State Investment House, Inc. vs. Citibank, et al, G.R. No. 79926-27, Oct. 17, 1991

FACTS:

Consolidated Mines, Inc. (CMI) obtained loans from Citibank, Bank of America and HSBC, all foreign corporations but with branches in the Philippines. Meanwhile, State Investment House, Inc. (SIHI) and State Financing Center, Inc. (SFCI), also creditors of CMI, filed collection suits against the latter with writs of preliminary attachment. Subsequently, the three banks jointly filed with the court a petition for involuntary insolvency of CMI. SHI and SFCI opposed the petition on the ground that the petitioners are not resident creditors in contemplation of the Insolvency Law.

ISSUE: Whether or not a foreign corporation with a branch in the Philippines and doing business therein can be considered a resident

HELD:

Foreign corporations duly licensed to do business in the Philippines are considered “residents” of the Philippines, as the word is understood in Sec. 20 of the Insolvency Law, authorizing at least three resident creditors of the Philippines to file a petition to declare a corporation insolvent. The Tax Code declares that the term “resident foreign corporation applies to foreign corporation engaged in trade or business within the Philippines” as distinguished from a “non-resident foreign corporation” which is not engaged in trade or business within the Philippines. The Offshore Banking Law sates that: “Branches, subsidiaries, affiliates, extension offices or any other units of corporation or juridical person organized under the laws of any foreign country operating in the Philippines shall be considered residents of the Philippines.” The General Banking Act places “branches and agencies in the Philippines of foreign banks” in the category as commercial banks, rural banks, stock savings and loan association making no distinction between the former ad the latter in so far as the terms “banking institutions” and “banks” are used in said Act.

Richard Reid Rogers, of New York City, pro se.

Chadbourne, Stanchfield Levy, of New York City, for appellees Hill, Riggio, Harvie, Boylan, and American Tobacco Co.

William M. Parke, of New York City, for appellee Taylor.

Davis, Polk, Wardwell, Gardiner Reed, of New York City, for appellees Guaranty Trust Co. and Parker.

John W. Davis, Victor J. Dowling, George W. Whiteside, and J. Arthur Leve, all of New York City, of counsel, for all appellees.

Before MANTON, SWAN, and CHASE, Circuit Judges.

MANTON, Circuit Judge.

Appellant, a stockholder of 200 shares of common and 400 shares of common B stock of the American Tobacco Company, a New Jersey corporation, seeks by these suits, which have been consolidated, to enjoin the execution of an employees' stock subscription plan approved by the directors of the corporation on June 25, 1930, and by the stockholders on July 28, 1930. He has joined as defendants with the company, the Guaranty Trust Company, and Junius Parker, as trustees of 56,712 shares of the common B stock, and the directors of the American Tobacco Company. These shares of stock were distributed among the directors and 527 other employees of the corporation, and the relief sought is the cancellation of the shares issued.

Four defenses were interposed in the answer filed, and a motion to strike out such *116116defenses was made. The court, in the exercise of its discretion, declined to entertain jurisdiction of the bill for the reason that the corporation existed under the laws of the state of New Jersey and it held that the court of the domicile of the corporation was the forum to which appellant should appeal. The complaints were dismissed.

The American Tobacco Company has its principal office in New York City, where its chief executives are located and where its board of directors hold its meetings and keeps its corporate records.

The defenses which were sought to be stricken out are (a) that the appellant failed to comply with the provisions of Federal Equity Rule 27 (28 USCA § 723); (b) that the stockholders of the corporation, including the appellant, ratified the action of the board of directors in the allotments made to the members of the board under the employees' stock plan by re-electing them to the board, thus making them eligible for the benefits of the plan; (c) that, since the action is an attempt to regulate the internal affairs of a foreign corporation, the court below should decline to take jurisdiction; (d) that the amount of compensation paid to the individual appellees was and is fair and reasonable by virtue of the valuable services that they have rendered to the company, and, under the by-laws of the corporation, the directors have the right to fix the compensation of its agents, and the allotment under the plan was in accordance therewith as well as in accordance with the statutes of New Jersey.

At a meeting of the directors on June 25, 1930, in accordance with section 2, c. 175, p. 354 of the Laws of 1920 (Comp. St. Supp. § 47 — 184) they duly declared the advisability, and directed the

submission, to the stockholders of a plan for the issuance and sale of its common B stock to employees and those actively engaged in the conduct of the business, by way of compensation for services to be rendered. Section 1, c. 175, of the Laws of 1920 (Comp. St. Supp. § 47 — 183), empowers a New Jersey corporation to provide and carry out a plan for the following purposes: "(a) The issue or the purchase and sale of its capital stock to any or all of its employees and those actively engaged in the conduct of its business or to trustees on their behalf, and the payment for such stock in installments or at one time with or without the right to vote thereon pending payment therefor in full, and for aiding any such employees and said other persons in paying for such stock by contributions, compensation for services, or otherwise." The stockholders met July 28, 1930, and passed two resolutions, one involving a change in the capital structure of the company, and the other authorizing the adoption of this stock subscription plan. The change in capital structure consisted in a decrease of the par value of the common stock and common B stock of the corporation from $50 to $25, and an increase of the authorized shares, in the case of common stock from one to two million shares, and in the case of common B stock from two to four million shares. The resolution also provided that the voting power of the preferred stock be increased from two to four votes in order to maintain the proper ratio. Each stockholder was to receive two shares of new stock, common or common B, for one share of old stock. There was outstanding on this date 526,997 shares of preferred stock, 778,548 shares of common, and 1,535,850 shares of common B stock. The plan was approved by a vote of 389,573 preferred, 620,268 common, and 1,220,855 shares of common B stock. There were voted against the resolutions 170 shares of common, 1,995 shares of common B, and 10 shares of preferred stock.

On January 28, 1931, the directors held a meeting which neither the president nor the vice president Penn attended. The board adopted a resolution providing that there be submitted to the president a number of employees who, in the opinion of the board, should be considered in the allotment of stock, together with a statement of the services rendered by each and with an estimated rating, on a percentage basis, of the value of the services to the company, as compared in each department with the key executive in such department, and the annual rate of compensation of each as of December 31, 1930, including all salary and other compensation of any kind. The board recommended that in determining the individual allotments under the plan there should be used as a general basis a number of shares of stock having an aggregate par value equal to 33 1/3 per cent. of the amount of compensation paid or accrued to such individual for his services to the company for the calendar year 1930, and that, "in view of the unusual ability and efficiency of the President George W. Hill, particularly in connection with sales as well as the general oversight and supervision of all the activities of the corporation and its subsidiaries, and in view of the unusual ability and efficiency of the Vice-President Charles *117117 A. Penn in connection with the manufacturing activities of the Company, this Board recommends that the said George W. Hill and Charles A. Penn be given recognition on the basis of 100 per cent. rating of the value of their services to this corporation, as indicated on the list hereinabove referred to."

As a result of the meeting, there was accorded to 535 employees, including directors who were active employees, the right to subscribe to a number of shares at $25 par value upon the terms and conditions described in an agreement between the company, the respective employees, and the trustees who were named in the agreement. Under the agreement, the stock certificates could not be delivered to the allottee until the purchase price, and all interest accrued thereon should be paid in full, and, in any event, should not be delivered to the participant until after December 31, 1931. If on or before that date the connection of any employee of the company should be severed by discharge, with or without cause, or by resignation, then the trustees had the power to cancel forthwith any right such employee had under the agreement for the delivery of the stock.

The American Tobacco Company, in 1912, by a decree of the United States Supreme Court, was ordered to disintegrate. United States v. American Tobacco Co., 221 U.S. 106, 31 S. Ct. 632, 55 L. Ed. 663. Those companies which were permitted to continue under the decree were estimated to have at that time 37.11 per cent. of the cigarette business in the United States. However, between 1912 and 1925, due to competition, the percentage dropped to 21.81 per cent. In December, 1925, the appellee, Hill, became president of the company. Under his management, and in co-operation with Vice President Penn and the rest of the board, most of whom were employees of the company, a new policy was inaugurated in all the departments. The result of the change of policy in the operation of the business made the American Tobacco Company the leader in the cigarette industry. In 1931 the total increase of sales over 1929 of cigarettes of all kinds in this country was approximately half a billion. The increase in the sale of the company's most popular brand, "Lucky Strike," was nearly six billions. The business is world-wide in scope, with many factories, branches, and organizations in all parts of this country. The company in 1930 expended $20,400,000 in advertising. In that year it sold 38.10 per cent. of the cigarettes produced in the United States. Its net earnings, after deducting all charges for management and taxes, amounted to $43,294,769. It paid dividends on its common stock of $29,294,000 in 1930, with an extra dividend of $1 for the first quarter of 1931. The total dividends on the common stock for the latter year exceeded $28,300,000; on its preferred stock, $3,161,982. It paid the United States government taxes of $150,000,000 in 1930. These figures give some idea of the gigantic problem confronting those engaged in the active management of the company's affairs. It has had most unusual commercial success. The services rendered by the individual appellees have been extraordinary and unique.

On April 1, 1931, at a meeting of the stockholders, the directors were re-elected, indicating a renewed confidence of those in charge of the corporation. On January 28, 1931, it was publicly announced through the newspapers that the directors had voted to allot 56,712 shares of the company's common B stock, pursuant to the authority conferred upon them under the plan. On March 12, 1931, each stockholder of record received a statement relative to the plan showing the amount of shares allotted to the president and the five vice presidents, and specifying the amount allotted to the various 535 employees. The statement also advised the stockholders of the operation of article XII of the by-laws, which had been adopted by the company on March 13, 1912. See Rogers v. Hill (C.C.A.) 60 F.2d 109, decided this day. After this public notice, the meeting of April 1, 1931, was held. The appellant gave public notice of his opposition to the plan, inviting others to join him in such opposition, and at the meeting nominated a candidate for director against Mr. Hill. He voted for all the directors except Mr. Hill. The directors were re-elected by a vote varying from 2,608,201 to 2,615,973. The opposition candidate received 11,980 votes. There were at the time approximately 40,000 stockholders in the company.

Appellant argues (a) that the directors' participation in the plan made it illegal ab initio; (b) that under the plan the stock was issued for services to be rendered, and this is unlawful, because the stock of a New Jersey corporation can be lawfully issued only for the amount that such corporation actually paid for labor performed; (c) that the sale to the directors was for $25 per share, whereas the stock was selling on the exchange market for $112 per share.

As to (a), ample notice was given to the stockholders of the directors' participation *118118and their respective amounts. The New Jersey statute (Laws of 1920, c. 175, p. 354, § 1 [Comp. St. Supp. N.J. § 47 — 183]), quoted above, includes within its terms such a plan as was here intended and contemplated.

