Corpo 4.docx

1. CHONA Petitioners, vs PAMPANGA I ELECTRIC COOPERATIVE, INC., and LOLIANO E. ALLAS, ESTACIO and LEOPOLDO MANLICLIC,

Respondents. G.R. No. 183196 This is a Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil Procedure assailing the Decision[1] of the Court of Appeals dated 29 May 2008 in CA-G.R. SP No. 93971, which annulled and set aside the Decision dated 30 June 2005 and Resolution dated 24 January 2006 of the National Labor Relations Commission (NLRC) in NLRC-NCR Case No. 040757-04. The NLRC found that petitioners Chona Estacio (Estacio) and Leopoldo Manliclic (Manliclic) were illegally dismissed by respondents Pampanga I Electric Cooperative, Inc. (PELCO I) and Engineer Loliano E. Allas (Engr. Allas), and ordered the reinstatement of petitioners and payment of their backwages. The NLRC reversed the Decision dated 30 April 2004 of the Labor Arbiter in NLRC Case No. RABIII-03-5517-03 dismissing petitioners Complaint for illegal dismissal against respondents for lack of merit. The facts of the case as culled from the records are as follows: Respondent PELCO I is an electric cooperative duly organized, incorporated, and registered pursuant to Presidential Decree No. 269.[2] Respondent Engr. Allas is the General Manager of respondent PELCO I.[3] Petitioner Estacio had been employed at respondent PELCO I as a bill custodian since 1977, while petitioner Manliclic had been working for respondent PELCO I as a bill collector since June 1992.[4] On 22 August 2002, Nelia D. Lorenzo (Lorenzo), the Internal Auditor of respondent PELCO I, submitted her Audit Findings at the San Luis Area Office to respondent Engr. Allas, pertinent portions of which state: Evaluation of the results of physical inventory of bills through reconciliation of records such as aging schedule of consumer accounts receivable balance, collection reports and other related documents revealed 87 bills amounting to One Hundred Twenty Six Thousand Seven Hundred Fifty and 93/100 (P126,750.93) remained unremitted as of August 20, 2002. Accounting of which includes the accountability of Ms. Estacio amounting to One Hundred Twenty Three Thousand Eight Hundred Seven and 14/100 (P123,807.14) representing 86 bills.[5]

Respondent Engr. Allas issued a Memorandum dated 6 September 2002 to petitioner Estacio informing her of the audit findings, and directing her to explain in writing, within 72 hours upon receipt thereof, why no disciplinary action should be imposed upon her for Gross Negligence of Duty under Section 6.6 of Board Policy No. 01-04 dated 23 July 2001. 1

In her written explanation, petitioner Estacio averred that she had no control over and should not be held answerable for the failure of the bill collectors at the San Luis Area Office to remit their daily collections. Petitioner Estacio also asserted that according to her revised job description as a bill custodian, she merely had to ascertain on a daily basis the total bills collected and uncollected by collectors. Any failure on her part to update the bill custodian records by the time the audit was conducted on 9 August 2002 was due to the abnormal weather conditions during July 2002, resulting in the flooding of San Luis and Candaba, Pampanga. Such negligence could not be categorized as gross in character as would warrant the imposition of disciplinary action against her.[6] Unsatisfied

with

petitioner

Estacios

explanation,

respondent

Engr.

Allas

issued

a

Memorandum[7] dated 26 September 2002 charging Estacio with gross negligence of duty. A formal investigation/hearing then ensued, during which petitioner Estacio was duly represented by counsel. The investigating committee, in the report it submitted to respondent Engr. Allas on 23 October 2002, found petitioner Estacio guilty of dishonesty and gross negligence of duty under Section 6.4[8] and Section 6.6,[9]respectively, of Board Policy No. 01-04 dated 23 July 2001; and recommended her dismissal from service with forfeiture of benefits.[10] On 25 October 2002, respondent Engr. Allas rendered a Decision which adopted the recommendation of the investigation committee dismissing petitioner Estacio from service, with forfeiture of her benefits, effective 28 October 2002; with the modification deleting the charge of dishonesty.[11] Petitioner Estacio sought a reconsideration of the said decision but it was denied by respondent Engr. Allas. In the same Audit Findings at the San Luis Area Office submitted to respondent Engineer Allas on 22 August 2002, Internal Auditor Lorenzo reported that petitioner Manliclic, a bill collector, failed to remit to respondent PELCO I management his collection amounting to P4,813.11, as of 20 August 2002. Respondent Engr. Allas issued a Memorandum dated 6 September 2002 directing petitioner Manliclic to explain in writing, within 48 hours from receipt thereof, why no disciplinary action should be taken against him for committing offenses against respondent PELCO I properties,[12] under Section 2.1 of Board Policy No. 01-04 dated 23 July 2001. On 11 September 2002, petitioner Manliclic submitted his written explanation[13]admitting the he used the amount of P4,813.11 from his collection to cover pressing family obligations and requesting two months to pay the same. With this admission, respondent Engr. Allas issued another Memorandum[14] dated 28 September 2002dismissing petitioner Manliclic from service effective 1 October 2002, with forfeiture of benefits. Petitioner Manliclic sought reconsideration[15] of his dismissal, but was rebuffed by respondent Engr. Allas in the latters letter[16] dated 10 October 2002, which reads: Your letter of reconsideration detailed in full the manner by which the amount of P4,813.11 was misappropriated. You admitted having lend (sic) to Joselito Ocampo 2

the sum of P3,719.75 and this is supported by the affidavit of admission of said Mr. Joselito Ocampo which was duly notarized by Notary Public, Juan Manalastas. Thus, said affidavit is taken by management as gospel truth. This affidavit does not however exculpate you from the offense of misappropriation, defined and penalized under Section 2, paragraph 2.1 ON COOP FUNDS (2.1.2, 2.1.3 & 2.1.4) of the Board Policy No. 27-96 and Administrative Policy No. 10-89. If we may inform you the money you collected are held in trust by you so that you have to remit the same to the cooperative (San Luis Area Office) at the proper time. You should not take the liberty of lending them to any co-employee because you have to account for them to the last centavo at the end of the collection day. In view of the foregoing, it is sad to say that your letter of reconsideration is hereby denied.[17]

From respondent Engr. Allas actions on their administrative case, petitioners Estacio and Manliclic separately filed with the Board of Directors of respondent PELCO I their memoranda of appeal.[18] The Board of Directors of respondent PELCO I subsequently passed two resolutions, with essentially the same contents, i.e., Resolutions No. 38[19] dated 15 November 2002 and No. 39,[20] dated 25 November 2002, respectively. In said Resolutions, the Board of Directors of respondent PELCO I reinstated petitioners to their positions without loss of seniority, and ordered respondent Engr. Allas to pay in full the salaries and other incentives accruing to petitioners after deducting the first 15 days of their suspension. Notwithstanding the approval of Resolutions No. 38 and No. 39, respondent Engr. Allas refused to reinstate petitioners and proceeded to dismiss them from service.Addressing the Board of Directors of respondent PELCO I, respondent Engr. Allas stated in his letter dated 29 November 2002[21]: The act of reducing their penalties is a gross abuse of authority and commission of acts inimical to the interest of the cooperative and the public at large because you have no authority to do so since Board Policy No. 01-04 of PELCO I clearly provides the penalty of dismissal for the offenses they were found guilty. Your honors authority to act is governed by the rules as provided in the aforesaid Board Policy. Going beyond that is abuse of authority instead of protecting the interest of the cooperative you protected the employees who through their acts depleted the earnings and funds of the cooperative. In a letter dated 9 December 2002 by Regional Director Alberto A. Guiang of the National Electrification Administration (NEA) to the Board of Directors of respondent PELCO I, he wrote: THE BOARD OF DIRECTORS Pampanga I Electric Cooperative, Inc. (PELCO I) Mexico, Pampanga 3

Gentlemen: This has reference to your Board Resolution No. 38 and 39 series of 2002, granting the letters of appeal of Ms. Chona Estacio and Mr. Leopoldo Manliclic for reinstatement of their positions to the PELCO I workforce. While we appreciate your concern to the coop operation, we wish to call your attention to the NEA Guidelines dated 27 January 1995, specifying the delineation of Roles of EC Board of Directors and General Managers, and on Memorandum No. 35. Accordingly, the Board is not vested with the authority to hire and fire nor rehire employees. The General Manager is the only authorized official for this matter, while the Board has to formulate policies nor guidelines only for the GM to implement. This office carefully reviewed the facts surrounding the issues raised by the concerned parties, and we found that due process was undertaken after rendering the decision by the General Manager on this matter, and should be enforced. This is healthy move of eradicating dishonesty and inefficiency among the employees. Thus, the disapproval of the above resolutions. Thank you. Very truly yours, (SGD)ALBERTO A. GUIANG[22] NEA through Regional Director Alberto A. Guiang issued another letter to the Board of Directors of respondent PELCO I dated 10 December 2002 stating that it was disapproving Resolution No. 39 issued by the Board of Directors of respondent PELCO I granting the letter of appeal of petitioners.[23] The foregoing events prompted petitioners to file with the NLRC, Regional Arbitration Board (RAB)-III, City of San Fernando, Pampanga, their Complaints[24]against respondents for illegal dismissal and payment of backwages, 13th month pay, and other benefits. The Complaints were docketed as NLRC Case No. RABIII-03-5517-03. In a Decision dated 30 April 2004, the Labor Arbiter ruled in favor of respondents, for the following reasons: Respondents under their onus were required to show that [herein petitioners] were dismissed for cause. As to [petitioner] Chona Estacio respondents contended that she was guilty of gross negligence of duty under sec. 6.6.6. of its Employees Code of Discipline (Board Policy 0104). Respondents have shown that [petitioner] Estacio failed to carry out her duties and responsibilities as a bill custodian per the latters job description more particularly no. 2 and no. 3 of her detailed duties, namely: 4

2. Maintains an accurate record of all Official Electric Bill Receipts (OERB) issued to and returned by collectors, and sees to it that the same are properly signed or initialed by the collector as clearance to any accountability; 3. Accounts and ascertains on a daily basis the total bills collected and uncollected by collectors and those bills paid in the office by consumers through the maintenance of bill route control and related record (Annex 1 of respondents Reply). It was likewise shown that this infraction carries the penalty of dismissal. Record also showed that the requirements of procedural due process was afforded the [petitioner] before she was finally separated. In the case of [petitioner] Manliclic, respondents were able to show with the admission of the former that sec. 2, subsection 2.1, pars. 2.1.2 to 2.1.4 of Board Policy No. 01-04 were violated by [petitioner]. The same violations carry the penalty of dismissal. The procedural requirements of notice and hearing were likewise afforded [petitioner] Manliclic before he was finally terminated. In view of the above, we hold that there is no illegal dismissal.[25]

In the end, the Labor Arbiter decreed: WHEREFORE, premises considered, judgment is hereby rendered dismissing instant complaint for illegal dismissal for lack of merit. However, respondents are held liable and ordered to pay [petitioners] the following: Service Incentive 13th month pay Leave pay 1. Chona Estacio P5,765.19 P5,074.03 2. Leopoldo Manliclic 8,294.19 6,596.25 All other claims are hereby dismissed for utter lack of merit.[26]

Disgruntled with the Labor Arbiters Decision, petitioners appealed to the NLRC. The appeal was docketed as NLRC-NCR Case No. 040757-04. The NLRC, in its Decision dated 30 June 2005, disagreed with the Labor Arbiter:

5

There is nothing on record showing that Resolution No. 39, Series of 2002 is null and void. Neither is there any evidence on record showing that there is legal basis to hold the December 9 and 10, 2002 letters of Alberto A. Guiang, Regional Director, National Electrification Administration (NEA), Regional Electrification Office III as having nullified Resolution No. 39, Series of 2002. For what the mentioned letters may be worth, we are convinced they were nothing but mere opinions which bear no weight on the labor dispute obtaining between complainants and respondents. Verily, complainants employer is Pampanga I Electric Cooperative, Inc. (PELCO), not the National Electrification Administration (NEA). Finally, jurisprudence teaches us that the Court, out of its concern for those less privileged in life, has inclined towards the worker and upheld his cause on his conflicts with the employer (Revidad vs. NLRC, 245 SCRA 356). Time and again we have held that should doubts exist between the evidence presented by the employer and the employee, the scales of justice must be tilted in favor of the latter (Asuncionvs. NLRC, G.R. No. 129329, July 31, 2001). This favored treatment is directed by the social justice policy of the Constitution (Article II of the 1987 Constitution), and embodied in Articles 3 and 4 of the Labor Code.[27]

The dispositive portion of the NLRC Decision[28] reads: WHEREFORE, premises considered, the decision appealed from is hereby MODIFIED. The findings a quo dismissing the complaint for illegal dismissal is REVERSED and SET ASIDE and a new one entered finding [herein petitioners] to have been illegally dismissed by respondents. Accordingly, respondents are hereby ordered to reinstate [petitioners] and pay them backwages pursuant to Article 279 of the Labor Code.The rest of the assailed decision is AFFIRMED. Let the Arbitration Branch of origin render the appropriate computations of [petitioners] backwages.[29]

Respondents filed a Motion for Reconsideration[30] of the NLRC Decision dated 30 June 2005, asking the Commission to affirm, instead, the Decision dated 30 April 2004 of the Labor Arbiter which dismissed petitioners Complaints for illegal dismissal for lack of merit. On 24 January 2006, the NLRC promulgated its Resolution[31] denying respondents Motion for Reconsideration.[32]

Respondents elevated their case to the Court of Appeals via a Petition for Certiorari, under Rule 65 of the 1997 Rules of Civil Procedure, docketed as CA-G.R. SP No. 93971. 6

In a Decision dated 29 May 2008, the Court of Appeals held: We agree with the [herein respondents], who was joined by the Labor Arbiter in their stance, pointing out that if only [herein petitioner] Estacio had conscientiously performed her duties in accordance with the revised job description of a bill custodian, then the unremitted collection of P123,807.14, representing different collection periods from July 3, 5, 6, 10, 23, 26, 27, 31 to August 1, 3, 5, 7, 2002, in the hands of the bill collector could have been discovered earlier and could not have accumulated to a bigger amount. [Petitioner] Estacios excuse that if she was not able to update the records of the Bill Custodian at the time when the audit was made on August 9, 2002, it is because due to the abnormal weather condition on the month of July 2002 when San Luis and Candaba were flooded, was correctly rejected by [respondents] for being insufficient justification since the whole month of July 2002 was not flooded and she was only on leave for a total of five (5) days. So also, from the evidence adduced by [respondents], it has been adequately established that [herein petitioner] Manliclic violated Section 2.1 of the Revised Employees Code of Discipline under Board Policy No.` 01-04 for failure on his part to remit/turn-over his collection to the management and misappropriating the same for his own personal use and benefit, constituting serious misconduct.[33]

The Court of Appeals disposed of CA-G.R. SP No. 93971, thus: WHEREFORE, premised considered, the instant petition is GRANTED. The assailed Decision dated June 30, 2005 and the Resolution dated January 24, 2006 rendered by public respondent NLRC are hereby ANNULLED and SET ASIDE. The Decision dated 30 April 2004 of the Labor Arbiter in NLRC Case No. RAB-III-03-5517-03 is REINSTATED.[34]

Petitioners did not file a Motion for Reconsideration to the Court of Appeals. Petitioners now come to this Court raising the following issues in the instant Petition: I. WHETHER OR NOT THE DECISION OF THE COURT OF APPEALS IS IN ACCORDANCE WITH LAW AND APPLICABLE DECISION OF THE SUPREME COURT AND ITS FINDINGS AND CONCLUSIONS WHICH ARE BASED ON MISAPPREHENSION OF FACTS WITHOUT CITATION OF SPECIFIC EVIDENCE OF WHICH THEY ARE PREMISED DUE TO THE APPARENT REASON THAT THEY WERE NOT SUPPORTED BY EVIDENCE AND CONTRADICTED BY RECORDS, SHALL PREVAIL OR PREPONDERATE OVER THE DECISION OF THE NLRC, WHICH IS SUPPORTED BY EVIDENCE ADDUCED BY BOTH PARTIES, LAWS, APPLICABLE JURISPRUDENCE AND CONSTITUTIONAL PROVISIONS. II. WHETHER OR NOT THE COURT OF APPEALS ACTED IN ACCORDANCE WITH EVIDENCE ON RECORD, APPLICABLE LAWS AND JURISPRUDENCE WHEN IT 7

RULED THAT RESOLUTIONS NOS. 38 AND 39 GRANTING THE LETTERS OF APPEAL OF ESTACIO AND MANLICLIC AND ORDERING THEIR REINSTATEMENT WITHOUT LOSS OF SENIORITY RIGHTS AND THE PAYMENT OF THEIR BACKWAGES INVALID. III WHETHER OR NOT THE COURT OF APPEALS ACTED IN ACCORDANCE WITH LAWS, ESTABLISHED JURISPRUDENCE AND CONSTITUTIONAL MANDATES WHEN IT RULED THAT RESPONDENT ALLAS AS GENERAL MANAGER OF PELCO I HAS THE SOLE PREROGATIVE AND POWER TO SUSPEND AND/OR DISMISS THE EMPLOYEES OF PELCO I, BASED ON NATIONAL ELECTRIFICATION ADMINISTRATION BULLETIN NO. 35. IV. WHETHER OR NOT THE FINDINGS OF THE COURT OF APPEALS COMMITTED SERIOUS ERRORS IN IGNORING OR THRUSTING ASIDE THE UNDISPUTED FACTS THAT THE PETITION FOR CERTIORARI FILED BY ALLAS TO THE COURT OF APPEALS WHICH WAS VERIFIED BY HIM WITHOUT BOARD RESOLUTION OF PELCO I BOARD OF DIRECTORS ASSAILING OR QUESTIONING RESOLUTIONS NO. 38 AND 39 OF PELCO I BOARD OF DIRECTORS DISCLOSED HIS LACK OF LEGAL PERSONALITY CONSIDERING THAT THE LATTER IS THE GOVERNING BODY OF PELCO I, AND HAS THE DIRECT INTEREST AND CONTROL OF ITS CORPORATE POWERS AND IN OVERLOOKING OR DISREGARDING THE FACT THAT RESOLUTION NO. 53-06 BELATEDLY ISSUED BY ANOTHER SET OF MEMBERS OF BOARD OF DIRECTORS OF PELCO I ATTACHED BY ALLAS IN A MOTION FOR RECONSIDERATION IN EFFECT RATIFIED OR CONSENTED ALLAS PETITION QUESTIONING OR ASSAILING PELCO I BOARD OF DIRECTORS VERY OWN RESOLUTIONS NO. 38 AND 39 EARLIER PROMULGATED BY DIFFERENT SET OF MEMBERS OF BOARD OF DIRECTORS, DEBAR OR PRECLUDE PELCO I FOR DOING SO, FOR IT IS AN OBVIOUS INSTANCE OF ESTOPPEL AND LACHES AND AN ELOQUENT PROOF OF AFTERTHOUGHT. V. WHETHER OR NOT RESOLUTIONS NO. 38 AND 39 WHICH WAS (sic) UPHELD BY THE NLRC IS IN ACCORDANCE WITH LAW, SETTLED JURISPRUDENCE AND CONSTITUTIONAL MANDATES.[35]

Before delving into the substantial issues in this case, the Court must first resolve the procedural issue of whether respondent Engr. Allas had the legal personality to file before the Court of Appeals the Petition in CA-G.R. SP No. 93971. The Court answers in the affirmative. It bears to stress that petitioners themselves filed their Complaints before the NLRC against both respondents PELCO I and Engr. Allas. Respondent Engr. Allas participated in the proceedings before the Labor Arbiter and the NLRC. As a party aggrieved by the NLRC decision and resolution, respondent

8

Engr. Allas had a substantial interest to file with the Court of Appeals the Petition for Certiorari under Rule 65 of the 1997 Revised Rules of Civil Procedure, on his own behalf.[36] As for respondent Engr. Allas authority to file the same Petition on behalf of respondent PELCO I, it is evidenced by Board Resolution No. 53-06,[37] approved by the Board of Directors of the cooperative on 5 August 2006. Even though Board Resolution No. 53-06 was belatedly filed, the Court of Appeals rightfully accepted the same. In the present case, the findings and conclusion of the Labor Arbiter and the NLRC are at odds, and the case concerns a labor matter to which our fundamental law mandates the state to give utmost priority and full protection.[38] Necessarily, this Court will look beyond alleged technicalities to open the way for resolution of substantive issues.[39] The Court cannot subscribe to petitioners argument that after passing Resolutions No. 38 and No. 39 reversing petitioners dismissal from service and ordering that they be reinstated and paid their backwages, the Board of Directors of respondent PELCO I was estopped from subsequently passing Board Resolution No. 53-06. The Board Resolution authorized respondent Engr. Allas to file the Petition for Certiorari with the Court of Appeals, challenging the NLRC judgment that petitioners were illegally dismissed. Estoppel, an equitable principle rooted upon natural justice, prevents persons from going back on their own acts and representations, to the prejudice of others who have relied on them.[40] The party claiming estoppel must show the following elements: 1) lack of knowledge and of the means of knowledge of the truth as to the facts in question; 2) reliance in good faith, upon the conduct or statements of the party to be estopped; and 3) action or inaction based thereon of such character as to change the position or status of the party claiming the estoppel, to his injury, detriment or prejudice.[41]

In this case, the essential elements of estoppel are inexistent.[42] The first element is unavailing in the case at bar. Petitioners have the knowledge and the means of knowledge of the truth as to the facts in question. In issuing Resolutions No. 38 and No. 39, the Board of Directors of respondent PELCO I relayed its initial determination that petitioners dismissal from service was harsh and drastic. These Resolutions merely expressed the position of the Board of Directors of respondent PELCO I at the time of their issuance. The subsequent passing of Board 9

Resolution No. 53-06 by the same Board of Directors of respondent PELCO I, explicitly conveyed a change of mind, i.e., the Board now wanted to contest, through respondent Engr. Allas, the finding of the NLRC that petitioners were illegally dismissed. Without any basis, the Court cannot conclude that by the mere issuance of Board Resolution No. 53-06, the Board of Directors of respondent PELCO I committed false representation or concealment of material facts in its earlier Resolutions No. 38 and No. 39. What is apparent to this Court, on the face of these Resolutions, is that the Board of Directors of respondent PELCO I eventually arrived at a different conclusion after reviewing the very same facts, which it considered for Resolutions No. 38 and No. 39. Also, Board Resolution No. 53-06 was unanimously passed by all the directors of respondent PELCO I. There is no allegation, much less, evidence, of any irregularity committed by the Board in the approval and issuance of said Board Resolution. Hence, the Court cannot simply brush Board Resolution No. 53-06 aside.Questions of policy and of management are left to the honest decision of the officers and directors of a corporation (or in this case, cooperative), and the courts are without authority to substitute their judgment for the judgment of the board of directors. The board is the business manager of the corporation, and so long as it acts in good faith, its orders are not reviewable by the courts.[43] Moreover, petitioners were unable to establish the third element of estoppel. It bears stressing that if there be any injury, detriment, or prejudice to the petitioners by the action of the Board of Directors in passing Resolution Nos. 38 and 39 and subsequently Resolution No. 53-06, such injury was due to petitioners own fault.Petitioner Estacio failed to account for and ascertain on a daily basis a total of 86 bills collected and uncollected by the bill collectors of PELCO I, resulting in unremitted bills amounting to P123,807.14. In the case of petitioner Manliclic, he admitted having used the amount of P4,813.111 from his collection. Estoppel is a shield against injustice; a party invoking its protection should not be allowed to use the same to conceal his or her own lack of diligence.[44] To be sure, estoppel cannot be sustained by mere argument or doubtful inference; it must be clearly proved in all its essential elements by clear, convincing and satisfactory evidence.[45] The Court then proceeds to resolve the substantive issue of whether petitioners were illegally dismissed by respondents. The requisites for a valid dismissal are: (a) the employee must be afforded due process, i.e., he must be given an opportunity to be heard and defend himself; and (b) the dismissal must be for a valid cause as provided in Article 282[46] of the Labor Code or for any of the authorized causes under Articles 283[47] and 284[48] of the same Code.

10

Well-settled is the rule that the essence of due process is simply an opportunity to be heard or as applied to administrative proceedings, an opportunity to explain one's side or an opportunity to seek a reconsideration of the action or ruling complained of.[49] It is undisputed that petitioners were accorded due process. Through the Memoranda issued by respondent Engr. Allas, petitioners were duly informed of the results of the audit conducted by Internal Auditor Lazaro, which were unfavorable to petitioners.Petitioners were given a chance to submit their written explanations. As to petitioner Estacio, a formal hearing/investigation was even conducted by an investigating committee. Only thereafter, did respondent Engr. Allas notify petitioners Estacio and Manliclic, through a Decision dated 25 October 2002 and Memorandum dated 28 September 2002, respectively, that they were found guilty of the charges against them and were being dismissed from service. Both petitioners had the opportunity to seek reconsideration of their dismissal. The Court also finds that there was valid cause for petitioner Estacios dismissal. Petitioner Estacio was dismissed from service for the commission of an offense under Board Policy No. 01-04 dated 23 July 2001 of respondent PELCO I, particularly: Section 6.6 On Negligence of Duty 6.6.6 Gross negligence in assigned tasks/duties as specified in the job description. Gross negligence connotes want or absence of or failure to exercise even slight care or diligence, or the total absence of care. It evinces a thoughtless disregard of consequences without exerting any effort to avoid them. To warrant removal from service, the negligence should not merely be gross, but also habitual.[50] A single or isolated act of negligence does not constitute a just cause for the dismissal of the employee.[51] In JGB and Associates, Inc. v. National Labor Relations Commission,[52] the Court further declared that gross negligence connotes want of care in the performance of ones duties. Habitual neglect implies repeated failure to perform ones duties for a period of time, depending upon the circumstances. Fraud and willful neglect of duties imply bad faith of the employee in failing to perform his job, to the detriment of the employer and the latters business. To determine if indeed petitioner Estacio was grossly negligent in the performance of her duties, the Court must first understand what her duties were.Petitioner Estacio, as a bill custodian of respondent PELCO I

11

1.

Issues and accounts all electric bills issued to and returned by collectors as well as paid office bills and shall be accountable and liable for all uncollected bills under his/her custody.

2.

Maintains an accurate record of all Official Electric Bill Receipts (OEBR) issued to and returned by collectors, and sees to it that the same are properly signed or initialed by the collector as clearance to any accountability.

3.

Accounts and ascertains on a daily basis the total bills collected and uncollected by collectors and those bills paid in the office by consumers through the maintenance of bill route control and related records;

4.

Prepares listings of delinquent consumers due for disconnection;

5.

Issues or certifies to the clearance of accounts of consumers before reconnection or change of billing names is effected.

6.

Issues bills due from employees to be deducted from their respective pay and correspondingly logs the same in the bill route control;

7.

Files in an orderly and systematic manner all the pertinent electric bills and other related documents in her possession for easy access and reference;

8.

