizure operation was conducted .
This resulted in the seizure of an electric motor, a hose with filling head, scales, v-belt, vapor
compressor, booklets of various receipts, and 73 LPG cylinders of various brands and sizes,
four of which were filled, i.e., two Superkalan 3.7 kg. LPG cylinders, one Shellane 11 kg. LPG
cylinder, and one Totalgaz 11 kg. cylinder.17 Inspection and evaluation of the said filled LPG
cylinders showed that they were underfilled by 0.5 kg. to 0.9 kg.18

On December 14, 2006, P/Supt Esguerra filed with the Department of Justice (DOJ)
Complaints-Affidavits against Antonio and respondents for illegal trading of petroleum products
and for underfilling of LPG cylinders under Section 2(a) and 2(c), respectively, of BP 33, as
amended.

The DOJ recommended that Antonio G. Del Rosario be charged with illegal refilling of LPG
cylinders penalized under Section 2(a) of Batas Pambansa Bilang 33 as amended by
Presidential Decree No. 1865 and that the complaints as against Ma. Cristina L. Del Rosario,
Celso E. Escobido II, Sheila M. Escobido, and Resty P. Capili be dismissed.

P/Supt. Esguerra and petitioner elevated the matter to the CA through a certiorari petition. They
contended that the Secretary of Justice acted with grave abuse of discretion amounting to lack
of or in excess of jurisdiction in affirming the dropping of respondents from the complaints and
the ruling out of the offense of underfilling.

The CA, however, sustained the Secretary of Justice.

Issues
1. WON respondents, as members of the Board of Directors of ACCS, may be criminally
prosecuted for the latter's alleged violation/s of BP 33 as amended?

2. WON offenses of illegal trading of petroleum products under Section 2(a) and underfilling
under Section 2(c), both of BP 33 as amended, distinct offenses?

Ruling
1. Respondents cannot be prosecuted for ACCS' alleged violations of BP 33. They were thus
correctly dropped as respondents in the complaints.

The CA ratiocinated that by the election or designation of Antonio as General Manager of

ACCS, the daily business operations of the corporation were vested in his hands and had
ceased to be the responsibility of respondents as members of the Board of Directors.
Respondents, therefore, were not officers charged with the management of the business affairs
who could be held liable pursuant to paragraph 3, Section 4 of BP 33, as amended, which
states that:

When the offender is a corporation, partnership, or other juridical person, the president, the
general manager, managing partner, or such other officer charged with the management of the
business affairs thereof, or employee responsible for the violation shall be criminally liable.

2. The offenses of illegal trading under Section 2(a) and underfilling under Section 2(c) both
under BP 33, as amended distinct offenses.

Illegal trading and underfilling are among the eight acts prohibited under Section 2 of BP 33, as
amended.

By definition, the acts penalized by both offenses are essentially different. Under paragraph 1(c)
of Section 3 of the said law, illegal trading in petroleum and/or petroleum products is committed
by refilling LPG cylinders without authority from the Bureau of Energy Utilization, or refilling of
another company's or firm's cylinder without such company's or firm's written authorization.
Underfilling or underdelivery, on the other hand, under paragraph 3 of the same section refers to
a sale, transfer, delivery or filling of petroleum products of a quantity that is actually below the
quantity indicated or registered on the metering device of a container. While it may be said that
an act could be common to both of them, the act of refilling does not in itself constitute illegal
trading through unauthorized refilling or that of underfilling. The concurrence of an additional
requisite different in each one is necessary to constitute each offense. Thus, aside from the act
of refilling, the offender must have no authority to refill from the concerned government agency
or the company or firm owning the LPG cylinder refilled for the act to be considered illegal
trading through unauthorized refilling. Whereas in underfilling, it is necessary that apart from the
act of refilling, the offender must have refilled the LPG cylinder below the authorized limits in the
sale of petroleum products. Moreover, the offense of underfilling is not limited to the act of
refilling below the authorized limits. Possession of an underfilled LPG cylinder another way of
committing the offense. As therefore correctly argued by petitioner, the offenses of illegal trading
through unauthorized refilling and underfilling are separate and distinct offenses.