It has been long recognized that in corporate transactions, where directors have an interest, the stockholders of the corporation have full power to authorize and ratify their acts if the existence of an interest is disclosed. United States Steel Corp. v. Hodge, 64 N.J. Eq. 807, 54 A. 1, 60 L.R.A. 742; Pierce v. Old Dominion Co., 67 N.J. Eq. 399, 58 A. 319; Lillard v. Oil, Paint Drug Co., 70 N.J. Eq. 197, 56 A. 254, 58 A. 188. When a contract is entered into by the stockholders with the directors, or the stockholders expressly authorize the directors to enter into a contract and the stockholders have notice of the directors' interest, the agreement is unassailable in the absence of actual fraud or want of power in the corporation. The stockholders gave authorization for and ratified the directors' interest here. Present interest of directors does not render a transaction void, but merely makes it voidable at the option of the stockholders of the company as distinguished from a single stockholder. Dana v. Morgan, 232 F. 85 (C.C.A. 2); Pollitz v. Wabash R.R. Co., 207 N.Y. 113, 100 N.E. 721; Russell v. Patterson, 232 Pa. 113, 81 A. 136, 36 L.R.A. (N.S.) 199.

When, on June 25, 1930, the board voted on the resolution to submit the plan to the company's stockholders, the directors had no self-interest, and the record discloses that they did not own or even control a majority of the stock on that date or at the time of the stockholders' meeting on July 28, 1930, at which time the plan was authorized. The New Jersey act required an approval by two-thirds of all classes of stock before the plan could be effective. The plan contemplated that the stock should be allotted, in part, for services that should be thereafter rendered. The stockholders were fully informed and advised that directors might obtain benefits under the plan. The notice to stockholders stated that "no employee or person * * * shall be deemed ineligible to the benefits of the Plan by reason of his being also a director of the Corporation." The later overwhelming approval of the directors' management by their re-election after the allotment was made to the employees, justified the claim that the stockholders had reiterated their former approval of the plan. As to (b), upon issuance of the stock and delivery to the trustees under the agreement, the Guaranty Trust Company paid $25 a share for each share of stock so delivered to it. Thus the American Tobacco Company received par value for the stock. The company during the entire year received services which were rendered in part upon the agreement that this stock had to be delivered to the employees to whom it was allotted under the plan. The statute authorizes stock to be issued without being paid for in full. The language is, "the issue * * * and the payment for such stock in installments or at any one time with or without the right to vote thereon pending payment therefor in full." See Morgan v. Bon Bon Co., 222 N.Y. 22, 118 N.E. 205; Vineland Grape Juice Co. v. Chandler, 80 N.J. Eq. 437, 85 A. 213, Ann. Cas. 1914A, 679.

The charter of the corporation permitted compensation to employees and officers in the form of a stock interest. It provides that the company shall have the powers conferred by section 1 of the act concerning corporations (Laws of 1896, c. 185, p. 278 [2 Comp. St. N.J. 1910, p. 1598, § 1, par. 5]). Section 1 of that act provides: "Every corporation shall have power: * * * V. To appoint such officers and agents as the business of the corporation shall require, and to allow them suitable compensation." The form of compensation, whether in stock or a share of the profits, is within the implied powers of the corporation. Bennett v. Millville Improvement Co., 67 N.J. Law, 320, 51 A. 706; Booth v. Beattie, 95 N.J. Eq. 776,118 A. 257, 123 A. 925; Harker v. Ralston Purina Co., 45 F.2d 929, 930 (C.C.A. 7); Church v. Harnit, 35 F.2d 499 (C.C.A. 6).

In the Harker Case, the Seventh Circuit said: "Every corporation has the right incidental to its expressed powers and purposes to exercise such incidental power as is necessarily implied in the legitimate achievement of its expressed powers. Among such is the employment of efficient employees. At the time appellee made the contract before us, it contracted for appellant's services for five years, and obligated itself, in consideration therefor, to sell to him some of its capital stock at

a price less than its market value. By selling the stock to the employee, appellee made sure that the employee would have a personal interest in the welfare of the corporation. The natural tendency of such interest was to increase the zeal of the employee and thus to forward the chances of success in the corporation's legitimate operations. Furthermore, it enabled the faithful employee, if he continued his employment to *119119 the maturity of his contract, to partake of the profits of the corporation. In a word, the contract contemplated the insurance of faithful efficient service to the corporation and a corresponding reward to the employee. Such a contract was clearly praiseworthy in its motives from the viewpoint of both parties, and the option to repurchase was clearly included to encourage the stay of the employee to the end of the period of his employment. In view of the fact that the performance of the option would work none of the results condemned by the courts of Missouri, viz., damage to creditors, impairment of capital, or jeopardy to the financial interests of any interested party, it follows that the contract was clearly within the implied powers of the corporation."

The fact that the stock may have been selling at a higher price in the open market does not brand the employees' subscription plan as fraudulent. The stock was issued for par and in recognition of efficient services which had been rendered and the promise of like services in the future. It was not necessary to the validity of the plan that the stock allotted under it be offered first to the appellee or any other stockholder of the company. The statutory right to such offer applies only to an issue for cash at the time the stock is sold, whereas stock allotted under this employees' plan passed first to the trustee, was paid for in cash, and lawfully issued pursuant to chapter 175 of the Laws of 1920 (Comp. St. Supp. § 47 — 183 et seq.).

The allotment of the stock under the plan was authorized by 99.99 per cent. of the stock represented in person or by proxy at the stockholders' meeting. This overwhelming vote leaves little to be desired in the approval of the management of the internal affairs of this corporation by its stockholders. It is only where actual fraud, and not alleged constructive fraud, is established, that the courts should interfere. The corporation had the right to aid and encourage its employees; the board of directors and stockholders deemed it good business policy. The selling price of the stock on the market (which is always subject to fluctuation) will not justify an allegation of insufficient consideration amounting to fraud. The corporation received what those in charge of its internal affairs deemed to be sufficient as its par value. The directors had the right to select employees who, in their judgment, were entitled to benefits under the plan and to apportion to them their respective rights to subscription. This was a matter of internal management of the corporation's affairs.

Moreover, there is no allegation in the complaint setting forth a demand upon the stockholders to take action, nor are there reasons stated to excuse such failure prior to the institution of these suits. Equity Rule 27 (28 USCA § 723) provides: "Every bill brought by one or more stockholders in a corporation against the corporation and other parties, founded on rights which may properly be asserted by the corporation, * * * must also set forth with particularity the efforts of the plaintiff to secure such action as he desires on the part of the managing directors or trustees, and, if necessary, of the shareholders, and the causes of his failure to obtain such action, or the reasons for not making such effort."

The complaint does allege a demand upon the directors in the form of a letter, and the refusal of the directors to take any action thereon within the twenty-day period fixed by the plaintiff. But there were remedies, within the company, which were open to the plaintiff as a stockholder under the laws of New Jersey.

(a) Section 3, c. 175, p. 357 of the Laws of 1920 (Comp. St. Supp. N.J. § 47 — 185) provides that "any plan adopted * * * may be recalled, abolished, revised, amended, altered or changed in the same manner as is herein provided for its adoption. * * *" (b) If the stockholders desire any change with respect to the corporate affairs, any three such stockholders may call a meeting for that purpose without even calling upon the directors to take such action. Laws of 1896, c. 185, p. 292, § 46 (2 Comp. St. N.J. 1910, p. 1629, § 46). See Watts v. Vanderbilt, 45 F.2d 968 (C.C.A. 2); Stone v. Holly Hill Fruit Products, 56 F.2d 553, 554 (C.C.A. 5).

The appellee could have asserted these rights. The lapse of time since the plan was approved and the stock allotted thereunder and the services performed by the allottees was ample. In the Stone Case, the court said: "The minority have a right to have the majority exercise their judgment, and to exercise it honestly and not fraudulently, but have no right to have a court substitute their own ideas and wishes for those of the majority, and that in advance of any refusal of the majority to hear and decide on the matter at issue. Minority stockholders may not in the absence of sudden emergency ask a court of equity to interfere in the management of *120120 their corporation until they have earnestly and unsuccessfully sought redress from the Board of Directors, and where appropriate also from the stockholders in meeting, unless they can show sufficient reasons for not doing so. This is implied in the provisions of Equity Rule 27 (28 USCA § 723). For defect in this respect a bill will be dismissed. Wathen v. Jackson Oil Ref. Co., 235 U.S. 635, 35 S. Ct. 225, 59 L. Ed. 395; Corbus v. Gold Mining Co., 187 U.S. 463, 23 S. Ct. 157, 47 L. Ed. 256; Hawes v. Oakland, 104 U.S. 450, 26 L. Ed. 827; Dimpfel v. Ohio Miss. R.R. Co., 110 U.S. 209, 3 S. Ct. 573, 28 L. Ed. 121; Memphis v. Dean, 8 Wall. at page 73, 19 L. Ed. 326.

The general averment that complainants had objected to the president does not meet the particular requirements of the rule. There is alleged no dominance of the board of directors or of the stockholders by those whose personal interests are adverse to the relief sought by the bill such as to make it evidently futile to expect fair consideration within the corporation. * * *"

Unless the directors were majority stockholders, it was the duty of the appellant to go to the directors or show adequate reason why action in that respect would be futile. Here the directors were not majority stockholders or, indeed, in control of the company.

Courts seldom interfere in the control of the internal affairs of a corporation, except where the directors are guilty of misconduct equivalent to a breach of trust, or where they stand in a dual relationship which prevents an unprejudiced exercise of judgment, and then, as a rule, only after an application to the stockholders or a showing that there was no opportunity for such application. United Copper Co. v. Amalgamated Copper Co.,244 U.S. 261, 37 S. Ct. 509, 61 L. Ed. 1119.

For these reasons the bill of complaint was properly dismissed.

Decrees affirmed.

Western Air Lines, Inc. v. Sobieski

[Civ. No. 24018. Second Dist., Div. Two. Apr. 20, 1961.]

WESTERN AIR LINES, INC. (a Corporation), Respondent, v. JOHN G. SOBIESKI, as Commissioner of Corporations, Appellant.

COUNSEL

Stanley Mosk, Attorney General, Lee B. Stanton, Deputy Attorney General, and Richard W. Jennings for Appellant.

Darling, Shattuck & Edmonds, Hugh W. Darling, O'Melveny & Myers and Pierce Works for Respondent.

OPINION

McMURRAY, J. pro tem. fn. *

This is an appeal by the Commissioner of Corporations of the State of California from a judgment of the superior court in an action brought by Western Air Lines, Inc., for a writ of mandate to review a final order rendered by the commissioner. By its judgment, the superior court, in substance, determined that the commissioner had exceeded his jurisdiction in purporting to act on a change in voting rights of its shareholders attempted by Western Air Lines, Inc., by means of amending its articles of incorporation.