Performs other duties that may be assigned from time to time.[53]

There is no more question that petitioner Estacio did fail to account for and record the bill collections for eight days of July and four days of August 2002. As a result of petitioner Estacios improper accounting and records keeping, the amount of P123,807.14 remains unremitted to respondent PELCO I. As correctly observed by the investigating committee of PELCO[54]: From the record of the case and investigation conducted it appears that Ms. Estacio as the designated Bill Custodian at San Luis Area Office is responsible for the safekeeping of consumers of electric bills especially the unpaid or uncollected bills.That for control and accounting purposes, she has to account daily all collected and uncollected bills in her custody including the bills paid in the office. That in issuing the bills to the bill collectors, she has to maintain an accurate record which is the basic tool in maintaining and controlling all the bills in her possession. Then in case the collectors do not return the bills uncollected and do not make a report of the collected bills in a day, as Bill Custodian, it is also her duty to require the collectors to return the bills and make a report of the collected bills. If the collector still failed to do such, the custodian should report the matter to the immediate supervisor or Area Manager. But sad to say Ms. Estacio failed to perform all the above stated duties which resulted to the accumulation of unremitted bills (86) amounting to P123,807.14.

12

If only Ms. Estacio is performing her duties as Bill Custodian in accordance with what is prescribed on the job description these unremitted collections could have been discovered earlier and did not accumulate to a bigger amount. Petitioner Estacio, despite the opportunities given to her, did not offer any satisfactory explanation or evidence in her defense. Her only reason for failing to comply with the requisite daily accounting and reporting of the bill collections was the terrible weather condition during the month of July 2002, which resulted in the flooding of the San Luis and Candaba area in Pampanga, hence, keeping her from going to work. Like the investigating committee, the Labor Arbiter, and the Court of Appeals, this Court is unconvinced. Petitioner Estacio was on leave for only five days of July 2002. She had the occasion to update her records on the bill collections during the other days of July and August 2002, when the weather was fine and she was able to report for work; yet, she still did not do so. She waited until her infraction was discovered during the conduct of the internal audit, only to proffer a feeble excuse. Petitioner Estacios failure to make a complete accounting and reporting of the bill collections plainly demonstrated her disregard for one of her fundamental duties as a bill custodian. It was an omission repeated by petitioner Estacio for several days, spanning several billing periods for July and August 2002; thus, she allowed, during the said period, the accumulation of the amounts unremitted by bill collectors to respondent PELCO I, until these reached the substantial amount of P123,807.14. All the foregoing considered, the Court can only conclude that there was valid cause to dismiss petitioner Estacio for gross and habitual negligence. Similarly, the Court rules that there is valid cause for petitioner Manliclics dismissal from service. To recall, petitioner Manliclic, a bill collector, admitted to having used the amount of P4,813.11 from his collection, lending P3,719.75 thereof to a Joselito Ocampo and presumably keeping the rest to himself. This qualifies as an offense against properties of respondent PELCO I, which may be committed by any of the means described in Section 2.1 of Board Policy No.01-04 dated 23 July 2001, to wit: 2.1.1. Malversation of Coop funds or other financial securities and such other funds or other financial securities in the care and custody of or entrusted to the Coop for which it maybe held liable. 2.1.2. Failure to remit collection and/or failure to turn-over materials/equipments due the Coop within the required period of time pursuant to Coop policies and rules and regulations. (Depending on the gravity as a result of the offense.) 2.1.3. Malversing/misappropriating or withholding Coop funds or any attempt/frustration thereof.[55] 13

In Piedad v. Lanao del Norte,[56] Warlito Piedad was a bill collector with the Lanao del Norte Electric Cooperative. Upon audit, Piedad was found to have incurred a shortage in his cash collection in the amount of P300.00. He acknowledged having used said amount. The Court affirmed Piedads termination from service on account of such shortage, despite his having rendered nine years of unblemished service and being awarded as Collector of the Year. We expostulated in that case that it was neither with rhyme nor reason that the petitioner was dismissed from employment.His acts need not have resulted in material damage or prejudice before his dismissal on grounds of loss of confidence may be effected. Being charged with the handling of company funds, the petitioners position, though generally described as menial, was, nonetheless, a position of trust and confidence. No company can afford to have dishonest bill collectors. In Garcia v. National Labor Relations Commission,[57] Evelyn Garcia, a cashier at a school, committed several irregularities in handling school funds. The Court upheld her dismissal from service on the ground of breach of trust. Bearing in mind that the position of cashier is a highly sensitive position, requiring as it does the attributes of absolute trust and honesty because of the temptations attendant to the daily handling of money, it could not be helped that Garcia's acts would sow mistrust and loss of confidence on the part of respondent employer. Petitioner Manliclics honesty and integrity are the primary considerations for his position as a bill collector because, as such, he has in his absolute control and possession -- prior to remittance -- a highly essential property of the cooperative, i.e., its collection. Respondent PELCO I, as the employer, must be able to have utmost trust and confidence in its bill collectors. The amount misappropriated by petitioner Manliclic is irrelevant. More than the resulting material damage or prejudice, it is petitioner Manliclics very act of misappropriation that is offensive to respondent PELCO I. If taxes are the lifeblood of the state, then, by analogy, the payment collection is the lifeblood of the cooperative.The collection provides respondent PELCO I with the financial resources to continue its operations. Respondent PELCO I cannot afford to continue in its employ dishonest bill collectors. By his own admission, petitioner Manliclic committed a breach of the trust reposed in him by his employer, respondent PELCO I. This constitutes valid cause for his dismissal from service. WHEREFORE, premises considered, the instant Petition is DENIED and the Decision dated 29 May 2008 of the Court of Appeals in CA-G.R. SP No. 93971 is AFFIRMED. No costs. SO ORDERED.

14

FIRST DIVISION PAUL LEE TAN, ANDREW G.R. No. 153468 LIUSON, ESTHER WONG, STEPHEN CO, JAMES TAN, Present: JUDITH TAN, ERNESTO TANCHI JR., EDWIN NGO, PANGANIBAN, CJ.,Chairperson, VIRGINIA KHOO, SABINO YNARES-SANTIAGO, PADILLA JR., EDUARDO P. AUSTRIA-MARTINEZ,

LIZARES and GRACE CALLEJO, SR., and CHRISTIAN HIGH SCHOOL, CHICO-NAZARIO, JJ. Petitioners,

- versus PAUL SYCIP and MERRITTO LIM, Promulgated: Respondents. August 17, 2006 x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x

DECISION PANGANIBAN, CJ.: For stock corporations, the quorum referred to in Section 52 of the Corporation Code is based on the number of outstanding voting stocks. For nonstock corporations, only those who are actual, living members with voting rights shall be counted in determining the existence of a quorum during members meetings. Dead members shall not be counted. The Case The present Petition for Review on Certiorari[1] under Rule 45 of the Rules of Court seeks the reversal of the January 23[2] and May 7, 2002,[3]Resolutions of the Court of Appeals (CA) in CA-GR SP No. 68202. The first assailed Resolution dismissed the appeal filed by petitioners with the CA. Allegedly, without the proper authorization of the other petitioners, the Verification and Certification of Non-

15

Forum Shopping were signed by only one of them -- Atty. Sabino Padilla Jr. The second Resolution denied reconsideration. The Facts Petitioner Grace Christian High School (GCHS) is a nonstock, non-profit educational corporation with fifteen (15) regular members, who also constitute the board of trustees.[4] During the annual members meeting held on April 6, 1998, there were only eleven (11)[5] living member-trustees, as four (4) had already died. Out of the eleven, seven (7)[6]attended the meeting through their respective proxies. The meeting was convened and chaired by Atty. Sabino Padilla Jr. over the objection of Atty. Antonio C. Pacis, who argued that there was no quorum.[7] In the meeting, Petitioners Ernesto Tanchi, Edwin Ngo, Virginia Khoo, and Judith Tan were voted to replace the four deceased member-trustees.When the controversy reached the Securities and Exchange Commission (SEC), petitioners maintained that the deceased member-trustees should not be counted in the computation of the quorum because, upon their death, members automatically lost all their rights (including the right to vote) and interests in the corporation.SEC Hearing Officer Malthie G. Militar declared the April 6, 1998meeting null and void for lack of quorum. She held that the basis for determining the quorum in a meeting of members should be their number as specified in the articles of incorporation, not simply the number of livingmembers.[8] She explained that the qualifying phrase entitled to vote in Section 24 [9] of the Corporation Code, which provided the basis for determining a quorum for the election of directors or trustees, should be read together with Section 89.[10] The hearing officer also opined that Article III (2)[11] of the By-Laws of GCHS, insofar as it prescribed the mode of filling vacancies in the board of trustees, must be interpreted in conjunction with Section 29[12] of the Corporation Code. The SEC en banc denied the appeal of petitioners and affirmed the Decision of the hearing officer in toto.[13] It found to be untenable their contention that the word members, as used in Section 52[14] of the Corporation Code, referred only to the living members of a nonstock corporation.[15] As earlier stated, the CA dismissed the appeal of petitioners, because the Verification and Certification of Non-Forum Shopping had been signed only by Atty. Sabino Padilla Jr. No Special Power of Attorney had been attached to show his authority to sign for the rest of the petitioners. Hence, this Petition.[16] Issues Petitioners state the issues as follows:

Petitioners principally pray for the resolution of the legal question of whether or not in NON-STOCK corporations, dead members should still be counted in determination of quorum for purposed of conducting the Annual Members Meeting. Petitioners have maintained before the courts below that the DEAD members should no longer be counted in computing quorum primarily on the ground that members rights 16

are personal and non-transferable as provided in Sections 90 and 91 of the Corporation Code of the Philippines. The SEC ruled against the petitioners solely on the basis of a 1989 SEC Opinion that did not even involve a non-stock corporation as petitioner GCHS. The Honorable Court of Appeals on the other hand simply refused to resolve this question and instead dismissed the petition for review on a technicality the failure to timely submit an SPA from the petitioners authorizing their co-petitioner Padilla, their counsel and also a petitioner before the Court of Appeals, to sign the petition on behalf of the rest of the petitioners. Petitioners humbly submit that the action of both the SEC and the Court of Appeals are not in accord with law particularly the pronouncements of this Honorable Court in Escorpizo v. University of Baguio (306 SCRA 497), Robern Development Corporation v. Quitain (315 SCRA 150,) and MC Engineering, Inc. v. NLRC, (360 SCRA 183). Due course should have been given the petition below and the merits of the case decided in petitioners favor.[17] In sum, the issues may be stated simply in this wise: 1) whether the CA erred in denying the Petition below, on the basis of a defective Verification and Certification; and 2) whether dead members should still be counted in the determination of the quorum, for purposes of conducting the annual members meeting. The Courts Ruling The present Petition is partly meritorious. Procedural Issue:

Verification and Certification of Non-Forum Shopping

The Petition before the CA was initially flawed, because the Verification and Certification of NonForum Shopping were signed by only one, not by all, of the petitioners; further, it failed to show proof that the signatory was authorized to sign on behalf of all of them. Subsequently, however, petitioners submitted a Special Power of Attorney, attesting that Atty. Padilla was authorized to file the action on their behalf.[18] In the interest of substantial justice, this initial procedural lapse may be excused. [19] There appears to be no intention to circumvent the need for proper verification and certification, which are aimed at assuring the truthfulness and correctness of the allegations in the Petition for Review and at discouraging forum shopping.[20] More important, the substantial merits of petitioners case and the purely legal question involved in the Petition should be considered special circumstances [21] or compelling reasons that justify an exception to the strict requirements of the verification and the certification of non-forum shopping.[22] Main Issue:

Basis for Quorum Generally, stockholders or members meetings are called for the purpose of electing directors or trustees[23] and transacting some other business calling for or requiring the action or consent of the 17

shareholders or members,[24] such as the amendment of the articles of incorporation and bylaws, sale or disposition of all or substantially all corporate assets, consolidation and merger and the like, or any other business that may properly come before the meeting. Under the Corporation Code, stockholders or members periodically elect the board of directors or trustees, who are charged with the management of the corporation.[25] The board, in turn, periodically elects officers to carry out management functions on a day-to-day basis. As owners, though, the stockholders or members have residual powers over fundamental and major corporate changes. While stockholders and members (in some instances) are entitled to receive profits, the management and direction of the corporation are lodged with their representatives and agents -- the board of directors or trustees.[26] In other words, acts of management pertain to the board; and those of ownership, to the stockholders or members. In the latter case, the board cannot act alone, but must seek approval of the stockholders or members.[27] Conformably with the foregoing principles, one of the most important rights of a qualified shareholder or member is the right to vote -- either personally or by proxy -- for the directors or trustees who are to manage the corporate affairs.[28] The right to choose the persons who will direct, manage and operate the corporation is significant, because it is the main way in which a stockholder can have a voice in the management of corporate affairs, or in which a member in a nonstock corporation can have a say on how the purposes and goals of the corporation may be achieved.[29] Once the directors or trustees are elected, the stockholders or members relinquish corporate powers to the board in accordance with law. In the absence of an express charter or statutory provision to the contrary, the general rule is that every member of a nonstock corporation, and every legal owner of shares in a stock corporation, has a right to be present and to vote in all corporate meetings. Conversely, those who are not stockholders or members have no right to vote.[30] Voting may be expressed personally, or through proxies who vote in their representative capacities.[31] Generally, the right to be present and to vote in a meeting is determined by the time in which the meeting is held.[32] Section 52 of the Corporation Code states: Section 52. Quorum in Meetings. Unless otherwise provided for in this Code or in the bylaws, a quorum shall consist of the stockholders representing a majority of the outstanding capital stock or a majority of the members in the case of non-stock corporations. In stock corporations, the presence of a quorum is ascertained and counted on the basis of the outstanding capital stock, as defined by the Code thus: SECTION 137. Outstanding capital stock defined. The term outstanding capital stock as used in this Code, means the total shares of stock issued under binding subscription agreements to subscribers or stockholders, whether or not fully or partially paid, except treasury shares. (Underscoring supplied)

The Right to Vote in Stock Corporations

The right to vote is inherent in and incidental to the ownership of corporate stocks.[33] It is settled that unissued stocks may not be voted or considered in determining whether a quorum is present in a stockholders meeting, or whether a requisite proportion of the stock of the corporation is voted to 18

adopt a certain measure or act. Only stock actually issued and outstanding may be voted.[34] Under Section 6 of the Corporation Code, each share of stock is entitled to vote, unless otherwise provided in the articles of incorporation or declared delinquent[35] under Section 67 of the Code. Neither the stockholders nor the corporation can vote or represent shares that have never passed to the ownership of stockholders; or, having so passed, have again been purchased by the corporation.[36] These shares are not to be taken into consideration in determining majorities. When the law speaks of a given proportion of the stock, it must be construed to mean the shares that have passed from the corporation, and that may be voted.[37] Section 6 of the Corporation Code, in part, provides: Section 6. Classification of shares. The shares of stock of stock corporations may be divided into classes or series of shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of incorporation: Provided, That no share may be deprived of voting rights except those classified and issued as preferred or redeemable shares, unless otherwise provided in this Code: Provided, further, that there shall always be a class or series of shares which have complete voting rights. xxxxxxxxx Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such shares shall nevertheless be entitled to vote on the following matters: 1. 2. 3. 4. 5. 6. 7. 8.

Amendment of the articles of incorporation; Adoption and amendment of by-laws; Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporation property; Incurring, creating or increasing bonded indebtedness; Increase or decrease of capital stock; Merger or consolidation of the corporation with another corporation or other corporations; Investment of corporate funds in another corporation or business in accordance with this Code; and Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights. Taken in conjunction with Section 137, the last paragraph of Section 6 shows that the intention of the lawmakers was to base the quorum mentioned in Section 52 on the number of outstanding voting stocks.[38]

The Right to Vote in 19

Nonstock Corporations In nonstock corporations, the voting rights attach to membership.[39]Members vote as persons, in accordance with the law and the bylaws of the corporation. Each member shall be entitled to one vote unless so limited, broadened, or denied in the articles of incorporation or bylaws.[40] We hold that when the principle for determining the quorum for stock corporations is applied by analogy to nonstock corporations, only those who are actual members with voting rights should be counted. Under Section 52 of the Corporation Code, the majority of the members representing the actual number of voting rights, not the number or numerical constant that may originally be specified in the articles of incorporation, constitutes the quorum.[41] The March 3, 1986 SEC Opinion[42] cited by the hearing officer uses the phrase majority vote of the members; likewise Section 48 of the Corporation Code refers to 50 percent of 94 (the number of registeredmembers of the association mentioned therein) plus one. The best evidence of who are the present members of the corporation is the membership book; in the case of stock corporations, it is the stock and transfer book.[43]

Section 25 of the Code specifically provides that a majority of the directors or trustees, as fixed in the articles of incorporation, shall constitute a quorum for the transaction of corporate business (unless the articles of incorporation or the bylaws provide for a greater majority). If the intention of the lawmakers was to base the quorum in the meetings of stockholders or members on their absolute number as fixed in the articles of incorporation, it would have expressly specified so. Otherwise, the only logical conclusion is that the legislature did not have that intention.

Effect of the Death of a Member or Shareholder Having thus determined that the quorum in a members meeting is to be reckoned as the actual number of members of the corporation, the next question to resolve is what happens in the event of the death of one of them. In stock corporations, shareholders may generally transfer their shares.Thus, on the death of a shareholder, the executor or administrator duly appointed by the Court is vested with the legal title to the stock and entitled to vote it. Until a settlement and division of the estate is effected, the stocks of the decedent are held by the administrator or executor.[44] On the other hand, membership in and all rights arising from a nonstock corporation are personal and non-transferable, unless the articles of incorporation or the bylaws of the corporation provide otherwise.[45] In other words, the determination of whether or not dead members are entitled to 20

exercise their voting rights (through their executor or administrator), depends on those articles of incorporation or bylaws. Under the By-Laws of GCHS, membership in the corporation shall, among others, be terminated by the death of the member.[46] Section 91 of the Corporation Code further provides that termination extinguishes all the rights of a member of the corporation, unless otherwise provided in the articles of incorporation or the bylaws. Applying Section 91 to the present case, we hold that dead members who are dropped from the membership roster in the manner and for the cause provided for in the By-Laws of GCHS are not to be counted in determining the requisite vote in corporate matters or the requisite quorum for the annual members meeting. With 11 remaining members, the quorum in the present case should be 6. Therefore, there being a quorum, the annual members meeting, conducted with six [47] members present, was valid.

Vacancy in the Board of Trustees As regards the filling of vacancies in the board of trustees, Section 29 of the Corporation Code provides: SECTION 29. Vacancies in the office of director or trustee. -- Any vacancy occurring in the board of directors or trustees other than by removal by the stockholders or members or by expiration of term, may be filled by the vote of at least a majority of the remaining directors or trustees, if still constituting a quorum; otherwise, said vacancies must be filled by the stockholders in a regular or special meeting called for that purpose. A director or trustee so elected to fill a vacancy shall be elected only for the unexpired term of his predecessor in office.

Undoubtedly, trustees may fill vacancies in the board, provided that those remaining still constitute a quorum. The phrase may be filled in Section 29 shows that the filling of vacancies in the board by the remaining directors or trustees constituting a quorum is merely permissive, not mandatory.[48] Corporations, therefore, may choose how vacancies in their respective boards may be filled up -- either by the remaining directors constituting a quorum, or by the stockholders or members in a regular or special meeting called for the purpose.[49] The By-Laws of GCHS prescribed the specific mode of filling up existing vacancies in its board of directors; that is, by a majority vote of the remaining members of the board.[50]

21

While a majority of the remaining corporate members were present, however, the election of the four trustees cannot be legally upheld for the obvious reason that it was held in an annual meeting of the members, not of the board of trustees. We are not unmindful of the fact that the members of GCHS themselves also constitute the trustees, but we cannot ignore the GCHS bylaw provision, which specifically prescribes that vacancies in the board must be filled up by the remaining trustees. In other words, these remaining member-trustees must sit as a board in order to validly elect the new ones. Indeed, there is a well-defined distinction between a corporate act to be done by the board and that by the constituent members of the corporation.The board of trustees must act, not individually or separately, but as a body in a lawful meeting. On the other hand, in their annual meeting, the members may be represented by their respective proxies, as in the contested annual members meeting of GCHS. WHEREFORE, the Petition is partly GRANTED. The assailed Resolutions of the Court of Appeals are hereby REVERSED AND SET ASIDE. The remaining members of the board of trustees of Grace Christian High School (GCHS) may convene and fill up the vacancies in the board, in accordance with this Decision. No pronouncement as to costs in this instance. SO ORDERED. G.R. No. 69999

April 30, 1991

LUZVIMINDA VISAYAN, BENJAMIN BORJA, PABLO AJERO, LORETO DEDOYCO, NESTOR GORGOLLO, DOMINGO METRAN, LITO MONTERON, ROMEO OMAGBON, BOMBOM PAUSAMOS, CIRILO RAMOS, MARCOS SISON, ERIC BONDOLO, REY ZAMORA, TERESA ANAVISO, EVELYN BACULINAO, MARIBEL BASAG, VIOLETA DAGUISA, ADELAIDA CANALDA, LAILA DIMLA, MACHAELA LUCERO, DIVINA MARIANO, EPIFANIA OBLIGADO, RAQUEL PONCIANO, ELLEN SACRAMENTO, GRACE SULLETA FELY TAPAY, SUSAN VILLAMOR, ANAINO AMPLAYO, MARIO CHIONG NESTOR ESTARES, ALELI ALEJO, ELVIE BAUTISTA, JANINA ESTARES NORMA MENDOZA, LIGAYA SYDUA and JANETTE VILLAREAL, petitioners, vs. NATIONAL LABOR RELATIONS COMMISSION (THIRD DIVISION) and FUJIYAMA RESTAURANT AND HOTEL, INC. and its MANAGER/OPERATOR, respondents.

Danilo S. Lorredo King, Capuchino, Banico & Associates for private respondent.

for

petitioners.

PARAS, J.: Assailed in the instant petition is the Resolution of public respondent National Labor Relations Commission (NLRC, for brevity) promulgated January 15, 1985 for being contrary to law and jurisprudence and arrived at in grave abuse of discretion amounting to lack or in excess of jurisdiction. 22

The facts are briefly stated as follows: Private respondent Fujiyama Hotel & Restaurant, Inc. was formally organized in April, 1978 with Aquilino Rivera holding a majority interest in the corporation. The rest of the four (4) incorporators composed the minority stockholders of respondent corporation. Upon organization in 1978, respondent corporation immediately opened a Japanese establishment, known as Fujiyama Hotel & Restaurant, located at 1413 M. Adriatico St., Ermita, Manila. In order to fully offer an authentic Japanese cuisine and traditional Japanese style of service, private respondent hired the services of Isamu Akasako as its chef and restaurant supervisor. (Private respondent's memorandum, p. 4). In June, 1980, Lourdes Jureidini and Milagros Tsuchiya, allegedly pretending to be stockholders of the corporation, filed a case with the then Court of First Instance of Manila, Branch XXXVI against Rivera and Akasako to wrest control over the establishment. In June, 1981, the said court issued a writ of preliminary mandatory injunction transferring possession of all the assets of the company and the management thereof to Jureidini and Tsuchiya. The stockholders and directors of the corporation were thereby excluded from the management and operation of the restaurant. Upon assuming management, Jureidini and Tsuchiya replaced almost all of the existing employees with new ones, majority of whom are the present petitioners in the instant case. Apparently, the new employees were extended probationary appointments for six (6) months from December 15, 1981 to June 1 5, 1982. In the meantime, Rivera and the rest of the stockholders elevated the civil case to the Supreme Court through a petition for certiorari assailing the ground for the issuance of the writ of preliminary mandatory injunction by the said Court of First Instance, which case was entitled Aquilino Rivera, et al. vs. Hon. Alfredo C. Florendo, et al., docketed as G.R. No. 57586. On motion of Rivera, et al. in the said case, this Court on August 21, 1981 issued a writ of preliminary injunction to enjoin enforcement of the June 23, 1981 writ of preliminary mandatory injunction issued by the said Court of First Instance. Since Jureidini and Tsuchiya disregarded the writ We had previously issued, We issued another resolution on May 26, 1982 directing both Jureidini and Tsuchiya to strictly and immediately comply with the Court's injunction. Thus, this Court ordered Jureidini and Tsuchiya, "their agents, representatives, and/or any person or persons acting upon their orders or in their place or stead to refrain from further managing and/or interfering with the management of the business and assets of petitioner corporation and . . . . to turn over all assets and the management of petitioner corporation, Fujiyama Hotel & Restaurant, Inc., to Aquilino Rivera and Isamu Akasako." (NLRC, Resolution, p. 4; Rollo, p. 116). Pursuant to the above-quoted resolution, Rivera and Akasako regained control and management of Fujiyama Hotel & Restaurant, Inc. Immediately upon assumption of the management of the corporation, Rivera et al., refused to recognize as employees of the corporation all persons that were hired by Jureidini and Tsuchiya during the one-year period that the latter had operated the company and reinstated the employees previously hired by them. This gave rise to the filing of the present case by the dismissed employees hired by Jureidini and Tsuchiya (some of whom had allegedly been hired by Rivera and Akasako even before Jureidini and Tsuchiya assumed management of the corporation) against Fujiyama Hotel & Restaurant, Inc. for illegal dismissal, which case was docketed as NLRC-NCR Case No. 6-4110-82. On motion of private respondent corporation, the Labor Arbiter included Jureidini 23

and Tsuchiya as third-party respondents therein. Thereafter, the parties, except Jureidini and Tsuchiya, submitted their respective position papers and affidavits in support of their contentions. On the basis of said position papers and affidavits, the Labor Arbiter rendered a decision on September 21, 1982 ordering respondent company and/or Akasako, Jureidini and Tsuchiya to reinstate all the complainants to their former positions plus backwages and to pay jointly and severally the complainants their unpaid wages plus their share in the service charges. (NLRC Decision, pp. 4-5; Rollo, pp. 25-26). On October 12, 1982, the aforesaid decision of the Labor Arbiter was received by private respondent's counsel. Ten (10) days thereafter, or on October 22, 1982, said counsel filed a notice of appeal with an accompanying supersedeas bond in the sum of P80,000.00 as fixed by the Labor Arbiter. Notably, the memorandum of appeal was not filed until November 24, 1982 when the attention of private respondent's counsel was called by the filing on November 19, 1982 of a motion for execution of the September 21, 1982 decision by the complainants. Thus, upon motion of private respondent, the NLRC temporarily stayed execution and directed the Labor Arbiter to transmit the entire record of the case to the NLRC for appropriate action. On December 28, 1983, the NLRC resolved to deny the appeal of private respondent for having been filed out of time.1âwphi1 Subsequently, a motion for reconsideration was seasonably filed by private respondent which became the basis of another resolution dated January 15, 1985 issued by the NLRC setting aside its previous resolution of December 28, 1983 as well as the Labor Arbiter's decision dated September 21, 1982. The decretal portion of the January 15, 1982 NLRC Resolution is quoted, thus: WHEREFORE, the Resolution sought to be reconsidered and the Decision appealed from are hereby SET ASIDE and a new Decision is entered, declaring respondents Lourdes Jureidini and Mila Tsuchiya as the previous employer of the complainants hired by them while operating the Fujiyama Restaurant & Hotel, Inc. Consequently, the establishment and its present operator, Isamu Akasako, is absolved of any liability to them but the entire record is remanded for further appropriate proceedings to determine who are the complainants hired by said Jureidini and Tsuchiya. SO ORDERED. (NLRC Resolution, pp. 19-20; Rollo, p. 7-8) The legal issues in the instant case are: (1) whether or not there is privity of contract between petitioners and private respondent as to establish an employer-employee relationship between the parties, and (2) whether or not the respondent NLRC erred in giving due course to private respondent's appeal and in reversing the September 21, 1982 decision of the Labor Arbiter. Section 23 of B.P. 68, otherwise known as the "Corporation Code of the Philippines," expressly provides as follows: Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year and until their successors are elected and qualified. . . . 24

