Corporation Law Case Doctrines (Sections 68 to 149)

CORPORATION LAW

Case Doctrines
(Sections 68-149)

by Olive Cachapero
Atty. Ayo

DELINQUENCY SALE

NAVA VS. PEERS MARKETING

[Delinquency sale (section 68)]

A stock subscription is a subsisting liability from the time the subscription is made. The subscriber is as much bound to pay his subscription as he would be to pay any other debt. The right of the corporation to demand payment is no less incontestable.

A corporation cannot release an original subscriber from paying for his shares without a valuable consideration or without the unanimous consent of the stockholders.

GARCIA VS. SUAREZ 1939

[Delinquency sale (section 68)]

·         When does the obligation to pay a subscription to a stock become demandable?

Subscription to the capital stock of the corporation, unless otherwise stipulated, is not payable at the moment of the subscription but on a subsequent date which may be fixed by the corporation. Hence, Section 38 of the Corporation Law, amended by Act No. 3518, provides that:

The board of directors or trustees of any stock corporation formed, organized, or existing under this Act may at any time declare due and payable to the corporation unpaid subscriptions to the capital stock . . . .

·         Release of subscribers by the corporation

There can be no doubt that a corporation may effectually release a subscriber from liability on his subscription, in whole or in part, or allow him to modify his contract, if all the stockholders expressly or impliedly consent. The agents or officers of the corporation have no such power, however, unless it is expressly conferred upon them by the charter or statute, or by the stockholders by a by-law or otherwise.

A corporation has no power to release an original subscriber to its capital stock from the obligation of paying for his shares, without a valuable consideration for such release, and any agreement to this effect is invalid.

PHIL. TRUST CO. VS. RIVERA

[Delinquency sale (section 68)]

·         It is established doctrine that subscription to the capital of a corporation constitute a fund to which creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its debts.

·         As against creditors a reduction of the capital stock can take place only in the manner an under the conditions prescribed by the statute or the charter or the articles of incorporation. Moreover, strict compliance with the statutory regulations is necessary.

APODACA VS. NLRC

(Court action to recover unpaid subscription (section 70)

The unpaid subscriptions are not due and payable until a call is made by the corporation for payment. Private respondents have not presented a resolution of the board of directors of respondent corporation calling for the payment of the unpaid subscriptions. It does not even appear that a notice of such call has been sent to petitioner by the respondent corporation.

What the records show is that the respondent corporation deducted the amount due to petitioner from the amount receivable from him for the unpaid subscriptions. No doubt such set-off was without lawful basis, if not premature. As there was no notice or call for the payment of unpaid subscriptions, the same is not yet due and payable.

BALTAZAR VS. LINGAYEN

(Effect of delinquency (section 71)

·         Fua Cun v. Summers 

In the absence of special agreement to the contrary, a subscriber for a certain number of shares of stock does not, upon payment of one-half of the subscription price, become entitled to the issuance of certificates for one-half of the number of shares subscribed for; the subscriber's right consists only in equity entitling him to a certificate for the total number of shares subscribed for by him upon payment of the remaining portion of the subscription price.

Ø  The case connotes the principle that a partial payment of a subscription does not entitle the stockholder to a certificate for the total number of shares subscribed by him; his right consists only in equity to a certificate of the total number of shares subscribed for, upon payment of the remaining portion of the subscription price.

Ø  In other words, it is contended, as in the present case, that if Baltazar subscribed to 600 shares of stock in a single subscription, and he merely paid for 300 shares, for which he was given fully paid certificates for 300 shares, he cannot vote said 300 shares, in any meeting of the Corporation, until he shall have paid the remaining 300 shares of stock.

Section 37 of the Corporation Law, as amended by Act No. 3518, provides:

SEC. 37. ... . No certificate of stock shall be issued to a subscriber as fully paid up until the full par value thereof, or the full subscription in the case of no par stock, has been paid by him to the corporation. Subscribed shares not fully paid up may be voted provided no subscription is unpaid and delinquent.

The present law requires as a condition before a share holder can vote his shares, that his full subscription be paid in the case of no par value stock; and in case of stock corporation with par value, the stockholder can vote the shares fully paid by him only, irrespective of the unpaid delinquent shares. As well-observed by the trial court, a corporation may now, in the absence of provisions in their by-laws to the contrary, apply payment made by, subscribers-stockholders, either as: "(a) full payment for the corresponding number of shares of stock, the par value of each of which is covered by such payment; or (b) as payment pro-rata to each and all the entire number of shares subscribed for" (amended decision). In the cases at bar, the defendant-corporation had chosen to apply payments by its stockholders to definite shares of the capital stock of the corporation and had fully paid capital stock shares certificates for said payments; its call for payment of unpaid subscription and its declaration of delinquency for non-payment of said call affecting only the remaining number of shares of its capital stock for which no fully paid capital stock shares certificates have been issued, "and only these have been legally shorn of their voting rights by said declaration of delinquency" (amended decision).

CAPITOL COLLEGE OF ILIGAN, INC. VS. CA

(Corporate books and records)

The purpose of the inspection of petitioner’s books of account is not only to determine whether dividends have been declared by the petitioner but also to ascertain whether profits have been earned by the latter and whether private respondents have been unjustly deprived of their share therein. Such determination is possible only after factual examination by the board of directors of petitioner of the existence of such profits and their declaration of dividends.

AFRICA VS. PCGG

(Corporate books and records)

In upholding therein the right of a stockholder of a sequestered company to inspect and/or examine the records of a corporation pursuant to Section 74 of the Corporation Code, the Court found nothing in Executive Orders Nos. 1, 2 and 14, as well as in BASECO, to indicate an implied amendment of the Corporation Code, much less an implied modification of a stockholder's right of inspection as guaranteed by Section 74 thereof. The only express limitation on the right of inspection, according to the Court, is that

1)       the right of inspection should be exercised at reasonable hours on business days;

2)      the person demanding the right to examine and copy excerpts from the corporate records and minutes has not improperly used any information secured through any previous examination of the records of such corporation; and

3)      the demand is made in good faith or for a legitimate purpose.

CORPORATE BOOKS

FLORDELIZA C. ANG-ABAYA, ET AL. VS. ANG,

(Right to inspect corporate books )

The STOCKHOLDER'S RIGHT OF INSPECTION of the corporation's books and records is based upon their ownership of the assets and property of the corporation. It is, therefore, an incident of ownership of the corporate property, whether this ownership or interest be termed an equitable ownership, a beneficial ownership, or a quasi-ownership. This right is predicated upon the necessity of self-protection. It is generally held by majority of the courts that where the right is granted by statute to the stockholder, it is given to him as such and must be exercised by him with respect to his interest as a stockholder and for some purpose germane thereto or in the interest of the corporation. In other words, the inspection has to be germane to the petitioner's interest as a stockholder, and has to be proper and lawful in character and not inimical to the interest of the corporation.

The stockholder’s right to inspect corporate books is not without limitations.  While the right of inspection was enlarged under the Corporation Code as opposed to the old Corporation Law,

It is now expressly required as a CONDITION FOR SUCH EXAMINATION

1.)     that the one requesting it must not have been guilty of using improperly any information secured through a prior examination,

2.)    or that the person asking for such examination must be acting in good faith and for a legitimate purpose in making his demand.

In order therefore for the penal provision under Section 144 of the Corporation Code to apply in a case of violation of a stockholder or member’s right to inspect the corporate books/records as provided for under Section 74 of the Corporation Code, the following ELEMENTS must be present:

1.)     A director, trustee, stockholder or member has made a prior demand in writing for a copy of excerpts from the corporation’s records or minutes;

2.)    Any officer or agent of the concerned corporation shall refuse to allow the said director, trustee, stockholder or member of the corporation to examine and copy said excerpts;

3.)    If such refusal is made pursuant to a resolution or order of the board of directors or trustees, the liability under this section for such action shall be imposed upon the directors or trustees who voted for such refusal; and,

4.)    Where the officer or agent of the corporation sets up the defense that the person demanding to examine and copy excerpts from the corporation’s records and minutes has improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand, the contrary must be shown or proved.

MERGER OR CONSOLIDATION

ASSOCIATED BANK VS. CA

Merger; definition (section 76)  

Effects of merger

Ordinarily, in the merger of two or more existing corporations, one of the combining 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 dissolution of the absorbed 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.  The PROCEDURE TO BE FOLLOWED is prescribed under the Corporation Code.

a.)    Section 79 of said Code requires the approval by the SEC of the articles of merger which, in turn, must have been duly approved by a majority of the respective stockholders of  the  constituent  corporations.  

b.)    The same provision further states that the merger shall be effective only upon the issuance by the SEC of a certificate of merger.  The effectivity date of the merger is crucial for determining when the merged or absorbed corporation ceases to exist; and when its rights, privileges, properties as well as liabilities pass on to the surviving corporation.

In a merger, does the surviving corporation have a right to enforce a contract entered into by the absorbed company subsequent to the date of the merger agreement, but prior to the issuance of a certificate of merger by the SEC? YES.

Assuming that the effectivity date of the merger was the date of its execution, we still cannot agree that petitioner no longer has any interest in the promissory note.  A closer perusal of the merger agreement leads to a different conclusion.  The provision quoted earlier has this other clause:

“Upon the effective date of the [m]erger, all references to [CBTC] in any deed, documents, or other papers of whatever kind or nature and wherever found shall be deemed for all intents and purposes, references to [ABC], the SURVIVING BANK, as if such references were direct references to [ABC].  

Thus, the fact that the promissory note was executed after the effectivity date of the merger does not militate against petitioner.  The agreement itself clearly provides that all contracts -- irrespective of the date of execution -- entered into in the name of CBTC shall be understood as pertaining to the surviving bank, herein petitioner.  