Western, as the respondent herein will be called, is a Delaware corporation with its principal place of business in California. Western's original predecessor was incorporated in California in 1925; thereafter, in 1928, a Delaware incorporation was effected. This Delaware corporation, under a permit [191 Cal. App. 2d 401] applied for and granted by the California Corporations Commissioner, exchanged its shares for all of the outstanding shares of the California corporation in 1929, and the California corporation then became a wholly owned subsidiary of the Delaware corporation. This wholly owned subsidiary was dissolved in 1934. The certificates of incorporation of both of these corporations contain provisions for cumulative voting.

On April 19, 1956, a group of Western's minority shareholders voted their shares cumulatively and elected two of Western's 13 directors. The board of directors thereafter met and, by amendment of the by-laws, increased the number of directors from 13 to 15. On July 12 and 13, 1956, the board resolved to eliminate cumulative voting for directors and began proceedings in compliance with the relevant Delaware laws to amend the certificate of incorporation with a view to the elimination of cumulative voting rights.

A proxy statement and proxy form for voting against cumulative voting were sent to each shareholder on July 31, 1956. The commissioner, by letter on August 28, 1956, advised counsel for Western that in his opinion the proposed amendment of the articles of incorporation would constitute a "sale" of securities within the provisions of section 25009, subdivision (a), of the Corporations Code, fn. 1 and, further, that pursuant to section 25500 fn. 2 of the same code Western should not engage in the solicitation of proxies or hold a shareholders meeting for the purpose of

amending the articles until Western had applied for and received a permit authorizing such action from the commissioner.

Western applied for such a permit, reserving, however, the right to question the jurisdiction of the commissioner to require such a permit. The commissioner granted a negotiating permit, but expressly reserved the issue of "fairness" under Corporations Code, section 25510, fn. 3 and conditioned the issuance [191 Cal. App. 2d 402] of the permit upon nonfiling of the proposed amendment with the Secretary of State of Delaware until a further permit had been obtained from the commissioner. The negotiating permit granted further authorized the use of any proxies received by management before its issuance, provided that such proxies were not thereafter revoked. Western so advised its shareholders and clarified certain matters contained in the original solicitation which had been objected to by the Securities and Exchange Commission as misleading. It did not forward any new proxy forms and subsequently voted those proxies which had been received before the objection of the commissioner and the Securities and Exchange Commission, except those proxies expressly revoked.

On October 10, 1956, at a shareholders' meeting, 442,780 shares voted in favor of eliminating cumulative voting and 199,810 voted against such change. Outstanding shares then numbered 743,963 shares, requiring a vote of 371,982 to abolish cumulative voting. Included in the voting were 194,278 proxies obtained prior to sending the explanatory letter and the obtaining of the negotiating permit. On October 15, 1956, Western applied for a supplemental permit to effect the elimination of the provision for cumulative voting from its articles. After notice to all shareholders, a hearing on the fairness of the proposed amendment was held by the commissioner. Upon conclusion of the hearing, the commissioner made detailed findings of unfair, unjust and inequitable actions and conduct by Western and its management. Among the findings made by the commissioner were specific findings that indicated that Western's business in California was of a substantial nature and that California residents were the holders of over 30 per cent of the outstanding shares in Western.

Western's certificate of incorporation, as permitted by the laws of Delaware, contained an article providing for cumulative voting and an article reserving the right to "amend, alter, change or repeal any provision" in the certificate. The stock certificates issued by Western also contained a written provision to the effect that by acceptance thereof the holder "assents to and agrees to be bound" by all the provisions of the certificate of incorporation. The final step to effect amendment of the articles of incorporation under Delaware law is the filing of such amendment with the Delaware Secretary of State.

What the commissioner described as his "terminal findings" were, in essence, that Western's management was determined [191 Cal. App. 2d 403] not to relinquish control, nor to tolerate any interference from minority shareholders, or directors representing them, and that the resolution enacted to eliminate the minority's right to cumulative voting would be "... unfair, unjust and inequitable to the great number of security holders residing in California." On the basis of the findings, the commissioner concluded that he had jurisdiction under Corporations Code, sections 25009, 25500, 25510, supra, and 22507, fn. 4 and that the change in the right and privilege of the shares from cumulative to straight voting would constitute a "sale" and an "exchange" within the meaning of section 25009, subdivision (a), and section 25510 of the Corporate Securities Law. The commissioner further found that the solicitation materials of respondent were prepared and mailed from California; that both shareholders of record and beneficial owners of shares of Western, resident in California, were solicited in California in order to accomplish such change in voting rights; that the shareholders' meeting on October 10, 1956, and the vote of the shareholders on the

amendment occurred in California, and that the filing of the certificate of amendment in Delaware would result in a change in the contract rights between the corporation and its California shareholder residents, over both of whom the commissioner had jurisdiction, and as to which a prior definitive permit under California law was and is necessary.

The commissioner further found that for the purpose of considering the application for a permit and to achieve overall fair play and substantial justice, the fiction of Delaware residence should yield to the totality of California contacts so as to require, in addition to compliance with the Delaware law, the approval of the California Corporations Commissioner as a condition to eliminating the right of cumulative voting by the shareholders. Upon the commissioner's denial of the definitive permit, Western applied for a rehearing, [191 Cal. App. 2d 404] which was denied. Western then filed a mandamus action, which resulted in a remand upon stipulation on April 12, 1957. Hearings were again held as a consequence of the remand in June 1957. On February 5, 1958, the commissioner issued his findings and again denied Western's application. It is the findings and denial of February 5, 1958, that are here in issue.

After being denied a rehearing, Western filed its complaint for administrative review and for writ of mandate on February 28, 1958. The superior court made findings of fact and conclusions of law and gave judgment issuing the peremptory writ of mandate. In a memorandum opinion that court properly stated that mandamus was the proper action under the circumstances. (Corp. Code, §§ 25317, 25318; Code Civ. Proc., §§ 1085 through 1094.5.) In its opinion, the court relied upon Moran v. Board of Medical Examiners,32 Cal. 2d 301, 308-309 [196 P.2d 20] and Tringham v. State Board of Education, 50 Cal. 2d 507, 508 [326 P.2d 850]. The court did not reject commissioner's argument that Code of Civil Procedure, section 1094.5, fn. 5 provides that judicial review of proceedings before the commissioner is limited to the determination of whether there is substantial evidence in the light of the entire record to support his findings and order, but rather determined that the court had the specific power under Code of Civil Procedure, section 1094.5, subdivision (b), to extend its review inquiry to the question of whether the commissioner proceeded in excess of his jurisdiction. The court then indicated that it felt that there was but one issue for determination, which was whether the commissioner proceeded [191 Cal. App. 2d 405] " 'without, or in excess of jurisdiction' " as a matter of law, and then the court concluded that under the facts before it, the commissioner acted beyond his jurisdiction. The court indicated, in dealing with the Corporations Code and the Corporate Securities Law of the State of California, that such laws could only have application to transactions occurring within the State of California, that the amendment of the articles of incorporation was not a "sale" or "exchange" of stock and that the amendment of the articles of incorporation was an internal affair of Western and its shareholders. The court further stated that any changes in the "rights, preferences, privileges, or restrictions" of the outstanding stock would be "... accomplished outside the State of California" by the filing and recording of the certificate of amendment in the appropriate offices in Delaware. The trial court made some 50 findings of fact and 10 conclusions of law with main emphasis upon Western's extra-California activities.

On this appeal, the commissioner vigorously contends that his findings of fact must be accepted as the controlling facts of the case, and respondent, as staunchly, contends that the court's findings of fact must be accepted as controlling. The rule set forth in Code of Civil Procedure, section 1094.5, subdivision (b), is supported by the language in Allen v. Railroad Commission, 179 Cal. 68, 74-75 [175 P. 466, 8 A.L.R. 249], where in considering a similar problem with relation to jurisdictional findings by a commission, it is said: " 'It is plain, and indeed it has in effect been decided, that the declaration in that section that "findings and conclusions of the commission on questions shall be final and not be subject to review, has to do with the commission's determination upon questions of fact within its

jurisdiction. When the question, ever one of mixed law and fact, goes, as here, to the jurisdiction itself, when the whole controversy revolves around the inquiry as to whether or not the corporation is a public utility, to say that the determination of the commission upon this matter is final and conclusive and is not subject to review, is the equivalent of denying to a petitioner a hearing upon a right carefully preserved to him by the language of section 67 itself. ...' "

" 'Thus we are brought to a consideration of the evidence upon which the commission acted in holding this plaintiff to be in toto a public service corporation.' "

[1] People v. Lang Transportation Co., 217 Cal. 166, 171 [17 P.2d 721], sets forth the proper rule as follows: [191 Cal. App. 2d 406]"... the determination of the board on the question whether the facts existing were sufficient to bring the case within the scope of its powers is subject to review in so far as they do, as here, present a question of law bearing upon the subject. In other words, the finding of the board is not conclusive as to the facts necessary to the existence of the board's jurisdiction." (Emphasis added.) (See also Witkin, Summary of California Law, vol. 3, Constitutional Law, § 204, p. 2017.)

[2] Insofar as the findings of the commissioner and the court pertain to the question of commissioner's jurisdiction to hold a hearing in circumstances such as those here disclosed, it would appear that the plain language of section 25009 [subd. (a)] of the Corporations Code providing that " '[s]ale' or 'sell' includes every disposition, or attempt to dispose, of a security or interest in a security for value. 'Sale' or 'sell' includes all of the following ... an exchange; any change in the rights, preferences, privileges, or restrictions on outstanding securities" persuades us that the court below erred in finding that the commission had no jurisdiction to act in this matter. Many cases hold that where the Corporate Securities Act is violated by solicitation of sales of stock in California, the Corporate Securities Act applies even though issuance of the stock and the transfer of title are to take place in a foreign state. (People v. Sears,138 Cal. App. 2d 773, 791 [292 P.2d 663].) Furthermore, even criminal sanctions may properly be imposed under the above-stated rule where the main effectuation of a sale or transfer of stock takes place in California although the ultimate act may take place extraterritorially. (People v. Alison, 189 Cal. App. 2d 201, 205 [10 Cal. Rptr. 859].)

People v. Rankin, 169 Cal. App. 2d 150 [337 P.2d 182], specifically holds that even though the last act necessary to the issuance of a security such as the signing of documents occurs outside of California, the Corporations Commissioner is not thereby deprived of jurisdiction over the subject matter.

Respondent cites Robbins v. Pacific Eastern Corp., 8 Cal. 2d 241 [65 P.2d 42]; B. C. Turf & Country Club v. Dougherty, 94 Cal. App. 2d 320 [210 P.2d 760] and Jones v. Re-Mine Oil Co., 47 Cal. App. 2d 832 [119 P.2d 219], to the effect that the commissioner has no extraterritorial jurisdiction, and that such jurisdiction as he has is limited to acts done or proposed to be done in California. The Robbins case, supra, on page 284, contains the following language: "It, therefore, follows that even if it be assumed that the negotiations in [191 Cal. App. 2d 407] California were illegal, nevertheless the validity of the sale in New York was not affected. This conclusion makes it unnecessary to pass upon the contention of respondents, that the Corporate Securities Act, properly interpreted, has no application at all to negotiations had in California that contemplate the issuance and sale of stock in a foreign jurisdiction." (Emphasis added.)