It is clear from the above-quoted provision that a corporation can act only through its board of directors. "The law is settled that contracts between a corporation and third persons must be made by or under the authority of its board of directors and not by its stockholders. Hence, the action of the stockholders in such matters is only advisory and not in any wise binding on the corporation." (De Leon, The Corporation Code of the Philippines, 1989 edition, p. 168, citing the case of Barreto vs. La Previsora Filipina, 57 Phil. 649). A corporation, like a natural person who may authorize another to do certain acts for and in his behalf, through its board of directors, may legally delegate some of its functions and powers to its officers, committees or agents appointed by it. (Campos & Campos, The Corporation Code-Comments, Notes, and Selected cases, 1981 ed., p. 253). In the absence of an authority from the board of directors, no person, not even the officers of the corporation, can validly bind the corporation. Thus, the Supreme Court, has made the following pronouncement in the case of Vicente vs. Geraldez, L-32473, 53 SCRA 210: . . . Whatever authority the officers or agents of a corporation may have is derived from the board of directors or other governing body, unless conferred by the charter of the corporation. A corporate officer's power as an agent of the corporation must therefore be sought from the statute, the charter, the by-laws, or in a delegation of authority to such officer, from the acts of the board of directors, formally expressed or implied from a habit or custom of doing business. In the case at bar no provision of the charter and by-laws of the corporation or any resolution or any other act of the board of directors has been cited from which we could reasonably infer that the administration trative manager had been granted expressly or impliedly the power to bind the corporation or the authority to compromise the case. The signature of Atty. Cardenas on the Agreement would therefore be legally ineffectual". (Vicente vs. Geraldez, L-32473, 52 SCRA 210, p. 227). (Respondent's Memorandum, p. 11) Applying the aforesaid doctrines in the case at bar, We hold that all acts done solely by Jureidini and Tsuchiya allegedly, for and in behalf of private respondent during the period from June, 1981 up to May 31, 1982 were not binding upon respondent corporation. It is not denied by both parties that the operation and management of the Fujiyama Hotel & Restaurant Corporation, including the control and possession of all its assets, were forcibly taken by Jureidini and Tsuchiya from the owners thereof by virtue of a writ of preliminary mandatory injunction issued by then Court of First Instance of Manila, Branch XXXVI These owners, the Rivera-Akasako group, composed the board of directors of respondent corporation during the one (1) year period that Jureidini and Tsuchiya controlled the respondent corporation, the former managed and operated the latter apparently without any authority from the latter's board of directors. As alleged by Rivera, et al., Jureidini and Tsuchiya were not even officers of respondent corporation as to be considered its agents, which act prompted this tribunal to order said persons, under pain of contempt, to turn over the management and assets of respondent corporation to Rivera et al., as shown by this Court's resolution of May 26, 1982. Thus, all acts done by Jureidini and Tsuchiya for and in behalf of respondent corporation, having been made without the requisite authority from the board of directors, were not binding upon the said corporation. One of these unauthorized acts was the unwarranted termination of the original employees of respondent corporation who were validly hired by its board of directors, visa-vis, the hiring of new employees, the petitioners in the case at bar, to replace the said original employees. Since said acts were not binding upon the corporation, no employer-employee existed between the Fujiyama Hotel & Restaurant, Inc. and the herein petitioners. 25

We agree with private respondent that the act of the Rivera-Akasako group in admitting the original employees of respondent corporation after regaining control and management of the latter on May 31, 1982, having been made by the corporation's board of directors, was valid. Even if Jureidini and Tsuchiya took over the management and control of respondent corporation, the employer-employee relationship between the corporation and its original employees has not been severed for lack of authority on the part of Jureidini and Tsuchiya to dismiss said employees. Consequently, petitioners' claim of illegal dismissal is entirely mistaken as they were not hired by respondent corporation or its duly authorized officers or agents, hence, no employer-employee relationship ever existed between them. Jureidini and Tsuchiya, the persons who hired petitioners' services, are to be considered their employer, and not the private respondents. Neither may petitioners claim good faith or ignorance of the lack of authority on the part of Jureidini and Tsuchiya to legally hire them and bind the corporation because they were all informed by Isamu Tatewaki respondent corporation's Assistant Manager, of such fact at the time they were hired. (Reply Brief of Isamu Tatewaki Annex "10"). Besides, it was clearly shown that the appointments of the petitioners were on a probationary basis. Further, it will be recalled that on August 21, 1981, this Court issued a writ of preliminary injunction in the case of Rivera, et al. vs. Judge Alfredo C. Florendo, et al., G.R. No. 57586, promulgated October 8, 1986, enjoining the enforcement of the writ of preliminary mandatory injunction issued by respondent judge therein. Despite the issuance of said writ, Jureidini and Tsuchiya refused to return the management of the corporation but continued managing and operating respondent corporation and in fact terminated the original employees of respondent corporation and hired new ones in place of those dismissed. The appointment papers of these new employees would show that they were hired only in one day, i.e., December 15, 1981, and that they were hired on a probationary basis. It follows that only Jureidini and Tsuchiya, being the ones who hired the petitioners, should be the ones responsible for the petitioners' claims. Since it would be most unfair and unjust to hold the respondent corporation liable for the claims of petitioners, even if respondent corporation's memorandum was filed beyond the 10 day reglementary period (note that the notice of appeal had been filed on time), We rule that the NLRC did not commit grave abuse of discretion in giving due course to respondent corporation's appeal and in reversing the Labor Arbiter's decision dated September 21, 1982. The NLRC is vested with broad powers by the Labor Code, particularly Art. 218 thereof, to correct, amend or waive any error, injustice, defect or irregularity whether in substance or in form; and in adjudicating all cases brought before it, the NLRC is likewise empowered to use every and all reasonable means to ascertain the facts in each case expeditiously and objectively without regard to procedural technicalities. Thus, Art. 221 of the Labor Code provides as follows: In any proceeding before the Commission or any of the Labor Arbiters, the rules of evidence prevailing in Courts of Law or equity shall not be controlling and it is the spirit and intention of this Code that the Commission and its members and the Labor Arbiters shall use every and all reasonable means to ascertain the facts in each case speedily and objectively and without regard to technicalities of law or procedure, all in the interest of due process. In any proceeding before the Commission or any Labor Arbiter to exercise complete control of the proceedings at all stages. 26

The factual circumstances and substantial merits of the instant case justify the NLRC's exercise of its reserve powers granted by the aforequoted provision. Private respondent's appeal should be granted and entertained in order to prevent a manifest injustice upon said respondent. While it is true that an appeal within the meaning of the Labor Code must include the assignments of error, memorandum of arguments in support thereof and the reliefs prayed for such that a mere notice of appeal will not toll the running of the period for perfecting an appeal, and the general rule is that after a judgment has become final the appellate court loses jurisdiction to entertain the appeal, the aforementioned rules admit of exceptions too, because it is also well-settled that such rules of procedure are used only to help secure and not override substantial justice. Litigations should, as much as possible, be decided on their merits and not on technicality, and under the circumstances obtaining in this case, We are reminded of what We said in the case of Gregorio vs. CA, 72 SCRA 120, –– "Dismissal of appeals purely on technical grounds is frowned upon where the policy of the courts is to encourage hearings of appeals on their merits and the rules of procedure ought not to be applied in a very rigid, technical sense; rules of procedure are used only to help secure, not override substantial justice. If a technical and rigid enforcement of the rules is made, their aim would be defeated. (American Home Insurance Co. vs. Court of Appeals, 109 SCRA 180) In the case at bar, the finding of the Labor Arbiter that there is an employer-employee relationship existing between petitioners and private respondent counter-acts the provisions of the Corporation Code such that to strictly apply the procedural rules on appeal under the Labor Code would obviously result in patent and gross injustice upon private respondent's substantive rights. In relation to the peculiar factual background of the instant case, private respondent's defense of lack of privity of contract with petitioners merits greater consideration in the interest of substantial justice. It will be recalled that the Labor Arbiter's finding of illegal dismissal and order of reinstatement were anchored on an erroneous premise that Jureidini and Tsuchiya were duly authorized and legitimate officers of the corporation. The enforcement of said erroneous ruling will cause serious injustice, not only upon respondent corporation but also upon the corporation's original employees who were taken back by the Aquilino Rivera group when they regained possession and management of the corporation. If petitioners are reinstated, that would result in an absurd situation wherein the corporation will have employees very much more in excess of what the business would require. Besides, it is quite evident that private respondent seriously intended to appeal the Labor Arbiter's decision and We hereby quote a portion of the herein assailed NLRC Resolution: . . . In fact, it even filed an urgent petition for reduction of supersedeas bond, praying that it be allowed to file a P50,000.00 bond but it was fixed at P80,000.00 by the Labor Arbiter which it filed with its notice of appeal. In the conference on 15 October 1982 called by the Labor Arbiter issuing his decision for the purpose of settling the case amicably, the respondent again manifested after no settlement was arrived at that it will file its appeal. With these in mind, We are convinced that respondent's failure to file its memorandum on appeal with its notice of appeal was through excusable mistake only on the part of the messenger-clerk. Otherwise, it would not have gone through the burden of going through the rigors of having the supersedeas bond reduced and abiding with the amount fixed which entailed expenses. Consequently, in the interest of substantial justice and in line with the repeated rulings of the Supreme Court lately 27

which abhors dismissal of cases based solely on technicalities, We set aside the Resolution sought to be reconsidered and give due course to the appeal. (pp. 15-16, Rollo) Finally' it is clear that petitioners were not abandoned by the NLRC as the latter ordered that the case be remanded to the Arbitration Branch for further proceedings to determine who among the petitioners were really hired by respondent corporation or by Jureidini, et al., in order to ultimately determine who is responsible for the settlement of petitioners' claims. Thus, petitioners are not without recourse relative to their claims. ACCORDINGLY, the instant petition is hereby DISMISSED for lack of merit and the assailed decision of the National Labor Relations Commission dated January 15, 1985 is AFFIRMED in toto. SO ORDERED. [G.R. No. L-58468. February 24, 1984.] PHILIPPINE SCHOOL OF BUSINESS ADMINISTRATION, MANILA, ANTONIO M. MAGTALAS, JOSE ARANAS, JUAN D. LIM, JOSE F. PERALTA and BENJAMIN P. PAULINO, Petitioners, v. LABOR ARBITER LACANDOLA S. LEANO of the National Labor Relations Commission and RUFINO R. TAN, Respondents. De Santos, Balgos and Perez Law Office, for Petitioners. The Solicitor General for respondent Arbiter. Caparas, Ilagan, Alcantara & Gatmaytan Law Office for Private Respondent. SYLLABUS 1. COMMERCIAL LAW; CORPORATION LAW; SECURITIES AND EXCHANGE COMMISSION; JURISDICTION THEREOF VIS-A-VIS THE NATIONAL LABOR RELATIONS COMMISSION; CASE AT BAR. — The jurisdiction of the Securities and Exchange Commission (SEC) vis-a-vis the National Labor Relations Commission (NLRC) is in issue. An intracorporate controversy would call for SEC jurisdiction. A labor dispute, that of the NLRC. 2. ID.; ID.; INTRA-CORPORATE CONTROVERSIES; LEGALITY OF ELECTION OF CORPORATE DIRECTORS, IN THE NATURE OF; CASE AT BAR. — Basically, therefore, the question is whether the election of directors on August 1, 1981 and the election of officers on September 5, 1981, which resulted in TAN’s failure to be re-elected, were validly held. This is the crux of the question that TAN has raised before the SEC. Even in his position paper before the NLRC, TAN alleged that the election on August 1, 1981 of the three directors was in contravention of the PSBA By-Laws providing that any vacancy in the Board shall be filled by a majority vote of the stockholders at a meeting specially called for the purpose. Thus, he concludes, the Board meeting on September 5, 1981 was tainted with irregularity on account of the presence of illegally elected directors without whom the results could have been different. TAN invoked the same allegations in his complaint filed with the SEC. So much so, that on December 17, 1981, the SEC (Case No. 2145) rendered a Partial Decision annulling the 28

election of the three directors and ordered the convening of a stockholders’ meeting for the purpose of electing new members of the Board. 9 The correctness of said conclusion is not for us to pass upon in this case. TAN was present at said meeting and again sought the issuance of injunctive relief from the SEC. The foregoing indubitably show that, fundamentally, the controversy is intra-corporate in nature. 3. ID.; ID.; SECURITIES AND EXCHANGE COMMISSION; JURISDICTION; ORIGINAL AND EXCLUSIVE OVER INTRA-CORPORATE CONTROVERSIES UNDER PRESIDENTIAL DECREE NO. 902-A; CASE AT BAR. — Presidential Decree No. 902-A vests in the Securities and Exchange Commission original and exclusive jurisdiction to hear and decide controversies involving the election of directors, officers, or managers of corporations registered with the Commission, the relation between and among its stockholders, and between them and the corporation. The instant case is not a case of dismissal. The situation is that of a corporate office having been declared vacant, and of TAN’s not having been elected thereafter. The matter of whom to elect is a prerogative that belongs to the Board, and involves the exercise of deliberate choice and the faculty of discriminative selection. Generally speaking, the relationship of a person to a corporation, whether as officer or as agent or employee, is not determined by the nature of the services performed, but by the incidents of the relationship as they actually exist. (Bruce v. Travelers Ins. Co., 266 F2d 781, cited in 19 Am. Jur. 2d 526). DECISION MELENCIO-HERRERA, J.: This Petition for Certiorari questions the jurisdiction of respondent Labor Arbiter over the present controversy (No. NCR-9-20-81) involving private respondent-complainant, Rufino R. Tan (TAN), and petitioners, the Philippine School of Business Administration (PSBA), a domestic corporation, and majority of its Directors.chanrobles lawlibrary : rednad TAN is one of the principal stockholders of PSBA. Before September 5, 1981, he was a Director and the Executive Vice President enjoying salaries and allowances. On August 1, 1981, at the PSBA Board of Directors’ regular meeting, three members were elected to fill vacancies in the seven-man body. On September 5, 1981, also during a regular meeting, the Board declared all corporate positions vacant except those of the Chairman and President, and at the same time elected a new set of officers. TAN was not re-elected as Executive Vice-President. 1 On September 16, 1981, TAN filed with the National Labor Relations Commission (NLRC) (National Capital Region) a complaint for Illegal Dismissal against petitioners alleging that he was "summarily, illegally, irregularly and improperly removed from his position as Executive Vice-President . . . without cause, investigation or notice" (NLRC Case No. NCR-9-20-81) (the Labor Case, in brief). On September 21, 1981, TAN also filed a one-million-peso damage suit against petitioners before the then Court of First Instance of Rizal, Quezon City, for illegal and oppressive removal (Civil Case No. 29

Q-33444). And, on September 28, 1981, TAN lodged before the Securities and Exchange Commission (SEC) another complaint against petitioners essentially questioning the validity of the PSBA elections of August 1, 1981 and September 5, 1981, and of his "ouster" as Executive Vice-President (SEC Case No. 2145).chanrobles lawlibrary : rednad On October 13, 1981, SEC issued a subpoena duces tecum commanding the production of corporate documents, books and records. 2 On October 15, 1981, respondent Labor Arbiter also issued a subpoena duces tecum to submit the same books and documents. 3 Before the NLRC, petitioners moved for the dismissal of TAN’s complaint, invoking the principle against split jurisdiction. On October 22, 1981, petitioners availed of this Petition contending mainly that:jgc:chanrobles.com.ph "1. The respondent labor arbiter illegally assumed jurisdiction over the complaint for ‘Illegal Dismissal’ because the failure of the private respondent to be re-elected to the corporate position of Executive Vice-President was an intra-corporate question over which the Securities and Exchange Commission had already assumed jurisdiction. "2. The issuance by the respondent labor arbiter of a subpoena duces tecum was likewise without jurisdiction especially if considered in the light of procedural and substantial requirements therefor such that it is imperative that the supervising authority of this Honorable Court should be exercised to prevent a substantial wrong and to do substantial justice." 4 TAN counter-argues that his sole and exclusive cause of action is illegal dismissal, falling within the jurisdiction of the NLRC, for he was dismissed suddenly and summarily without cause in violation of his constitutional rights to due process and security of tenure. He prays that his dismissal be declared illegal and that his reinstatement be ordered with full backwages and without loss of other benefits.chanroblesvirtualawlibrary We issued a Temporary Restraining Order, enjoining respondent Labor Arbiter from proceeding in any manner with the Labor Case, and subsequently gave due course to the Petition. The jurisdiction of the SEC vis-a-vis the NLRC is in issue. An intracorporate controversy would call for SEC jurisdiction. A labor dispute, that of the NLRC. Relevant and pertinent it is to note that the PSBA is a domestic corporation duly organized and existing under our laws. General management is vested in a Board of seven directors elected annually by the stockholders entitled to vote, who serve until the election and qualification of their successors. Any vacancy in the Board of Directors is filled by a majority vote of the subscribed capital stock entitled to vote at a meeting specially called for the purpose, and the director or directors so chosen hold office for the unexpired term. 5 Corporate officers are provided for, among them, the Executive Vice-President, who is elected by the Board of Directors from their own number. 6 The officers 30

receive such salaries or compensation as the Board of Directors may fix. 7 The By-Laws likewise provide that should the position of any officer of the corporation become vacant by reason of death, resignation, disqualification, or otherwise, the Board of Directors, by a majority vote, may choose a successor or successors who shall hold office for the expired term of his predecessor. 8 It was at a board regular monthly meeting held on August 1, 1981, that three directors were elected to fill vacancies. And, it was at the regular Board Meeting of September 5, 1981 that all corporate positions were declared vacant in order to effect a reorganization, and at the ensuing election of officers, TAN was not re-elected as Executive Vice-President. Basically, therefore, the question is whether the election of directors on August 1, 1981 and the election of officers on September 5, 1981, which resulted in TAN’s failure to be re-elected, were validly held. This is the crux of the question that TAN has raised before the SEC. Even in his position paper before the NLRC, TAN alleged that the election on August 1, 1981 of the three directors was in contravention of the PSBA By-Laws providing that any vacancy in the Board shall be filled by a majority vote of the stockholders at a meeting specially called for the purpose. Thus, he concludes, the Board meeting on September 5, 1981 was tainted with irregularity on account of the presence of illegally elected directors without whom the results could have been different. TAN invoked the same allegations in his complaint filed with the SEC. So much so, that on December 17, 1981, the SEC (Case No. 2145) rendered a Partial Decision annulling the election of the three directors and ordered the convening of a stockholders’ meeting for the purpose of electing new members of the Board. 9 The correctness of said conclusion is not for us to pass upon in this case. TAN was present at said meeting and again sought the issuance of injunctive relief from the SEC. The foregoing indubitably show that, fundamentally, the controversy is intra-corporate in nature. It revolves around the election of directors, officers or managers of the PSBA, the relation between and among its stockholders, and between them and the corporation. Private respondent also contends that his "ouster" was a scheme to intimidate him into selling his shares and to deprive him of his just and fair return on his investment as a stockholder received through his salary and allowances as Executive Vice-President. Vis-a-vis the NLRC, these matters fall within the jurisdiction of the SEC. Presidential Decree No. 902-A vests in the Securities and Exchange Commission:jgc:chanrobles.com.ph ". . . original and exclusive jurisdiction to hear and decide cases involving:jgc:chanrobles.com.ph "a) Devices or schemes employed by or any acts, of the board of directors, business associates, its officers or partners, amounting to fraud and misrepresentation which may be detrimental to the interest of the public and/or stockholders, partners, members of associations or organizations registered with the Commission. "b) Controversies arising out of intra-corporate or partnership relations, between and among stockholders, members, or associates; between any or all of them and the corporation, partnership or association of which they are stockholders, members or associates, respectively; and between such corporation, partnership or association and the state insofar as it concerns their individual franchise or right to exist as such entity; "c) Controversies in the election or appointments of directors, trustees, officers or managers of such 31

corporations, partnerships or associations. 10 This is not a case of dismissal. The situation is that of a corporate office having been declared vacant, and of TAN’s not having been elected thereafter. The matter of whom to elect is a prerogative that belongs to the Board, and involves the exercise of deliberate choice and the faculty of discriminative selection. Generally speaking, the relationship of a person to a corporation, whether as officer or as agent or employee, is not determined by the nature of the services performed, but by the incidents of the relationship as they actually exist. 11 With the foregoing conclusion, it follows that the issuance of a subpoena duces tecum by the Labor Arbiter will have to be set aside. WHEREFORE, judgment is hereby rendered (1) ordering respondent Labor Arbiter to dismiss the complaint in NLRC Case No. NCR-9-20-81 for lack of jurisdiction; (2) nullifying the subpoena duces tecum issued by him in said case; and (3) declaring the Temporary Restraining Order heretofore issued permanent. No costs. SO ORDERED. SECOND DIVISION WESTMONT BANK (formerly ASSOCIATED CITIZENS BANK and now UNITED OVERSEAS BANK, PHILS.) AND THE PROVINCIAL SHERIFF OF RIZAL, Petitioners, - versus INLAND CONSTRUCTION DEVELOPMENT CORP., Respondent.

G.R. No. 123650 Present: QUISUMBING, J., Chairperson, CARPIO MORALES, VELASCO, JR. NACHURA,* and BRION, JJ.

AND

x-------------------------x WESTMONT BANK (formerly ASSOCIATED CITIZENS BANK and now UNITED OVERSEAS BANK, PHILS.), Petitioner, - versus -

G.R. No. 123822

Promulgated: March 23, 2009

32

COURT OF APPEALS andINLAND CONSTRUCTION AND DEVELOPMENT CORP., Respondents. DECISION

CARPIO MORALES, J.: Inland Construction and Development Corp. (Inland) obtained various loans and other credit accommodations from petitioner, then known as Associated Citizens Bank ([the bank] which later became United Overseas Bank, Phils., and still later Westmost Bank) in 1977. To secure the payment of its obligations, Inland executed real estate mortgages over three real properties in Pasig City covered by Transfer Certificates of Title Nos. 4820, 4821 and 4822.[1] Inland likewise issued promissory notes in favor of the bank, viz:

Promissory Note No. BD-2739-77 Amount: P155,000.00 Due Date: January 2, 1978[2] Promissory Note No. BD-2884-77 Amount: P880,000.00 Due Date: February 23, 1978[3] Promissory Note No. BD-2997 Amount: P60,000.00 Due Date: March 22, 1978[4] (Emphasis supplied)

When the first and second promissory notes fell due, Inland defaulted in its payments. It, however, authorized the bank to debit P350,000 from its savings account to partially satisfy its obligations.[5] It appears that by a Deed of Assignment, Conveyance and Release dated May 2, 1978, Felix Aranda, President of Inland, assigned and conveyed all his rights and interests at Hanil-Gonzales Construction & Development (Phils.) Corporation (Hanil-Gonzales Corporation) in favor of Horacio Abrantes (Abrantes), Executive Vice-President and General Manager of Hanil-Gonzales Corporation. Under the 33

same Deed of Assignment, it appears that Abrantes assumed, among other obligations of Inland and Aranda, Promissory Note No. BD-2884-77 in the amount of P800,000 as shown in the May 26, 1978 Deed of Assignment of Obligation in which Aranda and Inland, on one hand, and Abrantes and Hanil-Gonzales Corporation, on the other, forged as follows: x x x x. WHEREAS, among the obligations assumed by Mr. HORACIO C. ABRANTES [in the May 2, 1978 Deed] is the account of the FIRST PARTY (Aranda and Inland) in favor of the ASSOCIATED CITIZENS BANK as evidenced by Promissory Note No. BD-288477 in the amount of EIGHT HUNDRED EIGHTY THOUSAND (P880,000.00) PESOS, x x x x; WHEREAS, the parties herein have agreed to obtain the conformity of the ASSOCIATED CITIZENS BANK to the foregoing arrangement x x x x; NOW, THEREFORE, the herein parties have mutually agreed that the SECOND PARTY (Abrantes and Hanil-Gonzalez) shall assume full and complete liability and responsibility for the payment to ASSOCIATED CITIZENS BANK Promissory Note No. BD2884-77 x x x x. THE SECOND PARTY shall make such necessary arrangements with the ASSOCIATED CITIZENS BANK for the full liquidation of said account, x x x x. x x x x. (Emphasis and underscoring supplied) The banks Account Officer, Lionel Calo Jr. (Calo), signed for its conformity to the deed.[6]

On December 14, 1979, Inland was served a Notice of Sheriffs Sale foreclosing the real estate mortgages over its real properties, prompting it to file a complaint for injunction against the bank and the Provincial Sheriff of Rizal at the Regional Trial Court (RTC) of Pasig City.[7] This complaint was later amended.[8] Answering the amended complaint, the bank underscored that it had no knowledge, much less did it give its conformity to the alleged assignment of the obligation covered by PN# BD-2884 [-77].[9] The trial court found that the bank ratified the act of its account officer Calo, thus: x x x x. Culled from the evidence on record, the Court finds that the defendant Bank ratified the act of Calo when its Executive Committee failed to repudiate the assignment within a reasonable time and even approved the request for a restructuring of Liberty Const. & Dev. Corp./Hanil-Gonzales 34

Construction & Development Corp.s obligations, which included the P880,000.00 loan (Exhibit U to X, and its submarkings). Clearly, the assumption of the loan was very well known to the defendant Bank and the latter posed no objection to it. In fact, the positive act on the part of the defendant in restructuring the loan of the assignee attest to its consent in the said transaction. The evidence on record conveys the fact that the Hanil-Gonzales Const. and Development Corp. assumed the obligation of the plaintiff on the SECOND NOTE. Later, it asked the defendant for a restructuring of its loan, including the P880,000.00 loan. Thereafter, payments were made by the assignee to the defendant Bank. The preponderance of evidence tilts heavily in favor of the plaintiff claiming that a case of delegacionoccurs.[10] (Emphasis and italics supplied; Underscoring in the original)

It accordingly rendered judgment in favor of Inland by Decision[11] of March 31, 1992, the dispositive portion of which reads: WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants, permanently, perpetually and forever restraining and enjoining the defendants Associated Citizens Bank and the Sheriff of this Court from proceeding with the foreclosure of and conducting an auction sale on the real estate covered by and embraced in Transfer Certificates of Title Nos. 4820, 4821 and 4822 of the Register of Deeds of Rizal (now Pasig, Metro Manila) and to refund to plaintiff the amount of P8,866.89, with legal interest thereon from the filing of the complaint until full payment, with costs. SO ORDERED. (Emphasis and underscoring supplied) The bank appealed the trial courts decision to the Court of Appeals which, by Decision[12] of May 31, 1995, modified the same, disposing as follows:[13] WHEREFORE, the decision appealed from is hereby AFFIRMED only insofar as it finds appellant Associated Bank to have ratified the Deed of Assignment (Exhibit O), but REVERSED in all other respects, and judgment is accordingly rendered ordering the plaintiff-appellee Inland Construction and Development Corporation to pay defendantappellant Associated Bank the sum of One Hundred Eighty Six Thousand Two Hundred Forty One Pesos and Eighty Six Centavos (P186,241.86) with legal interest thereon computed from December 21, 1979 until the same is fully paid. No pronouncement as to costs. SO ORDERED. (Underscoring supplied)

In affirming the observation of the trial court that the bank ratified the assignment of Inlands Promissory Note No. BD-2884-77, the appellate court discoursed as follows: 35

In the instant case, both the assignors (Aranda and Inland) and assignees (Abrantes and Hanil-Gonzales) in the subject deed of assignment have been major clients of Associated Bank for several years with accounts amounting to millions of pesos. For several years, Associated Bank had, either intentionally or negligently, been habitually clothing Calo with the apparent powers to perform acts in behalf of the bank. x x x x. x x x x. Calo signed the subject deed of assignment on or about May 26, 1978. The principal obligation covered by the deed involved a hefty sum of eight hundred eighty thousand pesos (P880,000.00). Despite the enormity of the amount involved, Associated Bank never made any attempt to repudiate the act of Calo until almost seven (7) years later, when Mitos C. Olivares, Manager of the Cash Department of Associated Bank, issued an INTER-OFFICE MEMORANDUM dated May 20, 1985 which pertinently reads: 2) Conforme of Associated Bank signed by Lionel Calo Jr. has no bearing since he has no authority to sign for the bank as he was only an account officer with no signing authority; x x x x. 5) I suggest, Mr. Calo be asked to be present at court hearings to explain why he signed for the bank, knowing his limitations The abovequoted inter-office memorandum is addressed internally to the other offices within Associated Bank. It is not addressed to Inland or any outsider for that matter. Worse, it was not even offered in evidence by Associated Bank to give Inland the opportunity to object to or comment on the said document, but was merely attached as one of the annexes to the banks MEMORANDUM FOR DEFENDANTS. Obviously, no evidentiary weight may be attached to said inter-office memorandum, which is even self serving. In fact, it ought not to be considered at all. (Emphasis and underscoring supplied)

The appellate court, however, specifically mentioned that the lower court erred when it rendered a decision which permanently, perpetually and forever restrains the sheriff from proceeding with the threatened foreclosure auction sale of the subject mortgage properties.[14] The bank moved for partial reconsideration of the appellate courts decision on the aspect of its ratification of the Deed of Assignment but the same was denied by Resolution[15] of January 24, 1996. The bank, via two different counsels,[16] filed before this Court separate petitions for review, G.R. No. 123650, Associated Citizens Bank, et al. v. Court of Appeals, et al; and G.R. No. 123822, Westmont Bank (formerly Associated Bank) v. Inland Construction & Development 36

Corp., assailing the same appellate courts decision. Owing to a series of oversight,[17] the petition in G.R. 123650 was initially dismissed but was later reinstated by Resolution of June 21, 1999. The records[18] show that Inland failed to file its comment and memorandum on the petitions. Both petitions for review impute error on the part of the appellate court in AFFIRMING THE FINDING OF THE TRIAL COURT THAT PETITIONER HAVE [SIC] RATIFIED THE DEED OF ASSIGNMENT (EXH. O).