SOLID VS. BIO HONG

(Merger; definition (section 76) 

CHESTER BABST VS. CA

Effects of merger or consolidation (Section 80)

APPRAISAL RIGHT

TURNER vs. LORENZO SHIPPING

Stockholder’s Right of Appraisal

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

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

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

3)      All rights accruing to the withdrawing stockholder’s shares, including voting and dividend rights, shall be suspended from the time of demand for the payment of the fair value of the shares until either the abandonment of the corporate action involved or the purchase of the shares by the corporation, except the right of such stockholder to receive payment of the fair value of the shares.

4)      Within 10 days after demanding payment for his or her shares, a dissenting stockholder shall submit to the corporation the certificates of stock representing his shares for notation thereon that such shares are dissenting shares. A failure to do so shall, at the option of the corporation, terminate his rights under this Title X of the Corporation Code. If shares represented by the certificates bearing such notation are transferred, and the certificates are consequently canceled, the rights of the transferor as a dissenting stockholder under this Title shall cease and the transferee shall have all the rights of a regular stockholder; and all dividend distributions that would have accrued on such shares shall be paid to the transferee.

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

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

         

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

PURPOSES

CHINESE YMCA VS. CHING

Purposes (section 88)

The courts cannot strip a member of a non-stock non-profit corporation of his membership therein without cause. Otherwise, that would be an unwarranted and undue interference with the well established right of a corporation to determine its membership, as announced by Fletcher, as follows:

Compliance with provisions of charter, constitution or by-laws. —In order that membership may be acquired in a non-stock corporation and valid by-laws must be complied with, except in so far as they may be and are waived. *** But provisions in the by-laws as to formal steps to be taken to acquire membership may be waived by the corporation, or it may be estopped to assert that they have not been taken.

PPSTA V. APOSTOL

Purposes (section 88)

Actions for quo warranto involving merely the administration of corporate functions or duties which touch only private individual rights, such as the election of officers, admission of a corporate officer, or member, and the like the action for quo warranto may be brought with leave of court, by the Solicitor General or fiscal upon the relation of any person or persons having an interest injuriously affected. Such action may be allowed in the discretion of the court, according to section 4 and the court, before granting leave, may direct that, notice be given to the defendant so that he may be heard in opposition thereto, under section 5. 

MEMBERS: RIGHT TO VOTE

AO-AS VS. CA

Members: Right To Vote (Section 89)

Section 89 of the Corporation Code pertaining to non-stock corporations provides that “(t)he right of the members of any class or classes (of a non-stock corporation) to vote may be limited, broadened or denied  to the extent specified in the articles of incorporation or the by-laws.” This is an exception to Section 6 of the same code where it is provided that “no share may be deprived of voting rights except those classified and issued as ‘preferred’ or ‘redeemable’ shares, unless otherwise provided in this Code.” The stipulation in the By-Laws providing for the election of the Board of Directors by districts is a form of limitation on the voting rights of the members of a non-stock corporation as recognized under the aforesaid Section 89.  Section 24, which requires the presence of a majority of the members entitled to vote in the election of the board of directors, applies only when the directors are elected by the members at large, such as is always the case in stock corporations by virtue of Section 6.

          

RELIGIOUS CORPORATION

ALFREDO LONG ET AL. VS. LYDIA BASA ET AL.

Termination of Membership (Section 91)  

Peculiarity of a Religious Corporation

The CHURCH By-law provision on expulsion, as phrased, may sound unusual and objectionable to petitioners as there is no requirement of prior notice to be given to an erring member before he can be expelled.  But that is how peculiar the nature of a religious corporation is vis-à-vis an ordinary corporation organized for profit.  It must be stressed that the basis of the relationship between a religious corporation and its members is the latter’s absolute adherence to a common religious or spiritual belief.  Once this basis ceases, membership in the religious corporation must also cease.  Thus, generally, there is no room for dissension in a religious corporation.   And where, as here, any member of a religious corporation is expelled from the membership for espousing doctrines and teachings contrary to that of his church, the established doctrine in this jurisdiction is that such action from the church authorities is conclusive upon the civil courts.   As far back in 1918, we held in United States vs. Canete that:

 "…in matters purely ecclesiastical the decisions of the proper church tribunals are conclusive upon the civil tribunals.  A church member who is expelled from the membership by the church authorities, or a priest or minister who is by them deprived of his sacred office, is without remedy in the civil courts, which will not inquire into the correctness of the decisions of the ecclesiastical tribunals."

"SEC. 91.  Termination of membership.-  Membership shall be terminated in the manner and for the causes provided in the articles of incorporation or the by-laws.  Termination of membership shall have the effect of extinguishing all rights of a member in the corporation or in its property, unless otherwise provided in the articles of incorporation or the by-laws."

LIONS CLUB INTL, ET AL. VS. AMORES, ET AL.

Election and Term of Trustees (Section 92)

GR: General rule of non-interference: the courts will not interfere with the internal affairs of an unincorporated association so as to settle disputes between the members, or questions of policy, discipline, or internal government, so long as the government of the society is fairly and honestly administered in conformity with its laws and the law of the land, and no property or civil rights are invaded. Under such circumstances, the decision of the governing body or established private tribunal of the association is binding and conclusive and not subject to review or collateral attack in the courts. "

E: The general rule of non-interference in the internal affairs of associations is, however, subject to exceptions, but the power of review is extremely limited. Accordingly, the courts have and will exercise power to interfere in the internal affairs of an association:

a)      where law and justice so require, and the proceedings of the association are subject to judicial review where there is fraud, oppression, or bad faith, or where the action complained of is capricious, arbitrary, or unjustly discriminatory.

b)      Also, the courts will usually entertain jurisdiction to grant relief in case property or civil rights are invaded, although it has also been held that the involvement of property rights does not necessarily authorize judicial intervention, in the absence of arbitrariness, fraud or collusion.

c)       Moreover, the courts will intervene where the proceedings in question are violative of the laws of the society, or the law of the land, as by depriving a person of due process of law.

d)      Similarly, judicial intervention is warranted where there is a lack of jurisdiction on the part of the tribunal conducting the proceedings, where the organization exceeds its powers, or where the proceedings are otherwise illegal.

In accordance with the general rules as to judicial interference cited above, the decision of an unincorporated association on the question of an election to office is a matter peculiarly and exclusively to be determined by the association, and, in the absence of fraud, is final and binding on the courts.

In U.S. vs. Cañete 38 Phil. 253, the SC held that in matters purely ecclesiastical, the decision of the proper church tribunals are conclusive upon the civil tribunals and that a church member who is expelled from membership by the church authorities or a priest or minister who is by then deprived of his sacred office, is without remedy in the civil court, which will not inquire into the correctness of the decision of the ecclesiastical tribunals.

DISSOLUTION

DULAY VS. CA

Withdrawal of Stockholder or Dissolution of Corporation (Section 105)

HELD:

Section 101 of the Corporation Code:

In the instant case, petitioner corporation is classified as a close corporation and consequently a board resolution authorizing the sale or mortgage of the subject property is not necessary to bind the corporation for the action of its president. At any rate, corporate action taken at a board meeting without proper call or notice in a close corporation is deemed ratified by the absent director unless the latter promptly files his written objection with the secretary of the corporation after having knowledge of the meeting.

FINANCING CORP. VS. TEODORO

Withdrawal of Stockholder or Dissolution of Corporation (Section 105)

RULE as to Petition for Disslution by Minority Stockholders

GR: Minority stockholders of a corporation cannot sue and demand its dissolution. They may not ask for its dissolution in a private suit, and that such action should be brought by the Government through its legal officer in a quo warranto case, at their instance and request.

E: However, there are cases that hold that even minority stockholders may ask for dissolution, this, under the theory that such minority members, if unable to obtain redress and protection of their rights within the corporation, must not and should not be left without redress and remedy, wherein the intervention of the State, for one reason or another, cannot be obtained:

Ø  as when the State is not interested because the complaint is strictly a matter between the stockholders and does not involve, in the opinion of the legal officer of the Government, any of the acts or omissions warranting quo warranto proceedings, in which minority stockholders are entitled to have such dissolution. When such action or private suit is brought by them, the trial court had jurisdiction and may or may not grant the prayer, depending upon the facts and circumstances attending it. The trial court's decision is of course subject to review by the appellate tribunal.

CORPORATION SOLE

DIRECTOR OF LANDS VS. CA

Corporation sole (Section 110)

If in 1966, the land in question was converted ipso jure into private land, it remained so in 1974 when the registration proceedings were commenced. This being the case, the prohibition (disqualification from holding alienable lands of the public domain) under the 1973 Constitution would have no application. Otherwise construed, if in 1966, private respondent Iglesia ni Cristo could have its title to the land confirmed, then it had acquired a vested right thereto, which the 1973 Constitution can neither impair nor defeat.

REPUBLIC VS. IAC

Corporation sole (Section 110)

ROMAN CATHOLIC VS. LRC

Corporation sole (Section 110)

In a corporation sole, the bishops or archbishops who sit as the incumbent are merely administrators of the church properties, and they only hold these in trust for the church. Consequently, upon the death of the incumbent of the corporation sole, the church properties acquired will pass on to his successor in office.

The Court also finds that here is no provision of law that confers ownership of the church properties on to the Pope, or even to the corporation sole or heads of the corporation sole who are mere administrators of said properties; rather, ownership of these properties fall and develop upon the congregation.

While the Catholic congregation does follow the guidance of the Pope, there cannot be said to be a merger of personalities between the Pope and the Catholic Church, and it cannot be said that the political and civil rights of the Catholics are affected by their relationship with the Pope; the fact that the clergy derive their authorities from the Vatican does not mean that the Pope bestows his own citizenship to each priest. To allow the theory that all of the Churches around the world would follow the citizenship of the Pope would lead to the absurdity that each member of the Catholic Church would be a citizen of the Vatican or of Italy. As such, it cannot be said that the citizenship of the corporation sole, as created under Philippine laws, is altered by the citizenship of whoever is the incumbent head.