Besides, it is not accurate to say that in this case the charges of illegal trading and underfilling
were based on the same act of refilling committed by ACCS during the test-buy operation. While
it appears from the records that the charge of illegal trading was principally based on ACCS' act
of refilling the four branded LPG cylinders without authority during the test buy, the Complaint-
Affidavit for underfilling would show that it was not solely based on the same. Aside from the
four branded LPG cylinders caused to be refilled by police operatives in the test buy which were
later found to be underfilled by 0.5 kg to 1.3 kg, the said complaint was likewise anchored on the
other four branded LPG cylinders seized during the search and seizure operation which were
also found to be underfilled, this time by 0.5 kg. to 0.9 kg. It is thus apparent that with respect to
the last four underfilled cylinders, the basis for the charge is not the act of refilling but ACCS's
possession of the same since as already mentioned, the offense of underfilling is not limited to
the act of refilling an LPG cylinder below authorized limits but also contemplates possession of
underfilled LPG cylinders for the purpose of sale, distribution, transportation, exchange or
barter.
CALIFORNIA MANUFACTURING COMPANY, INC., Petitioner,
vs. ADVANCED TECHNOLOGY SYSTEM, INC., Respondent.

FACTS:
MCI is a domestic corporation engaged in the food and beverage manufacturing business.
Respondent ATSI is also a domestic corporation that fabricates and distributes food processing
machinery and equipment, spare parts, and its allied products. CMCI leased from ATSI a
Prodopak machine which was used to pack products in 20-ml. pouches. The parties agreed to a
monthly rental of ₱98,000 exclusive of tax. Upon receipt of an open purchase order ATSI
delivered the machine to CMCI's plant.

ATSI filed a Complaint for Sum of Money against CMCI to collect unpaid rentals. In its
Answer, CMCI averred that ATSI was one and the same with Processing Partners and
Packaging Corporation (PPPC), which was a toll packer of CMCI products. CMCI alleged that in
2000, PPPC agreed to transfer the processing of CMCI's product line from its factory. Upon the
request of PPPC, through its Executive Vice President Felicisima Celones, CMCI advanced ₱4
million as mobilization fund. PPPC President and Chief Executive Officer Francis Celones
allegedly committed to pay the amount in 12 equal instalments deductible from PPPC's monthly
invoice to CMCI beginning in October 2000. CMCI likewise claims that in a letter, Felicisima
proposed to set off PPPC's obligation to pay the mobilization fund with the rentals for the
Prodopak machine. CMCI argued that the proposal was binding on both PPPC and A TSI
because Felicisima was an officer and a majority stockholder of the two corporations. Moreover,
in a letter, she allegedly represented to the new management of CMCI that she was authorized
to request the offsetting of PPPC's obligation with ATSI's receivable from CMCI.

ISSUE:
Whether or not the veil of corporate fiction be pierced.

HELD:
NO. Without question, the Spouses Celones are incorporators, directors, and majority
stockholders of the ATSI and PPPC. But that is all that CMCI has proven. There is no proof that
PPPC controlled the financial policies and business practices of ATSI either in July 2001 when
Felicisima proposed to set off the unpaid ₱3.2 million mobilization fund with CMCI's rental of
Prodopak machines; or in August 2001 when the lease agreement between CMCI and ATSI
commenced. Assuming arguendo that Felicisima was sufficiently clothed with authority to
propose the offsetting of obligations, her proposal cannot bind ATSI because at that time the
latter had no transaction yet with CMCI. Besides, CMCI had leased only one Prodopak
machine. Felicisima's reference to the Prodopak machines in its letter in July 2001 could only
mean that those were different from the Prodopak machine that CMCI had leased from A TSI.

In all its pleadings, CMCI averred that the P4 million mobilization fund was in furtherance of its
agreement with PPPC in 2000.1awp++i1 Prior thereto, PPPC had been a toll packer of its
products as early as 1996. Clearly, CMCI had been dealing with PPPC as a distinct juridical
person acting through its own corporate officers from 1996 to 2003.

CMCI's dealing with ATSI began only in August 2001. It appears, however, that CMCI now
wants the Court to gloss over the separate corporate existence ATSI and PPPC notwithstanding
the dearth of evidence showing that either PPPC or ATSI had used their corporate cover to
commit fraud or evade their respective obligations to CMCI. It even appears that CMCI faithfully
discharged its obligation to ATSI for a good two years without raising any concern about its
relationship to PPPC.