The bank, which had, as reflected early on, become known as Westmont Bank (petitioner), maintains that Calo had no authority to bind it in the Deed of Assignment and that a single, isolated unauthorized act of its agent is not sufficient to establish that it clothed him with apparent authority. Petitioner adds that the records fail to disclose evidence of similar acts of Calo executed either in its favor or in favor of other parties.[19] Moreover, petitioner reasserts that the unauthorized act of Calo never came to its knowledge, hence, it is not estopped from repudiating the Deed of Assignment.[20] The petitions fail. The general rule remains that, in the absence of authority from the board of directors, no person, not even its officers, can validly bind a corporation.[21] If a corporation, however, consciously lets one of its officers, or any other agent, to act within the scope of an apparent authority, it will be estopped from denying such officers authority.[22] The records show that Calo was the one assigned to transact on petitioners behalf respecting the loan transactions and arrangements of Inland as well as those of Hanil-Gonzales and Abrantes. Since it conducted business through Calo, who is an Account Officer, it is presumed that he had authority to sign for the bank in the Deed of Assignment. Petitioner cannot feign ignorance of the May 26, 1978 Deed of Assignment, the pertinent portion of which was quoted above. Notably, assignee Abrantes notified petitioner about his assumption of Inlands obligation. Thus, in his July 26, 1979 letter to petitioner, he wrote: This refers to the accounts of Liberty Construction and Development Corporation (LCDC) and our sister-company, Hanil-Gonzalez Construction & Development Corporation (HGCDC) which as of July 31, 1979 was computed at P1,814,442.40, inclusive of interest, penalties and fees, net of marginal deposits.This includes the account of

37

Inland Construction & Development Corporation which had been assumed by HGCDC.[23] (Emphasis and underscoring supplied) That petitioner sent the following reply-letter, dated November 29, 1982, to the above-quoted letter to it of assignee Abrantes indicates that it had full and complete knowledge of the assumption by Abrantes of Inlands obligation: We are pleased to advise you that our Executive Committee in its meeting last November 25, 1982, has approved your request for the restructuring of your outstanding obligations x x x x.[24] (Underscoring supplied) Respecting this reply-letter of the bank granting Hanil-Gonzales request to restructure its loans, petitioner, as a banking institution, is expected to have exercised the highest degree of diligence and meticulousness in the conduct of its business.When it received the loan restructuring request, with specific mention of Inlands Promissory Note No. BD-2884-77, petitioner-bank was under obligation to fastidiously scrutinize such loan account. And since it clearly approved the request for restructuring, any uncertainty that its reply-letter approving such request may not thus work to prejudice HanilGonzales or Inland.

Petitioner relies heavily, however, on the Courts pronouncement in Yao Ka Sin Trading that it was incumbent upon, in this case, Inland to prove that petitioner had clothed its account officer with apparent power to conform to the Deed of Assignment.[25] Petitioners simplistic reading of Yao Ka Sin Trading v. Court of Appeals[26]does not impress. In Yao Ka Sin Trading, the therein respondent cement company had shown by clear and convincing evidence that its president was not authorized to undertake a particular transaction. It presented its by-laws stating that only its board of directors has the power to enter into an agreement or contract of any kind. The companys board of directors even forthwith issued a resolution to repudiate the contract. Thus, it was only after the company successfully discharged its burden that the other party, the therein petitioner Yao Ka Sin Trading, had to prove that indeed the cement company had clothed its president with the apparent power to execute the contract by evidence of similar acts executed in its favor or in favor of other parties. Unmistakably, the Courts directive in Yao Ka Sin Trading is that a corporation should first prove by clear evidence that its corporate officer is not in fact authorizedto act on its behalf before the burden of evidence shifts to the other party to prove, by previous specific acts, that an officer was clothed by the corporation with apparent authority.

38

It bears noting that in Westmont Bank v. Pronstroller,[27] the therein petitioner Westmont Bank, through a management committee, proved that it rejected the letter-agreement entered into by its assistant vice-president. Consequently, the therein respondent had to prove by citing other instances of the said officers apparent authority to bind the bank-therein petitioner. In the present petitions, petitioner-bank failed to discharge its primary burden of proving that Calo was not authorized to bind it, as it did not present proof that Calo was unauthorized. It did not present, much less cite, any Resolution from its Board of Directors or its Charter or By-laws from which the Court could reasonably infer that he indeed had no authority to sign in its behalf or bind it in the Deed of Assignment.The May 20, 1985 inter-office memorandum[28] stating that Calo had no signing authority remains self-serving as it does not even form part of petitioners body of evidence. Thus, the assertion that the petitioner cannot be faulted for its delay in repudiating the apparent authority of Calo is similarly flawed, there being no evidence on record that it had actually repudiated such apparent authority. It should be noted that it was the bank which pleaded that defense in the first place. What is extant in the records is a reasonable certainty that the bank had ratified the Deed of Assignment. The assumption that a ruling on the issue of ratification would affect any and all foreclosure proceedings on the mortgaged properties remains unfounded. For the challenged appellate courts Decision[29] still mentioned the possibility of foreclosing on the mortgaged properties as Inland was still indebted to the bank in the amount of P186, 241.86 covering the other two promissory notes (No. BD2739-77 and No. BD-2997) and other obligations that Inland was not able to satisfy upon maturity. Both the trial courts and the appellate courts inferences and conclusion that petitioner ratified its account officers act are thus rationally based on evidence and circumstances duly highlighted in their respective decisions. Absent any serious abuse or evident lack of basis or capriciousness of any kind, the lower courts findings of fact are conclusive upon this Court.[30] WHEREFORE, the petitions are DENIED. The decision of the Court of Appeals in CA-G.R. CV No. 39634 is AFFIRMED. Costs against petitioner. SO ORDERED.

[G.R. No. 144661 and 144797. June 15, 2005] 39

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs. SPOUSES FRANCISCO ONG and LETICIA ONG, respondents. DECISION GARCIA, J.: Appealed to this Court by way of a petition for review on certiorari are the Decision[1]dated March 5, 1999 and Resolution dated July 19, 2000 of the Court of Appeals in CA-G.R. CV No. 54919, affirming in toto an earlier decision of the Regional Trial Court at Cagayan de Oro City, Branch 23, which ruled in favor of herein respondents, the Spouses Francisco Ong and Leticia Ong, in a suit for breach of contract and/or specific performance with prayer for writ of preliminary injunction and damages thereat commenced by them against petitioner Development Bank of the Philippines (DBP). Petitioner filed by registered mail a motion for extension time to submit petition, paying the corresponding docket fees therefor by money order. Upon receipt of the motion, the Court docketed the case as G.R. No. 144797. Before actual receipt of said motion, however, petitioner personally filed its petition, which was docketed with a lower number as G.R. No. 144661. What then appears to be two (2) cases before us are actually just one, now the subject of this decision. The facts are simple and undisputed: Petitioners foreclosed asset, formerly owned by one Enrique Abada under TCT No. T-4786 and located at Corrales Extension, Cagayan de Oro City is the subject of this controversy. On May 25, 1988, respondent Francisco Ong with the conformity of his wife Leticia Ong, addressed a written offer to petitioner thru its branch manager at Cagayan de Oro City to buy the subject property on a negotiated sale basis and submitted his best and last offer to purchase[2] under the following terms: PURCHASE PRICE P136,000.00 DOWNPAYMENT .. 14,000.00 BALANCE P122,000.00 TERM: C A S H MODE OF PAYMENT: Payable upon ejection of occupants on the property subject of my offer. I/We am/are depositing the amount of P14,000.00 in cash/check to accompany my/our offer, it being expressly understood, however, that the same does not bind the DBP to the offer until after my/our receipt of its approval by the higher authorities of the bank. Should the bank receive an offer from a third-party buyer higher by more than 5% or at more advantageous term accompanied by a deposit of at least 10% of the offered price, or a higher offer from the former-owner for at least the updated Total Claim of the Bank accompanied by a minimum deposit of 20% of the purchase price, the Bank may favorably consider the higher offer and thereafter refund my/our deposit within three (3) working days after the determination of the most advantageous offer. The foregoing offer was duly NOTED by petitioners branch head at its Cagayan de Oro City Branch, Jose Z. Lagrito (Lagrito, for brevity), and Official Receipt No. 3081947 was issued for the amount of P14,000.00 as respondents deposit. In a letter dated October 21, 1988[3], sent to respondents via registered mail, Lagrito informed the spouses that the bank recently received an offer from another interested third-party-buyer of the same 40

property at the same price and term, but better and more advantageous to the Bank considering that the buyer will assume the responsibility at her expense for the ejectment of present occupants in the said property. Nonetheless, respondents were given in the same letter three (3) days within which to match the said offer, failing in which the Bank will immediately award the said property to the other buyer, in which event respondents deposit of P14,000.00 shall be refunded to them upon surrender of O.R. No. 3081947. In yet another written offer dated October 28, 1988 [4], respondents matched the said offer of the second interested buyer by assuming the responsibility at my/our own expense for the ejection of squatters/occupants, if any, on the property. On April 7, 1989, there was a conference between respondents, together with their counsel, and the bank whereat respondents were informed why the sale could not be awarded to them. Thereafter, in a letter dated September 6, 1990[5], respondents were notified that the property would instead be offered for public bidding on September 24, 1990 at ten 10:00 oclock in the morning. Feeling aggrieved by such turn of events, respondents filed with the Regional Trial Court at Cagayan de Oro City a complaint for breach of contract and/or specific performance against petitioner. Thereat, the complaint was docketed as Civil Case No. 90-422 which was raffled to Branch 23 of the court. After pre-trial, the parties agreed to submit the case for judgment based on the pleadings. Accordingly, the trial court required them to submit simultaneously their respective memoranda within thirty (30) days. Only petitioner filed its memorandum. In a decision[6] dated April 25, 1995, the trial court dismissed the complaint finding that there was no perfected contract of sale between the parties, hence, there is no breach to speak of since there was no contract from the very beginning. However, upon respondents motion for reconsideration, the trial court vacated its judgment and set the case for the reception of evidence. This time, only the respondents adduced their evidence consisting of the lone testimony of respondent Francisco Ong and the documents identified by him in the course thereof. In his testimony, Ong gave the respondents version of what supposedly transpired in their transaction with petitioner. According to him, he and his wife went to the bank branch at Cabayan de Oro City and looked for Roy Palasan, a bank clerk thereat and told the latter that they were interested to buy two (2) lots. Palasan went to talk to Lagrito, the branch manager. Palasan returned to the spouses and informed them that the branch manager agreed to sell the property to them. Palasan further told them that they will be required to pay ten (10%) percent of the purchase price as downpayment, adding that if they were to pay the purchase price in cash, they would be entitled to a ten (10%) percent discount. After some computations, respondents rounded up the purchase price at P136,000.00 and pegged the downpayment therefor at P14,000.00. They were then required by Palasan to sign a bank form supposedly to express their firm offer to purchase the subject property. But since the form signed by them contains the statement that the approval of higher authorities of the bank is required to close the deal, respondents queried Palasan about it. Palasan, however, told them that the documents were only for formality purposes, and further assured them that the branch manager has already agreed to sell the subject property to them. Having completed the presentation of their evidence, respondents rested their case. For its part, petitioner no longer adduced any evidence but merely opted to formally offer its documentary exhibits. Thereafter, the case was submitted for resolution. 41

On September 26, 1996, the trial court came out with a new decision, [7] this time rendering judgment for the respondents, as follows: WHEREFORE, by reason of preponderance of evidence, the Court hereby finds in favor of the plaintiffs as against the defendant and hereby orders the defendant: 1. To execute a final sale of the lot subject matter of the contract of sale at the original agreed price of P136,000.00; 2. Defendant to accept the balance of the purchase price from the plaintiffs; 3. Defendant to pay moral damages in the amount of P30,000.00; 4. Defendant to refund the amount of P10,000.00 actual litigation expenses; and to pay attorneys fees in the amount of P20,000.00. SO ORDERED. Therefrom, petitioner went on appeal to the Court of Appeals in CA-G.R. CV No. 54919, and, on March 5, 1999, the appellate court rendered the herein assailed decision [8]affirming in toto that of the trial court, thus: ACCORDINGLY, the foregoing premises considered, the appealed decision is hereby AFFIRMED in toto. SO ORDERED. With its motion for reconsideration of the same decision having been denied by the Court of Appeals in its equally challenged resolution of July 19, 2000,[9] petitioner is now with us thru the present recourse on the following grounds: A. THAT THE RESPONDENTS INTRODUCTION OF PAROL EVIDENCE TO PROVE THE ALLEGED MEETING OF MINDS BETWEEN THE PARTIES WAS NOT SANCTIONED BY RULE 130, SEC. 9, RULES OF COURT, CONTRARY TO THE FINDINGS OF THE LOWER COURTS, CONSIDERING THAT THERE WAS NO WRITTEN CONTRACT THAT WAS EVER EXECUTED BY THE PARTIES IN THIS CASE, BUT MERELY UNILATERAL WRITTEN COMMUNICATIONS, AT BEST CONSTITUTING OFFERS AND COUNTEROFFERS. B. THAT THE QUANTUM OF PROOF IS WANTING TO PROVE THE ALLEGED PERFECTION OF CONTRACT OF SALE BETWEEN THE PARTIES BASED ON THE SOLE, UNCORROBORATED, ORAL TESTIMONY THUS FAR PRESENTED BY THE RESPONDENTS. C. THAT THE BURDEN OF PROOF THAT THERE WAS PERFECTION OF THE CONTRACT OF SALE BETWEEN THE PARTIES BASICALLY REST WITH THE RESPONDENTS, NOTWITHSTANDING THE NON42

OBJECTION ON THE PART OF HEREIN PETITIONER DURING THE INTRODUCTION OF THAT PAROL EVIDENCE; THE ADMISSIBILITY OF PETITIONERS (sic.) PAROL EVIDENCE DOES NOT AUTOMATICALLY RIPEN THE TESTIMONY AS A TRUTH RESPECTING A MATTER OF FACT AS ITS CREDIBILITY AND TRUSTWORTHINESS AND WEIGHT ARE STILL SUBJECT TO JUDICIAL SCRUTINY AND APPRECIATION. D. THAT THERE WAS ACTUALLY OPPOSITION ON THE PART OF THE PETITIONER TO THE CONTENTS OF THE ORAL TESTIMONY OF THE RESPONDENT REGARDING THE ALLEGED PERFECTION OF CONTRACT OF SALE BECAUSE THE PETITIONER HAD ALREADY INTERPOSED THEIR DEFENSES WHEN IT FILED A MEMORANDUM ATTACHING THEREIN THE DOCUMENTARY AS WELL AS DECLARATIONS IN ITS PLEADINGS ON THE NON-PERFECTION OF SUCH CONTRACT WHEN THE CASE WAS THEN SUBMITTED FOR JUDGMENT ON THE PLEADINGS, AS AGREED BY THE PARTIES DURING THE PRETRIAL, AND SUCH EVIDENCES WERE ALREADY PASSED UPON BY THE COURT WHEN IT RENDERED A JUDGMENT DATED APRIL 25, 1995. We GRANT the petition. At the very core of the controversy is the question of whether or not there actually was a perfected contract of sale between petitioner and respondents, for which the Court may compel petitioner to issue a board resolution approving the sale and to execute the final deed of sale in respondents favor, and/or hold petitioner liable for a breach thereof. Needless to state, without a perfected contract of sale, there could be no cause of action for specific performance or breach thereof. The trial court went on one direction by ruling in its earlier decision of April 25, 1995 that there was no perfected contract, but upon respondents motion for reconsideration, went exactly the opposite path by completely reversing itself in its herein challenged decision of September 26, 1996. Apparently, the trial courts ruling that there was already a perfected contract of sale was premised on its following factual findings: 1. That plaintiff [respondents] made a downpayment in a check that was subsequently encashed by the defendant [petitioner] bank; 2. That the sister-in-law of plaintiff [respondents] entered into the same arrangement and was able to buy the property she wanted to buy from defendant [petitioner] bank; 3. That defendant [petitioner] never presented any witness to rebut the positive and clear testimony of plaintiff [respondents] that it was a perfected contract of sale entered into by the former with the defendant [petitioner] bank.[10] Sustaining the foregoing factual findings of the trial court, the appellate court wrote in its assailed decision of March 5, 1999: This positive and clear testimony of [respondent] Ong was not objected to nor rebutted by the [petiotioner]. Notably, the bank personnel involved in the transaction, namely, Roy Palasan and the Branch Manager of the [petitioners] Cagayan de Oro Branch, Joe Lagrito, were never presented to refute the testimony of the [respondents] that the bank has agreed to sell the property to the 43

[respondents]. Suffice it to state that [respondents] were entitled to rely on the representation of Lagrito who, after all, is the banks manager. Under the premise that a bank is bound by the obligation contracted by its officers, the contract of sale between [petitioner] and the [respondents] was perfected when Palasan and Lagrito communicated the approval of the sale of the lot to the [respondents]. Significantly, the unrebutted testimony of Francisco Ong reveals that Norma Silfavan, [respondents] sister, made a similar offer to the [petitioner] under the same terms and conditions as to that of the [respondents], and was likewise assured by the same bank personnel that her offer, along with the [respondents] offer was already approved. Eventually, the transaction resulted in a consummated sale between Silfavan and DBP. Under these premises, We can not see any reason why the [petitioner] did not accord the same treatment to the [respondents] who were similarly situated. Evidently, the two (2) courts below were convinced that the actuation of Palasan, a mere bank clerk, upon which respondents relied in believing that their offer to purchase was already approved by the bank manager, would bind the bank to a perfected contract of sale between the parties in this case. The Court of Appeals further added that the acceptance of the offer to purchase was sufficiently established from the parol evidenceadduced by respondents during the trial. We do not agree. Concededly, in petitions for review on certiorari, our task is not to review once again the factual findings of the Court of Appeals and the trial court, but to determine if, on the basis of the facts thus found, the conclusions of law reached are correct or not. Judging from the findings of the two (2) courts below and the testimony of respondent Francisco Ong himself, it appears clear to us that the transaction between the respondents and the petitioner was limited to Palasan, one of the clerks of petitioners branch in Cagayan de Oro City. Lagrito, the branch manager, had no personal or direct communication with respondents to express his alleged consent to the sale transaction. Thus, the undisputed evidence showed that it was Palasan, a mere bank clerk, and not the branch manager himself who assured respondents that theirs was a closed deal. We are very much aware of our pronouncement in Rural Bank of Milaor vs. Ocfemia,[11] involving a mandamus suit where the supposed buyer of a foreclosed property from a bank sought a court order to compel the bank to issue the required board resolution confirming the sale between the parties therein. There, this Court, speaking thru Mr. Justice Artemio Panganiban, stated: Notwithstanding the putative authority of the manager to bind the bank in the Deed of Sale, petitioner has failed to file an answer to the Petition below within the reglementary period, let alone present evidence controverting such authority. Indeed, when one of herein respondents, Marife S. Nio, went to the bank to ask for the board resolution, she was merely told to bring the receipts. The bank failed to categorically declare that Tena had no authority. This Court stresses the following: . . . Corporate transactions would speedily come to a standstill were every person dealing with a corporation held duty-bound to disbelieve every act of its responsible officers, no matter how regular they should appear on their face. This Court has observed in Ramirez vs. Orientalist Co., 38 Phil. 634, 654-655, that In passing upon the liability of a corporation in cases of this kind it is always well to keep in mind the situation as it presents itself to the third party with whom the contract is made. Naturally he can have 44

little or no information as to what occurs in corporate meetings; and he must necessarily rely upon the external manifestation of corporate consent. The integrity of commercial transactions can only be maintained by holding the corporation strictly to the liability fixed upon it by its agents in accordance with law; and we would be sorry to announce a doctrine which would permit the property of man in the city of Paris to be whisked out of his hands and carried into a remote quarter of the earth without recourse against the corporation whose name and authority had been used in the manner disclosed in this case. As already observed, it is familiar doctrine that if a corporation knowingly permits one of its officers, or any other agent, to do acts within the scope of an apparent authority, and thus holds him out to the public as possessing power to do those acts, the corporation will, as against any one who has in good faith dealt with the corporation through such agent, be estopped from denying his authority; and where it is said 'if the corporation permits this means the same as 'if the thing is permitted by the directing power of the corporation.[12] In this light, the bank is estopped from questioning the authority of the bank manager to enter into the contract of sale. If a corporation knowingly permits one of its officers or any other agent to act within the scope of an apparent authority, it holds the agent out to the public as possessing the power to do those acts; thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agent's authority.[13] Unquestionably, petitioner has authorized Tena to enter into the Deed of Sale. Accordingly, it has a clear legal duty to issue the board resolution sought by respondents. Having authorized her to sell the property, it behooves the bank to confirm the Deed of Sale so that the buyers may enjoy its full use. There is, however, a striking and very material difference between the aforecited case and the one at bar. For, unlike in Milaor where it was the branch manager who approved the sale for and in behalf of the bank, here, there is absolutely no approval whatsoever by any responsible bank officer of the petitioner. True it is that the signature of branch manager Lagrito appears below the typewritten word NOTED at the bottom of respondents offer to purchase dated May 25, 1988. [14] By no stretch of imagination, however, can the mere NOTING of such an offer be taken to mean an approval of the supposed sale. Quite the contrary, the very circumstance that the offer to purchase was merely NOTED by the branch manager and not approved, is a clear indication that there is no perfected contract of sale to speak of. The representation of Roy Palasan, a mere clerk at petitioners Cagayan de Oro City branch, that the manager had already approved the sale, even if true, cannot bind the petitioner bank to a contract of sale with respondents, it being obvious to us that such a clerk is not among the bank officers upon whom such putative authority may be reposed by a third party. There is, thus, no legal basis to bind petitioner into any valid contract of sale with the respondents, given the absolute absence of any approval or consent by any responsible officer of petitioner bank. And because there is here no perfected contract of sale between the parties, respondents action for breach of contract and/or specific performance is simply without any leg to stand on and must therefore fall. We also disagree with the Court of Appeals that the encashment of the check representing the P14,000.00 deposit in relation to respondents offer to purchase is an indication or proof of perfection of a contract of sale. It must be noted that the very documents[15] signed by the respondents as their offer to purchase unmistakably state that the deposit shall only form part of the purchase price if the offer to purchase is approved, it being expressly understood xxx that the same (i.e., the deposit) 45

does not bind DBP to the offer until my/our receipt of its approval by higher authorities of the bank. It may be so that the official receipt issued therefor by the petitioner termed such deposit as a downpayment. But the very written offers of the respondents unequivocably and invariably speak of such amount as deposit, above deposit, we are depositing the amount of P14,000.00. Since there never was any approval or acceptance by the higher authorities of petitioner of respondents offer to purchase, the encashment of the check can not in any way represent partial payment of any purchase price. With the hard reality that no approval or acceptance of respondents offer to buy exists in this case, any independent transaction between petitioner and another third-party, like the one involving respondents sister, would be irrelevant and immaterial insofar as respondents own transaction with the petitioner is concerned. Besides, apart from saying that respondents sister made a similar offer to the [petitioner] under the same terms and conditions as to that of the [respondents], and was likewise assured by the same bank personnel that her offer xxx was already approved, which eventually resulted into a consummated sale between (the sister) and DBP, the Court of Appeals made no finding that the sisters transaction with the petitioner was made exactly under the same circumstances obtaining in the present case. In any event, petitioners favorable action on the offer of respondents sister is hardly, if ever, relevant and determinative in the resolution of the legal issue presented in this case. In sum, we cannot, in law, sustain the herein challenged issuances of the Court of Appeals. WHEREFORE, the instant petition is GRANTED and the assailed decision and resolution of the Court of Appeals REVERSED and SET ASIDE. The complaint filed in this case is accordingly DISMISSED. No pronouncement as to costs. SO ORDERED. [G.R. No. 117847. October 7, 1998] PEOPLES AIRCARGO AND WAREHOUSING CO. INC., petitioner, vs. COURT OF APPEALS and STEFANI SAO, respondents. DECISION PANGANIBAN, J.: Contracts entered into by a corporate president without express prior board approval bind the corporation, when such officers apparent authority is established and when these contracts are ratified by the corporation.

The Case This principle is stressed by the Court in rejecting the Petition for Review of the February 28, 1994 Decision and the October 28, 1994 Resolution of the Court of Appeals in CA-GR CV No. 30670. In a collection case[1] filed by Stefani Sao against Peoples Aircargo and Warehousing Co., Inc., the Regional Trial Court (RTC) of Pasay City, Branch 110, rendered a Decision [2]dated October 26, 1990, the dispositive portion of which reads:[3] WHEREFORE, in light of all the foregoing, judgment is hereby rendered, ordering [petitioner] to pay [private respondent] the amount of sixty thousand (P60,000.00) pesos representing payment of 46

[private respondents] services in preparing the manual of operations and in the conduct of a seminar for [petitioner]. The Counterclaim is hereby dismissed. Aggrieved by what he considered a minuscule award of P60,000, private respondent appealed to the Court of Appeals[4] (CA) which, in its Decision promulgated February 28, 1994, granted his prayer for P400,000, as follows:[5] WHEREFORE, PREMISES CONSIDERED, the appealed judgment is hereby MODIFIED in that [petitioner] is ordered to pay [private respondent] the amount of four hundred thousand pesos (P400,000.00) representing payment of [private respondents] services in preparing the manual of operations and in the conduct of a seminar for [petitioner]. As no new ground was raised by petitioner, reconsideration of the above-mentioned Decision was denied in the Resolution promulgated on October 28, 1994.