The Corporation Law recognized that corporation soles as those which are organized and composed of a single individual for the administration of the properties not used exclusively for religious worship of the church. The successor in office will become the corporation on ascension to office. Furthermore, the Corporation Law also recognized that the corporation sole can purchase real property, although there are restrictions as to the power to sell or mortgage depending on the rules, regulations and discipline of the church concerned. As such, the Court finds it absurd that the corporation sole can purchase properties but would not be able to register properties in its name.

While the Constitution prohibits foreigners from taking, acquiring, exploiting or developing the natural resources of the country, the Court finds that the provisions relating to these are not applicable to corporation soles because they are merely administrators of the properties titled in their name. Furthermore, the administration of these properties is for the benefit of the members of the congregation, which is overwhelmingly comprised of Filipinos.

As the acquisition of the properties is for the benefit of the congregation, the Roman Catholic Apostolic Administrator of Davao cannot be deprived of the right to acquire by purchase or donation real properties for charitable, benevolent and educational purposes, nor of the right to register these properties in its name in the Register of Deeds of Davao.

DOCTRINES

CASE LAW/ DOCTRINE : CORPORATIONS SOLE; COMPONENTS AND PURPOSE OF; POWER TO HOLD AND TRANSMIT CHURCH PROPERTIES TO HIS SUCCESSOR IN OFFICE. — A corporation sole is a special form of corporation usually associated with clergy designed to facilitate the exercise of the functions of ownership of the church which was regarded as the property owner (I Bouvier’s Law Dictionary, p. 682 -683). It consists of one person only, and his successors (who will always be one at a time), in some particular, who are incorporated by law in order to give them some legal advantages particularly that of perpetuity which in their natural persons they could not have . . . (Reid v. Barry, 93 Fla. 849 112 So. 846). Through this legal fiction, church properties acquired by the incumbent of a corporation sole pass, by operation of law, upon his death not to his personal heirs but to his successor in office. A corporation sole, therefore, is created not only to administer the temporalities of the church or religious society where he belongs, but also to hold and transmit the same to his successor in said office.

POWER AND QUALIFICATION TO PURCHASE IN ITS NAME PRIVATE LANDS; 60 PER CENTUM REQUIREMENT NOT INTENDED TO CORPORATION SOLE. — Under the circumstances of the present case, it is safe to state that even before the establishment of the Philippine Commonwealth and of the Republic of the Philippines every corporation sole then organized and registered had by express provision of law (Corporation Law, Public Act. 1459) the necessary power and qualification to purchase in its name private lands located in the territory in which it exercised its functions or ministry and for which it was created, independently of the nationality of its incumbent unique and single number and head, the bishop of the diocese. It can be also maintained without fear of being gainsaid that the Roman Catholic Apostolic Church in the Philippines has no nationality and that the frames of the Constitution did not have in mind the religious corporation sole when they provided that 60 per centum of the capital thereof be owned by Filipino citizens. Thus, if this constitutional provision were not intended for corporation sole, it is obvious that this could not be regulated or restricted by said provision.

INVOLUNTARY DISSOLUTION

REPUBLIC VS. SECURITY CREDIT

Involuntary dissolution (Section 121)

Defendant corporation has violated the law by engaging in banking without securing the administrative authority required in RA 337. That the illegal transactions thus undertaken by defendant corporation warrant its dissolution is apparent from the fact that the foregoing misuser of the corporate funds and franchise affects the essence of its business, that it is willful and has been repeated 59,463 times, and that its continuance inflicts injury upon the public, owing to the number of persons affected thereby. Accordingly, the defendant corporation was ordered dissolved and appointment of receiver was made permanent.

GOVERNMENT VS. PHIL. SUGAR ESTATES

Involuntary dissolution (Section 121)

Forfeiture of Corporate Franchise

Section 212 of Act No. 190 provides a judgment which may be rendered in said case:

When in any such action, it is found and adjudged that the corporation has, by any act done or omitted surrendered, or forfeited its corporate rights, privileges, and franchise, or has not used the same during the term of five years, judgment shall be entered that it be ousted and excluded therefrom and that it be dissolved; (NONUSER) but when it is found and adjudged that a corporation has offended in any matter or manner which does not by law work as a surrender or forfeiture, or has misused a franchise or exercised a power not conferred by law, but not of such a character as to work a surrender or forfeiture of its franchise, judgment shall be rendered that it be ousted from the continuance of such offense or the exercise of such power. (MISUSER)

It will be seen that said section (212) gives the court a wide discretion in its judgment in depriving corporations of their franchise. High, in his work on Extraordinary Legal Remedies, says at page 606:

The courts proceed with extreme caution in the proceeding which have for their object the forfeiture of corporate franchises, and a forfeiture will not be allowed, except:

a)      under express limitation, or

b)      for a plain abuse of power by which the corporation fails to fulfill the design and purpose of its organization.

In the case of State of Minnesota vs. Minnesota Thresher Manufacturing Co. the court said:

The scope of the remedy furnished by its (quo warranto) is to forfeit the franchises of a corporation for misuser or nonuser. It is therefore necessary in order to secure a judicial forfeiture of respondent's charter to show a misuser of its franchises justifying such a forfeiture. And as already remarked the object being to protect the public, and not to redress private grievances, the misuser must be such as to work or threaten a substantial injury to the public, or such as to amount to a violation of the fundamental condition of the contract by which the franchise was granted and thus defeat the purpose of the grant; and ordinarily the wrong or evil must be one remediable in no other form of judicial proceeding.

While it is true that the courts are given a wide discretion in ordering the dissolution of corporations for violations of its franchises, etc., yet nevertheless, when such abuses and violations constitute or threaten a substantial injury to the public or such as to amount to a violation of the fundamental conditions of the contract (charter) by which the franchises were granted and thus defeat the purpose of the grant, then the power of the courts should be exercised for the protection of the people.

LIQUIDATION

PEPSI-COLA PRODUCTS PHIL INC. VS. CA

Liquidation of corporate assets (Section 122)

Under Section 122 of the Corporation Code, a corporation whose corporate existence is terminated in any manner continues to be a body corporate for three (3) years after its dissolution for purposes of prosecuting and defending suits by and against it and to enable it to settle and close its affairs, culminating in the disposition and distribution of its remaining assets. It may, during the three-year term, appoint a trustee or a receiver who may act beyond that period.

The termination of the life of a corporate entity does not by itself cause the extinction or diminution of the rights and liabilities of such entity. If the three-year extended life has expired without a trustee or receiver having been expressly designated by the corporation, within that period, the board of directors (or trustees) itself, may be permitted to so continue as "trustees" by legal implication to complete the corporate liquidation.

PHIL. VETERANS BANK EMPLOYEES UNION-N.U.B.E. VS. VEGA

Liquidation of corporate assets (Section 122)

May a liquidation court continue with liquidation proceedings of the Philippine Veterans Bank (PVB) when Congress had mandated its rehabilitation and reopening? NO.

The enactment of RA 7169 entitled "An Act To Rehabilitate The Philippine Veterans Bank Created Under Republic Act No. 3518, Providing The Mechanisms Therefor, And For Other Purposes," as well as the subsequent developments has rendered the liquidation court functus officio. Consequently, respondent judge has been stripped of the authority to issue orders involving acts of liquidation.

Liquidation, in corporation law, connotes a winding up or settling with creditors and debtors. It is the winding up of a corporation so that assets are distributed to those entitled to receive them. It is the process of reducing assets to cash, discharging liabilities and dividing surplus or loss.

Rehabilitation which connotes a reopening or reorganization. Rehabilitation contemplates a continuance of corporate life and activities in an effort to restore and reinstate the corporation to its former position of successful operation and solvency.

CHUNG KA BIO VS. IAC

Methods of liquidation

While we agree that the board of directors is not normally permitted to undertake any activity outside of the usual liquidation of the business of the dissolved corporation, there is nothing to prevent the stockholders from conveying their respective shareholdings toward the creation of a new corporation to continue the business of the old. Winding up is the sole activity of a dissolved corporation that does not intend to incorporate anew. If it does, however, it is not unlawful for the old board of directors to negotiate and transfer the assets of the dissolved corporation to the new corporation intended to be created as long as the stockholders have given their consent.

Non-filing of the by-laws will not result in automatic dissolution of the corporation. Under Section 6(i) of PD 902-A, the SEC is empowered to "suspend or revoked, after proper notice and hearing, the franchise or certificate of registration of a corporation" on the ground inter alia of "failure to file by-laws within the required period." It is clear from this provision that there must first of all be a hearing to determine the existence of the ground, and secondly, assuming such finding, the penalty is not necessarily revocation but may be only suspension of the charter. In fact, under the rules and regulations of the SEC, failure to file the by-laws on time may be penalized merely with the imposition of an administrative fine without affecting the corporate existence of the erring firm. 

REPUBLIC VS. MARSMAN DEV'T CO.

Methods of liquidation

ALHAMBRA CIGAR VS. SEC

Methods of liquidation

 Section 77 of the Corporation Law:

SEC. 77. Every corporation whose charter expires by its own limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall nevertheless be continued as a body corporate for three years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and of enabling it gradually to settle and close its affairs, to dispose of and convey its property and to divide its capital stock, but not for the purpose of continuing the business for which it was established.

Plain from the language of the provision is its meaning: continuance of a "dissolved" corporation as a body corporate for three years has for its purpose the final closure of its affairs, and no other; the corporation is specifically enjoined from "continuing the business for which it was established". The liquidation of the corporation's affairs set forth in Section 77 became necessary precisely because its life had ended. For this reason alone, the corporate existence and juridical personality of that corporation to do business may no longer be extended.