The fraud test, which is the second of the three-prong test to determine the application of the
alter ego doctrine, requires that the parent corporation's conduct in using the subsidiary
corporation be unjust, fraudulent or wrongful. Under the third prong, or the harm test, a causal
connection between the fraudulent conduct committed through the instrumentality of the
subsidiary and the injury suffered or the damage incurred by the plaintiff has to be established.
None of these elements have been demonstrated in this case. Hence, we can only agree with
the CA and RTC in ruling out mutuality of parties to justify the application of legal compensation
in this case.

BUSTOS v. MILLIANS SHOE, INC.

FACTS:

Spouses Fernando and Amelia Cruz owned a 464-square-meter lot covered by Transfer
Certificate of Title (TCT) No. N-126668. On 6 January 2004, the City Government of Marikina
levied the property for non-payment of real estate taxes. Petitioner then applied for the
cancellation of TCT of the property. Marikina City RTC, rendered a final and executory Decision
ordering the cancellation of the previous title and the issuance of a new one under the name of
petitioner.

On 26 September 2006, petitioner moved for the exclusion of the subject property from the Stay
Order. He claimed that the lot belonged to Spouses Cruz who were mere stockholders and
officers of MSL He further argued that since he had won the bidding of the property before the
annotation of the title, the auctioned property could no longer be part of the Stay Order. The
RTC denied the entreaty of petitioner. It ruled that because the period of redemption hadnot yet
lapsed at the time of the issuance of the Stay Order, the ownership thereof had not yet been
transferred to petitioner.

Petitioner moved for reconsideration, but to no avail. He then filed an action for certiorari before
the CA. He asserted that the Stay Order undermined the taxing powers of the local government
unit. He also reiterated his arguments that Spouses Cruz owned the property, and that the lot
had already been auctioned to him.
The said parcel of land which secured several mortgage liens for the account of MSI remains to
be an asset of the Cruz Spouses, who are the stockholders and officers of MSI, a close
corporation. Incidentally, as an exception to the general rule, in a close corporation, the
stockholders and/or officers usually manage the business of the corporation and are subject to
all liabilities of directors, i.e. personally liable for corporate debts and obligations. Thus, the Cruz
Spouses being stockholders of MSI are personally liable for the latter's debt and obligations.
Petitioner unsuccessfully moved for reconsideration. The CA maintained its ruling and even held
that his prayer to exclude the property was time-barred by the 10-day reglementary period to
oppose rehabilitation petitions under Rule 4, Section 6 of the Interim Rules of Procedure on
Corporate Rehabilitation Before this Court, petitioner maintains three points: (1) the Spouses
Cruz are not liable for the debts of MSI; (2) the Stay Order undermines the taxing power of
Marikina City; and (3) the time bar rule does not apply to him, because he is not a creditor of
MSI. 12 In their Comment, 13 respondents do not contest that Spouses Cruz own the subject
property. Rather, respondents assert that as stockholders and officers of a close corporation,
they are personally liable for its debts and obligations. Furthermore, they argue that since the
Rehabilitation Plan of MSI has been approved, petitioner can no longer assail the same.

ISSUE:
Whether or not the CA correctly considered the properties of Spouses Cruz answerable for the
obligations of MSI.

HELD:
Yes.In finding the subject property answerable for the obligations of MSI, the CA characterized
respondent spouses as stockholders of a close corporation who, as such, are liable for its
debts.To be considered a close corporation, an entity must abide by the requirements laid out in
Section 96 of the Corporation Code, which reads: Sec. 96. Definition and applicability of Title. -
A close corporation, within the meaning of this Code, is one whose articles of incorporation
provide that: (1) All the corporation's issued stock of all classes, exclusive of treasury shares,
shall be held of record by not more than a specified number of persons, not exceeding twenty
(20); (2) all the issued stock of all classes shall be subject to one or more specified restrictions
on transfer permitted by this Title; and (3) The corporation shall not list in any stock exchange or
make any public offering of any of its stock ofany class. Notwithstanding the foregoing, a
corporation shall not be deemed a close corporation when at least twothirds (2/3) of its voting
stock or voting rights is owned or controlled by another corporation which is not a close
corporation within the meaning of this Code.