The Facts Petitioner is a domestic corporation, which was organized in the middle of 1986 to operate a customs bonded warehouse at the old Manila International Airport in Pasay City.[6] To obtain a license for the corporation from the Bureau of Customs, Antonio Punsalan Jr., the corporation president, solicited a proposal from private respondent for the preparation of a feasibility study.[7] Private respondent submitted a letter-proposal dated October 17, 1986 (First Contract hereafter) to Punsalan, which is reproduced hereunder:[8] Dear Mr. Punsalan: With reference to your request for professional engineering consultancy services for your proposed MIA Warehousing Project may we offer the following outputs and the corresponding rate and terms of agreement: ==================================== Project Feasibility Study consisting of Market Study Technical Study Financial Feasibility Study Preparation of pertinent documentation requirements for the application ===================================================== The above services will be provided for a fee of [p]esos 350,000.00 payable according to the following schedule: 47

===================================================== Fifty percent (50%) .upon confirmation of the agreement Twenty-five percent (25%)..15 days after the confirmation of the agreement Twenty-five percent (25%)..upon submission of the specified outputs The outputs will be completed and submitted within 30 days upon confirmation of the agreement and receipt by us of the first fifty percent payment. --------------------------------------------------------------------------------------------Thank you. Yours truly, CONFORME: (S)STEFANI C. SAO (S)ANTONIO C. PUNSALAN, JR. (T)STEFANI C. SAO (T)ANTONIO C. PUNSALAN, JR. Consultant for President, PAIRCARGO Industrial Engineering Initially, Cheng Yong, the majority stockholder of petitioner, objected to private respondents offer, as another company priced a similar proposal at only P15,000.[9]However, Punsalan preferred private respondents services because of the latters membership in the task force, which was supervising the transition of the Bureau of Customs from the Marcos government to the Aquino administration.[10] On October 17, 1986, petitioner, through Punsalan, sent private respondent a letter, confirming their agreement as follows: Dear Mr. Sao: With regard to the services offered by your company in your letter dated 13 October 1986, for the preparation of the necessary study and documentations to support our Application for Authority to Operate a public Customs Bonded Warehouse located at the old MIA Compound in Pasay City, please be informed that our company is willing to hire your services and will pay the amount of THREE HUNDRED FIFTY THOUSAND PESOS (P350,000.00) as follows: P100,000.00 - upon signing of the agreement; 150,000.00 - on or before October 31, 1986, with the favorable Recommendation of the CBW on our application. 100,000.00 - upon receipt of the study in final form. Very truly yours, 48

(S)ANTONIO C. PUNSALAN (T)ANTONIO C. PUNSALAN President CONFORME & RECEIVED from PAIRCARGO, the amount of ONE HUNDRED THOUSAND PESOS (P100,000.00), this 17th day of October, 1986 as 1st installment payment of the service agreement dated October 13, 1986. (S)STEFANI C. SAO (T)STEFANI C. SAO Accordingly, private respondent prepared a feasibility study for petitioner which eventually paid him the balance of the contract price, although not according to the schedule agreed upon.[11] On December 4, 1986, upon Punsalans request, private respondent sent petitioner another letterproposal (Second Contract hereafter), which reads: Peoples Air Cargo & Warehousing Co., Inc. Old MIA Compound, Metro Manila Attention: Mr. ANTONIO PUN[S]ALAN, JR. President Dear Mr. Pun[s]alan: This is to formalize our proposal for consultancy services to your company the scope of which is defined in the attached service description. The total service you have decided to avail xxx would be available upon signing of the conforme below and would come [in] the amount of FOUR HUNDRED THOUSAND PESOS (P400,000.00) payable at the schedule defined as follows (with the balance covered by post-dated cheques): Downpayment upon signing conforme . . . P80,000.00 15 January 1987 . . . . . . . . . . . . . 53,333.00 30 January 1987 . . . . . . . . . . . . . 53,333.00 49

15 February 1987 . . . . . . . . . . . . . 53,333.00 28 February 1987 . . . . . . . . . . . . . 53,333.00 15 March1987 . . . . . . . . . . . . . 53,333.00 30 March 1987 . . . . . . . . . . . . . 53,333.00 With this package, you are assured of the highest service quality as our performance record shows we always deliver no less. Thank you very much. Yours truly, (S)STEFANI C. SAO (T)STEFANI C. SAO Industrial Engineering Consultant CONFORME: (S)ANTONIO C. PUNSALAN JR. (T)PAIRCARGO CO. INC. During the trial, the lower court observed that the Second Contract bore, at the lower right portion of the letter, the following notations in pencil: 1. Operations Manual 2. Seminar/workshop for your employees P400,000 - package deal 50% upon completion of seminar/workshop 50% upon approval by the Commissioner The Manual has already been approved by the Commissioner but payment has not yet been made." The lower left corner of the letter also contained the following notations: 1st letter - 4 Dec. 1986 2nd letter - 15 June 1987 with 50

Hinanakit. On January 10, 1987, Andy Villaceren, vice president of petitioner, received the operations manual prepared by private respondent.[12] Petitioner submitted said operations manual to the Bureau of Customs in connection with the formers application to operate a bonded warehouse; thereafter, in May 1987, the Bureau issued to it a license to operate, enabling it to become one of the three public customs bonded warehouses at the international airport.[13] Private respondent also conducted, in the third week of January 1987 in the warehouse of petitioner, a three-day training seminar for the latters employees.[14] On March 25, 1987, private respondent joined the Bureau of Customs as special assistant to then Commissioner Alex Padilla, a position he held until he became technical assistant to then Commissioner Miriam Defensor-Santiago on March 7, 1988.[15]Meanwhile, Punsalan sold his shares in petitionercorporation and resigned as its president in 1987.[16] On February 9, 1988, private respondent filed a collection suit against petitioner. He alleged that he had prepared an operations manual for petitioner, conducted a seminar-workshop for its employees and delivered to it a computer program; but that, despite demand, petitioner refused to pay him for his services. Petitioner, in its answer, denied that private respondent had prepared an operations manual and a computer program or conducted a seminar-workshop for its employees. It further alleged that the letter-agreement was signed by Punsalan without authority, in collusion with [private respondent] in order to unlawfully get some money from [petitioner], and despite his knowledge that a group of employees of the company had been commissioned by the board of directors to prepare an operations manual.[17] The trial court declared the Second Contract unenforceable or simulated. However, since private respondent had actually prepared the operations manual and conducted a training seminar for petitioner and its employees, the trial court awarded P60,000 to the former, on the ground that no one should be unjustly enriched at the expense of another (Article 2142, Civil Code). The trial court determined the amount in light of the evidence presented by defendant on the usual charges made by a leading consultancy firm on similar services.[18]

The Ruling of the Court of Appeals To Respondent Court, the pivotal issue of private respondents appeal was the enforceability of the Second Contract. It noted that petitioner did not appeal the Decision of the trial court, implying that it had agreed to pay the P60,000 award. If the contract was valid and enforceable, then petitioner should be held liable for the full amount stated therein, not P60,000 as held by the lower court. Rejecting the finding of the trial court that the December 4, 1986 contract was simulated or unenforceable, the CA ruled in favor of its validity and enforceability.According to the Court of Appeals, the evidence on record shows that the president of petitioner-corporation had entered into the First Contract, which was similar to the Second Contract. Thus, petitioner had clothed its president with apparent authority to enter into the disputed agreement. As it had also become the practice of the petitioner-corporation to allow its president to negotiate and execute contracts necessary to secure its license as a customs bonded warehouse without prior board approval, the board itself, by its acts and through acquiescence, practically laid aside the normal requirement of prior express approval. The 51

Second Contract was declared valid and binding on the petitioner, which was held liable to private respondent in the full amount of P400,000. Disagreeing with the CA, petitioner lodged this petition before us.[19] The Issues Instead of alleging reversible errors, petitioner imputes grave abuse of discretion to the Court of Appeals, viz.:[20] I. xxx [I]n ruling that the subject letter-agreement for services was binding on the corporation simply because it was entered into by its president[;] II. xxx [I]n ruling that the subject letter-agreement for services was binding on the corporation notwithstanding the lack of any board authority since it was the purported practice to allow the president to enter into contracts of said nature (citing one previous instance of a similar contract)[;] and III. xxx [I]n ruling that the subject letter-agreement for services was a valid contract and not merely simulated." The Court will overlook the lapse of petitioner in alleging grave abuse of discretion as its ground for seeking a reversal of the assailed Decision. Although the Rules of Court specify reversible errors as grounds for a petition for review under Rule 45, the Court will lay aside for the nonce this procedural lapse and consider the allegations of grave abuse as statements of reversible errors of law. Petitioner does not contest its liability; it merely disputes the amount of such accountability. Hence, the resolution of this petition rests on the sole issue of the enforceability and validity of the Second Contract, more specifically: (1) whether the president of the petitioner-corporation had apparent authority to bind petitioner to the Second Contract; and (2) whether the said contract was valid and not merely simulated.

The Courts Ruling The petition is not meritorious.

First Issue: Apparent Authority of a Corporate President Petitioner argues that the disputed contract is unenforceable, because Punsalan, its president, was not authorized by its board of directors to enter into said contract. The general rule is that, in the absence of authority from the board of directors, no person, not even its officers, can validly bind a corporation.[21] A corporation is a juridical person, separate and distinct from its stockholders and members, having xxx powers, attributes and properties expressly authorized by law or incident to its existence.[22] 52

Being a juridical entity, a corporation may act through its board of directors, which exercises almost all corporate powers, lays down all corporate business policies and is responsible for the efficiency of management,[23] as provided in Section 23 of the Corporation Code of the Philippines: SEC. 23. The Board of Directors or Trustees. -- Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees x x x. Under this provision, the power and the responsibility to decide whether the corporation should enter into a contract that will bind the corporation is lodged in the board, subject to the articles of incorporation, bylaws, or relevant provisions of law.[24] However, just as a natural person may authorize another to do certain acts for and on his behalf, the board of directors may validly delegate some of its functions and powers to officers, committees or agents. The authority of such individuals to bind the corporation is generally derived from law, corporate bylaws or authorization from the board, either expressly or impliedly by habit, custom or acquiescence in the general course of business, viz.: [25] A corporate officer or agent may represent and bind the corporation in transactions with third persons to the extent that [the] authority to do so has been conferred upon him, and this includes powers which have been intentionally conferred, and also such powers as, in the usual course of the particular business, are incidental to, or may be implied from, the powers intentionally conferred, powers added by custom and usage, as usually pertaining to the particular officer or agent, and such apparent powers as the corporation has caused persons dealing with the officer or agent to believe that it has conferred. Accordingly, the appellate court ruled in this case that the authority to act for and to bind a corporation may be presumed from acts of recognition in other instances, wherein the power was in fact exercised without any objection from its board or shareholders.Petitioner had previously allowed its president to enter into the First Contract with private respondent without a board resolution expressly authorizing him; thus, it had clothed its president with apparent authority to execute the subject contract. Petitioner rebuts, arguing that a single isolated agreement prior to the subject contract does not constitute corporate practice, which Webster defines as frequent or customary action. It cites Board of Liquidators v. Kalaw,[26] in which the practice of NACOCO allowing its general manager to negotiate and execute contract in its copra trading activities for and on its behalf, without prior board approval, was inferred from sixty contracts not one, as in the present case -- previously entered into by the corporation without such board resolution. Petitioners argument is not persuasive. Apparent authority is derived not merely from practice. Its existence may be ascertained through (1) the general manner in which the corporation holds out an officer or agent as having the power to act or, in other words, the apparent authority to act in general, with which it clothes him; or (2) the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, whether within or beyond the scope of his ordinary powers.[27] It requires presentation of evidence of similar act(s) executed either in its favor or in favor of other parties.[28] It is not the quantity of similar acts which establishes apparent authority, but the vesting of a corporate officer with the power to bind the corporation. In the case at bar, petitioner, through its president Antonio Punsalan Jr., entered into the First Contract without first securing board approval. Despite such lack of board approval, petitioner did not object to or repudiate said contract, thus clothing its president with the power to bind the 53

corporation. The grant of apparent authority to Punsalan is evident in the testimony of Yong -- senior vice president, treasurer and major stockholder of petitioner. Testifying on the First Contract, he said:[29] A: Mr. [Punsalan] told me that he prefer[s] Mr. Sao because Mr. Sao is very influential with the Collector of Customs[s]. Because the Collector of Custom[s] will be the one to approve our project study and I objected to that, sir. And I said it [was an exorbitant] price. And Mr. Punsalan he is the [p]resident, so he [gets] his way. Q: And so did the company eventually pay this P350,000.00 to Mr. Sao? A: Yes, sir. The First Contract was consummated, implemented and paid without a hitch. Hence, private respondent should not be faulted for believing that Punsalans conformity to the contract in dispute was also binding on petitioner. It is familiar doctrine that if a corporation knowingly permits one of its officers, or any other agent, to act within the scope of an apparent authority, it holds him out to the public as possessing the power to do those acts; and thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agents authority.[30] Furthermore, private respondent prepared an operations manual and conducted a seminar for the employees of petitioner in accordance with their contract. Petitioner accepted the operations manual, submitted it to the Bureau of Customs and allowed the seminar for its employees. As a result of its aforementioned actions, petitioner was given by the Bureau of Customs a license to operate a bonded warehouse. Granting arguendothen that the Second Contract was outside the usual powers of the president, petitioners ratification of said contract and acceptance of benefits have made it binding, nonetheless.The enforceability of contracts under Article 1403(2) is ratified by the acceptance of benefits under them under Article 1405. Inasmuch as a corporate president is often given general supervision and control over corporate operations, the strict rule that said officer has no inherent power to act for the corporation is slowly giving way to the realization that such officer has certain limited powers in the transaction of the usual and ordinary business of the corporation.[31] In the absence of a charter or bylaw provision to the contrary, the president is presumed to have the authority to act within the domain of the general objectives of its business and within the scope of his or her usual duties.[32] Hence, it has been held in other jurisdictions that the president of a corporation possesses the power to enter into a contract for the corporation, when the conduct on the part of both the president and the corporation [shows] that he had been in the habit of acting in similar matters on behalf of the company and that the company had authorized him so to act and had recognized, approved and ratified his former and similar actions.[33]Furthermore, a party dealing with the president of a corporation is entitled to assume that he has the authority to enter, on behalf of the corporation, into contracts that are within the scope of the powers of said corporation and that do not violate any statute or rule on public policy.[34]

Second Issue: Alleged Simulation of the First Contract

54

As an alternative position, petitioner seeks to pare down its liabilities by limiting its exposure from P400,000 to only P60,000, the amount awarded by the RTC. Petitioner capitalizes on the badges of fraud cited by the trial court in declaring said contract either simulated or unenforceable, viz.: xxx The October 1986 transaction with [private respondent] involved P350,000. The same was embodied in a letter which bore therein not only the conformity of [petitioners] then President Punsalan but also drew a letter-confirmation from the latter for, indeed, he was clothed with authority to enter into the contract after the same was brought to the attention and consideration of [petitioner]. Not only that, a [down payment] was made. In the alleged agreement of December 4, 1986 subject of the present case, the amount is even bigger-P400,000.00. Yet, the alleged letter-agreement drew no letter of confirmation. And no [down payment] and postdated checks were given. Until the filing of the present case in February 1988, no written demand for payment was sent to [petitioner]. [Private respondents] claim that he sent one in writing, and one was sent by his counsel who manifested that [h]e was looking for a copy in [his] files fails in light of his failure to present any such copy. These and the following considerations, to wit: 1) Despite the fact that no [down payment] and/or postdated checks [partial payments] (as purportedly stipulated in the alleged contract) [was given, private respondent] went ahead with the services[;] 2) [There was a delay in the filing of the present suit, more than a year after [private respondent] allegedly completed his services or eight months after the alleged last verbal demand for payment made on Punsalan in June 1987; 3) Does not Punsalans writing allegedly in June 1987 on the alleged letter-agreement of your employees[,] when it should have been our employees, as he was then still connected with [petitioner], indicate that the letter-agreement was signed by Punsalan when he was no longer connected with [petitioner] or, as claimed by [petitioner], that Punsalan signed it without [petitioners] authority and must have been done in collusion with plaintiff in order to unlawfully get some money from [petitioner]? 4) If, as [private respondent] claims, the letter was returned by Punsalan after affixing thereon his conformity, how come xxx when Punsalan allegedly visited [private respondent] in his office at the Bureau of Customs, in June 1987, Punsalan brought (again?) the letter (with the pencil [notation] at the left bottom portion allegedly already written)? 5) How come xxx [private respondent] did not even keep a copy of the alleged service contract allegedly attached to the letter-agreement? 6) Was not the letter-agreement a mere draft, it bearing the corrections made by Punsalan of his name (the letter n is inserted before the last letter o in Antonio) and of the spelling of his family name (Punsalan, not Punzalan)? 7) Why was not Punsalan impleaded in the case? The issue of whether the contract is simulated or real is factual in nature, and the Court eschews factual examination in a petition for review under Rule 45 of the Rules of Court.[35] This rule, however, admits of exceptions, one of which is a conflict between the factual findings of the lower and of the appellate courts[36] as in the case at bar. 55

After judicious deliberation, the Court agrees with the appellate court that the alleged badges of fraud mentioned earlier have not affected in any manner the perfection of the Second Contract or proved the alleged simulation thereof. First, the lack of payment (whether down, partial or full payment), even after completion of private respondents obligations, imports only a defect in the performance of the contract on the part of petitioner. Second, the delay in the filing of action was not fatal to private respondents cause. Despite the lapse of one year after private respondent completed his services or eight months after the alleged last demand for payment in June 1987, the action was stillfiled within the allowable period, considering that an action based on a written contract prescribes only after ten years from the time the right of action accrues.[37] Third, a misspelling in the contract does not establish vitiation of consent, cause or object of the contract. Fourth, a confirmation letter is not an essential element of a contract; neither is it necessary to perfect one. Fifth, private respondents failure to implead the corporate president does not establish collusion between them. Petitioner could have easily filed a third-party claim against Punsalan if it believed that it had recourse against the latter. Lastly, the mere fact that the contract price was six times the alleged going rate does not invalidate it.[38] In short, these badges do not establish simulation of said contract. A fictitious and simulated agreement lacks consent which is essential to a valid and enforceable contract.[39] A contract is simulated if the parties do not intend to be bound at all (absolutely simulated),[40] or if the parties conceal their true agreement (relatively simulated).[41] In the case at bar, petitioner received from private respondent a letter-offer containing the terms of the former, including a stipulation of the consideration for the latters services. Punsalans conformity, as well as the receipt and use of the operations manual, shows petitioners consent to or, at the very least, ratification of the contract. To repeat, petitioner even submitted the manual to the Bureau of Customs and allowed private respondent to conduct the seminar for its employees. Private respondent heard no objection from the petitioner, until he claimed payment for the services he had rendered. Contemporaneous and subsequent acts are also principal factors in the determination of the will of the contracting parties.[42] The circumstances outlined above do not establish any intention to simulate the contract in dispute. On the contrary, the legal presumption is always on the validity of contracts. A corporation, by accepting benefits of a transaction entered into without authority, has ratified the agreement and is, therefore, bound by it.[43] WHEREFORE, the petition is hereby DENIED and the assailed Decision AFFIRMED. Costs against petitioner. SO ORDERED. [G.R. No. 126200. August 16, 2001] DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs. HONORABLE COURT OF APPEALS and REMINGTON INDUSTRIAL SALES CORPORATION, respondents. DECISION KAPUNAN, J.: Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court, seeking a review of the Decision of the Court of Appeals dated October 6, 1995 and the Resolution of the same court dated August 29, 1996. The facts are as follows: 56

Marinduque Mining Industrial Corporation (Marinduque Mining), a corporation engaged in the manufacture of pure and refined nickel, nickel and cobalt in mixed sulfides, copper ore/concentrates, cement and pyrite conc., obtained from the Philippine National Bank (PNB) various loan accommodations. To secure the loans, Marinduque Mining executed on October 9, 1978 a Deed of Real Estate Mortgage and Chattel Mortgage in favor of PNB. The mortgage covered all of Marinduque Minings real properties, located at Surigao del Norte, Sipalay, Negros Occidental, and at Antipolo, Rizal, including the improvements thereon. As of November 20, 1980, the loans extended by PNB amounted to P4 Billion, exclusive of interest and charges.[1] On July 13, 1981, Marinduque Mining executed in favor of PNB and the Development Bank of the Philippines (DBP) a second Mortgage Trust Agreement. In said agreement, Marinduque Mining mortgaged to PNB and DBP all its real properties located at Surigao del Norte, Sipalay, Negros Occidental, and Antipolo, Rizal, including the improvements thereon. The mortgage also covered all of Marinduque Minings chattels, as well as assets of whatever kind, nature and description which Marinduque Mining may subsequently acquire in substitution or replenishment or in addition to the properties covered by the previous Deed of Real and Chattel Mortgage dated October 7, 1978.Apparently, Marinduque Mining had also obtained loans totaling P2 Billion from DBP, exclusive of interest and charges.[2] On April 27, 1984, Marinduque Mining executed in favor of PNB and DBP an Amendment to Mortgage Trust Agreement by virtue of which Marinduque Mining mortgaged in favor of PNB and DBP all other real and personal properties and other real rights subsequently acquired by Marinduque Mining.[3] For failure of Marinduque Mining to settle its loan obligations, PNB and DBP instituted sometime on July and August 1984 extrajudicial foreclosure proceedings over the mortgaged properties. The events following the foreclosure are narrated by DBP in its petition, as follows: In the ensuing public auction sale conducted on August 31, 1984, PNB and DBP emerged and were declared the highest bidders over the foreclosed real properties, buildings, mining claims, leasehold rights together with the improvements thereon as well as machineries [sic] and equipments [sic] of MMIC located at Nonoc Nickel Refinery Plant at Surigao del Norte for a bid price of P14,238,048,150.00 [and] [o]ver the foreclosed chattels of MMIC located at Nonoc Refinery Plant at Surigao del Norte, PNB and DBP as highest bidders, bidded for P170,577,610.00 (Exhs. 5 to 5-A, 6, 7 to 7-AA- PNB/DBP). For the foreclosed real properties together with all the buildings, major machineries & equipment and other improvements of MMIC located at Antipolo, Rizal, likewise held on August 31, 1984, were sold to PNB and DBP as highest bidders in the sum ofP1,107,167,950.00 (Exhs. 10 to 10-X- PNB/ DBP). At the auction sale conducted on September 7, 1984[,] over the foreclosed real properties, buildings, & machineries/equipment of MMIC located at Sipalay, Negros Occidental were sold to PNB and DBP, as highest bidders, in the amount of P2,383,534,000.00 and P543,040,000.00 respectively (Exhs. 8 to 8-BB, 9 to 90-GGGGGGPNB/DBP). Finally, at the public auction sale conducted on September 18, 1984 on the foreclosed personal properties of MMIC, the same were sold to PNB and DBP as the highest bidder in the sum of P678,772,000.00 (Exhs. 11 and12-QQQQQPNB). PNB and DBP thereafter thru a Deed of Transfer dated August 31, 1984, purposely, in order to ensure the continued operation of the Nickel refinery plant and to prevent the deterioration of the assets 57

foreclosed, assigned and transferred to Nonoc Mining and Industrial Corporation all their rights, interest and participation over the foreclosed properties of MMIC located at Nonoc Island, Surigao del Norte for an initial consideration of P14,361,000,000.00 (Exh. 13-PNB). Likewise, thru [sic] a Deed of Transfer dated June 6, 1984, PNB and DBP assigned and transferred in favor of Maricalum Mining Corp. all its rights, interest and participation over the foreclosed properties of MMIC at Sipalay, Negros Occidental for an initial consideration of P325,800,000.00 (Exh. 14PNB/DBP). On February 27, 1987, PNB and DBP, pursuant to Proclamation No. 50 as amended, again assigned, transferred and conveyed to the National Government thru [sic] the Asset Privatization Trust (APT) all its existing rights and interest over the assets of MMIC, earlier assigned to Nonoc Mining and Industrial Corporation, Maricalum Mining Corporation and Island Cement Corporation (Exh. 15 & 15APNB/DBP).[4] In the meantime, between July 16, 1982 to October 4, 1983, Marinduque Mining purchased and caused to be delivered construction materials and other merchandise from Remington Industrial Sales Corporation (Remington) worth P921,755.95. The purchases remained unpaid as of August 1, 1984 when Remington filed a complaint for a sum of money and damages against Marinduque Mining for the value of the unpaid construction materials and other merchandise purchased by Marinduque Mining, as well as interest, attorneys fees and the costs of suit. On September 7, 1984, Remingtons original complaint was amended to include PNB and DBP as co-defendants in view of the foreclosure by the latter of the real and chattel mortgages on the real and personal properties, chattels, mining claims, machinery, equipment and other assets of Marinduque Mining.[5] On September 13, 1984, Remington filed a second amended complaint to include as additional defendant, the Nonoc Mining and Industrial Corporation (Nonoc Mining). Nonoc Mining is the assignee of all real and personal properties, chattels, machinery, equipment and all other assets of Marinduque Mining at its Nonoc Nickel Factory in Surigao del Norte.[6] On March 26, 1986, Remington filed a third amended complaint including the Maricalum Mining Corporation (Maricalum Mining) and Island Cement Corporation (Island Cement) as codefendants. Remington asserted that Marinduque Mining, PNB, DBP, Nonoc Mining, Maricalum Mining and Island Cement must be treated in law as one and the same entity by disregarding the veil of corporate fiction since: 1. Co-defendants NMIC, Maricalum and Island Cement which are newly created entities are practically owned wholly by defendants PNB and DBP, and managed by their officers, aside from the fact that the aforesaid co-defendants NMIC, Maricalum and Island Cement were organized in such a hurry and in such suspicious circumstances by co-defendants PNB and DBP after the supposed extra-judicial foreclosure of MMICs assets as to make their supposed projects assets, machineries and equipment which were originally owned by co-defendant MMIC beyond the reach of creditors of the latter. 2. The personnel, key officers and rank-and-file workers and employees of co-defendants NMIC, Maricalum and Island Cement creations of co-defendants PNB and DBP were the personnel of codefendant MMIC such that x x x practically there has only been a change of name for all legal purpose and intents. 58