B. C. Turf & Country Club v. Daugherty, supra, dealt with a state of facts which the court felt did not amount to the solicitation or the type of preliminary negotiation requiring a permit under California law. On page 332 of that opinion, it is expressly stated: "... the discussions had in California by Fraser

during his short visit in September, did not amount to solicitation or the type of preliminary negotiation requiring a permit under California law." The opinion further contains the following language relative to the Corporate Securities Act (p. 329): "From a standpoint of interpretation, there can be no reasonable doubt but that these provisions of the statute require a foreign corporation to secure a permit to solicit a sale of its stock in this state, or to engage in preliminary negotiations looking towards such sale, even though the issuance of the securities and the transfer of their title will, in good faith, be completed in a foreign state. The sections quoted clearly prohibit a foreign corporation from soliciting in this state a sale of stock of its own issue without first securing a permit, even though in good faith the issuance of the stock and transfer of title are to take place in the foreign state. We also have no doubt that, although such a regulation may impose some restraint on interstate commerce and place some restriction on free speech, it is a valid exercise of the state's police power, and is not unconstitutional. It is true that in the Robbins case, supra, these problems were expressly left open and not decided, and that no other California case seems to have expressly determined these questions, but the suggested construction is so clear that reasonable minds cannot differ thereon, and the question of constitutionality has been so long settled that citation of authority would be superfluous."

As we interpret Jones v. Re-Mine Oil Co., supra, 47 Cal. App. 2d 832, that case, insofar as it relates to the Corporate Securities Act, appears to rely upon the Robbins case, supra, and states at page 840: "All the parties here did go in person to Nevada; they there organized a corporation; they there paid for and had issued shares of stock in that corporation, [191 Cal. App. 2d 408] and they there made an agreement regarding the conditions on which they would hold the shares. No suggestion is made that any of these acts were invalid under Nevada law. California law can have no application to them and they must be regarded as valid here." The instant case shows no such substantial extraterritorial dealing.

The case of Transportation Building Co. v. Daugherty, 74 Cal. App. 2d 604 [169 P.2d 470], relied upon by Western, was one wherein a corporation requested approval of the amendment of its articles of incorporation to change its stock structure. The appellate court upheld a trial court's determination that the commissioner had acted improperly in denying such permit since such reorganization was an internal affair of the corporation. It appears that at the hearing held by the corporations commissioner, stockholders were invited to attend but none did; and the court based its opinion upon the ground that the commissioner did not find that the plan was unfair, unjust, or inequitable, nor that a fraud would be worked upon those who would acquire the new stock. On page 615 it is said: "There was no dispute whatever as to the facts, and there was no failure to disclose any facts in connection with the proposal. It is a fair, just, and equitable plan unless it is the reverse. It is an honest plan if it is not dishonest. There is no middle ground. The deputy commissioner evidently thought there was, and that without any finding or evidence to support a finding that the plan was unfair, unjust or inequitable, it was his duty to refuse the permit because of his opinion that the shareholders should be able to work out a better deal for themselves." The quoted language clearly distinguishes the instant case where proper findings were made under the relevant Corporate Securities Act sections.

Western earnestly insists that under the authority of Southern Sierras Power Co. v. Railroad Com., 205 Cal. 479 [271 P. 747], the commissioner had no jurisdiction to act upon the amendment of the articles here proposed, again contending that such amendment is essentially an internal affair of the corporation. The Southern Sierras case was considered in Gillis v. Pan American Western Petroleum Co., 3 Cal. 2d 249 [44 P.2d 311], where it is put in its proper framework. In the last cited case, on page 252, it is said with reference to the Southern Sierras case: "The court held that the commission was

without jurisdiction, for the reason that it was never intended by the Public Utilities Act of this state 'to subject [191 Cal. App. 2d 409] foreign corporations to regulation concerning the exercise of the inherent corporate powers conferred upon them by the legislative power of the incorporating state.' It was largely grounded upon the Fryeburg case, which was very similar in character. The Fryeburg Water Company was a Maine corporation doing business in both Maine and New Hampshire. It sought to compel the public service commission to approve that portion of a stock dividend which was represented by its capital investment in New Hampshire. The court refused the writ upon the statement that while the language of the act conferring authority upon the commission was quite broad it would not be 'presumed that the legislature intended to give the commission power to regulate the internal affairs of such corporations.' We have no criticism of these authorities. Indeed, in Commonwealth Acceptance Corp v. Jordan, 198 Cal. 618 [246 P. 796], this court called attention to the well-known fact that the laws of the several states authorize different capital stock structures for corporations, and under the doctrine of comity they are allowed, in the absence of express constitutional or statutory inhibitions, to enter other states for the purpose of doing business, regardless of whether a corporation with like structure is permitted to be formed in the latter states. However, these authorities are far from holding that the issuance and sale of the stock in a state other than that in which the corporation is formed is not a proper subject for legislative action. A number of authorities by their conclusions confirm the right of the state to protect its citizens, by legislative interposition, against the issuance or sale of stock in the state. Among these we cite, Hohn v. Peters, 216 Cal. 406 [14 P.2d 519]; Hayden Plan Co. v. Friedlander, 97 Cal. App. 12-16 [275 P. 248, 253]; In re Flesher, 81 Cal. App. 128 [252 P. 1057]. In the case of London, Paris & American Bank v. Aronstein, 117 F. 601-609, it is said: 'It is true that the courts in California cannot control the internal affairs of any foreign corporation. Such matters are to be conducted in pursuance of and in compliance with the provisions of the charter of the foreign corporation, and the laws of the country where it was created; but in the management and method of its business affairs in California with the citizens and residents thereof, in the sale or disposition or transfer of the shares of stock, it must conform to the laws of California in relation to such matters, and is bound thereby. In the recent case of Williams v. Gaylord, supra, 186 U.S. 157 [22 S. Ct. 798, 46 L. Ed. 1102], the Supreme Court of the United States said: [191 Cal. App. 2d 410] "When a corporation sells or encumbers its property, incurs debts, or gives securities, it does business; and a statute regulating such transactions does not regulate the internal affairs of the corporation." ' (Italics ours.) In Hall v. Geiger-Jones Co., 242 U.S. 539-550 [37 S. Ct. 217, 61 L. Ed. 480, Ann. Cas. 1917C 643, L.R.A. 1917F 514], we find a similar statement of the purpose of legislation similar to that we are considering which is helpful in arriving at a sound conclusion. It is as follows: 'It will be observed, therefore, that the law is a regulation of business, constrains conduct only to that end, the purpose being to protect the public against the imposition of unsubstantial schemes and the securities based upon them. Whatever prohibition there is, is a means to the same purpose, made necessary, it may be supposed, by the persistence of evil and its insidious forms and the experience of the inadequacy of penalties or other repressive measures.' To like effect is Merrick v. N.W. Halsey & Co., 242 U.S. 568 [37 S. Ct. 227, 61 L. Ed. 498]. The case of Biddle v. Smith, 148 Tenn. 489-494 [256 S.W. 453], is authority for the proposition that in order 'to protect residents of the state against the imposition of worthless investments offered by domestic and foreign investment companies under whatsoever guise presented,' the legislature is empowered to restrict valid issues to those which are in accordance with a permit therefor and to declare void other issues. To the same effect is Edward v. Ioor, 205 Mich. 617 [172 N.W. 620, 15 A.L.R. 256]. Conceding, therefore, the premise of respondents' argument that ordinarily speaking the issuance of capital stock or the stock structure of a corporation is an internal affair, yet the issuance and sale of stock within a state other than that of its organization may be regulated in order to protect the residents and citizens of the former state."

Western also urges that the case of Order of United Commercial Travelers of America v. Wolfe, 331 U.S. 586 [67 S. Ct. 1355, 91 L. Ed. 1687, 173 A.L.R. 1107], sustains the proposition that the commissioner had no jurisdiction to act as he did here. A reading of that case persuades us that its holdings are necessarily restricted by the facts therein to fraternal insurance associations. There were a number of such cases before the United States Supreme Court before the decision in Wolfe, and the court seems to have treated these cases as unique and to have established rules of law applicable only thereto. [191 Cal. App. 2d 411]

The case of Watson v. Employers Liability Assurance Corp., 348 U.S. 66 [75 S. Ct. 166, 99 L. Ed. 74] was one wherein it was contended that no action might lie against an insurer, where that insurance company was a foreign corporation qualified to do business in Louisiana, until after the insured's liability to pay damages had been finally determined either by judgment or agreement. The Supreme Court dealt with a Louisiana statute which provided for direct actions for injuries occurring in Louisiana (regardless of whether the insurance policy was written or delivered in that state), and which conditioned the right of a foreign liability insurer to do business in Louisiana upon the consent to allow suits under such statute. The court rejected the argument that such statute was violative of the equal protection, contract, due process and full faith and credit clauses of the federal Constitution and realistically recognized that a state has a legitimate interest in safeguarding the rights of persons injured there even though certain of the activities affected occurred beyond its boundaries.

It would appear that the provisions of the Corporate Securities Act here before us are a proper exercise of legislative discretion in requiring that corporate dealings with residents of this state be authorized by the Commissioner of Corporations, particularly where such corporation does a substantial amount of business within the state, and the act is not violative of the constitutional clauses of equal protection, contract, due process and full faith and credit if such legislative enactments operate equally upon such foreign corporations and domestic corporations in this state.

Furthermore, it appears here that since 1929 Western has recognized and submitted to the continuing jurisdiction of the California Corporations Commissioner. At that early date Western applied for and was granted a permit by the commissioner to allow the exchange of its shares for those of its California predecessor. At that time, the permittee represented to the commissioner that the shareholders of the California corporation would not be hurt in any way by the exchange. If the exchange had not taken place, the shareholders could not now be deprived of their right to cumulative voting, for a California corporation, by legislative act (Corp. Code, § 2235) must provide its shareholders with the right to vote cumulatively for directors. Thus it is apparent that the condition agreed to by Western as a basis for the original exchange of stock now tacitly prevents the company from [191 Cal. App. 2d 412] depriving its shareholders of a right which they would now have had if the 1929 exchange had not taken place.

Western complains that the commissioner, since the institution of this action, has created a new class of foreign corporation called a pseudo- foreign corporation, and urges that such definition of such corporation is mere fiat; that the commissioner has usurped the function of the Legislature which has seen fit to divide corporations into only two classes--domestic and foreign; and that the commissioner has seen fit by his arbitrary definition to create a third. Western's position in this respect is not well taken. The commissioner did not create any new class of corporation. He merely named a class of corporation which has, in effect, existed for many years, one with its technical domicile outside of this state but one which exercises most of its corporate vitality within this state. Unless it can be said that the Corporations Commissioner's characterization of such corporation as

"pseudo-foreign" is arbitrary, it would appear to be a matter well within his administrative discretion. The concept of a pseudo- foreign corporation as defined by the commissioner and the well established concept of "commercial domicile" of a corporation appear to us to be founded upon reality.