RA 3531, amending Section 18 of the Corporation Law, is silent, it is true, as to when such act of extension may be made. But even with a superficial knowledge of corporate principles, it does not take much effort to reach a correct conclusion. For, implicit in Section 77 heretofore quoted is that the privilege given toprolong corporate life under the amendment must be exercised before the expiry of the term fixed in the articles of incorporation.

CHINA BANKING CORP VS. MICHELIN

Methods of liquidation

VOLUNTARY DISSOLUTION; APPOINTMENT OF RECEIVER. — Section 176 of the Code of Civil Procedure dealing with the appointment of receiver upon decree of a corporation provides that the court "may . . . appoint a receiver to take charge" of the estate and effects of the corporation, "and to pay the outstanding debts thereof, and to divide the money and other properties that shall remain over among the stockholders or members," and consistent with respect to decrees of dissolution rendered upon voluntary application that the court "may appoint receivers to collect and take charge of the assets of the corporation." Such language found in both statutes on the subject is permissive rather than mandatory and tends to recognize that in cases of voluntary dissolution there is no occasion for the appointment of a receiver except under special circumstances and upon proper showing. There can be no doubt that when enacting the Corporation Law the Legislature intended to let the shareholders have the control of the assets of the corporation upon dissolution in winding up its affairs. The normal method of procedure is for the directors and executive officers to have charge of the winding up operations, though there is the alternative method of assigning the property of the corporation to trustees for the benefit of its creditors and shareholders. 

Statutes authorizing voluntary dissolutions are generally held to apply only to a dissolution brought about by the stockholders themselves, and while the appointment of a receiver rests within the sound judicial discretion of the court, such discretion must, however, always be exercised with caution and governed by legal and equitable principles, the violation of which will amount to its abuse, and in making such appointment the court should take into consideration all the facts and weigh the relative advantages and disadvantages of appointing a receiver to wind up the corporate business. The court should only act on facts which have been proved by competent legal evidence.

The appointment of a receiver by the court to wind up the affairs of the corporation upon petition of voluntary dissolution does not empower the court to hear and pass on the claims of the creditors of the corporation at first hand. In such cases the receiver does not act as a receiver of an insolvent corporation. Since "liquidation" as applied to the settlement of the affairs of a corporation consists of:

a)      adjusting the debts and claims, that is, of collecting all that is due the corporation, the settlement and adjustment of claims against it and the payment of its just debts, all claims must be presented for allowance to the receiver or trustee or other proper persons during the winding up proceedings which in this jurisdiction would be within the three years provided by sections 77 and 78 of the Corporation Law as the term for the corporate existence of the corporation,

b)      and if a claim is disputed or unliquidated so that the receiver cannot safely allow the same, it should be transferred to the proper court for trial and allowance, and the amount so allowed then presented to the receiver or trustee for payment.

c)       The rulings of the receiver on the validity of claims submitted are subject to review by the court appointing such receiver though no appeal is taken to the latter’s ruling (8 Thompson on Corp., 718),

d)      and during the winding up proceedings after dissolution, no creditor will be permitted by legal process or otherwise to acquire priority, or to enforce his claim against the property held for distribution as against the rights of other creditors.

REHABILITATION

NEGROS NAVIGATION CO., INC. VS. CA

Rehabilitation

Rehabilitation contemplates continuance of corporate life and activities in an effort to restore and reinstate the corporation to its former position of successful operation and solvency.

The purpose of rehabilitation proceedings is precisely to enable the company to gain a new lease on life and thereby allow creditors to be paid their claims from its earnings. The rehabilitation of a financially distressed corporation benefits its employees, creditors, stockholders and, in a larger sense, the general public.

The governing law concerning rehabilitation and suspension of actions for claims against corporations is PD 902-A, as amended. RA 8799 (RA 8799), otherwise known as The Securities Regulation Code, amended Section 5 of PD 902-A, thereby transferring to the RTC the jurisdiction of the SEC over cases, among others, involving petitions of corporations, partnerships or associations to be declared in the state of suspension of payments where the corporation, partnership or association possesses property to cover all its debts but foresees the impossibility of meeting them when they respectively fall due, or where the corporation, partnership or association has no sufficient assets to cover its liabilities, but is under the management of a rehabilitation receiver or a management committee.

The Court adopted the Interim Rules of Procedure on Corporate Rehabilitation on December 15, 2000, and these rules apply to petitions for rehabilitation filed by corporations, partnerships, and associations pursuant to PD 902-A.

PD 902-A mandates that upon appointment of a management committee, rehabilitation receiver, board or body, all actions for claims against corporations, partnerships or associations under management or receivership pending before any court, tribunal, board or body shall be suspended. PD 902-A does not make any distinction as to what claims are covered by the suspension of actions for claims against corporations under rehabilitation. No exception is made therein in favor of maritime claims. Thus, since the law does not make any exemptions or distinctions, neither should we. Ubi lex non distinguit nec nos distinguere debemos.

The justification for the suspension of actions or claims, without distinction, pending rehabilitation proceedings is to enable the management committee or rehabilitation receiver to effectively exercise its/his powers free from any judicial or extra-judicial interference that might unduly hinder or prevent the "rescue" of the debtor company. To allow such other actions to continue would only add to the burden of the management committee or rehabilitation receiver, whose time, effort and resources would be wasted in defending claims against the corporation instead of being directed toward its restructuring and rehabilitation.

When a distressed company is placed under rehabilitation, the appointment of a management committee follows to avoid collusion between the previous management and creditors it might favor, to the prejudice of the other creditors. The stay order is effective on all creditors of the corporation without distinction, whether secured or unsecured. All assets of a corporation under rehabilitation receivership are held in trust for the equal benefit of all creditors to preclude one from obtaining an advantage or preference over another by the expediency of attachment, execution or otherwise. As between the creditors, the key phrase is equality in equity. Once the corporation threatened by bankruptcy is taken over by a receiver, all the creditors ought to stand on equal footing. Not any one of them should be paid ahead of the others. This is precisely the reason for suspending all pending claims against the corporation under receivership.

Rizal Commercial Banking Corporation v. Intermediate Appellate Court, promulgated by the Court en banc before the effectivity of the Interim Rules on Corporate Rehabilitation, is still valid case law up to the present. It enumerates the guidelines in the treatment of claims involving corporations undergoing rehabilitation, viz.:

1.)     All claims against corporations, partnerships, or associations that are pending before any court, tribunal, or board, without distinction as to whether or not a creditor is secured or unsecured, shall be suspended effective upon the appointment of a management committee, rehabilitation receiver, board, or body in accordance with the provisions of Presidential Decree No. 902-A.

2.)    Secured creditors retain their preference over unsecured creditors, but enforcement of such preference is equally suspended upon the appointment of a management committee, rehabilitation receiver, board, or body. In the event that the assets of the corporation, partnership, or association are finally liquidated, however, secured and preferred credits under the applicable provisions of the Civil Code will definitely have preference over unsecured ones.

TIONG ROSARIO VS. ALFONSO CO

Rehabilitation

Whether a criminal case against a corporate officer could be suspended on account of the pendency of a petition for suspension of payments filed by that officer’s corporation with the SEC. NO.

Section 6 (c) of P.D. No. 902-A, as amended, provides:

Section 6. In order to effectively exercise such jurisdiction, the Commission shall possess the following powers:

xxx                               

c)         To appoint one or more receivers of the property, real or personal, which is the subject of the action pending before the Commission in accordance with the pertinent provisions of the Rules of Court in such other cases whenever necessary in order to preserve the rights of the parties-litigants and/or protect the interest of the investing public and creditors: ... Provided, finally, That upon appointment of a management committee, the rehabilitation receiver, board or body, pursuant to this Decree, all actions for claims against corporations, partnerships, or associations under management or receivership pending before any court, tribunal, board or body shall be suspended accordingly.(italics supplied)

As early as Finasia Investment and Finance Corp. v. Court of Appeals, this Court clarified that the word “claim” used in Sec. 6 (c) of P.D. No. 902-A, as amended, refers to debts or demands of a pecuniary nature and the assertion of a right to have money paid.  It is used in special proceedings like those before AN administrative court on insolvency. In Arranza v. B.F. Homes, Inc. “claim” was defined as an action involving monetary considerations.  Clearly, the suspension contemplated under Sec. 6 (c) of P.D. No. 902-A refers only to claims involving actions which are pecuniary in nature.

PHIL. AIRLINES, INC., ET AL. VS. ZAMORA

Rehabilitation

It is plain from the foregoing provisions of law that “upon the appointment by the SEC of a management committee or a rehabilitation receiver,” all actions for claims against the corporation pending before any court, tribunal or board shall ipso jure be suspended.

The employee maintained that the suspension of proceedings provided in Section 6(c) of Presidential Decree No. 902-A refers to actions or suits for claims against corporations placed under receivership and not to petitions for certiorari initiated by the corporation under receivership.  In a Resolution, this Court granted PAL’s motion elucidating that:

         

          In Rubberworld (Phils.), Inc. v. NLRC, we held that worker’s claims before the NLRC and labor arbiters are included among the actions suspended upon the placing under receivership of the employer-corporations.  Although strictly speaking, the ruling in Rubberworld dealt with actions for claims pending before the NLRC and labor arbiters, we find that the rationale for the automatic suspension therein set out would apply to the instant case where the employee’s claim was elevated on certiorari before this Court, 

The Court holds that rendition of judgment while petitioner is under a state of receivership could render violence to the rationale for suspension of payments in Section 6 (c) of P.D. 902-A, if the judgment would result in the granting of private respondent’s claim to separation pay, thus defeating the basic purpose behind Section 6 (c) of P.D. 902-A which is to prevent dissipation of the distressed company’s resources.

And quite recently, in another PAL case, we declared that this Court is “not prepared to depart from the well-established doctrines” essentially maintaining that all actions for claims against a corporation pending before any court, tribunal or board shall ipso jure be suspended in whatever stage such actions may be found upon the appointment by the SEC of a management committee or a rehabilitation receiver.