3. The places of business not to mention the mining claims and project premises of co-defendants NMIC, Maricalum and Island Cement likewise used to be the places of business, mining claims and project premises of co-defendant MMIC as to make the aforesaid co-defendants NMIC, Maricalum and Island Cement mere adjuncts and subsidiaries of co-defendants PNB and DBP, and subject to their control and management. On top of everything, co-defendants PNB, DBP NMIC, Maricalum and Island Cement being all corporations created by the government in the pursuit of business ventures should not be allowed to ignore, x x x or obliterate with impunity nay illegally, the financial obligations of x x x MMIC whose operations co-defendants PNB and DBP had highly financed before the alleged extrajudicial foreclosure of defendant MMICs assets, machineries and equipment to the extent that major policies of codefendant MMIC were being decided upon by co-defendants PNB and DBP as major financiers who were represented in its board of directors forming part of the majority thereof which through the alleged extrajudicial foreclosure culminated in a complete take-over by co-defendants PNB and DBP bringing about the organization of their co-defendants NMIC, Maricalum and Island Cement to which were transferred all the assets, machineries and pieces of equipment of co-defendant MMIC used in its nickel mining project in Surigao del Norte, copper mining operation in Sipalay, Negros Occidental and cement factory in Antipolo, Rizal to the prejudice of creditors of co-defendant MMIC such as plaintiff Remington Industrial Sales Corporation whose stockholders, officers and rank-and-file workers in the legitimate pursuit of its business activities, invested considerable time, sweat and private money to supply, among others, co-defendant MMIC with some of its vital needs for its operation, which codefendant MMIC during the time of the transactions material to this case became x x x co-defendants PNB and DBPs instrumentality, business conduit, alter ego, agency (sic), subsidiary or auxiliary corporation, by virtue of which it becomes doubly necessary to disregard the corporation fiction that co-defendants PNB, DBP, MMIC, NMIC, Maricalum and Island Cement, six (6) distinct and separate entities, when in fact and in law, they should be treated as one and the same at least as far as plaintiffs transactions with co-defendant MMIC are concerned, so as not to defeat public convenience, justify wrong, subvert justice, protect fraud or confuse legitimate issues involving creditors such as plaintiff, a fact which all defendants were as (sic) still are aware of during all the time material to the transactions subject of this case.[7] On April 3, 1989, Remington filed a motion for leave to file a fourth amended complaint impleading the Asset Privatization Trust (APT) as co-defendant. Said fourth amended complaint was admitted by the lower court in its Order dated April 29, 1989. On April 10, 1990, the Regional Trial Court (RTC) rendered a decision in favor of Remington, the dispositive portion of which reads: WHEREFORE, judgment is hereby rendered in favor of the plaintiff, ordering the defendants Marinduque Mining & Industrial Corporation, Philippine National Bank, Development Bank of the Philippines, Nonoc Mining and Industrial Corporation, Maricalum Mining Corporation, Island Cement Corporation and Asset Privatization Trust to pay, jointly and severally, the sum of P920,755.95, representing the principal obligation, including the stipulated interest as of June 22, 1984, plus ten percent (10%) surcharge per annum by way of penalty, until the amount is fully paid; the sum equivalent to 10% of the amount due as and for attorneys fees; and to pay the costs.[8]

59

Upon appeal by PNB, DBP, Nonoc Mining, Maricalum Mining, Island Cement and APT, the Court of Appeals, in its Decision dated October 6, 1995, affirmed the decision of the RTC.Petitioner filed a Motion for Reconsideration, which was denied in the Resolution dated August 29, 1996. Hence, this petition, DBP maintaining that Remington has no cause of action against it or PNB, nor against their transferees, Nonoc Mining, Island Cement, Maricalum Mining, and the APT. On the other hand, private respondent Remington submits that the transfer of the properties was made in fraud of creditors. The presence of fraud, according to Remington, warrants the piercing of the corporate veil such that Marinduque Mining and its transferees could be considered as one and the same corporation. The transferees, therefore, are also liable for the value of Marinduque Minings purchases. In Yutivo Sons Hardware vs. Court of Tax Appeals,[9] cited by the Court of Appeals in its decision,[10] this Court declared: It is an elementary and fundamental principle of corporation law that a corporation is an entity separate and distinct from its stockholders and from other corporations to which it may be connected. However, when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons or in case of two corporations, merge them into one. (Koppel [Phils.], Inc., vs. Yatco, 71 Phil. 496, citing 1 Fletcher Encyclopedia of Corporation, Permanent Ed., pp. 135-136; U.S. vs. Milwaukee Refrigeration Transit Co., 142 Fed., 247, 255 per Sanborn, J.) xxx In accordance with the foregoing rule, this Court has disregarded the separate personality of the corporation where the corporate entity was used to escape liability to third parties. [11] In this case, however, we do not find any fraud on the part of Marinduque Mining and its transferees to warrant the piercing of the corporate veil. It bears stressing that PNB and DBP are mandated to foreclose on the mortgage when the past due account had incurred arrearages of more than 20% of the total outstanding obligation. Section 1 of Presidential Decree No. 385 (The Law on Mandatory Foreclosure) provides: It shall be mandatory for government financial institutions, after the lapse of sixty (60) days from the issuance of this decree, to foreclose the collateral and/or securities for any loan, credit accommodation, and/or guarantees granted by them whenever the arrearages on such account, including accrued interest and other charges, amount to at least twenty percent (20%) of the total outstanding obligations, including interest and other charges, as appearing in the books of account and/or related records of the financial institution concerned. This shall be without prejudice to the exercise by the government financial institution of such rights and/or remedies available to them under their respective contracts with their debtors, including the right to foreclose on loans, credits, accomodations and/or guarantees on which the arrearages are less than twenty (20%) percent. Thus, PNB and DBP did not only have a right, but the duty under said law, to foreclose upon the subject properties. The banks had no choice but to obey the statutory command. The import of this mandate was lost on the Court of Appeals, which reasoned that under Article 19 of the Civil Code, Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith. The appellate court, however, did not point to any fact evidencing bad faith on the part of the Marinduque Mining and its 60

transferees. Indeed, it skirted the issue entirely by holding that the question of actual fraudulent intent on the part of the interlocking directors of DBP and Marinduque Mining was irrelevant because: As aptly stated by the appellee in its brief, x x x where the corporations have directors and officers in common, there may be circumstances under which their interest as officers in one company may disqualify them in equity from representing both corporations in transactions between the two.Thus, where one corporation was insolvent and indebted to another, it has been held that the directors of the creditor corporation were disqualified, by reason of self-interest, from acting as directors of the debtor corporation in the authorization of a mortgage or deed of trust to the former to secure such indebtedness x x x (page 105 of the Appellees Brief). In the same manner that x x x when the corporation is insolvent, its directors who are its creditors can not secure to themselves any advantage or preference over other creditors. They can not thus take advantage of their fiduciary relation and deal directly with themselves, to the injury of others in equal right. If they do, equity will set aside the transaction at the suit of creditors of the corporation or their representatives, without reference to the question of any actual fraudulent intent on the part of the directors, for the right of the creditors does not depend upon fraud in fact, but upon the violation of the fiduciary relation to the directors. xxx. (page 106 of the Appellees Brief.) We also concede that x x x directors of insolvent corporation, who are creditors of the company, can not secure to themselves any preference or advantage over other creditors in the payment of their claims. It is not good morals or good law. The governing body of officers thereof are charged with the duty of conducting its affairs strictly in the interest of its existing creditors, and it would be a breach of such trust for them to undertake to give any one of its members any advantage over any other creditors in securing the payment of his debts in preference to all others. When validity of these mortgages, to secure debts upon which the directors were indorsers, was questioned by other creditors of the corporation, they should have been classed as instruments rendered void by the legal principle which prevents directors of an insolvent corporation from giving themselves a preference over outside creditors. x x x (page 106-107 of the Appellees Brief.)[12] The Court of Appeals made reference to two principles in corporation law. The first pertains to transactions between corporations with interlocking directors resulting in the prejudice to one of the corporations. This rule does not apply in this case, however, since the corporation allegedly prejudiced (Remington) is a third party, not one of the corporations with interlocking directors (Marinduque Mining and DBP). The second principle invoked by respondent court involves directors who are creditors which is also inapplicable herein. Here, the creditor of Marinduque Mining is DBP, not the directors of Marinduque Mining. Neither do we discern any bad faith on the part of DBP by its creation of Nonoc Mining, Maricalum and Island Cement. As Remington itself concedes, DBP is not authorized by its charter to engage in the mining business.[13] The creation of the three corporations was necessary to manage and operate the assets acquired in the foreclosure sale lest they deteriorate from non-use and lose their value. In the absence of any entity willing to purchase these assets from the bank, what else would it do with these properties in the meantime? Sound business practice required that they be utilized for the purposes for which they were intended.

61

Remington also asserted in its third amended complaint that the use of Nonoc Mining, Maricalum and Island Cement of the premises of Marinduque Mining and the hiring of the latters officers and personnel also constitute badges of bad faith. Assuming that the premises of Marinduque Mining were not among those acquired by DBP in the foreclosure sale, convenience and practicality dictated that the corporations so created occupy the premises where these assets were found instead of relocating them. No doubt, many of these assets are heavy equipment and it may have been impossible to move them. The same reasons of convenience and practicality, not to mention efficiency, justified the hiring by Nonoc Mining, Maricalum and Island Cement of Marinduque Minings personnel to manage and operate the properties and to maintain the continuity of the mining operations. To reiterate, the doctrine of piercing the veil of corporate fiction applies only when such corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime. [14] To disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and convincingly established. It cannot be presumed.[15] In this case, the Court finds that Remington failed to discharge its burden of proving bad faith on the part of Marinduque Mining and its transferees in the mortgage and foreclosure of the subject properties to justify the piercing of the corporate veil. The Court of Appeals also held that there exists in Remingtons favor a lien on the unpaid purchases of Marinduque Mining, and as transferee of these purchases, DBP should be held liable for the value thereof. In the absence of liquidation proceedings, however, the claim of Remington cannot be enforced against DBP. Article 2241 of the Civil Code provides: Article 2241. With reference to specific movable property of the debtor, the following claims or liens shall be preferred: xxx (3) Claims for the unpaid price of movables sold, on said movables, so long as they are in the possession of the debtor, up to the value of the same; and if the movable has been resold by the debtor and the price is still unpaid, the lien may be enforced on the price; this right is not lost by the immobilization of the thing by destination, provided it has not lost its form, substance and identity, neither is the right lost by the sale of the thing together with other property for a lump sum, when the price thereof can be determined proportionally; (4) Credits guaranteed with a pledge so long as the things pledged are in the hands of the creditor, or those guaranteed by a chattel mortgage, upon the things pledged or mortgaged, up to the value thereof; xxx In Barretto vs. Villanueva,[16] the Court had occasion to construe Article 2242, governing claims or liens over specific immovable property. The facts that gave rise to the case were summarized by this Court in its resolution as follows: x x x Rosario Cruzado sold all her right, title, and interest and that of her children in the house and lot herein involved to Pura L. Villanueva for P19,000.00. The purchaser paid P1,500 in advance, and 62

executed a promissory note for the balance of P17,500.00. However, the buyer could only pay P5,500 on account of the note, for which reason the vendor obtained judgment for the unpaid balance. In the meantime, the buyer Villanueva was able to secure a clean certificate of title (No. 32626), and mortgaged the property to appellant Magdalena C. Barretto, married to Jose C. Baretto, to secure a loan of P30,000.03, said mortgage having been duly recorded. Pura Villanueva defaulted on the mortgage loan in favor of Barretto. The latter foreclosed the mortgage in her favor, obtained judgment, and upon its becoming final asked for execution on 31 July 1958. On 14 August 1958, Cruzado filed a motion for recognition for her "vendor's lien" in the amount of P12,000.00, plus legal interest, invoking Articles 2242, 2243, and 2249 of the new Civil Code. After hearing, the court below ordered the "lien" annotated on the back of Certificate of Title No. 32526, with the proviso that in case of sale under the foreclousre decree the vendor's lien and the mortgage credit of appellant Barretto should be paid pro rata from the proceeds. Our original decision affirmed this order of the Court of First Instance of Manila. In its decision upholding the order of the lower court, the Court ratiocinated thus: Article 2242 of the new Civil Code enumerates the claims, mortgages and liens that constitute an encumbrance on specific immovable property, and among them are: "(2) For the unpaid price of real property sold, upon the immovable sold"; and "(5) Mortgage credits recorded in the Registry of Property." Article 2249 of the same Code provides that "if there are two or more credits with respect to the same specific real property or real rights, they shall be satisfied pro-rata, after the payment of the taxes and assessments upon the immovable property or real rights." Application of the above-quoted provisions to the case at bar would mean that the herein appellee Rosario Cruzado as an unpaid vendor of the property in question has the right to share pro-rata with the appellants the proceeds of the foreclosure sale. xxx As to the point made that the articles of the Civil Code on concurrence and preference of credits are applicable only to the insolvent debtor, suffice it to say that nothing in the law shows any such limitation. If we are to interpret this portion of the Code as intended only for insolvency cases, then other creditor-debtor relationships where there are concurrence of credits would be left without any rules to govern them, and it would render purposeless the special laws on insolvency.[17] Upon motion by appellants, however, the Court reconsidered its decision. Justice J.B.L. Reyes, speaking for the Court, explained the reasons for the reversal: A. The previous decision failed to take fully into account the radical changes introduced by the Civil Code of the Philippines into the system of priorities among creditors ordained by the Civil Code of 1889. Pursuant to the former Code, conflicts among creditors entitled to preference as to specific real property under Article 1923 were to be resolved according to an order of priorities established by Article 1927, 63

whereby one class of creditors could exclude the creditors of lower order until the claims of the former were fully satisfied out of the proceeds of the sale of the real property subject of the preference, and could even exhaust proceeds if necessary. Under the system of the Civil Code of the Philippines, however, only taxes enjoy a similar absolute preference. All the remaining thirteen classes of preferred creditors under Article 2242 enjoy no priority among themselves, but must be paid pro rata, i.e., in proportion to the amount of the respective credits. Thus, Article 2249 provides: "If there are two or more credits with respect to the same specific real property or real rights, they shall be satisfied pro rata, after the payment of the taxes and assessments upon the immovable property or real rights." But in order to make this prorating fully effective, the preferred creditors enumerated in Nos. 2 to 14 of Article 2242 (or such of them as have credits outstanding) must necessarily be convened, and the import of their claims ascertained. It is thus apparent that the full application of Articles 2249 and 2242 demands that there must be first some proceeding where the claims of all the preferred creditors may be bindingly adjudicated, such as insolvency, the settlement of decedent's estate under Rule 87 of the Rules of Court, or other liquidation proceedings of similar import. This explains the rule of Article 2243 of the new Civil Code that "The claims or credits enumerated in the two preceding articles shall be considered as mortgages or pledges of real or personal property, or liens within the purview of legal provisions governing insolvency xxx (Italics supplied). And the rule is further clarified in the Report of the Code Commission, as follows: "The question as to whether the Civil Code and the Insolvency Law can be harmonized is settled by this Article (2243). The preferences named in Articles 2261 and 2262 (now 2241 and 2242) are to be enforced in accordance with the Insolvency Law." (Italics supplied) Thus, it becomes evident that one preferred creditor's third-party claim to the proceeds of a foreclosure sale (as in the case now before us) is not the proceeding contemplated by law for the enforcement of preferences under Article 2242, unless the claimant were enforcing a credit for taxes that enjoy absolute priority. If none of the claims is for taxes, a dispute between two creditors will not enable the Court to ascertain the pro rata dividend corresponding to each, because the rights of the other creditors likewise enjoying preference under Article 2242 can not be ascertained.Wherefore, the order of the Court of First Instance of Manila now appealed from, decreeing that the proceeds of the foreclosure sale be apportioned only between appellant and appellee, is incorrect, and must be reversed. [Underscoring supplied] The ruling in Barretto was reiterated in Phil. Savings Bank vs. Hon. Lantin, Jr., etc., et al.,[18]and in two cases both entitled Development Bank of the Philippines vs. NLRC.[19] Although Barretto involved specific immovable property, the ruling therein should apply equally in this case where specific movable property is involved. As the extra-judicial foreclosure instituted by

64

PNB and DBP is not the liquidation proceeding contemplated by the Civil Code, Remington cannot claim its pro rata share from DBP. WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals dated October 6, 1995 and its Resolution promulgated on August 29, 1996 is REVERSED and SET ASIDE. The original complaint filed in the Regional Trial Court in CV Case No. 84-25858 is hereby DISMISSED. SO ORDERED. G.R. No. L-45911 April 11, 1979 JOHN GOKONGWEI, JR., petitioner, vs. SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO, JOSE M. SORIANO, ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO BUNAO, WALTHRODE B. CONDE, MIGUEL ORTIGAS, ANTONIO PRIETO, SAN MIGUEL CORPORATION, EMIGDIO TANJUATCO, SR., and EDUARDO R. VISAYA, respondents.

De Santos, Balgos & Perez for petitioner. Angara, Abello, Concepcion, Regala, Cruz Law Offices for respondents Sorianos Siguion Reyna, Montecillo & Ongsiako for respondent San Miguel Corporation. R. T Capulong for respondent Eduardo R. Visaya.

ANTONIO, J.: The instant petition for certiorari, mandamus and injunction, with prayer for issuance of writ of preliminary injunction, arose out of two cases filed by petitioner with the Securities and Exchange Commission, as follows:

SEC CASE NO 1375 On October 22, 1976, petitioner, as stockholder of respondent San Miguel Corporation, filed with the Securities and Exchange Commission (SEC) a petition for "declaration of nullity of amended by-laws, cancellation of certificate of filing of amended by- laws, injunction and damages with prayer for a preliminary injunction" against the majority of the members of the Board of Directors and San Miguel Corporation as an unwilling petitioner. The petition, entitled "John Gokongwei Jr. vs. Andres Soriano, Jr., Jose M. Soriano, Enrique Zobel, Antonio Roxas, Emeterio Bunao, Walthrode B. Conde, Miguel Ortigas, Antonio Prieto and San Miguel Corporation", was docketed as SEC Case No. 1375. As a first cause of action, petitioner alleged that on September 18, 1976, individual respondents amended by bylaws of the corporation, basing their authority to do so on a resolution of the stockholders adopted on March 13, 1961, when the outstanding capital stock of respondent corporation was only P70,139.740.00, divided into 5,513,974 common shares at P10.00 per share and 150,000 preferred shares at P100.00 per share. At the time of the amendment, the outstanding and paid up 65

shares totalled 30,127,047 with a total par value of P301,270,430.00. It was contended that according to section 22 of the Corporation Law and Article VIII of the by-laws of the corporation, the power to amend, modify, repeal or adopt new by-laws may be delegated to the Board of Directors only by the affirmative vote of stockholders representing not less than 2/3 of the subscribed and paid up capital stock of the corporation, which 2/3 should have been computed on the basis of the capitalization at the time of the amendment. Since the amendment was based on the 1961 authorization, petitioner contended that the Board acted without authority and in usurpation of the power of the stockholders. As a second cause of action, it was alleged that the authority granted in 1961 had already been exercised in 1962 and 1963, after which the authority of the Board ceased to exist. As a third cause of action, petitioner averred that the membership of the Board of Directors had changed since the authority was given in 1961, there being six (6) new directors. As a fourth cause of action, it was claimed that prior to the questioned amendment, petitioner had all the qualifications to be a director of respondent corporation, being a Substantial stockholder thereof; that as a stockholder, petitioner had acquired rights inherent in stock ownership, such as the rights to vote and to be voted upon in the election of directors; and that in amending the by-laws, respondents purposely provided for petitioner's disqualification and deprived him of his vested right as aforementioned hence the amended by-laws are null and void. 1 As additional causes of action, it was alleged that corporations have no inherent power to disqualify a stockholder from being elected as a director and, therefore, the questioned act is ultra vires and void; that Andres M. Soriano, Jr. and/or Jose M. Soriano, while representing other corporations, entered into contracts (specifically a management contract) with respondent corporation, which was allowed because the questioned amendment gave the Board itself the prerogative of determining whether they or other persons are engaged in competitive or antagonistic business; that the portion of the amended bylaws which states that in determining whether or not a person is engaged in competitive business, the Board may consider such factors as business and family relationship, is unreasonable and oppressive and, therefore, void; and that the portion of the amended by-laws which requires that "all nominations for election of directors ... shall be submitted in writing to the Board of Directors at least five (5) working days before the date of the Annual Meeting" is likewise unreasonable and oppressive. It was, therefore, prayed that the amended by-laws be declared null and void and the certificate of filing thereof be cancelled, and that individual respondents be made to pay damages, in specified amounts, to petitioner. On October 28, 1976, in connection with the same case, petitioner filed with the Securities and Exchange Commission an "Urgent Motion for Production and Inspection of Documents", alleging that the Secretary of respondent corporation refused to allow him to inspect its records despite request made by petitioner for production of certain documents enumerated in the request, and that respondent corporation had been attempting to suppress information from its stockholders despite a negative reply by the SEC to its query regarding their authority to do so. Among the documents requested to be copied were (a) minutes of the stockholder's meeting field on March 13, 1961, (b) copy of the management contract between San Miguel Corporation and A. Soriano Corporation (ANSCOR); (c) latest balance sheet of San Miguel International, Inc.; (d) authority of the stockholders to invest the funds of respondent corporation in San Miguel International, Inc.; and (e) lists of salaries, 66

allowances, bonuses, and other compensation, if any, received by Andres M. Soriano, Jr. and/or its successor-in-interest. The "Urgent Motion for Production and Inspection of Documents" was opposed by respondents, alleging, among others that the motion has no legal basis; that the demand is not based on good faith; that the motion is premature since the materiality or relevance of the evidence sought cannot be determined until the issues are joined, that it fails to show good cause and constitutes continued harrasment, and that some of the information sought are not part of the records of the corporation and, therefore, privileged. During the pendency of the motion for production, respondents San Miguel Corporation, Enrique Conde, Miguel Ortigas and Antonio Prieto filed their answer to the petition, denying the substantial allegations therein and stating, by way of affirmative defenses that "the action taken by the Board of Directors on September 18, 1976 resulting in the ... amendments is valid and legal because the power to "amend, modify, repeal or adopt new By-laws" delegated to said Board on March 13, 1961 and long prior thereto has never been revoked of SMC"; that contrary to petitioner's claim, "the vote requirement for a valid delegation of the power to amend, repeal or adopt new by-laws is determined in relation to the total subscribed capital stock at the time the delegation of said power is made, not when the Board opts to exercise said delegated power"; that petitioner has not availed of his intra-corporate remedy for the nullification of the amendment, which is to secure its repeal by vote of the stockholders representing a majority of the subscribed capital stock at any regular or special meeting, as provided in Article VIII, section I of the by-laws and section 22 of the Corporation law, hence the, petition is premature; that petitioner is estopped from questioning the amendments on the ground of lack of authority of the Board. since he failed, to object to other amendments made on the basis of the same 1961 authorization: that the power of the corporation to amend its by-laws is broad, subject only to the condition that the by-laws adopted should not be respondent corporation inconsistent with any existing law; that respondent corporation should not be precluded from adopting protective measures to minimize or eliminate situations where its directors might be tempted to put their personal interests over t I hat of the corporation; that the questioned amended by-laws is a matter of internal policy and the judgment of the board should not be interfered with: That the by-laws, as amended, are valid and binding and are intended to prevent the possibility of violation of criminal and civil laws prohibiting combinations in restraint of trade; and that the petition states no cause of action. It was, therefore, prayed that the petition be dismissed and that petitioner be ordered to pay damages and attorney's fees to respondents. The application for writ of preliminary injunction was likewise on various grounds. Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed their opposition to the petition, denying the material averments thereof and stating, as part of their affirmative defenses, that in August 1972, the Universal Robina Corporation (Robina), a corporation engaged in business competitive to that of respondent corporation, began acquiring shares therein. until September 1976 when its total holding amounted to 622,987 shares: that in October 1972, the Consolidated Foods Corporation (CFC) likewise began acquiring shares in respondent (corporation. until its total holdings amounted to P543,959.00 in September 1976; that on January 12, 1976, petitioner, who is president and controlling shareholder of Robina and CFC (both closed corporations) purchased 5,000 shares of stock of respondent corporation, and thereafter, in behalf of himself, CFC and Robina, "conducted malevolent and malicious publicity campaign against SMC" to generate support from the stockholder "in his effort to secure for himself and in representation of Robina and CFC interests, a seat in the Board of Directors of SMC", that in the stockholders' meeting of March 18, 1976, petitioner was rejected by the stockholders in his bid to secure a seat in the Board of Directors on the basic issue that petitioner was engaged in a competitive 67

business and his securing a seat would have subjected respondent corporation to grave disadvantages; that "petitioner nevertheless vowed to secure a seat in the Board of Directors at the next annual meeting; that thereafter the Board of Directors amended the by-laws as afore-stated. As counterclaims, actual damages, moral damages, exemplary damages, expenses of litigation and attorney's fees were presented against petitioner. Subsequently, a Joint Omnibus Motion for the striking out of the motion for production and inspection of documents was filed by all the respondents. This was duly opposed by petitioner. At this juncture, respondents Emigdio Tanjuatco, Sr. and Eduardo R. Visaya were allowed to intervene as oppositors and they accordingly filed their oppositions-intervention to the petition. On December 29, 1976, the Securities and Exchange Commission resolved the motion for production and inspection of documents by issuing Order No. 26, Series of 1977, stating, in part as follows: Considering the evidence submitted before the Commission by the petitioner and respondents in the above-entitled case, it is hereby ordered: 1. That respondents produce and permit the inspection, copying and photographing, by or on behalf of the petitioner-movant, John Gokongwei, Jr., of the minutes of the stockholders' meeting of the respondent San Miguel Corporation held on March 13, 1961, which are in the possession, custody and control of the said corporation, it appearing that the same is material and relevant to the issues involved in the main case. Accordingly, the respondents should allow petitioner-movant entry in the principal office of the respondent Corporation, San Miguel Corporation on January 14, 1977, at 9:30 o'clock in the morning for purposes of enforcing the rights herein granted; it being understood that the inspection, copying and photographing of the said documents shall be undertaken under the direct and strict supervision of this Commission. Provided, however, that other documents and/or papers not heretofore included are not covered by this Order and any inspection thereof shall require the prior permission of this Commission; 2. As to the Balance Sheet of San Miguel International, Inc. as well as the list of salaries, allowances, bonuses, compensation and/or remuneration received by respondent Jose M. Soriano, Jr. and Andres Soriano from San Miguel International, Inc. and/or its successorsin- interest, the Petition to produce and inspect the same is hereby DENIED, as petitionermovant is not a stockholder of San Miguel International, Inc. and has, therefore, no inherent right to inspect said documents; 3. In view of the Manifestation of petitioner-movant dated November 29, 1976, withdrawing his request to copy and inspect the management contract between San Miguel Corporation and A. Soriano Corporation and the renewal and amendments thereof for the reason that he had already obtained the same, the Commission takes note thereof; and 4. Finally, the Commission holds in abeyance the resolution on the matter of production and inspection of the authority of the stockholders of San Miguel Corporation to invest the funds of respondent corporation in San Miguel International, Inc., until after the hearing on the merits of the principal issues in the above-entitled case. 68

This Order is immediately executory upon its approval.