There appears to be little difference in difficulty of concept between that of commercial domicile and that of pseudo-foreign existence. Each would appear to be descriptive of a particular type entity and neither would appear to have been created by a fiat or definition but rather by the nature, operation and establishment of certain corporations and the transaction of corporate business. For an interesting discussion of the concept of commercial domicile, see the case of Southern Pacific Co. v. McColgan, 68 Cal. App. 2d 48[156 P.2d 81].

The fact that since the commencement of this action the commissioner has seen fit to enunciate certain administrative rules which will be applied when dealing with a pseudo-foreign corporation does not indicate any abuse of his discretion. Such corporations have existed for many years, and naming them does not change their nature. Contrariwise, it would appear to be a just and fair administrative step to preinform those interested in such corporations as to the standards which will be applied by the commissioner in considering various applications and granting various permits.

Western properly contends that there is nothing basically evil in provisions giving shareholders the right of straight voting instead of giving them the right of cumulative voting. [191 Cal. App. 2d 413] This does not mean, however, that the commissioner's announced policy, that insofar as a pseudo- foreign corporation's coming into this state is concerned, the lack of provision for cumulative voting in its charter will be considered by him as a negative factor, is any abuse of his discretion. The argument that the commissioner has created another class of corporation is not persuasive, nor is the argument that legislative history relative to foreign corporations indicates that the Legislature, by eliminating earlier provisions requiring cumulative voting to be provided by all corporations and associations doing business in this state, declared an affirmative public policy allowing foreign corporations to provide whatever form of voting they wished persuasive.

It is certainly equally likely that the Legislature, by eliminating and failing later to reenact the sections requiring foreign corporations to provide for cumulative voting, intended to allow the appraisal of the fairness of the corporate structures of foreign corporations to be examined and appraised by the commissioner within reasonable limits of discretion, as it is that such legislative action was a declaration of public policy. It seems patent that if the Legislature may provide that all domestic corporations shall have cumulative voting, the commissioner may well, in his discretion, look askance upon any corporate scheme of voting which does not contain such rights. This is not to say that under certain circumstances the commissioner, in the exercise of sound discretion, could not approve the issuance of securities in a corporation which did not provide for such cumulative voting.

When we consider the complexity of present-day corporate structure and operation, and the far-flung area of corporate activities where transportation or nation-wide distribution of products may be involved, we are persuaded that the commissioner has this discretion. To hold otherwise, and to follow the argument of Western to its conclusion, would be to say that the commissioner might have the power in the first instance to require certain rights to be guaranteed to shareholders before he would permit the sale or issuance of a foreign corporation's stock in this state, but that immediately thereafter, by the device of amending the charter of such corporation in another state, the entire structure of that corporation, even to substantial changes in the rights of shareholders in California, might be legally effected. Such a holding would enable a foreign corporation to destroy the [191 Cal.

App. 2d 414] rights which the State of California has deemed worthy of protection by the enactment of the Corporate Securities Act.

This position is not without support in other jurisdictions. The mere fact that the last act here necessary to effectuate the change in the voting rights of the numerous California residents who are shareholders of Western will take place in Delaware does not of itself necessitate a finding that the commissioner for that reason was without jurisdiction in this matter. Also, a fair and impartial reading of the pertinent Corporations Code sections convinces us that the amendment here sought is a "change in the rights, preferences, privileges, or restrictions on outstanding securities" (Corp. Code, § 25009, subd. (a), supra) of such nature as to be within the contemplation of the Legislature upon enactment of those sections.

Numerous arguments relative to comity between states are advanced by Western, but none of these appear to be sufficiently cogent to invalidate the above interpretations of the Corporate Securities Act sections here involved. It would seem too evident to require protracted dissertation that the right of cumulative voting is a substantial right, and one which the Legislature may well have had in mind when it enacted the code sections here under consideration.

While not binding upon the courts of this state, the reasoning and result reached in State ex rel. Weede v. Iowa Southern Utilities Co. of Delaware, 231 Iowa 784 [2 N.W.2d 372], (State ex rel. Weede v. Bechtel, 239 Iowa 1298 [31 N.W.2d 853], cert. den. 337 U.S. 918 [69 S. Ct. 1159, 63 L. Ed. 1727] [same case on merits]) are persuasive of the above result. That case, at 2 N.W.2d 395, succinctly states: "Simply because that State [Delaware] chartered the appellee [corporation] does not require Iowa to admit it to transact business within its border unconditionally" in a case where the directors of the corporation proposed an amendment to the certificate which would change the value of outstanding stock.

Because of the foregoing the judgment of the superior court must be reversed.

[3] This, however, raises another disagreement between the parties, the commissioner contending that this court has before it the entire record of the proceedings before the Corporations Commissioner and must therefore review the entire record, citing Code of Civil Procedure, section 1094.5, supra. Western, however, argues that since the trial court never appraised the commissioner's findings from either the standpoint [191 Cal. App. 2d 415] of substantial evidence or, as it contends should have been done, an independent review of the evidence, the matter must be remanded to the superior court for trial. Western's position in this regard appears to be correct. The superior court's determination was confined to establishing whether or not the commissioner had jurisdiction. In so examining the record, the full review contemplated by section 1094.5 of the Code of Civil Procedure was not made. The court below determined there was no jurisdiction, and thus made no determination of the merits of the case, that is, whether there was substantial evidence to support the commissioner's findings. (See Martin v. Alcoholic Beverage etc. Appeals Board, 52 Cal. 2d 259, 264-265 [341 P.2d 291].)

There is no express grant of the right of an appellate court to conduct a review in such a case without remand, and it would appear to be of doubtful wisdom to attempt such review in a court which is constituted as an appellate court when trial courts are established for that very purpose.

Reversed and remanded.

MANSFIELD HARDWOOD LUMBER COMPANY V. JOHNSON

MANSFIELD HARDWOOD LUMBER COMPANY, APPELLANT, V. HATTIE A. JOHNSON ET AL., APPELLEE.

NO. 17299.

UNITED STATES COURT OF APPEALS, FIFTH CIRCUIT.

FEBRUARY 20, 1959. *749749

Benjamin C. King, Charles D. Egan, Sidney M. Cook, Frank M. Cook, Shreveport, La., for appellant.

John M. Madison, Vernon W. Woods, Shreveport, La., J.W. Patton, Jr., Lewisville, Ark., Ned A. Stewart, Texarkana, Ark., for appellee.

Before RIVES, TUTTLE, and BROWN, Circuit Judges.

*750750

RIVES, Circuit Judge.

This appeal is from a final decree ordering a rescission of sales of corporate stock made in 1953, granting plaintiffs a pro rata portion of assets realized by a liquidation of defendant corporation, ordering an accounting by defendant, and making permanent a temporary injunction, already issued.

The opinion and order granting the temporary injunction were reported at D.C., 143 F. Supp. 826. This order was affirmed at 5 Cir., 242 F.2d 45. This case was reported on the merits at159 F. Supp. 104 in a twenty-seven page opinion where District Judge Benjamin C. Dawkins, Jr., preludes:

"The crux of the case is that, had it not been for this suit, the majority — six people who proceeded to *751751 sell and liquidate the corporate assets immediately after the minority stock was bought, notwithstanding promises that this would not be done — would have reaped a profit for themselves, before taxes, of more than $3,400,000, at the expense of the minority, and in addition to nearly $6,000,000 rightly to be received by them in the liquidation for their own stock.

"All persons involved are educated, cultured, refined. They have enjoyed, and still occupy, positions of prestige in their home communities. Until this tragic controversy arose, they appeared to be fairly congenial, at least on the surface.

"Now, regrettably, they are publicly and irreconcilably divided into two warring camps. One group — the former minority stockholders — is convinced that its members are victims of deliberate fraud perpetrated upon them by the majority. For their part, the majority resists and resents, with equal fervor, the charges made against them.

"While the suit is one which ought not to have been necessary, and clearly should have been settled, the depth of feeling is such that compromise has not even been discussed. Consequently, this litigation must run its bitter course, for better or for worse.

* * * * * *

"After a full trial on the merits, lasting more than a week; having heard all of the parties and their witnesses; having considered the lengthy briefs (totaling approximately 300 pages), and the authorities cited; having studied the transcript of testimony and exhibits (some 1255 pages); having heard the oral arguments of respective counsel, lasting nearly three hours; and having reached our findings of fact and conclusions of law, we now set them down for the record. They represent to us the only result which justly could come from the evidence before us.

"While there are some facts not in dispute, there are many more which are hotly controverted, especially as to what was said or not said, done or not done, known or not known, with regard to the purchase of plaintiffs' stock. In stating the facts we have found, our statements are based upon what we believe to be the truth, notwithstanding some testimony to the contrary. We also have drawn inferences, which we believe to be reasonable and correct, from the facts and circumstances in evidence." 159 F. Supp. at pages 106, 107-108.

This case concerns the purchase of minority shares from the plaintiffs as treasury stock by the defendant-corporation and a subsequent liquidation of the corporation, the transaction alleged (1) to have been fraudulent upon the interest of the plaintiffs, or (2) to have unjustly enriched the defendant, or (3) to have had no "serious" consideration under Art. 2464, L.S.A.-Civil Code.1

1.

"Art. 2464. The price of the sale * * * ought not to be out of all proportion with the value of the thing; for instance the sale of a plantation for a dollar could not be considered as a fair sale; it would be considered as a donation disguised."

The gist of the complaint is in paragraph 28 thereof, which states:

"28. Plaintiffs aver that A.S. Johnson and Brown McCullough (acting in their capacities as President and Vice President, respectively, of Defendant, and who actually dominated the business policies of the Company and without securing the prior approval of the directors or stockholders of Defendant) conceived a fraudulent scheme acquiesced in by those stockholders whom they controlled and constituting a majority of the outstanding stock, whereby they conspired to cause Mansfield Hardwood Lumber Company *752752 to buy as treasury stock all the stock of the remaining stockholders for an inadequate price and then to cause the company to sell its assets and distribute the proceeds upon liquidation at a tremendous profit to the conspiring group. The plan or artifice of the scheme was to cause Mansfield Hardwood Lumber Company to falsely notify the minority stockholders that dividend payments would be virtually discontinued for a period of the next 15 to 20 years, this to be the consequence of the company's entering upon a long range plan of extensive

reforestation and improvement of its assets. The company was to negotiate for and purchase the stock at a price approximating its value as reflected by the books of the company, which value the conspirators knew to be grossly understated. The company was to falsely deny any intention of disposing of its assets and liquidating. Plaintiffs aver that the representations made to each of them in the purchase of their stock were in furtherance of this fraudulent scheme."