Otherwise stated, no other action may be taken in, including the rendition of judgment during the state of suspension – what are automatically stayed or suspended are the proceedings of an action or suit and not just the payment of claims during the execution stage after the case had become final and executory. 

The suspension of action for claims against a corporation under rehabilitation receiver or management committee embraces all phases of  the suit, be it before the trial court or any tribunal or before this Court. Furthermore, the actions that are suspended cover all claims against a distressed corporation whether for damages founded on a breach of contract of carriage, labor cases, collection suits or any other claims of a pecuniary nature.

FOREIGN CORPORATIONS

AVON VS. CA

Definition; Rights of Foreign Corporations (Section 123)

A foreign corporation, is one which owes its existence to the laws of another state, and generally has no legal existence within the state in which it is foreign.  In Marshall Wells Co. vs. Elser,it was held that corporations have no legal status beyond the bounds of sovereignty by which they are created.  Nevertheless, it is widely accepted that foreign corporations are, by reason of state comity, allowed to transact business in other states and to sue in the courts of such fora.  In the Philippines, foreign corporations are allowed such privileges, subject to certain restrictions, arising from the state’s sovereign right of regulation. (AVON VS. CA)

GENERAL RULE: No foreign corporation transacting business in the Philippines without a license, or its successors or assigns, shall be permitted to maintain or intervene in any action, suit or proceeding in any court or administrative agency of the Philippines; but such corporation may be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws." (COMMISSIONER OF CUSTOMS VS. K.M.K. GANI)

EXCEPTIONS:

1)       Isolated Transaction Rule

2)      Doctrine of Estoppe;

Section 69 of the old Corporation Law (Act No. 1459) which reads:

SEC. 69. No foreign corporation or corporation formed, organized, or existing under any laws other than those of the Philippines shall be permitted to transact business in the Philippines or maintain by itself or assignee any suit for the recovery of any debt, claim, or demand whatever, unless it shall have the license prescribed in the section immediately preceding. Any officer, director or agent of the corporation or any person transacting business for any foreign corporation not having the license prescribed shall be punished by imprisonment for not less than six months nor more than two years or by a fine of not less than two hundred pesos nor more than one thousand pesos, or by both such imprisonment and fine, in the discretion of the Court. (HANG LUNG BANK vs. SAULOG)

“There is no exact rule of governing principle as to what constitutes doing or engaging in or transacting business.  Indeed, such case must be judged in the light of its peculiar circumstances, upon its peculiar facts and upon the language of the statute applicable.  (AVON VS. CA)

“doing business” includes:

'soliciting orders, purchases, service contracts opening offices, whether called ‘liaison offices of branches; appointing representatives or distributors who are domiciled in the Philippines or who in any calendar year stay in the Philippines for a period or periods totaling one hundred eighty (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 or 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 progressive prosecution of, commercial gain or of purpose and object of the business organization.’ (Article 44 of the Omnibus Investments Code of 1987)

TWO GENERAL TESTS TO DETERMINE WHETHER OR NOT A FOREIGN CORPORATION CAN BE CONSIDERED AS “DOING BUSINESS” IN THE PHILIPPINES. 

1)       The first of these is the substance test:

Ø  The true test for doing business, however, seems to be whether the foreign corporation is continuing the body of the business or enterprise for which it was organized or whether it has substantially retired from it and turned it over to another.

2)      The second test is the continuity test:

Ø  The term doing business 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 the progressive prosecution of, the purpose and object of its organization. (MENTHOLATUM vs. MANGALIMAN)

Before a foreign corporation can transact business in the country,

a.)    it must first obtain a license to transact business here and

b.)    secure the proper authorizations under existing law.

The principles regarding the RIGHT OF A FOREIGN CORPORATION TO BRING SUIT IN PHILIPPINE COURTS may thus be condensed in four statements:

1)       if a foreign corporation does business in the Philippines without a license, it cannot sue before the Philippine courts;

2)      if a foreign corporation is not doing business in the Philippines, it needs no license to sue before Philippine courts on an isolated transaction or on a cause of action entirely independent of any business transaction;

3)      if a foreign corporation does business in the Philippines without a license, a Philippine citizen or entity which has contracted with said corporation may be estopped from challenging the foreign corporation’s corporate personality in a suit brought before Philippine courts;  and

4)      if a foreign corporation does business in the Philippines with the required license, it can sue before Philippine courts on any transaction. (AGILENT vs. INTEGRATED SILICON)

Noncompliance

If a foreign corporation engages in business activities without the necessary requirements, it opens itself to court actions against it, but it shall not be allowed maintain or intervene in an action, suit or proceeding for its own account in any court or tribunal or agency in the Philippines.

Section 133 of the Corporation Code: "it is not the lack of the prescribed license (to do business in the Philippines) but doing business without license, which bars a foreign corporation from access to our courts." (HANG LUNG BANK vs. SAULOG)

RULE: To be doing or “transacting business in the Philippines” for purposes of Section 133, the foreign corporation must actually transact business in the Philippines, that is, perform specific business transactions within the Philippine territory on a continuing basis in its own name and for its own account.  Actual transaction of business within the Philippine territory is an ESSENTIAL REQUISITE for the Philippines to acquire jurisdiction over a foreign corporation and thus require the foreign corporation to secure a Philippine business license.  If a foreign corporation does not transact such kind of business in the Philippines, even if it exports its products to the Philippines, the Philippines has no jurisdiction to require such foreign corporation to secure a Philippine business license. (VAN ZUIDEN BROS., LTD. vs. GTVL MFG. INDUSTRIES, INC.)

Purpose of license

The purpose of the law in requiring that foreign corporations doing business in the country be licensed to do so, is to subject the foreign corporations doing business in the Philippines to the jurisdiction of the courts, otherwise, a foreign corporation illegally doing business here because of its refusal or neglect to obtain the required license and authority to do business may successfully though unfairly plead such neglect or illegal act so as to avoid service and thereby impugn the jurisdiction of the local courts.

Rules on among foreign corporations that are not doing business in the Philippines

The same danger does not exist among foreign corporations that are indubitably not doing business in the Philippines.  Indeed, if a foreign corporation does not do business here, there would be no reason for it to be subject to the State’s regulation.  As we observed, in so far as State is concerned, such foreign corporation has no legal existence.  Therefore, to subject such corporation to the court’s jurisdiction would violate the essence of sovereignty.

As we have found, there is no showing that petitioners had performed any act in the country that would place it within the sphere of the court’s jurisdiction.  A general allegation standing alone, that a party is doing business in the Philippines does not make it so. (AVON VS. CA) 

The Concept of Doing Business

 Sec. 133 of the Corporation Code prohibits, not merely absence of the prescribed license, but it also bars a foreign corporation “doing business” in the Philippines without such license access to our courts. A foreign corporation without such license is not ipso facto incapacitated from bringing an action.  A license is necessary only if it is “transacting or doing business” in the country. (ERIKS vs. CA)

What acts are considered "doing business in the Philippines" are enumerated in §3(d) of the Foreign Investments Act of 1991 (R.A. No. 7042) as follows:

d) the phrase "doing business" shall include

Ø  soliciting orders,

Ø  service contracts,

Ø  opening offices, whether called "liaison" offices or branches,

Ø  appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totalling 180 days or more;

Ø  participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and

Ø  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 progressive prosecution of, commercial gain or of the purpose and object of the business organization. (HAHN VS. CA)

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, and/or the exercise of rights as such investor; nor having, a nominee director or officer to represent its interests in such corporation; nor appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account. (HAHN VS. CA)

SCHMID AND OBERLY vs. RJL MARTINEZ FISHING CORP

Amendment of license (Section 131)

Webster defines an indent as "a purchase order for goods especially when sent from a foreign country." An indentor may be best described as one who, for compensation, acts as a middleman in bringing about a purchase and sale of goods between a foreign supplier and a local purchaser. The distinct role of an indentor, such that when a foreign corporation does business through such indentor, the foreign corporation is not deemed doing business in the Philippines.

A foreign firm which does business through middlemen acting in their own names, such as indentors, commercial brokers or commission merchants, shall not be deemed doing business in the Philippines. But such indentors, commercial brokers or commission merchants shall be the ones deemed to be doing business in the Philippines. (HAHN VS. CA)

EXCEPTION: However, the Court in a long line of cases has held that a foreign corporation not engaged in business in the Philippines may not be denied the right to file an action in the Philippine courts for an isolated transaction.

BULAKHIDAS VS. NAVARRO

Amendment of license (Section 131)

WON a foreign corporation not engaged in business in the Philippines can institute an action before our courts. YES.

Plaintiff is a foreign corporation not duly licensed to do business in the Philippines and, therefore, without capacity to sue and be sued.