2

Dissatisfied with the foregoing Order, petitioner moved for its reconsideration. Meanwhile, on December 10, 1976, while the petition was yet to be heard, respondent corporation issued a notice of special stockholders' meeting for the purpose of "ratification and confirmation of the amendment to the By-laws", setting such meeting for February 10, 1977. This prompted petitioner to ask respondent Commission for a summary judgment insofar as the first cause of action is concerned, for the alleged reason that by calling a special stockholders' meeting for the aforesaid purpose, private respondents admitted the invalidity of the amendments of September 18, 1976. The motion for summary judgment was opposed by private respondents. Pending action on the motion, petitioner filed an "Urgent Motion for the Issuance of a Temporary Restraining Order", praying that pending the determination of petitioner's application for the issuance of a preliminary injunction and/or petitioner's motion for summary judgment, a temporary restraining order be issued, restraining respondents from holding the special stockholder's meeting as scheduled. This motion was duly opposed by respondents. On February 10, 1977, respondent Commission issued an order denying the motion for issuance of temporary restraining order. After receipt of the order of denial, respondents conducted the special stockholders' meeting wherein the amendments to the by-laws were ratified. On February 14, 1977, petitioner filed a consolidated motion for contempt and for nullification of the special stockholders' meeting. A motion for reconsideration of the order denying petitioner's motion for summary judgment was filed by petitioner before respondent Commission on March 10, 1977. Petitioner alleges that up to the time of the filing of the instant petition, the said motion had not yet been scheduled for hearing. Likewise, the motion for reconsideration of the order granting in part and denying in part petitioner's motion for production of record had not yet been resolved. In view of the fact that the annul stockholders' meeting of respondent corporation had been scheduled for May 10, 1977, petitioner filed with respondent Commission a Manifestation stating that he intended to run for the position of director of respondent corporation. Thereafter, respondents filed a Manifestation with respondent Commission, submitting a Resolution of the Board of Directors of respondent corporation disqualifying and precluding petitioner from being a candidate for director unless he could submit evidence on May 3, 1977 that he does not come within the disqualifications specified in the amendment to the by-laws, subject matter of SEC Case No. 1375. By reason thereof, petitioner filed a manifestation and motion to resolve pending incidents in the case and to issue a writ of injunction, alleging that private respondents were seeking to nullify and render ineffectual the exercise of jurisdiction by the respondent Commission, to petitioner's irreparable damage and prejudice, Allegedly despite a subsequent Manifestation to prod respondent Commission to act, petitioner was not heard prior to the date of the stockholders' meeting. Petitioner alleges that there appears a deliberate and concerted inability on the part of the SEC to act hence petitioner came to this Court.

SEC. CASE NO. 1423 Petitioner likewise alleges that, having discovered that respondent corporation has been investing corporate funds in other corporations and businesses outside of the primary purpose clause of the 69

corporation, in violation of section 17 1/2 of the Corporation Law, he filed with respondent Commission, on January 20, 1977, a petition seeking to have private respondents Andres M. Soriano, Jr. and Jose M. Soriano, as well as the respondent corporation declared guilty of such violation, and ordered to account for such investments and to answer for damages. On February 4, 1977, motions to dismiss were filed by private respondents, to which a consolidated motion to strike and to declare individual respondents in default and an opposition ad abundantiorem cautelam were filed by petitioner. Despite the fact that said motions were filed as early as February 4, 1977, the commission acted thereon only on April 25, 1977, when it denied respondents' motion to dismiss and gave them two (2) days within which to file their answer, and set the case for hearing on April 29 and May 3, 1977. Respondents issued notices of the annual stockholders' meeting, including in the Agenda thereof, the following: 6. Re-affirmation of the authorization to the Board of Directors by the stockholders at the meeting on March 20, 1972 to invest corporate funds in other companies or businesses or for purposes other than the main purpose for which the Corporation has been organized, and ratification of the investments thereafter made pursuant thereto. By reason of the foregoing, on April 28, 1977, petitioner filed with the SEC an urgent motion for the issuance of a writ of preliminary injunction to restrain private respondents from taking up Item 6 of the Agenda at the annual stockholders' meeting, requesting that the same be set for hearing on May 3, 1977, the date set for the second hearing of the case on the merits. Respondent Commission, however, cancelled the dates of hearing originally scheduled and reset the same to May 16 and 17, 1977, or after the scheduled annual stockholders' meeting. For the purpose of urging the Commission to act, petitioner filed an urgent manifestation on May 3, 1977, but this notwithstanding, no action has been taken up to the date of the filing of the instant petition. With respect to the afore-mentioned SEC cases, it is petitioner's contention before this Court that respondent Commission gravely abused its discretion when it failed to act with deliberate dispatch on the motions of petitioner seeking to prevent illegal and/or arbitrary impositions or limitations upon his rights as stockholder of respondent corporation, and that respondent are acting oppressively against petitioner, in gross derogation of petitioner's rights to property and due process. He prayed that this Court direct respondent SEC to act on collateral incidents pending before it. On May 6, 1977, this Court issued a temporary restraining order restraining private respondents from disqualifying or preventing petitioner from running or from being voted as director of respondent corporation and from submitting for ratification or confirmation or from causing the ratification or confirmation of Item 6 of the Agenda of the annual stockholders' meeting on May 10, 1977, or from Making effective the amended by-laws of respondent corporation, until further orders from this Court or until the Securities and Ex-change Commission acts on the matters complained of in the instant petition. On May 14, 1977, petitioner filed a Supplemental Petition, alleging that after a restraining order had been issued by this Court, or on May 9, 1977, the respondent Commission served upon petitioner copies of the following orders: 70

(1) Order No. 449, Series of 1977 (SEC Case No. 1375); denying petitioner's motion for reconsideration, with its supplement, of the order of the Commission denying in part petitioner's motion for production of documents, petitioner's motion for reconsideration of the order denying the issuance of a temporary restraining order denying the issuance of a temporary restraining order, and petitioner's consolidated motion to declare respondents in contempt and to nullify the stockholders' meeting; (2) Order No. 450, Series of 1977 (SEC Case No. 1375), allowing petitioner to run as a director of respondent corporation but stating that he should not sit as such if elected, until such time that the Commission has decided the validity of the bylaws in dispute, and denying deferment of Item 6 of the Agenda for the annual stockholders' meeting; and (3) Order No. 451, Series of 1977 (SEC Case No. 1375), denying petitioner's motion for reconsideration of the order of respondent Commission denying petitioner's motion for summary judgment; It is petitioner's assertions, anent the foregoing orders, (1) that respondent Commission acted with indecent haste and without circumspection in issuing the aforesaid orders to petitioner's irreparable damage and injury; (2) that it acted without jurisdiction and in violation of petitioner's right to due process when it decided en banc an issue not raised before it and still pending before one of its Commissioners, and without hearing petitioner thereon despite petitioner's request to have the same calendared for hearing , and (3) that the respondents acted oppressively against the petitioner in violation of his rights as a stockholder, warranting immediate judicial intervention. It is prayed in the supplemental petition that the SEC orders complained of be declared null and void and that respondent Commission be ordered to allow petitioner to undertake discovery proceedings relative to San Miguel International. Inc. and thereafter to decide SEC Cases No. 1375 and 1423 on the merits. On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and Jose M. Soriano filed their comment, alleging that the petition is without merit for the following reasons: (1) that the petitioner the interest he represents are engaged in business competitive and antagonistic to that of respondent San Miguel Corporation, it appearing that the owns and controls a greater portion of his SMC stock thru the Universal Robina Corporation and the Consolidated Foods Corporation, which corporations are engaged in business directly and substantially competing with the allied businesses of respondent SMC and of corporations in which SMC has substantial investments. Further, when CFC and Robina had accumulated investments. Further, when CFC and Robina had accumulated shares in SMC, the Board of Directors of SMC realized the clear and present danger that competitors or antagonistic parties may be elected directors and thereby have easy and direct access to SMC's business and trade secrets and plans; (2) that the amended by law were adopted to preserve and protect respondent SMC from the clear and present danger that business competitors, if allowed to become directors, will illegally and unfairly utilize their direct access to its business secrets and plans for their own private gain to the irreparable prejudice of respondent SMC, and, ultimately, its stockholders. Further, it is asserted that membership of a competitor in the Board of Directors is a blatant disregard of no less that the Constitution and pertinent laws against combinations in restraint of trade;

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(3) that by laws are valid and binding since a corporation has the inherent right and duty to preserve and protect itself by excluding competitors and antogonistic parties, under the law of self-preservation, and it should be allowed a wide latitude in the selection of means to preserve itself; (4) that the delay in the resolution and disposition of SEC Cases Nos. 1375 and 1423 was due to petitioner's own acts or omissions, since he failed to have the petition to suspend, pendente lite the amended by-laws calendared for hearing. It was emphasized that it was only on April 29, 1977 that petitioner calendared the aforesaid petition for suspension (preliminary injunction) for hearing on May 3, 1977. The instant petition being dated May 4, 1977, it is apparent that respondent Commission was not given a chance to act "with deliberate dispatch", and (5) that, even assuming that the petition was meritorious was, it has become moot and academic because respondent Commission has acted on the pending incidents, complained of. It was, therefore, prayed that the petition be dismissed. On May 21, 1977, respondent Emigdio G, Tanjuatco, Sr. filed his comment, alleging that the petition has become moot and academic for the reason, among others that the acts of private respondent sought to be enjoined have reference to the annual meeting of the stockholders of respondent San Miguel Corporation, which was held on may 10, 1977; that in said meeting, in compliance with the order of respondent Commission, petitioner was allowed to run and be voted for as director; and that in the same meeting, Item 6 of the Agenda was discussed, voted upon, ratified and confirmed. Further it was averred that the questions and issues raised by petitioner are pending in the Securities and Exchange Commission which has acquired jurisdiction over the case, and no hearing on the merits has been had; hence the elevation of these issues before the Supreme Court is premature. Petitioner filed a reply to the aforesaid comments, stating that the petition presents justiciable questions for the determination of this Court because (1) the respondent Commission acted without circumspection, unfairly and oppresively against petitioner, warranting the intervention of this Court; (2) a derivative suit, such as the instant case, is not rendered academic by the act of a majority of stockholders, such that the discussion, ratification and confirmation of Item 6 of the Agenda of the annual stockholders' meeting of May 10, 1977 did not render the case moot; that the amendment to the bylaws which specifically bars petitioner from being a director is void since it deprives him of his vested rights. Respondent Commission, thru the Solicitor General, filed a separate comment, alleging that after receiving a copy of the restraining order issued by this Court and noting that the restraining order did not foreclose action by it, the Commission en banc issued Orders Nos. 449, 450 and 451 in SEC Case No. 1375. In answer to the allegation in the supplemental petition, it states that Order No. 450 which denied deferment of Item 6 of the Agenda of the annual stockholders' meeting of respondent corporation, took into consideration an urgent manifestation filed with the Commission by petitioner on May 3, 1977 which prayed, among others, that the discussion of Item 6 of the Agenda be deferred. The reason given for denial of deferment was that "such action is within the authority of the corporation as well as falling within the sphere of stockholders' right to know, deliberate upon and/or to express their wishes regarding disposition of corporate funds considering that their investments are the ones directly affected." It was alleged that the main petition has, therefore, become moot and academic. 72

On September 29,1977, petitioner filed a second supplemental petition with prayer for preliminary injunction, alleging that the actuations of respondent SEC tended to deprive him of his right to due process, and "that all possible questions on the facts now pending before the respondent Commission are now before this Honorable Court which has the authority and the competence to act on them as it may see fit." (Reno, pp. 927-928.) Petitioner, in his memorandum, submits the following issues for resolution; (1) whether or not the provisions of the amended by-laws of respondent corporation, disqualifying a competitor from nomination or election to the Board of Directors are valid and reasonable; (2) whether or not respondent SEC gravely abused its discretion in denying petitioner's request for an examination of the records of San Miguel International, Inc., a fully owned subsidiary of San Miguel Corporation; and (3) whether or not respondent SEC committed grave abuse of discretion in allowing discussion of Item 6 of the Agenda of the Annual Stockholders' Meeting on May 10, 1977, and the ratification of the investment in a foreign corporation of the corporate funds, allegedly in violation of section 17-1/2 of the Corporation Law. I

Whether or not amended by-laws are valid is purely a legal question which public interest requires to be resolved — It is the position of the petitioner that "it is not necessary to remand the case to respondent SEC for an appropriate ruling on the intrinsic validity of the amended by-laws in compliance with the principle of exhaustion of administrative remedies", considering that: first: "whether or not the provisions of the amended by-laws are intrinsically valid ... is purely a legal question. There is no factual dispute as to what the provisions are and evidence is not necessary to determine whether such amended by-laws are valid as framed and approved ... "; second: "it is for the interest and guidance of the public that an immediate and final ruling on the question be made ... "; third: "petitioner was denied due process by SEC" when "Commissioner de Guzman had openly shown prejudice against petitioner ... ", and "Commissioner Sulit ... approved the amended by-laws ex-parte and obviously found the same intrinsically valid; and finally: "to remand the case to SEC would only entail delay rather than serve the ends of justice." Respondents Andres M. Soriano, Jr. and Jose M. Soriano similarly pray that this Court resolve the legal issues raised by the parties in keeping with the "cherished rules of procedure" that "a court should always strive to settle the entire controversy in a single proceeding leaving no root or branch to bear the seeds of future ligiation", citing Gayong v. Gayos. 3 To the same effect is the prayer of San Miguel Corporation that this Court resolve on the merits the validity of its amended by laws and the rights and obligations of the parties thereunder, otherwise "the time spent and effort exerted by the parties concerned and, more importantly, by this Honorable Court, would have been for naught because the main question will come back to this Honorable Court for final resolution." Respondent Eduardo R. Visaya submits a similar appeal.

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It is only the Solicitor General who contends that the case should be remanded to the SEC for hearing and decision of the issues involved, invoking the latter's primary jurisdiction to hear and decide case involving intra-corporate controversies. It is an accepted rule of procedure that the Supreme Court should always strive to settle the entire controversy in a single proceeding, leaving nor root or branch to bear the seeds of future litigation. 4 Thus, in Francisco v. City of Davao, 5 this Court resolved to decide the case on the merits instead of remanding it to the trial court for further proceedings since the ends of justice would not be subserved by the remand of the case. In Republic v. Security Credit and Acceptance Corporation, et al., 6 this Court, finding that the main issue is one of law, resolved to decide the case on the merits "because public interest demands an early disposition of the case", and in Republic v. Central Surety and Insurance Company, 7 this Court denied remand of the third-party complaint to the trial court for further proceedings, citing precedent where this Court, in similar situations resolved to decide the cases on the merits, instead of remanding them to the trial court where (a) the ends of justice would not be subserved by the remand of the case; or (b) where public interest demand an early disposition of the case; or (c) where the trial court had already received all the evidence presented by both parties and the Supreme Court is now in a position, based upon said evidence, to decide the case on its merits. 8 It is settled that the doctrine of primary jurisdiction has no application where only a question of law is involved. 8a Because uniformity may be secured through review by a single Supreme Court, questions of law may appropriately be determined in the first instance by courts. 8b In the case at bar, there are facts which cannot be denied, viz.: that the amended by-laws were adopted by the Board of Directors of the San Miguel Corporation in the exercise of the power delegated by the stockholders ostensibly pursuant to section 22 of the Corporation Law; that in a special meeting on February 10, 1977 held specially for that purpose, the amended by-laws were ratified by more than 80% of the stockholders of record; that the foreign investment in the Hongkong Brewery and Distellery, a beer manufacturing company in Hongkong, was made by the San Miguel Corporation in 1948; and that in the stockholders' annual meeting held in 1972 and 1977, all foreign investments and operations of San Miguel Corporation were ratified by the stockholders. II

Whether or not the amended by-laws of SMC of disqualifying a competitor from nomination or election to the Board of Directors of SMC are valid and reasonable — The validity or reasonableness of a by-law of a corporation in purely a question of law. 9 Whether the by-law is in conflict with the law of the land, or with the charter of the corporation, or is in a legal sense unreasonable and therefore unlawful is a question of law. 10 This rule is subject, however, to the limitation that where the reasonableness of a by-law is a mere matter of judgment, and one upon which reasonable minds must necessarily differ, a court would not be warranted in substituting its judgment instead of the judgment of those who are authorized to make by-laws and who have exercised their authority. 11 Petitioner claims that the amended by-laws are invalid and unreasonable because they were tailored to suppress the minority and prevent them from having representation in the Board", at the same time depriving petitioner of his "vested right" to be voted for and to vote for a person of his choice as director.

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Upon the other hand, respondents Andres M. Soriano, Jr., Jose M. Soriano and San Miguel Corporation content that ex. conclusion of a competitor from the Board is legitimate corporate purpose, considering that being a competitor, petitioner cannot devote an unselfish and undivided Loyalty to the corporation; that it is essentially a preventive measure to assure stockholders of San Miguel Corporation of reasonable protective from the unrestrained self-interest of those charged with the promotion of the corporate enterprise; that access to confidential information by a competitor may result either in the promotion of the interest of the competitor at the expense of the San Miguel Corporation, or the promotion of both the interests of petitioner and respondent San Miguel Corporation, which may, therefore, result in a combination or agreement in violation of Article 186 of the Revised Penal Code by destroying free competition to the detriment of the consuming public. It is further argued that there is not vested right of any stockholder under Philippine Law to be voted as director of a corporation. It is alleged that petitioner, as of May 6, 1978, has exercised, personally or thru two corporations owned or controlled by him, control over the following shareholdings in San Miguel Corporation, vis.: (a) John Gokongwei, Jr. — 6,325 shares; (b) Universal Robina Corporation — 738,647 shares; (c) CFC Corporation — 658,313 shares, or a total of 1,403,285 shares. Since the outstanding capital stock of San Miguel Corporation, as of the present date, is represented by 33,139,749 shares with a par value of P10.00, the total shares owned or controlled by petitioner represents 4.2344% of the total outstanding capital stock of San Miguel Corporation. It is also contended that petitioner is the president and substantial stockholder of Universal Robina Corporation and CFC Corporation, both of which are allegedly controlled by petitioner and members of his family. It is also claimed that both the Universal Robina Corporation and the CFC Corporation are engaged in businesses directly and substantially competing with the alleged businesses of San Miguel Corporation, and of corporations in which SMC has substantial investments.

ALLEGED AREAS OF COMPETITION BETWEEN PETITIONER'S CORPORATIONS AND SAN MIGUEL CORPORATION According to respondent San Miguel Corporation, the areas of, competition are enumerated in its Board the areas of competition are enumerated in its Board Resolution dated April 28, 1978, thus: Product Line 1977 SMC Robina-CFC

Estimated

Table Eggs Layer Pullets Dressed Chicken Poultry & Hog Ice Cream Instant Coffee Woven Fabrics 17.5% 9.1% 26.6%

0.6% 33.0% 35.0% Feeds 70.0% 45.0%

Market

Share

Total

10.0% 24.0% 14.0% 40.0% 12.0% 13.0% 40.0%

10.6% 57.0% 49.0% 52.0% 83.0% 85.0%

Thus, according to respondent SMC, in 1976, the areas of competition affecting SMC involved product sales of over P400 million or more than 20% of the P2 billion total product sales of SMC. Significantly, the combined market shares of SMC and CFC-Robina in layer pullets dressed chicken, poultry and hog feeds ice cream, instant coffee and woven fabrics would result in a position of such dominance as to affect the prevailing market factors.

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It is further asserted that in 1977, the CFC-Robina group was in direct competition on product lines which, for SMC, represented sales amounting to more than ?478 million. In addition, CFC-Robina was directly competing in the sale of coffee with Filipro, a subsidiary of SMC, which product line represented sales for SMC amounting to more than P275 million. The CFC-Robina group (Robitex, excluding Litton Mills recently acquired by petitioner) is purportedly also in direct competition with Ramie Textile, Inc., subsidiary of SMC, in product sales amounting to more than P95 million. The areas of competition between SMC and CFC-Robina in 1977 represented, therefore, for SMC, product sales of more than P849 million. According to private respondents, at the Annual Stockholders' Meeting of March 18, 1976, 9,894 stockholders, in person or by proxy, owning 23,436,754 shares in SMC, or more than 90% of the total outstanding shares of SMC, rejected petitioner's candidacy for the Board of Directors because they "realized the grave dangers to the corporation in the event a competitor gets a board seat in SMC." On September 18, 1978, the Board of Directors of SMC, by "virtue of powers delegated to it by the stockholders," approved the amendment to ' he by-laws in question. At the meeting of February 10, 1977, these amendments were confirmed and ratified by 5,716 shareholders owning 24,283,945 shares, or more than 80% of the total outstanding shares. Only 12 shareholders, representing 7,005 shares, opposed the confirmation and ratification. At the Annual Stockholders' Meeting of May 10, 1977, 11,349 shareholders, owning 27,257.014 shares, or more than 90% of the outstanding shares, rejected petitioner's candidacy, while 946 stockholders, representing 1,648,801 shares voted for him. On the May 9, 1978 Annual Stockholders' Meeting, 12,480 shareholders, owning more than 30 million shares, or more than 90% of the total outstanding shares. voted against petitioner.

AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS OF DIRECTORS EXPRESSLY CONFERRED BY LAW Private respondents contend that the disputed amended by laws were adopted by the Board of Directors of San Miguel Corporation a-, a measure of self-defense to protect the corporation from the clear and present danger that the election of a business competitor to the Board may cause upon the corporation and the other stockholders inseparable prejudice. Submitted for resolution, therefore, is the issue — whether or not respondent San Miguel Corporation could, as a measure of self- protection, disqualify a competitor from nomination and election to its Board of Directors. It is recognized by an authorities that 'every corporation has the inherent power to adopt by-laws 'for its internal government, and to regulate the conduct and prescribe the rights and duties of its members towards itself and among themselves in reference to the management of its affairs. 12 At common law, the rule was "that the power to make and adopt by-laws was inherent in every corporation as one of its necessary and inseparable legal incidents. And it is settled throughout the United States that in the absence of positive legislative provisions limiting it, every private corporation has this inherent power as one of its necessary and inseparable legal incidents, independent of any specific enabling provision in its charter or in general law, such power of self-government being essential to enable the corporation to accomplish the purposes of its creation. 13 In this jurisdiction, under section 21 of the Corporation Law, a corporation may prescribe in its by-laws "the qualifications, duties and compensation of directors, officers and employees ... " This must necessarily refer to a qualification in addition to that specified by section 30 of the Corporation Law, which provides that "every director must own in his right at least one share of the capital stock of the stock corporation of which he is a director ... " In Government v. El Hogar, 14 the Court sustained the 76

validity of a provision in the corporate by-law requiring that persons elected to the Board of Directors must be holders of shares of the paid up value of P5,000.00, which shall be held as security for their action, on the ground that section 21 of the Corporation Law expressly gives the power to the corporation to provide in its by-laws for the qualifications of directors and is "highly prudent and in conformity with good practice. "

NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED DIRECTOR Any person "who buys stock in a corporation does so with the knowledge that its affairs are dominated by a majorityof the stockholders and that he impliedly contracts that the will of the majority shall govern in all matters within the limits of the act of incorporation and lawfully enacted by-laws and not forbidden by law." 15 To this extent, therefore, the stockholder may be considered to have "parted with his personal right or privilege to regulate the disposition of his property which he has invested in the capital stock of the corporation, and surrendered it to the will of the majority of his fellow incorporators. ... It cannot therefore be justly said that the contract, express or implied, between the corporation and the stockholders is infringed ... by any act of the former which is authorized by a majority ... ." 16

Pursuant to section 18 of the Corporation Law, any corporation may amend its articles of incorporation by a vote or written assent of the stockholders representing at least two-thirds of the subscribed capital stock of the corporation If the amendment changes, diminishes or restricts the rights of the existing shareholders then the disenting minority has only one right, viz.: "to object thereto in writing and

demand payment for his share." Under section 22 of the same law, the owners of the majority of the subscribed capital stock may amend or repeal any by-law or adopt new by-laws. It cannot be said, therefore, that petitioner has a vested right to be elected director, in the face of the fact that the law at the time such right as stockholder was acquired contained the prescription that the corporate charter and the by-law shall be subject to amendment, alteration and modification. 17 It being settled that the corporation has the power to provide for the qualifications of its directors, the next question that must be considered is whether the disqualification of a competitor from being elected to the Board of Directors is a reasonable exercise of corporate authority.

A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE CORPORATION AND ITS SHAREHOLDERS Although in the strict and technical sense, directors of a private corporation are not regarded as trustees, there cannot be any doubt that their character is that of a fiduciary insofar as the corporation and the stockholders as a body are concerned. As agents entrusted with the management of the corporation for the collective benefit of the stockholders, "they occupy a fiduciary relation, and in this sense the relation is one of trust." 18 "The ordinary trust relationship of directors of a corporation and stockholders", according to Ashaman v. Miller, 19 "is not a matter of statutory or technical law. It springs from the fact that directors have the control and guidance of corporate affairs and property and hence of the property interests of the stockholders. Equity recognizes that stockholders are the proprietors of the corporate interests and are ultimately the only beneficiaries thereof * * *. Justice Douglas, in Pepper v. Litton, directors of corporations, thus:

20

emphatically restated the standard of fiduciary obligation of the

A director is a fiduciary. ... Their powers are powers in trust. ... He who is in such fiduciary position cannot serve himself first and his cestuis second. ... He cannot manipulate the 77

affairs of his corporation to their detriment and in disregard of the standards of common decency. He cannot by the intervention of a corporate entity violate the ancient precept against serving two masters ... He cannot utilize his inside information and strategic position for his own preferment. He cannot violate rules of fair play by doing indirectly through the corporation what he could not do so directly. He cannot violate rules of fair play by doing indirectly though the corporation what he could not do so directly. He cannot use his power for his personal advantage and to the detriment of the stockholders and creditors no matter how absolute in terms that power may be and no matter how meticulous he is to satisfy technical requirements. For that power is at all times subject to the equitable limitation that it may not be exercised for the aggrandizement, preference or advantage of the fiduciary to the exclusion or detriment of the cestuis. And in Cross v. West Virginia Cent, & P. R. R. Co.,

21

it was said:

... A person cannot serve two hostile and adverse master, without detriment to one of them. A judge cannot be impartial if personally interested in the cause. No more can a director. Human nature is too weak -for this. Take whatever statute provision you please giving power to stockholders to choose directors, and in none will you find any express prohibition against a discretion to select directors having the company's interest at heart, and it would simply be going far to deny by mere implication the existence of such a salutary power ... If the by-law is to be held reasonable in disqualifying a stockholder in a competing company from being a director, the same reasoning would apply to disqualify the wife and immediate member of the family of such stockholder, on account of the supposed interest of the wife in her husband's affairs, and his suppose influence over her. It is perhaps true that such stockholders ought not to be condemned as selfish and dangerous to the best interest of the corporation until tried and tested. So it is also true that we cannot condemn as selfish and dangerous and unreasonable the action of the board in passing the by-law. The strife over the matter of control in this corporation as in many others is perhaps carried on not altogether in the spirit of brotherly love and affection. The only test that we can apply is as to whether or not the action of the Board is authorized and sanctioned by law. ... . 22 These principles have been applied by this Court in previous cases.23