The intricate facts are set out fully in the opinion below at159 F. Supp. 104, 106-117, and it would be redundant for us to reiterate them here. However, for the purpose of this opinion, we must attempt a brief summary.

The sole defendant is a corporation formed in 1901 by two men, the predecessors of the parties in interest here. The corporation engaged in the business of growing timber and sawmilling and by 1955 had acquired extensive holdings — some 93,000 acres of timberlands, two sawmills, several lumber companies, and a small railroad. Out of the 4,836 shares of stock outstanding in 1953 (par value of $100 per share), the defendant's three officers and their immediate families owned some 2,751 shares. These three officers — A.S. (Bud) Johnson, Brown McCullough, and T.W.M. Long — and their families will be referred to as the majority stockholders. The remaining shares were spread out among the plaintiffs and others, the two largest holders being plaintiffs, Mrs. Hattie A. Johnson and Mrs. Jeanette Johnson Jennette. The corporation began purchasing the minority shares in the Spring of 1953 for $350 per share and made its last purchase from Mrs. Johnson and Mrs. Jennette in the Fall of 1953 for $400 per share. The defendant purchased a total of 1,567 shares. There was some evidence that the fair market value of the stock, considering all elements, was about $320 per share.

As early as 1952, the officers of the corporation considered the possibility of liquidating the corporation but testified that this possibility was dismissed because of the large tax consequences. In the Spring of 1954, some negotiations for a liquidation sale were resumed in earnest; and, after receiving word that Sections 331(a)(1) and 337(a) of the 1954 Internal Revenue Code, 26 U.S.C.A. §§ 331(a)(1), 337(a) would become effective on August 16, 1954, which would abolish the double capital gains tax in liquidation, that is on both the corporation and the stockholders, the officers actively solicited a sale to several purchasers. In July 1955, Robert Gair Company, Inc. had agreed to purchase all the assets of defendant, excepting certain mineral rights, for $9,531,630.34. This agreement was approved by defendant's remaining stockholders on September 26, 1955, and the sale to Gair was consummated on May 25, 1956.

As the district court found, had the plaintiffs and other minority sellers not sold their stock, it would have been worth about $2,068 per share on liquidation or over five times the amount received. The majority stockholders thus profited by some $3,458,007 from the treasury purchases.

There are two outstanding facets in this case: (1) the shortness of the time interval between the purchase of the minority shares as treasury stock and the subsequent liquidation of the corporation, and (2) the great difference between the amount paid per share for the *753753 repurchased stock ($350 to $400) and its worth on liquidation ($2,068).

Thirty-four specifications of error are assigned by appellant. Some merit consideration and some are purely frivolous. In discussing only those which we think dispositive of the case, we again refer for a more complete statement of the facts to the opinion below.

Great emphasis is placed on the failure to join as indispensable parties the officers as wrongdoers, the liquidators, the stockholders after adoption of liquidation, the court trustee (a local bank) holding

the remaining liquidated assets not yet disbursed, and the stockholders as owners of the assets held by the trustee. To join any of these would, of course, defeat diversity jurisdiction. On the prior appeal, from the granting of the temporary injunction, Chief Judge Hutcheson stated for this Court at 242 F.2d 45, 47:

"* * * and agreeing with the district judge that the case should not have been dismissed for want of indispensable parties,4 * * *.

"4. Hudson v. Newell, 5 Cir., 172 F.2d 848, at page 850, Id., 5 Cir., 174 F.2d 546; Mackintosh v. Marks, 5 Cir., 225 F.2d 211. Cf. Christian v. Texas Gas Co., D.C., 14 F.R.D. 80, 81."

Without deciding whether this prior adjudication of jurisdiction is the law of the case,2 we note that, under the circumstances of this case, if the plaintiffs have stated a claim against the defendant corporation upon which relief can be granted, the failure to join the corporate officers and others as party-defendants is not fatal, for

2. See, Richardson v. Ainsa, 218 U.S. 289, 31 S.Ct. 23,54 L.Ed. 1044; Federal Reserve Bank of Kansas City, Mo. v. Omaha National Bank, 8 Cir., 1930, 45 F.2d 511, 514; cf. Lowry v. International Brotherhood, etc., 5 Cir., 1958, 259 F.2d 568,575.

"The power of a court of equity so to mold its decree as to do complete justice between the parties without adversely affecting those not before the court is exceedingly broad and elastic." Mackintosh v. Mark's Estate, 5 Cir., 1955, 225 F.2d 211, 215.

This brings us to consider whether defendant's motion to dismiss should have been granted for failure to state a claim, which also raises substantially the same question presented in its argument concerning the joinder of defendant's officers as indispensable parties. In defendant's brief, it summarizes:

"In summary, it is submitted that the Court below erred in failing to dismiss this action because the complaint fails to state a claim upon which relief can be granted in three important respects: (1) the complaint affirmatively alleged that the sale of plaintiffs' stock was induced by the alleged fraud of defendant's officers who are alleged to have acted without authority and for their own benefit; (2) the complaint fails to state the value of the stock in its then condition, at the time of the sale; and (3) the alleged representations by the officers with reference to future dividends and future liquidation of the corporation were mere indefinite expressions of opinion, relating solely to future prospects of the Corporation, and could not, if made, constitute grounds for an action for rescission for fraud."

We feel it unnecessary to dwell upon these contentions because, after carefully studying all of the evidence in this cause, we are of the opinion that the district court was clearly erroneous in finding that fraud per se of defendant through its officers was established beyond a reasonable doubt3 to the extent of "grasping greed" and "moral bankruptcy." We so hold because of our *754754 doubt that the "intent" element necessary as the basis for actual fraud was adequately established. In other words, we doubt that defendant's officers during the stock purchases from plaintiffs had the necessary mens rea for a predication of actionable fraud.

3. Belcher v. Booth, 1927, 164 La. 514, 114 So. 116; American Guaranty Co. v. Sunset Realty Planting Co., 1944, 208 La. 772,23 So.2d 409, 430.

However, the results were correct and are soundly predicated, we think, upon the liability for breach of the fiduciary duty owed by a corporation's officers to its individual stockholders. Practically all jurisdictions recognize a fiduciary relationship arising from the directors and officers to their corporation and to the stockholders as a whole, while a "growing minority" accord this duty to individual stockholders,4 especially concerning the purchase of stock from a shareholder.5 Whether this relationship between officers and directors and their stockholders is termed fiduciary or quasifiduciary or trust or confidence is immaterial, and, likewise, is it immaterial whether its breach is described as constructive fraud, unjust enrichment, fraudulent breach of trust, breach of fiduciary obligation, gross negligence, or otherwise, and whether the remedy is given by a constructive trust, restitution, or accounting. These are all relative terms describing broad equitable concepts. The standard of a fiduciary's duty to his beneficiary, depending upon the instant relation and the facts of the particular case, lies somewhere between simple negligence and willful misconduct or fraud with the intent to deceive. The actual intent to deceive is not required where one party is so placed in such an advantageous position to the other. Actual fraud will afford redress in the absence of the special relationship.

4. See Fletcher, Cyclopedia Corporations, perm.ed., § 848: "Sometimes it is said that a director or other managing officer is a trustee in so far as the corporation and its stockholders are concerned, and sometimes it is said that he is a trustee only as to the corporation itself. However, the better rule, although not sustained by the weight of authority seems to be that he is a trustee for an individual stockholder, as well as the corporation, at least in a limited sense."

5. "There is a sharp conflict in the authorities over the question as to whether the relations between a director or officer of a corporation, on the one hand, and shareholders on the other, are not of such a fiduciary nature as to make it the duty of the former to disclose the knowledge which he possesses affecting the value of the stock before purchasing the same from a shareholder. To go further back, it would seem that the dividing line is whether directors are to be deemed trustees for individual stockholders so far as their stock in the corporation is concerned." Fletcher, Cyclopedia Corporations, perm.ed., § 1168. "The older or so-called majority rule laid down by one class of decisions is that `while directors occupy a trust relation to the corporation which they direct, their duty does not apply to the stockholder in the sale and purchase of stock. Dealing in its own stock is not a corporate function. In buying or selling stock, directors may trade like an outsider, provided they do not affirmatively act or speak wrongfully, or intentionally conceal facts with reference to it. There is also the qualification that no other relation of trust exists between the parties.' The numerical majority of the decided decisions have adopted the rule that courts do not impose upon officers and directors of a corporation any fiduciary duty to its stockholders which precludes them, merely because they are officers and directors, from buying and selling the corporation's stock." Id. § 1168.1. "Under the minority rule directors are considered trustees for individual stockholders with respect to their stock, and this rule goes to the extreme of holding that they cannot purchase stock from a stockholder without giving him the benefit of any official knowledge they possess which may increase the value of the stock. [Citing Markey v. Hibernia Homestead Ass'n (La.App.),186 So. 757]. This view has been adopted by a substantial number of cases and has been approved by practically every legal writer in this field." Id. § 1168.2. See also, 19 C.J.S. Corporations § 793(b).

Louisiana has long recognized the fiduciary duty owed by corporate directors and officers to their individual stockholders. Her courts have applied it over and over, applying, it seems,

the *755755 same standard of care to stockholders as owed by officers and directors to the corporation under LSA-Revised Statutes 12:36:

"Officers and directors shall be deemed to stand in a fiduciary relation to the corporation, and shall discharge the duties of their respective positions in good faith, and with that diligence, care, judgment, and skill which ordinarily prudent men would exercise under similar circumstances in like positions."

For brevity, these decisions are discussed in the margin.6 We feel that these decisions fully answer appellant's contentions *756756 that Louisiana's limited equity jurisprudence will prevent our imposition of a "constructive trust" or "equitable lien" or "right of restitution" for the breach of the fiduciary duty owed to the plaintiffs by defendant's officers.

6. See the case of Markey v. Hibernia Homestead Ass'n, La.App. 1939, 186 So. 757, 763, quoted at length in footnote 7 of the lower court's first opinion, D.C., 143 F. Supp. 826, 839, 840; and Commercial Nat. Bank in Shreveport v. Parsons, 5 Cir., 1944,144 F.2d 231, 238-239, quoted in the lower court's opinion on the merits at 159 F. Supp. at page 119. In Dawkins v. Mitchell, 1922, 149 La. 1038, 90 So. 396,398-399, the Supreme Court of Louisiana stated: "The directors of the bank were its agents, charged under the law with an implied trust to use its funds only for the purposes permitted by law, and to preserve them for its creditors and stockholders * * *. The obligation which the directors incurred in favor of the bank was a special one, due to it in particular, and to the stockholders. It was not a general duty due to every one. They were elected by the stockholders to administer the affairs of the bank and accepted the trust.