Furthermore, we find that the CA seriously erred in portraying the import of Section 97 of the
Corporation Code. Citing that provision, the CA concluded that "in a close corporation, the
stockholders and/or officers usually manage the business of the corporation and are subject to
all liabilities of directors, i.e. personally liable for corporate debts and obligations."

However, Section 97 of the Corporation Code only specifies that "the stockholders of the
corporation shall be subject to all liabilities of directors." Nowhere in that provision do we find
any inference that stockholders of a close corporation are automatically liable for corporate
debts and obligations.

Lim vs. Philippine Fishing Gear Industries Inc. [GR 136448, 3 November 1999]

FACTS:
Lim Tong Lim requested Peter Yao and Antonio Chuato engage in commercial fishing with him.
The three agreed to purchase two fishing boats but since they do not have the money they
borrowed from one Jesus Lim the brother of Lim Tong Lim. Subsequently, they again borrowed
money for the purchase of fishing nets and other fishing equipments. Yao and Chua
represented themselves as acting in behalf of “Ocean Quest Fishing Corporation” (OQFC) and
they contracted with Philippine Fishing Gear Industries (PFGI) for the purchase of fishing nets
amounting to more than P500k. However, they were unable to pay PFGI and hence were sued
in their own names as Ocean Quest Fishing Corporation is a non-existent corporation. Chua
admitted his liability while Lim Tong Lim refused such liability alleging that Chua and Yao acted
without his knowledge and consent in representing themselves as a corporation.

ISSUE:
Whether Lim Tong Lim is liable as a partner

HELD:
Yes. It is apparent from the factual milieu that the three decided to engage in a fishing business.
Moreover, their Compromise Agreement had revealed their intention to pay the loan with the
proceeds of the sale and to divide equally among them the excess or loss. The boats and
equipment used for their business entails their common fund. The contribution to such fund
need not be cash or fixed assets; it could be an intangible like credit or industry. That the parties
agreed that any loss or profit from the sale and operation of the boats would be divided equally
among them also shows that they had indeed formed a partnership. The principle of corporation
by estoppel cannot apply in the case as Lim Tong Lim also benefited from the use of the nets in
the boat, which was an asset of the partnership. Under the law on estoppel, those acting in
behalf of a corporation and those benefited by it, knowing it to be without valid existence are
held liable as general partners. Hence, the question as to whether such was legally formed for
unknown reasons is immaterial to the case.

Mindanao Savings and Loan Association, Inc. vs. Willkom

FACTS:
The First Iligan Savings and Loan Association, Inc. (FISLAI) and the Davao Savings and Loan
Association, Inc. (DSLAI) are entities duly registered with the SEC primarily engaged in the
business of granting loans and receiving deposits from the general public, and treated as banks.
Sometime in 1985, FISLAI and DSLAI entered into a merger, with DSLAI as the surviving
corporation.The articles of merger were not registered with the SEC due to incomplete
documentation. On August 12, 1985, DSLAI changed its corporate name to MSLAI by way of an
amendment to Article 1 of its Articles of Incorporation, but the amendment was approved by the
SEC only on April 3, 1987. Meanwhile, on May 26, 1986, the Board of Directors of FISLAI
passed and approved Board Resolution No. 86-002, assigning its assets in favor of DSLAI
which in turn assumed the formers liabilities. The business of MSLAI, however, failed. Hence,
the Monetary Board of the Central Bank of the Philippines ordered its closure and placed it
under receivership per Monetary Board Resolution No. 922 dated August 31, 1990. The
Monetary Board found that MSLAIs financial condition was one of insolvency, and for it to
continue in business would involve probable loss to its depositors and creditors. On May 24,
1991, the Monetary Board ordered the liquidation of MSLAI, with PDIC as its liquidator. It
appears that prior to the closure of MSLAI, Uy filed with the RTC, an action for collection of sum
of money against FISLAI. On October 19, 1989, the RTC issued a summary decision in favor of
Uy, directing defendants therein (which included FISLAI) to pay the former the sum of
P136,801.70, plus interest until full payment, 25% as attorneys fees, and the costs of suit. On
April 28, 1993, sheriff Bantuas levied on six (6) parcels of land owned by FISLAI located in
Cagayan de Oro City, and the notice of sale was subsequently published. During the public
auction on May 17, 1993, Willkom was the highest bidder. A certificate of sale was issued and
eventually registered with the Register of Deeds of Cagayan de Oro City. Upon the expiration of
the redemption period, sheriff Bantuas issued the sheriffs definite deed of sale. New certificates
of title covering the subject properties were issued in favor of Willkom. On September 20, 1994,
Willkom sold one of the subject parcels of land to Go. On June 14, 1995, MSLAI, represented
by PDIC, filed before the RTC, a complaint for Annulment of Sheriffs Sale, Cancellation of Title
and Reconveyance of Properties against respondents.MSLAI alleged that the sale on execution
of the subject properties was conducted without notice to it and PDIC; that PDIC only came to
know about the sale for the first time in February 1995 while discharging its mandate of
liquidating MSLAIs assets; that the execution of the RTC was illegal and contrary to law and
jurisprudence, not only because PDIC was not notified of the execution sale, but also because
the assets of an institution placed under receivership or liquidation such as MSLAI should be
deemed in custodia legis and should be exempt from any order of garnishment, levy,
attachment, or execution.