AN AMENDMENT TO THE CORPORATION BY-LAW WHICH RENDERS A STOCKHOLDER INELIGIBLE TO BE DIRECTOR, IF HE BE ALSO DIRECTOR IN A CORPORATION WHOSE BUSINESS IS IN COMPETITION WITH THAT OF THE OTHER CORPORATION, HAS BEEN SUSTAINED AS VALID It is a settled state law in the United States, according to Fletcher, that corporations have the power to make by-laws declaring a person employed in the service of a rival company to be ineligible for the corporation's Board of Directors. ... (A)n amendment which renders ineligible, or if elected, subjects to removal, a director if he be also a director in a corporation whose business is in competition with or is antagonistic to the other corporation is valid." 24This is based upon the principle that where the director is so employed in the service of a rival company, he cannot serve both, but must betray one or the other. Such an amendment "advances the benefit of the corporation and is good." An exception exists in New Jersey, where the Supreme Court held that the Corporation Law in New Jersey prescribed the only qualification, and therefore the corporation was not empowered to add additional qualifications. 25 This is the exact opposite of the situation in the Philippines because as stated 78

heretofore, section 21 of the Corporation Law expressly provides that a corporation may make by-laws for the qualifications of directors. Thus, it has been held that an officer of a corporation cannot engage in a business in direct competition with that of the corporation where he is a director by utilizing information he has received as such officer, under "the established law that a director or officer of a corporation may not enter into a competing enterprise which cripples or injures the business of the corporation of which he is an officer or director. 26 It is also well established that corporate officers "are not permitted to use their position of trust and confidence to further their private interests." 27 In a case where directors of a corporation cancelled a contract of the corporation for exclusive sale of a foreign firm's products, and after establishing a rival business, the directors entered into a new contract themselves with the foreign firm for exclusive sale of its products, the court held that equity would regard the new contract as an offshoot of the old contract and, therefore, for the benefit of the corporation, as a "faultless fiduciary may not reap the fruits of his misconduct to the exclusion of his principal. 28 The doctrine of "corporate opportunity" 29 is precisely a recognition by the courts that the fiduciary standards could not be upheld where the fiduciary was acting for two entities with competing interests. This doctrine rests fundamentally on the unfairness, in particular circumstances, of an officer or director taking advantage of an opportunity for his own personal profit when the interest of the corporation justly calls for protection. 30 It is not denied that a member of the Board of Directors of the San Miguel Corporation has access to sensitive and highly confidential information, such as: (a) marketing strategies and pricing structure; (b) budget for expansion and diversification; (c) research and development; and (d) sources of funding, availability of personnel, proposals of mergers or tie-ups with other firms. It is obviously to prevent the creation of an opportunity for an officer or director of San Miguel Corporation, who is also the officer or owner of a competing corporation, from taking advantage of the information which he acquires as director to promote his individual or corporate interests to the prejudice of San Miguel Corporation and its stockholders, that the questioned amendment of the bylaws was made. Certainly, where two corporations are competitive in a substantial sense, it would seem improbable, if not impossible, for the director, if he were to discharge effectively his duty, to satisfy his loyalty to both corporations and place the performance of his corporation duties above his personal concerns. Thus, in McKee & Co. v. First National Bank of San Diego, supra the court sustained as valid and reasonable an amendment to the by-laws of a bank, requiring that its directors should not be directors, officers, employees, agents, nominees or attorneys of any other banking corporation, affiliate or subsidiary thereof. Chief Judge Parker, in McKee, explained the reasons of the court, thus: ... A bank director has access to a great deal of information concerning the business and plans of a bank which would likely be injurious to the bank if known to another bank, and it was reasonable and prudent to enlarge this minimum disqualification to include any director, officer, employee, agent, nominee, or attorney of any other bank in California. The Ashkins case, supra, specifically recognizes protection against rivals and others who might acquire information which might be used against the interests of the corporation as a legitimate object of by-law protection. With respect to attorneys or persons associated with a firm which is attorney for another bank, in addition to the direct conflict 79

or potential conflict of interest, there is also the danger of inadvertent leakage of confidential information through casual office discussions or accessibility of files. Defendant's directors determined that its welfare was best protected if this opportunity for conflicting loyalties and potential misuse and leakage of confidential information was foreclosed. In McKee the Court further listed qualificational by-laws upheld by the courts, as follows: (1) A director shall not be directly or indirectly interested as a stockholder in any other firm, company, or association which competes with the subject corporation. (2) A director shall not be the immediate member of the family of any stockholder in any other firm, company, or association which competes with the subject corporation, (3) A director shall not be an officer, agent, employee, attorney, or trustee in any other firm, company, or association which compete with the subject corporation. (4) A director shall be of good moral character as an essential qualification to holding office. (5) No person who is an attorney against the corporation in a law suit is eligible for service on the board. (At p. 7.) These are not based on theorical abstractions but on human experience — that a person cannot serve two hostile masters without detriment to one of them. The offer and assurance of petitioner that to avoid any possibility of his taking unfair advantage of his position as director of San Miguel Corporation, he would absent himself from meetings at which confidential matters would be discussed, would not detract from the validity and reasonableness of the by-laws here involved. Apart from the impractical results that would ensue from such arrangement, it would be inconsistent with petitioner's primary motive in running for board membership — which is to protect his investments in San Miguel Corporation. More important, such a proposed norm of conduct would be against all accepted principles underlying a director's duty of fidelity to the corporation, for the policy of the law is to encourage and enforce responsible corporate management. As explained by Oleck: 31 "The law win not tolerate the passive attitude of directors ... without active and conscientious participation in the managerial functions of the company. As directors, it is their duty to control and supervise the day to day business activities of the company or to promulgate definite policies and rules of guidance with a vigilant eye toward seeing to it that these policies are carried out. It is only then that directors may be said to have fulfilled their duty of fealty to the corporation." Sound principles of corporate management counsel against sharing sensitive information with a director whose fiduciary duty of loyalty may well require that he disclose this information to a competitive arrival. These dangers are enhanced considerably where the common director such as the petitioner is a controlling stockholder of two of the competing corporations. It would seem manifest that in such situations, the director has an economic incentive to appropriate for the benefit of his own corporation the corporate plans and policies of the corporation where he sits as director.

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Indeed, access by a competitor to confidential information regarding marketing strategies and pricing policies of San Miguel Corporation would subject the latter to a competitive disadvantage and unjustly enrich the competitor, for advance knowledge by the competitor of the strategies for the development of existing or new markets of existing or new products could enable said competitor to utilize such knowledge to his advantage. 32 There is another important consideration in determining whether or not the amended by-laws are reasonable. The Constitution and the law prohibit combinations in restraint of trade or unfair competition. Thus, section 2 of Article XIV of the Constitution provides: "The State shall regulate or prohibit private monopolies when the public interest so requires. No combinations in restraint of trade or unfair competition shall be snowed." Article 186 of the Revised Penal Code also provides: Art. 186. Monopolies and combinations in restraint of trade. —The penalty of prision correccional in its minimum period or a fine ranging from two hundred to six thousand pesos, or both, shall be imposed upon: 1. Any person who shall enter into any contract or agreement or shall take part in any conspiracy or combination in the form of a trust or otherwise, in restraint of trade or commerce or to prevent by artificial means free competition in the market. 2. Any person who shag monopolize any merchandise or object of trade or commerce, or shall combine with any other person or persons to monopolize said merchandise or object in order to alter the price thereof by spreading false rumors or making use of any other artifice to restrain free competition in the market. 3. Any person who, being a manufacturer, producer, or processor of any merchandise or object of commerce or an importer of any merchandise or object of commerce from any foreign country, either as principal or agent, wholesale or retailer, shall combine, conspire or agree in any manner with any person likewise engaged in the manufacture, production, processing, assembling or importation of such merchandise or object of commerce or with any other persons not so similarly engaged for the purpose of making transactions prejudicial to lawful commerce, or of increasing the market price in any part of the Philippines, or any such merchandise or object of commerce manufactured, produced, processed, assembled in or imported into the Philippines, or of any article in the manufacture of which such manufactured, produced, processed, or imported merchandise or object of commerce is used. There are other legislation in this jurisdiction, which prohibit monopolies and combinations in restraint of trade. 33 Basically, these anti-trust laws or laws against monopolies or combinations in restraint of trade are aimed at raising levels of competition by improving the consumers' effectiveness as the final arbiter in free markets. These laws are designed to preserve free and unfettered competition as the rule of trade. "It rests on the premise that the unrestrained interaction of competitive forces will yield the best allocation of our economic resources, the lowest prices and the highest quality ... ." 34 they operate to forestall concentration of economic power. 35 The law against monopolies and combinations in restraint 81

of trade is aimed at contracts and combinations that, by reason of the inherent nature of the contemplated acts, prejudice the public interest by unduly restraining competition or unduly obstructing the course of trade. 36 The terms "monopoly", "combination in restraint of trade" and "unfair competition" appear to have a well defined meaning in other jurisdictions. A "monopoly" embraces any combination the tendency of which is to prevent competition in the broad and general sense, or to control prices to the detriment of the public. 37 In short, it is the concentration of business in the hands of a few. The material consideration in determining its existence is not that prices are raised and competition actually excluded, but that power exists to raise prices or exclude competition when desired. 38 Further, it must be considered that the Idea of monopoly is now understood to include a condition produced by the mere act of individuals. Its dominant thought is the notion of exclusiveness or unity, or the suppression of competition by the qualification of interest or management, or it may be thru agreement and concert of action. It is, in brief, unified tactics with regard to prices. 39 From the foregoing definitions, it is apparent that the contentions of petitioner are not in accord with reality. The election of petitioner to the Board of respondent Corporation can bring about an illegal situation. This is because an express agreement is not necessary for the existence of a combination or conspiracy in restraint of trade. 40 It is enough that a concert of action is contemplated and that the defendants conformed to the arrangements, 41 and what is to be considered is what the parties actually did and not the words they used. For instance, the Clayton Act prohibits a person from serving at the same time as a director in any two or more corporations, if such corporations are, by virtue of their business and location of operation, competitors so that the elimination of competition between them would constitute violation of any provision of the anti-trust laws. 42 There is here a statutory recognition of the anti-competitive dangers which may arise when an individual simultaneously acts as a director of two or more competing corporations. A common director of two or more competing corporations would have access to confidential sales, pricing and marketing information and would be in a position to coordinate policies or to aid one corporation at the expense of another, thereby stifling competition. This situation has been aptly explained by Travers, thus: The argument for prohibiting competing corporations from sharing even one director is that the interlock permits the coordination of policies between nominally independent firms to an extent that competition between them may be completely eliminated. Indeed, if a director, for example, is to be faithful to both corporations, some accommodation must result. Suppose X is a director of both Corporation A and Corporation B. X could hardly vote for a policy by A that would injure B without violating his duty of loyalty to B at the same time he could hardly abstain from voting without depriving A of his best judgment. If the firms really do compete — in the sense of vying for economic advantage at the expense of the other — there can hardly be any reason for an interlock between competitors other than the suppression of competition. 43 (Emphasis supplied.) According to the Report of the House Judiciary Committee of the U. S. Congress on section 9 of the Clayton Act, it was established that: "By means of the interlocking directorates one man or group of men have been able to dominate and control a great number of corporations ... to the detriment of the small ones dependent upon them and to the injury of the public. 44

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Shared information on cost accounting may lead to price fixing. Certainly, shared information on production, orders, shipments, capacity and inventories may lead to control of production for the purpose of controlling prices. Obviously, if a competitor has access to the pricing policy and cost conditions of the products of San Miguel Corporation, the essence of competition in a free market for the purpose of serving the lowest priced goods to the consuming public would be frustrated, The competitor could so manipulate the prices of his products or vary its marketing strategies by region or by brand in order to get the most out of the consumers. Where the two competing firms control a substantial segment of the market this could lead to collusion and combination in restraint of trade. Reason and experience point to the inevitable conclusion that the inherent tendency of interlocking directorates between companies that are related to each other as competitors is to blunt the edge of rivalry between the corporations, to seek out ways of compromising opposing interests, and thus eliminate competition. As respondent SMC aptly observes, knowledge by CFC-Robina of SMC's costs in various industries and regions in the country win enable the former to practice price discrimination. CFC-Robina can segment the entire consuming population by geographical areas or income groups and change varying prices in order to maximize profits from every market segment. CFC-Robina could determine the most profitable volume at which it could produce for every product line in which it competes with SMC. Access to SMC pricing policy by CFC-Robina would in effect destroy free competition and deprive the consuming public of opportunity to buy goods of the highest possible quality at the lowest prices. Finally, considering that both Robina and SMC are, to a certain extent, engaged in agriculture, then the election of petitioner to the Board of SMC may constitute a violation of the prohibition contained in section 13(5) of the Corporation Law. Said section provides in part that "any stockholder of more than one corporation organized for the purpose of engaging in agriculture may hold his stock in such corporations solely for investment and not for the purpose of bringing about or attempting to bring about a combination to exercise control of incorporations ... ." Neither are We persuaded by the claim that the by-law was Intended to prevent the candidacy of petitioner for election to the Board. If the by-law were to be applied in the case of one stockholder but waived in the case of another, then it could be reasonably claimed that the by-law was being applied in a discriminatory manner. However, the by law, by its terms, applies to all stockholders. The equal protection clause of the Constitution requires only that the by-law operate equally upon all persons of a class. Besides, before petitioner can be declared ineligible to run for director, there must be hearing and evidence must be submitted to bring his case within the ambit of the disqualification. Sound principles of public policy and management, therefore, support the view that a by-law which disqualifies a competition from election to the Board of Directors of another corporation is valid and reasonable. In the absence of any legal prohibition or overriding public policy, wide latitude may be accorded to the corporation in adopting measures to protect legitimate corporation interests. Thus, "where the reasonableness of a by-law is a mere matter of judgment, and upon which reasonable minds must necessarily differ, a court would not be warranted in substituting its judgment instead of the judgment of those who are authorized to make by-laws and who have expressed their authority. 45 Although it is asserted that the amended by-laws confer on the present Board powers to perpetua themselves in power such fears appear to be misplaced. This power, but is very nature, is subject to certain well established limitations. One of these is inherent in the very convert and definition of the terms "competition" and "competitor". "Competition" implies a struggle for advantage between two or 83

more forces, each possessing, in substantially similar if not Identical degree, certain characteristics essential to the business sought. It means an independent endeavor of two or more persons to obtain the business patronage of a third by offering more advantageous terms as an inducement to secure trade. 46 The test must be whether the business does in fact compete, not whether it is capable of an indirect and highly unsubstantial duplication of an isolated or non-characteristics activity. 47 It is, therefore, obvious that not every person or entity engaged in business of the same kind is a competitor. Such factors as quantum and place of business, Identity of products and area of competition should be taken into consideration. It is, therefore, necessary to show that petitioner's business covers a substantial portion of the same markets for similar products to the extent of not less than 10% of respondent corporation's market for competing products. While We here sustain the validity of the amended by-laws, it does not follow as a necessary consequence that petitioner is ipso facto disqualified. Consonant with the requirement of due process, there must be due hearing at which the petitioner must be given the fullest opportunity to show that he is not covered by the disqualification. As trustees of the corporation and of the stockholders, it is the responsibility of directors to act with fairness to the stockholders.48Pursuant to this obligation and to remove any suspicion that this power may be utilized by the incumbent members of the Board to perpetuate themselves in power, any decision of the Board to disqualify a candidate for the Board of Directors should be reviewed by the Securities behind Exchange Commission en banc and its decision shall be final unless reversed by this Court on certiorari. 49 Indeed, it is a settled principle that where the action of a Board of Directors is an abuse of discretion, or forbidden by statute, or is against public policy, or is ultra vires, or is a fraud upon minority stockholders or creditors, or will result in waste, dissipation or misapplication of the corporation assets, a court of equity has the power to grant appropriate relief. 50 III

Whether or not respondent SEC gravely abused its discretion in denying petitioner's request for an examination of the records of San Miguel International Inc., a fully owned subsidiary of San Miguel Corporation — Respondent San Miguel Corporation stated in its memorandum that petitioner's claim that he was denied inspection rights as stockholder of SMC "was made in the teeth of undisputed facts that, over a specific period, petitioner had been furnished numerous documents and information," to wit: (1) a complete list of stockholders and their stockholdings; (2) a complete list of proxies given by the stockholders for use at the annual stockholders' meeting of May 18, 1975; (3) a copy of the minutes of the stockholders' meeting of March 18,1976; (4) a breakdown of SMC's P186.6 million investment in associated companies and other companies as of December 31, 1975; (5) a listing of the salaries, allowances, bonuses and other compensation or remunerations received by the directors and corporate officers of SMC; (6) a copy of the US $100 million Euro-Dollar Loan Agreement of SMC; and (7) copies of the minutes of all meetings of the Board of Directors from January 1975 to May 1976, with deletions of sensitive data, which deletions were not objected to by petitioner. Further, it was averred that upon request, petitioner was informed in writing on September 18, 1976; (1) that SMC's foreign investments are handled by San Miguel International, Inc., incorporated in Bermuda and wholly owned by SMC; this was SMC's first venture abroad, having started in 1948 with an initial outlay of ?500,000.00, augmented by a loan of Hongkong $6 million from a foreign bank under the personal guaranty of SMC's former President, the late Col. Andres Soriano; (2) that as of December 31, 1975, the estimated value of SMI would amount to almost P400 million (3) that the total cash dividends received by SMC from SMI since 1953 has amount to US $ 9.4 million; and (4) that from 84

1972-1975, SMI did not declare cash or stock dividends, all earnings having been used in line with a program for the setting up of breweries by SMI These averments are supported by the affidavit of the Corporate Secretary, enclosing photocopies of the afore-mentioned documents. 51 Pursuant to the second paragraph of section 51 of the Corporation Law, "(t)he record of all business transactions of the corporation and minutes of any meeting shall be open to the inspection of any director, member or stockholder of the corporation at reasonable hours." 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 ownership. 52 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. 53 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. 54 In Grey v. Insular Lumber, 55 this Court held that "the right to examine the books of the corporation must be exercised in good faith, for specific and honest purpose, and not to gratify curiosity, or for specific and honest purpose, and not to gratify curiosity, or for speculative or vexatious purposes. The weight of judicial opinion appears to be, that on application for mandamus to enforce the right, it is proper for the court to inquire into and consider the stockholder's good faith and his purpose and motives in seeking inspection. 56 Thus, it was held that "the right given by statute is not absolute and may be refused when the information is not sought in good faith or is used to the detriment of the corporation." 57 But the "impropriety of purpose such as will defeat enforcement must be set up the corporation defensively if the Court is to take cognizance of it as a qualification. In other words, the specific provisions take from the stockholder the burden of showing propriety of purpose and place upon the corporation the burden of showing impropriety of purpose or motive. 58 It appears to be the general rule that stockholders are entitled to full information as to the management of the corporation and the manner of expenditure of its funds, and to inspection to obtain such information, especially where it appears that the company is being mismanaged or that it is being managed for the personal benefit of officers or directors or certain of the stockholders to the exclusion of others." 59 While the right of a stockholder to examine the books and records of a corporation for a lawful purpose is a matter of law, the right of such stockholder to examine the books and records of a wholly-owned subsidiary of the corporation in which he is a stockholder is a different thing. Some state courts recognize the right under certain conditions, while others do not. Thus, it has been held that where a corporation owns approximately no property except the shares of stock of subsidiary corporations which are merely agents or instrumentalities of the holding company, the legal fiction of distinct corporate entities may be disregarded and the books, papers and documents of all the corporations may be required to be produced for examination, 60 and that a writ of mandamus, may be granted, as the records of the subsidiary were, to all incontents and purposes, the records of the parent even though subsidiary was not named as a party. 61 mandamus was likewise held proper to inspect both the subsidiary's and the parent corporation's books upon proof of sufficient control or dominion by the parent showing the relation of principal or agent or something similar thereto. 62 85

On the other hand, mandamus at the suit of a stockholder was refused where the subsidiary corporation is a separate and distinct corporation domiciled and with its books and records in another jurisdiction, and is not legally subject to the control of the parent company, although it owned a vast majority of the stock of the subsidiary. 63Likewise, inspection of the books of an allied corporation by stockholder of the parent company which owns all the stock of the subsidiary has been refused on the ground that the stockholder was not within the class of "persons having an interest." 64 In the Nash case, 65 The Supreme Court of New York held that the contractual right of former stockholders to inspect books and records of the corporation included the right to inspect corporation's subsidiaries' books and records which were in corporation's possession and control in its office in New York." In the Bailey case, 66 stockholders of a corporation were held entitled to inspect the records of a controlled subsidiary corporation which used the same offices and had Identical officers and directors. In his "Urgent Motion for Production and Inspection of Documents" before respondent SEC, petitioner contended that respondent corporation "had been attempting to suppress information for the stockholders" and that petitioner, "as stockholder of respondent corporation, is entitled to copies of some documents which for some reason or another, respondent corporation is very reluctant in revealing to the petitioner notwithstanding the fact that no harm would be caused thereby to the corporation." 67 There is no question that stockholders are entitled to inspect the books and records of a corporation in order to investigate the conduct of the management, determine the financial condition of the corporation, and generally take an account of the stewardship of the officers and directors. 68 In the case at bar, considering that the foreign subsidiary is wholly owned by respondent San Miguel Corporation and, therefore, under its control, it would be more in accord with equity, good faith and fair dealing to construe the statutory right of petitioner as stockholder to inspect the books and records of the corporation as extending to books and records of such wholly subsidiary which are in respondent corporation's possession and control. IV

Whether or not respondent SEC gravely abused its discretion in allowing the stockholders of respondent corporation to ratify the investment of corporate funds in a foreign corporation Petitioner reiterates his contention in SEC Case No. 1423 that respondent corporation invested corporate funds in SMI without prior authority of the stockholders, thus violating section 17-1/2 of the Corporation Law, and alleges that respondent SEC should have investigated the charge, being a statutory offense, instead of allowing ratification of the investment by the stockholders. Respondent SEC's position is that submission of the investment to the stockholders for ratification is a sound corporate practice and should not be thwarted but encouraged. Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds in any other corporation or business or for any purpose other than the main purpose for which it was organized" provided that its Board of Directors has been so authorized by the affirmative vote of stockholders holding shares entitling them to exercise at least two-thirds of the voting power. If the investment is made in pursuance of the corporate purpose, it does not need the approval of the stockholders. It is only when 86

the purchase of shares is done solely for investment and not to accomplish the purpose of its incorporation that the vote of approval of the stockholders holding shares entitling them to exercise at least two-thirds of the voting power is necessary. 69 As stated by respondent corporation, the purchase of beer manufacturing facilities by SMC was an investment in the same business stated as its main purpose in its Articles of Incorporation, which is to manufacture and market beer. It appears that the original investment was made in 1947-1948, when SMC, then San Miguel Brewery, Inc., purchased a beer brewery in Hongkong (Hongkong Brewery & Distillery, Ltd.) for the manufacture and marketing of San Miguel beer thereat. Restructuring of the investment was made in 1970-1971 thru the organization of SMI in Bermuda as a tax free reorganization. Under these circumstances, the ruling in De la Rama v. Manao Sugar Central Co., Inc., supra, appears relevant. In said case, one of the issues was the legality of an investment made by Manao Sugar Central Co., Inc., without prior resolution approved by the affirmative vote of 2/3 of the stockholders' voting power, in the Philippine Fiber Processing Co., Inc., a company engaged in the manufacture of sugar bags. The lower court said that "there is more logic in the stand that if the investment is made in a corporation whose business is important to the investing corporation and would aid it in its purpose, to require authority of the stockholders would be to unduly curtail the power of the Board of Directors." This Court affirmed the ruling of the court a quo on the matter and, quoting Prof. Sulpicio S. Guevara, said: "j. Power to acquire or dispose of shares or securities. — A private corporation, in order to accomplish is purpose as stated in its articles of incorporation, and subject to the limitations imposed by the Corporation Law, has the power to acquire, hold, mortgage, pledge or dispose of shares, bonds, securities, and other evidence of indebtedness of any domestic or foreign corporation. Such an act, if done in pursuance of the corporate

purpose, does not need the approval of stockholders; but when the purchase of shares of another corporation is done solely for investment and not to accomplish the purpose of its incorporation, the vote of approval of the stockholders is necessary. In any case, the purchase of such shares or securities must be subject to the limitations established by the Corporations law; namely, (a) that no agricultural or mining corporation shall be restricted to own not more than 15% of the voting stock of nay agricultural or mining corporation; and (c) that such holdings shall be solely for investment and not for the purpose of bringing about a monopoly in any line of commerce of combination in restraint of trade." The Philippine Corporation Law by Sulpicio S. Guevara, 1967 Ed., p. 89) (Emphasis supplied.)

40. Power to invest corporate funds. — A private corporation has the power to invest its corporate funds "in any other corporation or business, or for any purpose other than the main purpose for which it was organized, provide that 'its board of directors has been so authorized in a resolution by the affirmative vote of stockholders holding shares in the corporation entitling them to exercise at least two-thirds of the voting power on such a propose at a stockholders' meeting called for that purpose,' and provided further, that no agricultural or mining corporation shall in anywise be interested in any other agricultural or mining corporation. When the investment is necessary to accomplish its purpose or

purposes as stated in its articles of incorporation the approval of the stockholders is not necessary."" (Id., p. 108) (Emphasis ours.) (pp. 258-259).

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Assuming arguendo that the Board of Directors of SMC had no authority to make the assailed investment, there is no question that a corporation, like an individual, may ratify and thereby render binding upon it the originally unauthorized acts of its officers or other agents. 70 This is true because the questioned investment is neither contrary to law, morals, public order or public policy. It is a corporate transaction or contract which is within the corporate powers, but which is defective from a supported failure to observe in its execution the. requirement of the law that the investment must be authorized by the affirmative vote of the stockholders holding two-thirds of the voting power. This requirement is for the benefit of the stockholders. The stockholders for whose benefit the requirement was enacted may, therefore, ratify the investment and its ratification by said stockholders obliterates any defect which it may have had at the outset. "Mere ultra vires acts", said this Court in Pirovano, 71 "or those which are not illegal and void ab initio, but are not merely within the scope of the articles of incorporation, are merely voidable and may become binding and enforceable when ratified by the stockholders. Besides, the investment was for the purchase of beer manufacturing and marketing facilities which is apparently relevant to the corporate purpose. The mere fact that respondent corporation submitted the assailed investment to the stockholders for ratification at the annual meeting of May 10, 1977 cannot be construed as an admission that respondent corporation had committed an ultra vires act, considering the common practice of corporations of periodically submitting for the gratification of their stockholders the acts of their directors, officers and managers. WHEREFORE, judgment is hereby rendered as follows: The Court voted unanimously to grant the petition insofar as it prays that petitioner be allowed to examine the books and records of San Miguel International, Inc., as specified by him. On the matter of the validity of the amended by-laws of respondent San Miguel Corporation, six (6) Justices, namely, Justices Barredo, Makasiar, Antonio, Santos, Abad Santos and De Castro, voted to sustain the validity per se of the amended by-laws in question and to dismiss the petition without prejudice to the question of the actual disqualification of petitioner John Gokongwei, Jr. to run and if elected to sit as director of respondent San Miguel Corporation being decided, after a new and proper hearing by the Board of Directors of said corporation, whose decision shall be appealable to the respondent Securities and Exchange Commission deliberating and acting en banc and ultimately to this Court. Unless disqualified in the manner herein provided, the prohibition in the afore-mentioned amended by-laws shall not apply to petitioner. The afore-mentioned six (6) Justices, together with Justice Fernando, voted to declare the issue on the validity of the foreign investment of respondent corporation as moot. Chief Justice Fred Ruiz Castro reserved his vote on the validity of the amended by-laws, pending hearing by this Court on the applicability of section 13(5) of the Corporation Law to petitioner. Justice Fernando reserved his vote on the validity of subject amendment to the by-laws but otherwise concurs in the result. Four (4) Justices, namely, Justices Teehankee, Concepcion, Jr., Fernandez and Guerrero filed a separate opinion, wherein they voted against the validity of the questioned amended bylaws and that this question should properly be resolved first by the SEC as the agency of primary jurisdiction. They 88

concur in the result that petitioner may be allowed to run for and sit as director of respondent SMC in the scheduled May 6, 1979 election and subsequent elections until disqualified after proper hearing by the respondent's Board of Directors and petitioner's disqualification shall have been sustained by respondent SEC en banc and ultimately by final judgment of this Court. In resume, subject to the qualifications aforestated judgment is hereby rendered GRANTING the petition by allowing petitioner to examine the books and records of San Miguel International, Inc. as specified in the petition. The petition, insofar as it assails the validity of the amended by- laws and the ratification of the foreign investment of respondent corporation, for lack of necessary votes, is hereby DISMISSED. No costs.

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