RULE ON ISOLATED TRANSACTION

·         It is settled that if a foreign corporation is not engaged in business in the Philippines, it may not be denied the right to file an action in Philippine courts for isolated transactions. The object of the Corporation Law was not to prevent the foreign corporation from performing single acts, but to prevent it from acquiring a domicile for the purpose of business without taking the steps necessary to render it amenable to suit in the local courts. It was never the purpose of the Legislature to exclude a foreign corporation which happens to obtain an isolated order for business from the Philippines, from securing redress in the Philippine courts. (Bulakhidas vs. Navarro)

·         While plaintiff is a foreign corporation without license to transact business in the Philippines, it does not follow that it has no capacity to bring the present action. Such license is not necessary because it is not engaged in business in the Philippines. In fact, the transaction herein involved is the first business undertaken by plaintiff in the Philippines, although on a previous occasion plaintiff's vessel was chartered by the National Rice and Corn Corporation to carry rice cargo from abroad to the Philippines. These two isolated transactions do not constitute engaging in business in the Philippines within the purview of Sections 68 and 69 of the Corporation Law so as to bar plaintiff from seeking redress in our courts. (Eastboard Navigation, Ltd. et al vs. Juan Ysmael & Co., Inc)

·         Thus, we hold that the series of transactions in question could not have been isolated or casual transactions.  What is determinative of “doing business” is not really the number or the quantity of the transactions, but more importantly, the intention of an entity to continue the body of its business in the country.  The number and quantity are merely evidence of such intention.  The phrase “isolated transaction” has a definite and fixed meaning, i.e. a transaction or series of transactions set apart from the common business of a foreign enterprise in the sense that there is no intention to engage in a progressive pursuit of the purpose and object of the business organization.  Whether a foreign corporation is “doing business” does not necessarily depend upon the frequency of its transactions, but more upon the nature and character of the transactions. (ERIKS vs. CA)

COMMISSIONER OF CUSTOMS VS. K.M.K. GANI, INDRAPAL & CO., and CTA

Doing business without a license (Section 133)

Requirement for the Isolatoed-Transaction Rule

The fact that a foreign corporation is not doing business in the Philippines must be disclosed if it desires to sue in Philippine courts under the "isolated transaction rule." Without this disclosure, the court may choose to deny it the right to sue.

Only Foreign Corporations

We are cognizant of the fact that under the "isolated transaction rule," only foreign corporations and not just any business organization or entity can avail themselves of the privilege of suing before Philippine courts even without a license. The "isolated transaction rule" refers only to foreign corporations. Here the petitioners are not foreign corporations.

In the case at bar, the private respondents K.M.K. and INDRAPAL aver that they are "suing upon a singular and isolated transaction." But they failed to prove their legal existence or juridical personality as foreign corporations. Their unverified petition before the respondent CTA merely stated:

1)       That petitioner "K.M.K. Gani" is a single proprietorship doing business in accordance with the laws of Singapore, while Petitioner INDRAPAL and COMPANY" is a firm doing business in accordance with the laws of Singapore, and summons as well as other Court process may be served to the undersigned lawyer;

2)      That the Petitioners are suing upon a singular and isolated transaction.

ERIKS PTE.LTD. VS. CA and DELFIN F. ENRIQUEZ, JR.

Doing business without a license (Section 133)

The trial court held that petitioner-corporation was doing business without a license, finding that:

“The invoices and delivery receipts covering the period of (sic) from January 17, 1989 to August 16, 1989 cannot be treated to mean a singular and isolated business transaction that is temporary in character.  Granting that there is no distributorship agreement between herein parties, yet by the mere fact that plaintiff, each time that the defendant posts an order delivers the items as evidenced by the several invoices and receipts of various dates only indicates that plaintiff has the intention and desire to repeat the (sic) said transaction in the future in pursuit of its ordinary business.  Furthermore, ‘and if the corporation is doing that for which it was created, the amount or volume of the business done is immaterial and a single act of that character may constitute doing business’.

Thus, we hold that the series of transactions in question could not have been isolated or casual transactions.  What is determinative of “doing business” is not really the number or the quantity of the transactions, but more importantly, the intention of an entity to continue the body of its business in the country.  The number and quantity are merely evidence of such intention.  The phrase “isolated transaction” has a definite and fixed meaning, i.e. a transaction or series of transactions set apart from the common business of a foreign enterprise in the sense that there is no intention to engage in a progressive pursuit of the purpose and object of the business organization.  Whether a foreign corporation is “doing business” does not necessarily depend upon the frequency of its transactions, but more upon the nature and character of the transactions.

Other Remedy Still Available

This Court has ruled that subsequent acquisition of the license will cure the lack of capacity at the time of the execution of the contract.

HANG LUNG BANK, LTD vs. SAULOG

Doing business without a license (Section 133)

Since petitioner foreign banking corporation was not doing business in the Philippines, it may not be denied the privilege of pursuing its claims against private respondent for a contract which was entered into and consummated outside the Philippines. (Isolated Transaction Rule)

MENTHOLATUM CO., INC., VS. MANGALIMAN

Doing business without a license (Section 133)

It is undeniable that the Mentholatum Co., through its agent, the Philippine-American Drug Co., Inc., has been doing business in the Philippines by selling its products here since the year 1929, at least."

The Mentholatum Co., Inc., being a foreign corporation doing business in the Philippines without the license required by section 68 of the Corporation Law, it may not prosecute this action for violation of trade mark and unfair competition. Neither may the Philippine-American Drug Co., Inc., maintain the action here for the reason that the distinguishing features of the agent being his representative character and derivative authority, it cannot now, to the advantage of its principal, claim an independent standing in court.

HAHN VS. CA

Doing business without a license (Section 133)

RULE ON SERVICE OF SUMMONS TO FOREIGN CORPORATIONS

Rule 14, § 14 provides:

§14. Service upon foreign corporations. — If the defendant is a foreign corporation, or a nonresident joint stock company or association, doing business in the Philippines, service may be made on its resident agent designated in accordance with law for that purpose, or, if there be no such agent, on the government official designated by law to that effect, or on any of its officers or agents within the Philippines.

Section 14 provides for THREE MODES OF EFFECTING SERVICES UPON A PRIVATE CORPORATION, namely:

1)       by serving upon the resident agent designated in accordance with law to accept service by summons;

2)      if there be no special agent, by serving on the government official designated by law to that effect; and

3)      by serving on any officer or agent within the Philippines.

For purposes of having summons served on a foreign corporation in accordance with Rule 14, §14, it is sufficient that it be alleged in the complaint that the foreign corporation is doing business in the Philippines. The court need not go beyond the allegations of the complaint in order to determine whether it has jurisdiction. 

Ø  A determination that the foreign corporation is doing business is only tentative and is made only for the purpose of enabling the local court to acquire jurisdiction over the foreign corporation through service of summons pursuant to Rule 14, §14.

Ø  Such determination does not foreclose a contrary finding should evidence later show that it is not transacting business in the country.

FACILITIES VS. DELA ROSA

Exception in Doing business without a license (Section 133)

Whether petitioner has been 'doing business in the Philippines' so that the service of summons upon its agent in the Philippines vested the CGI Manila with jurisdiction. YES.

Ø  Is the mere act by a non-resident foreign corporation of recruiting Filipino workers for its own use abroad, in law doing business in the Philippines? YES.

Indeed, if a foreign corporation, not engaged in business in the Philippines, is not banned from seeking redress from courts in the Philippines, a fortiori, that same corporation cannot claim exemption from being sued in Philippine courts for acts done against a person or persons in the Philippines.

SIGNETICS VS. CA

Exception in Doing business without a license (Section 133)

Whether or not "a foreign corporation can be sued in the Philippines and validly summoned by a Philippine court without prior 'proof' that it was doing business here at the time of the suit." YES.

The pertinent rule to be considered is section 14, Rule 7 of the Rules of Court, which refers to service upon private foreign corporations.

Requirement of Sec. 14

But, it should be noted, in order that services may be effected in the manner above stated, said section also requires that the foreign corporation be one which is doing business in the Philippines. This is a sine qua non requirement. This fact must first be established in order that summons can be made and jurisdiction acquired. This is not only clear in the rule but is reflected in a recent decision of this Court. We there said that "as long as a foreign private corporation does or engages in business in this jurisdiction, it should and will be amenable to process and the jurisdiction of the local courts."

·         The petitioner opines that the phrase, "the fact of doing business in the Philippines must first be established in order that summons be made and jurisdiction acquired," used in the above pronouncement, would indicate that a mere allegation to that effect in the complaint is not enough — there must instead be proof of doing business.  In any case, the petitioner, points out, the allegations themselves did not sufficiently show the fact of its doing business in the Philippines.

It should be recalled that jurisdiction and venue of actions are, as they should be, initially determined by the allegations of the complaint.  Jurisdiction cannot be made to depend on independent pleas set up in a mere motion to dismiss, otherwise jurisdiction would become dependent almost entirely upon the defendant.  The fact of doing business must then, in the first place, be established by appropriate allegations in the complaint. This is what the Court should be seen to have meant in the Pacific Micronisian case. The complaint, it is true, may have been vaguely structured but, taken correlatively, not disjunctively as the petitioner would rather suggest, it is not really so weak as to be fatally deficient in the above requirement.

ATLANTIC MUTUAL VS. CEBU

Exception in Doing business without a license (Section 133)

But merely to say that a foreign corporation not doing business in the Philippines does not need a license in order to sue in our courts does not completely resolve the issue in the present case. The proposition, as stated, refers to the right to sue; the question here refers to pleading and procedure. It should be noted that insofar as the allegations in the complaint have a bearing on appellants’ capacity to sue, all that is averred is that they are both foreign corporations existing under the laws of the United States. The averment conjures two alternative possibilities:

a)      either they are engaged in business in the Philippines - they must have been duly licensed in order to maintain this suit; or

b)      they are not so engaged - if the transaction sued upon is singular and isolated, no such license is required. In either case, the qualifying circumstance is an essential part of the element of plaintiffs’ capacity to sue and must be affirmatively pleaded.

VAN ZUIDEN BROS., LTD. VS. GTVL MFG. INDUSTRIES, INC.

Other cases on doing business

Considering that petitioner is not doing business in the Philippines, it does not need a license in order to initiate and maintain a collection suit against respondent for the unpaid balance of respondent’s purchases.

1.)     Section 133 of the Corporation Code is clear. An unlicensed foreign corporation doing business in the Philippines cannot sue before Philippine courts.  On the other hand, an unlicensed foreign corporation not doing business in the Philippines can sue before Philippine courts. 

The series of transactions between petitioner and respondent cannot be classified as “doing business” in the Philippines under Section 3(d) of RA 7042.  An ESSENTIAL CONDITION to be considered as “doing business” in the Philippines is the actual performance of specific commercial acts within the territory of the Philippines for the plain REASON that the Philippines has no jurisdiction over commercial acts performed in foreign territories.  