We agree with the district court that the fiduciary relationship in this case necessitated a disclosure of the following facts admittedly not disclosed by defendant's officers to the plaintiffs:

"1) The $5,000,000 offer, for 55% of defendant's timberlands, made by R.O. Martin to Bud Johnson in 1952;

"2) The instructions given to C.L. Brooke, in 1952, to assume that defendant's assets possessed a value in excess of $9,000,000;

"3) The opinion of W.C. Postle, defendant's Chief Forester, in 1953, that its timberlands then had a market value `in the neighborhood of a hundred dollars an acre', which the officers knew about;

"4) The letters containing tax advice, written by Brooke on August 29 and October 14, 1952, wherein contemplated plans for sale of defendant's assets, liquidation, merger, stock sales, etc., were discussed;

"5) The officers' secret consideration of various plans of liquidation, reorganization, merger, etc., before the stock-buying program was begun."

Johnson v. Mansfield Hardwood Lumber Co., D.C.W.D.La. 1958,159 F. Supp. 104, 118, note 9. Furthermore, the special relationship between defendant's officers and the plaintiffs demanded that restitution be made to plaintiffs for the difference of price in their sold shares and their value upon the almost immediate liquidation — especially where the defendant's officers made promises

concerning curtailment of future dividends and disclosed plans for no liquidation in the near future and used economic coercion to secure the sale of the minority shares.

As the district court found, defendant's officers were the corporation. Other than their official nature, they were directors and also had in their control over one-half of the voting stock. They knew the intricate workings of the corporation, its total assets, and they knew more than the other stockholders about the value of the stock both for sale and upon liquidation. They used promises and representations as to their intended future running of the corporation which exerted economic influence on the plaintiffs, forcing them to sell, and then immediately began plans to liquidate in contradiction of their representations. Certainly, their fiduciary duty was violated to the plaintiffs-stockholders.

The district court answered appellant's contention that the officers rather than it or in conjunction with it were the proper parties defendant, as raised in its motion to dismiss, by quoting part of the following from Kohler v. Jacobs, 5 Cir., 1943,138 F.2d 440, 442-443, which, in our opinion, is good law:

"* * * As to the Corporation, it is true that it owes the stockholder no duty of disclosure when he trades with others in its stock, and since he has access to the corporate books diligence might well lead him to them when he desires information from the Corporation. But if a corporation (which ordinarily does not deal in its own stock) for its own lawful purposes sets out to buy shares through its managing officers, and they by intentional misrepresentation and concealment deceive a selling stockholder who is ignorant of the truth, though he be an inactive director who ought to know, so that he is damaged, we see no reason why the corporation is not bound for the consequences. The deceit practiced by the corporation's high officers in the corporation's business and for its benefit must be taken to be a corporate act, and not ultra vires. 19 C.J.S., Corporations, § 1278(a)(b); 13 Am.Jur., Corporations, § 1125. If on trial it should appear that the transaction *757757 was a deceit committed by Jacobs for the benefit of the Corporation, both the Corporation and himself as an individual might be liable; because the action is not one to rescind a fraudulent transaction, or to recover an unjust enrichment, but for the damages done by a wilful tort for which a perpetrator may be held liable though he realized no benefit from it. United States v. City of Brookhaven, 5 Cir., 134 F.2d 442. * * *"

Actually, however, the acts of defendant's officers in inducing the plaintiffs to sell were in all respects within their authority and not ultra vires — both Louisiana,7 where the acts occurred, and Delaware,8 where defendant is incorporated, allow a corporation to purchase its own stock after meeting certain requirements (apparently satisfied here), and such acts were well within the implied, if not the express, authority of the officers' agency. Further, as covered by the trial court, there is no doubt about ratification by the corporation, if necessary at all, for breach of confidence. In fact, here, the corporation was the proper party defendant for satisfying all claims of all plaintiffs in one lawsuit. A stockholder derivative action certainly is not proper for, here, the wrong is to the individual plaintiffs and not to the corporation.9 And the general rule that "a corporation is not relieved from liability for the fraudulent acts of its officer within the apparent scope of his authority, by the fact that the officer in committing the fraud is acting for his own benefit, and the corporation does not profit from it,"10 applies as strongly where a fiduciary breach is substituted for fraud.

7. Louisiana allows the purchase of treasury stock [State v. Stewart Bros. Cotton Co., 1939, 193 La. 16, 190 So. 317,321-322], as Section 23, paragraph A of Act 250 of 1928 permits: "A. Unless the articles otherwise provide, a corporation may purchase its own shares of any class

issued by it, but only out of surplus available for dividends, and only if the purchase does not violate the contractual right of any other class of shares * * *." LSA-R.S. 12:23, subd. A.

8. Ashman v. Miller, 6 Cir., 1939, 101 F.2d 85, 90: "Section 19 of the General Corporation Act of Delaware (Rev. Code 1935, § 2051 [8 Del.C. § 160]) expressly confers on a corporation the power to purchase its own stock provided it can do so without impairing its capital." See also, Bankers Securities Corp. v. Kresge Department Stores, D.C.D.Del. 1944, 54 F. Supp. 378.

9. See Fletcher, Cyclopedia Corporations, Perm.ed., § 5911.

10. Annotation, 43 A.L.R. 615.

Appellant earnestly predicates separate defenses to the claims of four plaintiffs, Max Brown, Mrs. Hattie A. Johnson, Mrs. Jeanette Johnson Jennette, and Ben Drew Velvin, Executor, who collectively assert more than eighty-four per cent in value of the claims. As to these first three plaintiffs, discussed by the lower court at 159 F. Supp. at pages 127-131, we must summarily hold that the facts conclusively warrant an affirmance on the basis of the breach of fiduciary relationship existing to them from the corporate officers and especially on the "business duress" practiced on Brown. Their special defenses are of no avail. To further elucidate would be repetitious. Ben Drew Velvin, as executor and sole heir of his mother, a party plaintiff having died during this litigation, may pursue the claim which she had asserted. We do not feel that his opinion testimony that there was no fraud would prevent him from pursuing his claim as executor.

We do hold that the trial court was clearly erroneous in its findings as to the Shreveport Lumber Sales, in commenting on the excessiveness of the officers' salaries and expense accounts, and in holding "that the officers probably bought a large amount of timber from outside sources, instead of cutting from defendant's timberlands, thus maintaining their value for purposes of later liquidation," all found at 159 F. Supp. at *758758 page 111. In fairness to defendant's officers, we record our opinion that such findings are clearly erroneous, notwithstanding that our so holding does not change the result.

The judgment is

Affirmed.

HYATT ELEVATORS AND G.R. No. 161026

ESCALATORS CORPORATION,

- versus -

GOLDSTAR ELEVATORS, PHILS., INC.,*

Respondent.

PANGANIBAN, J.:

Well established in our jurisprudence is the rule that the residence of a corporation is the place where its principal office is located, as stated in its Articles of Incorporation.

The Case

Before us is a Petition for Review[1] on Certiorari, under Rule 45 of the Rules of Court, assailing the June 26, 2003 Decision[2] and the November 27, 2003 Resolution[3] of the Court of Appeals (CA) in CA-GR SP No. 74319. The decretal portion of the Decision reads as follows:

WHEREFORE, in view of the foregoing, the assailed Orders dated May 27, 2002 and October 1, 2002 of the RTC, Branch 213, Mandaluyong City in Civil Case No. 99-600, are hereby SET ASIDE. The said case is hereby ordered DISMISSED on the ground of improper venue.[4]

The assailed Resolution denied petitioners Motion for Reconsideration.

The Facts

The relevant facts of the case are summarized by the CA in this wise:

Petitioner [herein Respondent] Goldstar Elevator Philippines, Inc. (GOLDSTAR for brevity) is a domestic corporation primarily engaged in the business of marketing, distributing, selling, importing, installing, and maintaining elevators and escalators, with address at 6th Floor, Jacinta II Building, 64 EDSA, Guadalupe, Makati City.

On the other hand, private respondent [herein petitioner] Hyatt Elevators and Escalators Company (HYATT for brevity) is a domestic corporation similarly engaged in the business of selling, installing and maintaining/servicing elevators, escalators and parking equipment, with address at the 6th Floor, Dao I Condominium, Salcedo St., Legaspi Village, Makati, as stated in its Articles of Incorporation.

On February 23, 1999, HYATT filed a Complaint for unfair trade practices and damages under Articles 19, 20 and 21 of the Civil Code of the Philippines against LG Industrial Systems Co. Ltd. (LGISC) and LG International Corporation (LGIC), alleging among others, that: in 1988, it was appointed by LGIC and LGISC as the exclusive distributor of LG elevators and escalators in the Philippines under a Distributorship Agreement; x x x LGISC, in the latter part of 1996, made a proposal to change the exclusive distributorship agency to that of a joint venture partnership; while it looked forward to a healthy and fruitful negotiation for a joint venture, however, the various meetings it had with LGISC and LGIC, through the latters representatives, were conducted in utmost bad faith and with malevolent intentions; in the middle of the negotiations, in order to put pressures upon it, LGISC and LGIC terminated the Exclusive Distributorship Agreement; x x x [A]s a consequence, [HYATT] suffered P120,000,000.00 as actual damages, representing loss of earnings and business opportunities, P20,000,000.00 as damages for its reputation and goodwill, P1,000,000.00 as and by way of exemplary damages, and P500,000.00 as and by way of attorneys fees.

On March 17, 1999, LGISC and LGIC filed a Motion to Dismiss raising the following grounds: (1) lack of jurisdiction over the persons of defendants, summons not having been served on its resident agent; (2) improper venue; and (3) failure to state a cause of action. The [trial] court denied the said motion in an Order dated January 7, 2000.

On March 6, 2000, LGISC and LGIC filed an Answer with Compulsory Counterclaim ex abundante cautela. Thereafter, they filed a Motion for Reconsideration and to Expunge Complaint which was denied.

On December 4, 2000, HYATT filed a motion for leave of court to amend the complaint, alleging that subsequent to the filing of the complaint, it learned that LGISC transferred all its organization, assets and goodwill, as a consequence of a joint venture agreement with Otis Elevator Company of the USA, to LG Otis Elevator Company (LG OTIS, for brevity). Thus, LGISC was to be substituted or changed to LG OTIS, its successor-in-interest. Likewise, the motion averred that x x x GOLDSTAR was being utilized by LG OTIS and LGIC in perpetrating their unlawful and unjustified acts against HYATT. Consequently, in order to afford complete relief, GOLDSTAR was to be additionally impleaded as a party-defendant. Hence, in the Amended Complaint, HYATT impleaded x x x GOLDSTAR as a party-defendant, and all references to LGISC were correspondingly replaced with LG OTIS.

On December 18, 2000, LG OTIS (LGISC) and LGIC filed their opposition to HYATTs motion to amend the complaint. It argued that: (1) the inclusion of GOLDSTAR as party-defendant would lead to a change in the theory of the case since the latter took no part in the negotiations which led to the alleged unfair trade practices subject of the case; and (b) HYATTs move to amend the complaint at that time was dilatory, considering that HYATT was aware of the existence of GOLDSTAR for almost two years before it sought its inclusion as party-defendant.