ISSUE:
Was the merger between FISLAI and DSLAI (now MSLAI) valid and effective

HELD:
NO. Ordinarily, in the merger of two or more existing corporations, one of the corporations
survives and continues the combined business, while the rest are dissolved and all their rights,
properties, and liabilities are acquired by the surviving corporation. Although there is a
dissolution of the absorbed or merged corporations, there is no winding up of their affairs or
liquidation of their assets because the surviving corporation automatically acquires all their
rights, privileges, and powers, as well as their liabilities.

The merger, however, does not become effective upon the mere agreement of the constituent
corporations. Since a merger or consolidation involves fundamental changes in the corporation,
as well as in the rights of stockholders and creditors, there must be an express provision of law
authorizing them.

The steps necessary to accomplish a merger or consolidation are provided in the Corporation
Code :

(1) The board of each corporation draws up a plan of merger or consolidation. Such plan must
include any amendment, if necessary, to the articles of incorporation of the surviving
corporation, or in case of consolidation, all the statements required in the articles of
incorporation of a corporation.

(2) Submission of plan to stockholders or members of each corporation for approval. A meeting
must be called and at least two (2) weeks notice must be sent to all stockholders or members,
personally or by registered mail. A summary of the plan must be attached to the notice. Vote of
two-thirds of the members or of stockholders representing two-thirds of the outstanding capital
stock will be needed. Appraisal rights, when proper, must be respected.

(3) Execution of the formal agreement, referred to as the articles of merger or consolidation, by
the corporate officers of each constituent corporation. These take the place of the articles of
incorporation of the consolidated corporation, or amend the articles of incorporation of the
surviving corporation.

(4) Submission of said articles of merger or consolidation to the SEC for approval.
(5) If necessary, the SEC shall set a hearing, notifying all corporations concerned at least two
weeks before.

(6) Issuance of certificate of merger or consolidation.

Clearly, the merger shall only be effective upon the issuance of a certificate of merger by the
SEC, subject to its prior determination that the merger is not inconsistent with the Corporation
Code or existing laws. Where a party to the merger is a special corporation governed by its own
charter, the Code particularly mandates that a favorable recommendation of the appropriate
government agency should first be obtained.
In this case, it is undisputed that the articles of merger between FISLAI and DSLAI were not
registered with the SEC due to incomplete documentation. Consequently, the SEC did not issue
the required certificate of merger. Even if it is true that the Monetary Board of the Central Bank
of the Philippines recognized such merger, the fact remains that no certificate was issued by the
SEC. Such merger is still incomplete without the certification.
The issuance of the certificate of merger is crucial because not only does it bear out SECs
approval but it also marks the moment when the consequences of a merger take place. By
operation of law, upon the effectivity of the merger, the absorbed corporation ceases to exist but
its rights and properties, as well as liabilities, shall be taken and deemed transferred to and
vested in the surviving corporation.

WHEREFORE, premises considered, the petition is DENIED. The Court of Appeals Decision
dated March 21, 2007 and Resolution dated June 1, 2007 in CA-G.R. CV No. 58337 are
AFFIRMED