Here, there is no showing that petitioner performed within the Philippine territory  the specific acts of doing business mentioned in Section 3(d) of RA 7042.  Petitioner did not also open an office here in the Philippines, appoint a representative or distributor, or manage, supervise or control a local business. While petitioner and respondent entered into a series of transactions implying a continuity of commercial dealings, the perfection and consummation of these transactions were done outside the Philippines (the sale of lace products was consummated in Hong Kong).

An exporter in one country may export its products to many foreign importing countries without performing in the importing countries specific commercial acts that would constitute doing business in the importing countries.  The mere act of exporting from one’s own country, without doing any specific commercial act within the territory of the importing country, cannot be deemed as doing business in the importing country.  The importing country does not acquire jurisdiction over the foreign exporter who has not performed any specific commercial act within the territory of the importing country.  Without jurisdiction over the foreign exporter, the importing country cannot compel the foreign exporter to secure a license to do business in the importing country. 

  

AGILENT TECHNOLOGIES vs. INTEGRATED SILICON, ET AL.

Other cases on doing business

RULE ON DOCTRINE OF ESTOPPEL

An unlicensed foreign corporation doing business in the Philippines may bring suit in Philippine courts against a Philippine citizen or entity who had contracted with and benefited from said corporation. Such a suit is premised on the doctrine of estoppel.  A party is estopped from challenging the personality of a corporation after having acknowledged the same by entering into a contract with it.  This doctrine of estoppel to deny corporate existence and capacity applies to foreign as well as domestic corporations. The application of this principle prevents a person contracting with a foreign corporation from later taking advantage of its noncompliance with the statutes chiefly in cases where such person has received the benefits of the contract.

The challenge to Agilent’s legal capacity to file suit hinges on whether or not it is doing business in the Philippines.  

Section 1 of the Implementing Rules and Regulations of the FIA (as amended by RA 8179) provides that the following shall NOT BE DEEMED “DOING BUSINESS”:

1)       Mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor;

2)      Having a nominee director or officer to represent its interest in such corporation;

3)      Appointing a representative or distributor domiciled in the Philippines which transacts business in the representative’s or distributor’s own name and account;

4)      The publication of a general advertisement through any print or broadcast media;

5)      Maintaining a stock of goods in the Philippines solely for the purpose of having the same processed by another entity in the Philippines;

6)      Consignment by a foreign entity of equipment with a local company to be used in the processing of products for export;

7)      Collecting information in the Philippines; and

8)      Performing services auxiliary to an existing isolated contract of sale which are not on a continuing basis, such as installing in the Philippines machinery it has manufactured or exported to the Philippines, servicing the same, training domestic workers to operate it, and similar incidental services.

By and large, to constitute “doing business”, the activity to be undertaken in the Philippines is one that is for profit-making.

By the clear terms of the VAASA, Agilent’s activities in the Philippines were confined to:

1)       maintaining a stock of goods in the Philippines solely for the purpose of having the same processed by Integrated Silicon; and

2)      consignment of equipment with Integrated Silicon to be used in the processing of products for export.  As such, we hold that, based on the evidence presented thus far, Agilent cannot be deemed to be “doing business” in the Philippines.  Respondents’ contention that Agilent lacks the legal capacity to file suit is therefore devoid of merit.  As a foreign corporation not doing business in the Philippines, it needed no license before it can sue before our courts.

EUROPEAN RESOURCES, ET AL. vs. INGENIEUBURO BIRKHAHN + NOLTE

Other cases on doing business

There is no general rule or governing principle laid down as to what constitutes "doing" or "engaging in" or "transacting" business in the Philippines. Thus, it has often been held that a single act or transaction may be considered as "doing business" when a corporation performs acts for which it was created or exercises some of the functions for which it was organized. We have held that the act of participating in a bidding process constitutes "doing business" because it shows the foreign corporation’s intention to engage in business in the Philippines. In this regard, it is the performance by a foreign corporation of the acts for which it was created, regardless of volume of business, that determines whether a foreign corporation needs a license or not.

A corporation has legal status only within the state or territory in which it was organized. For this reason, a corporation organized in another country has no personality to file suits in the Philippines. In order to subject a foreign corporation doing business in the country to the jurisdiction of our courts, it must acquire a license from the SEC and appoint an agent for service of process. Without such license, it cannot institute a suit in the Philippines.

However, there are EXCEPTIONS to this rule. In a number of cases, we have declared a party estopped from challenging or questioning the capacity of an unlicensed foreign corporation from initiating a suit in our courts. In the case of Communication Materials and Design, Inc. v. Court of Appeals, the party is estopped from questioning the capacity of a foreign corporation to institute an action in our courts where it had obtained benefits from its dealings with such foreign corporation and thereafter committed a breach of or sought to renege on its obligations. The rule relating to estoppel is deeply rooted in the axiom of commodum ex injuria sua non habere debet—no person ought to derive any advantage from his own wrong.

Estoppel does not apply in this case.

In the case at bar, petitioners have clearly not received any benefit from its transactions with the German Consortium. In fact, there is no question that petitioners were the ones who have expended a considerable amount of money and effort preparatory to the implementation of the MOA. Neither do petitioners seek to back out from their obligations under both the MOU and the MOA by challenging respondents’ capacity to sue. The reverse could not be any more accurate. Petitioners are insisting on the full validity and implementation of their agreements with the German Consortium.

SUBIC BAY METROPOLITAN AUTHORITY, ET AL. vs. UNIVERSAL INTERNATIONAL, ET AL.

Other cases on doing business

It should be stressed, however, that the licensing requirement was "never intended to favor domestic corporations who enter into solitary transactions with unwary foreign firms and then repudiate their obligations simply because the latter are not licensed to do business in this country."

MISCELLANEOUS PROVISIONS

UNION BANK OF THE PHILIPPINES VS. CA

Miscellaneous provisions

Whether the SEC can validly acquire jurisdiction over a petition for suspension of payments when such petition joins as co-petitioners the petitioning corporate entities AND individual stockholders thereof. NO.

Section 5(d) of P.D. No. 902 – A, as amended,

SEC. 5.  In addition to the regulatory and adjudicative functions of the SEC over corporations, partnerships and other forms of association registered with it as expressly granted under existing law and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving. (Now, it is under the jurisdiction of the RTC)

          x  x x    x x x     x x x

(a)  Petitions of corporations, partnerships or associations to be declared in the state of suspension of payments in cases where the corporation, partnership or association possesses sufficient property to cover all its debts but foresees the impossibility of meeting then when they respectively fall due or in case where the corporation, partnership or association has no sufficient assets to cover its liabilities, but is under the management of a Rehabilitation Receiver or Management Committee created pursuant to this Decree.  (As added by P.D. No. 1758).”

Section 5 (d) of P.D. No. 902-A, as amended clearly does not allow a mere individual to file the petition which is limited to ‘corporations, partnerships or associations.’ Administrative agencies like the SEC are tribunals of limited jurisdiction and, as such, can exercise only those powers which are specifically granted to them by their enabling statutes.  Consequently, where no authority is granted to hear petitions of individuals for suspension of payments, such petitions are beyond the competence of the SEC. (except stockholders in an intra-corporate dispute)

An anomalous situation would arise if individual sureties for debtor corporations may escape liability by simply co-filing with the corporation a petition for suspension of payments in the SEC whose jurisdiction is limited only to corporations and their corporate assets. It logically follows that the SEC does not have jurisdiction to entertain petitions for suspension of payments filed by parties other than corporations, partnerships or associations.

SEC. 11.  Misjoinder and non-joinder of parties. --- Neither misjoinder nor non-joinder of parties is ground for dismissal of an action.  Parties may be dropped or added  by order or the court on motion of any party or on its own initiative at any stage of the action and on such terms as are just.  Any claim against a misjoined party may be severed and proceeded with separately.  

From the foregoing, it is thus clear that in a case of misjoinder of parties --- which in this case is the co-filing of the petition for suspension of payments by both the Yutingcos and the EYCO group --- the remedy has never been to dismiss the petition in its entirety but to dismiss it only as against the party upon whom the tribunal or body cannot acquire jurisdiction.  The result, therefore, is that the petition with respect to EYCO shall subsist and may be validly acted upon by the SEC.  The Yutingcos, on the other hand, shall be dropped from the petition and be required to pursue their remedies in the regular courts of competent jurisdiction.

MODERN PAPER PRODUCTS, INC. vs. CA

Issuance of certificate of revocation (section 135)

Section 3 of P.D. No. 902-A vests upon the SEC absolute jurisdiction, supervision, and control over all corporations, partnerships, or associations which are grantees of primary franchise or license or permit issued by the government to operate in the Philippines. Section 5 thereof grants SEC original and exclusive jurisdiction to hear and decide cases such as petitions of corporations, partnerships, or associations for suspension of payments. As amended by P.D. No. 1758, Section 5 reads in part as follows:

Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over corporations, partnerships and other forms of associations registered with it as expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving:

xxx xxx xxx

d) Petitions of corporations, partnerships or associations to be declared in the state of suspension of payments in cases where the corporation, partnership or association possesses sufficient property to cover all its debts but foresees the impossibility of meeting them when they respectively fall due or in cases where the corporation, partnership or association has no sufficient assets to cover its liabilities, but is under the management of a Rehabilitation Receiver or Management Committee created pursuant to this Decree.

It is axiomatic that jurisdiction is conferred by the Constitution or by 
law. It is indubitably clear from the aforequoted Section 5(d) that only corporations, partnerships, and associations — NOT private individuals — can file with the SEC petitions to be declared in a state of suspension of payments. It logically follows that the SEC does not have jurisdiction to entertain petitions for suspension of payments filed by parties other thancorporations, partnerships, or associations.

NOTE: It is now the RTC who has jurisdiction.

RENE KNECHT SND KNECHT, INC. VS. UNITED CIGARETTE CORP

Amendment or repeal (section 145)

Knecht, Inc. and Rene Knecht, claiming that they had just discovered UCC’s dissolution and that the three-year period to liquidate its affairs had already expired, again questioned before the RTC the validity of the Order granting the writ of execution.  They averred that upon its dissolution, UCC may no longer move for execution. The trial court ordered the issuance of an alias writ of execution in favor of UCC. The CA dismissed the petition. 

In Reburiano vs. Court of Appeals, a case with similar facts, this Court held:

“the trustee (of a dissolved corporation) may commence a suit which can proceed to final judgment even beyond the three-year period (of liquidation) x x x, no reason can be conceived why a suit already commenced by the corporation itself during its existence, not by a mere trustee who, by fiction, merely continues the legal personality of the dissolved corporation, should not be accorded similar treatment – to proceed to final judgment and execution thereof.”  

The dissolution of UCC itself, or the expiration of its three-year liquidation period, should not be a bar to the enforcement of its rights as a corporation.   One of these rights, to be sure, includes the UCC’s right to seek from the court the execution of a valid and final judgment for the benefit of its stockholders, creditors and any other person who may have legal claims against it.  To hold otherwise would be to allow petitioners to unjustly enrich themselves at the expense of UCC.  

SEC VS. INTERPORT RESOURCES CORP.

Cases involving the SEC

Insider Trading

RA 8799 otherwise known as the Securities Regulation Code (SRC), took effect on 8 August 2000. Sec. 8 of PD 902-A, as amended, which created the PED, was already repealed as provided for in Section 76 of the SRC. Thus, under the new law, the PED has been abolished, and the SRC has taken the place of the Revised Securities Act.

  

Section 53 of the SRC clearly provides that criminal complaints for violations of rules and regulations enforced or administered by the SEC shall be referred to the DOJ for preliminary investigation, while the SEC nevertheless retains limited investigatory powers. Additionally, the SEC may still impose the appropriate administrative sanctions under Section 54 of the aforementioned law.

Insider Trading

Section 30 of the Revised Securities Act reads on insider’s duty to disclose when trading explains in simple terms that the insider's misuse of nonpublic and undisclosed information is the gravamen of illegal conduct.  The intent of the law is the protection of investors against fraud, committed when an insider, using secret information, takes advantage of an uninformed investor. Insiders are obligated to disclose material information to the other party or abstain from trading the shares of his corporation.  This duty to disclose or abstain is based on two factors: first, the existence of a relationship giving access, directly or indirectly, to information intended to be available only for a corporate purpose and not for the personal benefit of anyone; and second, the inherent unfairness involved when a party takes advantage of such information knowing it is unavailable to those with whom he is dealing.

   

Sections 30 and 36 of the Revised Securities Act were enacted to promote full disclosure in the securities market and prevent unscrupulous individuals, who by their positions obtain non-public information, from taking advantage of an uninformed public.  No individual would invest in a market which can be manipulated by a limited number of corporate insiders.  Such reaction would stifle, if not stunt, the growth of the securities market.  To avert the occurrence of such an event, Section 30 of the Revised Securities Act prevented the unfair use of non-public information in securities transactions, while Section 36 allowed the SEC to monitor the transactions entered into by corporate officers and directors as regards the securities of their companies. 

CUENCA vs. ATAS, ET AL. 2007

Cases involving the SEC

The Philippine National Construction Corporation is an acquired asset corporation and not a GOCC.  In said case, we held that PNCC did not lose its status as a private corporation upon acquisition by the government through GFIs of the majority of its shares of stock.  Our determination that PNCC is an acquired asset corporation removed it from the category of a GOCC.  Thus, while the SEC has no jurisdiction over GOCCs with original charter or created by special law primarily because they are governed by their charters, it retains jurisdiction over government-acquired asset corporations.  Therefore, the SEC may compel PNCC to hold a stockholders’ meeting for the purpose of electing members of the latter’s board of directors.

PAL VS. PHIL. AIRLINES EMPLOYEES ASS'N.

Cases involving the SEC

SUMNDAD VS. HARRIGAN, ET AL. 2002

Cases involving the SEC

Is it the regular court or the SEC that has jurisdiction over the subject matter of the case? RTC.

With RA. 8799, Securities Regulation Code, it is now the Regional Trial Court and no longer the SEC that has jurisdiction. Under Section 5.2 of Republic Act No. 8799, original and exclusive jurisdiction to hear and decide cases involving intra-corporate controversies have been transferred to a court of general jurisdiction or the appropriate Regional Trial Court.

ANDAYA VS. ABADIA

Cases involving the SEC

ADDITIONAL CASES

POWER HOMES UNLIMITED CORP. VS. SEC

Securities Regulation Code

Whether the business of petitioner involves an investment contract that is considered security and thus, must be registered prior to sale or offer for sale or distribution to the public pursuant to Section 8.1 of R.A. No. 8799 (Securities Regulation Code):

Section 8. Requirement of Registration of Securities. – 8.1. Securities shall not be sold or offered for sale or distribution within the Philippines, without a registration statement duly filed with and approved by the Commission. Prior to such sale, information on the securities, in such form and with such substance as the Commission may prescribe, shall be made available to each prospective purchaser.

An investment contract is defined in the Amended Implementing Rules and Regulations of R.A. No. 8799 as a “contract, transaction or scheme (collectively ‘contract’) whereby a person invests his money in a common enterprise and is led to expect profits primarily from the efforts of others.”

SEC v. Glenn W. Turner Enterprises, Inc. et al.  

It held that a literal reading of the requirement “solely”  would lead to unrealistic results. It reasoned out that its flexible reading is in accord with the statutory policy of affording broad protection to the public. Our R.A. No. 8799 appears to follow this flexible concept for it defines an investment contract as a contract, transaction or scheme (collectively “contract”) whereby a person  invests  his  money  in  a  common  enterprise  and  is  led  to  expect  profits  not solely but primarily from the efforts of others.  Thus, to be a security subject to regulation by the SEC, an investment contract in our jurisdiction must be proved to be:   

1)       an investment of money,

2)      in a common enterprise,

3)      with expectation of profits,

4)      primarily from efforts of others.

An investor enrolls under the scheme of petitioner to be entitled to recruit other investors and to receive commissions from the investments of those directly recruited by him.  Under the scheme, the accumulated amount received by the investor comes primarily from the efforts of his recruits. We therefore rule that the business operation or the scheme of petitioner constitutes an investment contract that is a security under R.A. No. 8799.  

PUBLIC ESTATES AUTHORITY VS. YUJUICO

Petitioner isa creation of PD 1084 as a government corporation wholly owned by the Government. The Court, in fine, holds that petitioner, as and when it sues or sued in the exercise of a governmental function, could come within the category of an exempt agency of government under the Rules.

MALAYANG SAMAHAN NG MGA MANGGAGAWA VS. RAMOS

ANTIPORDA VS. SANDIGANBAYAN

WON the PCGG may vote the shares of the sequestered corporations in the election of the SMC Board of Directors. NO.

The PCGG cannot perform acts of strict ownership of sequestered property.  It is a mere conservator.  It may not vote the shares in a corporation and elect the members of the board of directors.  The only conceivable exception is in a case of a takeover of a business belonging to the government or whose capitalization comes from public funds, but which landed in private hands as in BASECO.

The constitutional right against deprivation of life, liberty and property without due process of law is so well-known and too precious so that the hand of the PCGG must be stayed in its indiscriminate takeover of and voting of shares allegedly ill-gotten in these cases. It is only after appropriate judicial proceedings when a clear determination is made that said shares are truly ill-gotten when such takeover and exercise of acts of strict ownership by the PCGG are justified. It is thus important to determine first if the sequestered corporate shares came from public funds that “landed in private hands.

DEL MAR VS. PAGCOR

WON the PAGCOR has a franchise to operate jai-alai, by itself or with the infrastructure facilities of co-respondents BELLE and FILGAME.

PAGCOR, BELLE and FILGAMES have no franchise to operate jai-alai games)

A "franchise" is a special privilege and its terms and conditions are specifically prescribed by Congress. Thus, the manner of granting the franchise, to whom it may be granted, the mode of conducting the business, the character and quality of the service to be rendered and the duty of the grantee to the public in exercising the franchise are defined in clear and unequivocal language by the legislature. These conditionalities are made more stringent when the franchise involves the operation of a game played for bets, such as jai-alai, which is conceded as a menace to morality. Franchises are granted in accord with this universal principle.

ASSET PRIVATIZATION TRUST VS. SANDIGANBAYAN

JG SUMMIT HOLDINGS VS. CA

A shipyard such as PHILSECO being a public utility as provided by law, the following provision of the Article XII of the Constitution applies:

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

The progenitor of this constitutional provision, Article XIV, Section 5 of the 1973 Constitution, required the same proportion of 60%-40% capitalization.  The JVA between NIDC and Kawasaki manifests the intention of the parties to abide by the constitutional mandate on capitalization of public utilities.

A joint venture is an association of persons or companies jointly undertaking some commercial enterprise with all of them generally contributing assets and sharing risks.  It requires a community of interest in the performance of the subject matter, a right to direct and govern the policy in connection therewith, and duty, which may be altered by agreement to share both in profit and losses. Persons and business enterprises usually enter into a joint venture because it is exempt from corporate income tax. Considered more of a partnership, a joint venture is governed by the laws on contracts and on partnership.  The joint venture created between NIDC and Kawasaki falls within the purview of an “association” pursuant to Section 5 of Article XIV of the 1973 Constitution and Section 11 of Article XII of the 1987 Constitution.  Consequently, a joint venture that would engage in the business of operating a public utility, such as a shipyard, must observe the proportion of 60%-40% Filipino-foreign capitalization.