On January 8, 2001, the [trial] court admitted the Amended Complaint. LG OTIS (LGISC) and LGIC filed a motion for reconsideration thereto but was similarly rebuffed on October 4, 2001.

On April 12, 2002, x x x GOLDSTAR filed a Motion to Dismiss the amended complaint, raising the following grounds: (1) the venue was improperly laid, as neither HYATT nor defendants reside in Mandaluyong City, where the original case was filed; and (2) failure to state a cause of action against [respondent], since the amended complaint fails to allege with certainty what specific ultimate acts x

x x Goldstar performed in violation of x x x Hyatts rights. In the Order dated May 27, 2002, which is the main subject of the present petition, the [trial] court denied the motion to dismiss, ratiocinating as follows:

Upon perusal of the factual and legal arguments raised by the movants-defendants, the court finds that these are substantially the same issues posed by the then defendant LG Industrial System Co. particularly the matter dealing [with] the issues of improper venue, failure to state cause of action as well as this courts lack of jurisdiction. Under the circumstances obtaining, the court resolves to rule that the complaint sufficiently states a cause of action and that the venue is properly laid. It is significant to note that in the amended complaint, the same allegations are adopted as in the original complaint with respect to the Goldstar Philippines to enable this court to adjudicate a complete determination or settlement of the claim subject of the action it appearing preliminarily as sufficiently alleged in the plaintiffs pleading that said Goldstar Elevator Philippines Inc., is being managed and operated by the same Korean officers of defendants LG-OTIS Elevator Company and LG International Corporation.

On June 11, 2002, [Respondent] GOLDSTAR filed a motion for reconsideration thereto. On June 18, 2002, without waiving the grounds it raised in its motion to dismiss, [it] also filed an Answer Ad Cautelam. On October 1, 2002, [its] motion for reconsideration was denied.

From the aforesaid Order denying x x x Goldstars motion for reconsideration, it filed the x x x petition for certiorari [before the CA] alleging grave abuse of discretion amounting to lack or excess of jurisdiction on the part of the [trial] court in issuing the assailed Orders dated May 27, 2002 and October 1, 2002.[5]

Ruling of the Court of Appeals

The CA ruled that the trial court had committed palpable error amounting to grave abuse of discretion when the latter denied respondents Motion to Dismiss. The appellate court held that the venue was clearly improper, because none of the litigants resided in Mandaluyong City, where the case was filed.

According to the appellate court, since Makati was the principal place of business of both respondent and petitioner, as stated in the latters Articles of Incorporation, that place was controlling for purposes of determining the proper venue. The fact that petitioner had abandoned its principal office in Makati years prior to the filing of the original case did not affect the venue where personal actions could be commenced and tried.

Hence, this Petition.[6]

The Issue

In its Memorandum, petitioner submits this sole issue for our consideration:

Whether or not the Court of Appeals, in reversing the ruling of the Regional Trial Court, erred as a matter of law and jurisprudence, as well as committed grave abuse of discretion, in holding that in the light of the peculiar facts of this case, venue was improper[.][7]

This Courts Ruling

The Petition has no merit.

Sole Issue:

Venue

The resolution of this case rests upon a proper understanding of Section 2 of Rule 4 of the 1997 Revised Rules of Court:

Sec. 2. Venue of personal actions. All other actions may be commenced and tried where the plaintiff or any of the principal plaintiff resides, or where the defendant or any of the principal defendant resides, or in the case of a non-resident defendant where he may be found, at the election of the plaintiff.

Since both parties to this case are corporations, there is a need to clarify the meaning of residence. The law recognizes two types of persons: (1) natural and (2) juridical. Corporations come under the latter in accordance with Article 44(3) of the Civil Code.[8]

Residence is the permanent home -- the place to which, whenever absent for business or pleasure, one intends to return.[9] Residence is vital when dealing with venue.[10] A corporation, however, has no residence in the same sense in which this term is applied to a natural person. This is precisely the reason why the Court in Young Auto Supply Company v. Court of Appeals[11] ruled that for practical purposes, a corporation is in a metaphysical sense a resident of the place where its principal office is located as stated in the articles of incorporation.[12] Even before this ruling, it has already been established that the residence of a corporation is the place where its principal office is established.[13]

This Court has also definitively ruled that for purposes of venue, the term residence is synonymous with domicile.[14] Correspondingly, the Civil Code provides:

Art. 51. When the law creating or recognizing them, or any other provision does not fix the domicile of juridical persons, the same shall be understood to be the place where their legal representation is established or where they exercise their principal functions.[15]

It now becomes apparent that the residence or domicile of a juridical person is fixed by the law creating or recognizing it. Under Section 14(3) of the Corporation Code, the place where the principal office of the corporation is to be located is one of the required contents of the articles of incorporation, which shall be filed with the Securities and Exchange Commission (SEC).

In the present case, there is no question as to the residence of respondent. What needs to be examined is that of petitioner. Admittedly,[16] the latters principal place of business is Makati, as indicated in its Articles of Incorporation. Since the principal place of business of a corporation determines its residence or domicile, then the place indicated in petitioners articles of incorporation becomes controlling in determining the venue for this case.

Petitioner argues that the Rules of Court do not provide that when the plaintiff is a corporation, the complaint should be filed in the location of its principal office as indicated in its articles of incorporation.[17] Jurisprudence has, however, settled that the place where the principal office of a corporation is located, as stated in the articles, indeed establishes its residence.[18] This ruling is important in determining the venue of an action by or against a corporation,[19] as in the present case.

Without merit is the argument of petitioner that the locality stated in its Articles of Incorporation does not conclusively indicate that its principal office is still in the same place. We agree with the appellate court in its observation that the requirement to state in the articles the place where the principal office of the corporation is to be located is not a meaningless requirement. That proviso would be rendered nugatory if corporations were to be allowed to simply disregard what is expressly stated in their Articles of Incorporation.[20]

Inconclusive are the bare allegations of petitioner that it had closed its Makati office and relocated to Mandaluyong City, and that respondent was well aware of those circumstances. Assuming arguendo that they transacted business with each other in the Mandaluyong office of petitioner, the fact remains that, in law, the latters residence was still the place indicated in its Articles of Incorporation. Further unacceptable is its faulty reasoning that the ground for the CAs dismissal of its Complaint was its failure to amend its Articles of Incorporation so as to reflect its actual and present principal office. The appellate court was clear enough in its ruling that the Complaint was dismissed because the venue had been improperly laid, not because of the failure of petitioner to amend the latters Articles of Incorporation.

Indeed, it is a legal truism that the rules on the venue of personal actions are fixed for the convenience of the plaintiffs and their witnesses. Equally settled, however, is the principle that choosing the venue of an action is not left to a plaintiffs caprice; the matter is regulated by the Rules of Court.[21] Allowing petitioners arguments may lead precisely to what this Court was trying to avoid in Young Auto Supply Company v. CA:[22] the creation of confusion and untold inconveniences to party litigants. Thus enunciated the CA:

x x x. To insist that the proper venue is the actual principal office and not that stated in its Articles of Incorporation would indeed create confusion and work untold inconvenience. Enterprising litigants may, out of some ulterior motives, easily circumvent the rules on venue by the simple expedient of closing old offices and opening new ones in another place that they may find well to suit their needs.[23]

We find it necessary to remind party litigants, especially corporations, as follows:

The rules on venue, like the other procedural rules, are designed to insure a just and orderly administration of justice or the impartial and evenhanded determination of every action and proceeding. Obviously, this objective will not be attained if the plaintiff is given unrestricted freedom to choose the court where he may file his complaint or petition.

The choice of venue should not be left to the plaintiffs whim or caprice. He may be impelled by some ulterior motivation in choosing to file a case in a particular court even if not allowed by the rules on venue.[24]

WHEREFORE, the Petition is hereby DENIED, and the assailed Decision and Resolution AFFIRMED. Costs against petitioner.

SO ORDERED.

G.R. No. L-22238 February 18, 1967

CLAVECILLIA RADIO SYSTEM, petitioner-appellant, vs.HON. AGUSTIN ANTILLON, as City Judge of the Municipal Court of Cagayan de Oro City and NEW CAGAYAN GROCERY, respondents-appellees.

B. C. Padua for petitioner and appellant.Pablo S. Reyes for respondents and appellees.

REGALA, J.:

This is an appeal from an order of the Court of First Instance of Misamis Oriental dismissing the petition of the Clavecilla Radio System to prohibit the City Judge of Cagayan de Oro from taking cognizance of Civil Case No. 1048 for damages.

It appears that on June 22, 1963, the New Cagayan Grocery filed a complaint against the Clavecilla Radio System alleging, in effect, that on March 12, 1963, the following message, addressed to the former, was filed at the latter's Bacolod Branch Office for transmittal thru its branch office at Cagayan de Oro:

NECAGRO CAGAYAN DE ORO (CLAVECILLA)

REURTEL WASHED NOT AVAILABLE REFINED TWENTY FIFTY IF AGREEABLE SHALL SHIP LATER REPLY POHANG

The Cagayan de Oro branch office having received the said message omitted, in delivering the same to the New Cagayan Grocery, the word "NOT" between the words "WASHED" and "AVAILABLE," thus changing entirely the contents and purport of the same and causing the said addressee to suffer damages. After service of summons, the Clavecilla Radio System filed a motion to dismiss the complaint on the grounds that it states no cause of action and that the venue is improperly laid. The New Cagayan Grocery interposed an opposition to which the Clavecilla Radio System filed its rejoinder. Thereafter, the City Judge, on September 18, 1963, denied the motion to dismiss for lack of merit and set the case for hearing.1äwphï1.ñët

Hence, the Clavecilla Radio System filed a petition for prohibition with preliminary injunction with the Court of First Instance praying that the City Judge, Honorable Agustin Antillon, be enjoined from further proceeding with the case on the ground of improper venue. The respondents filed a motion to dismiss the petition but this was opposed by the petitioner. Later, the motion was submitted for resolution on the pleadings.

In dismissing the case, the lower court held that the Clavecilla Radio System may be sued either in Manila where it has its principal office or in Cagayan de Oro City where it may be served, as in fact it was served, with summons through the Manager of its branch office in said city. In other words, the court upheld the authority of the city court to take cognizance of the case.1äwphï1.ñët

In appealing, the Clavecilla Radio System contends that the suit against it should be filed in Manila where it holds its principal office.

It is clear that the case for damages filed with the city court is based upon tort and not upon a written contract. Section 1 of Rule 4 of the New Rules of Court, governing venue of actions in inferior courts, provides in its paragraph (b) (3) that when "the action is not upon a written contract, then in the municipality where the defendant or any of the defendants resides or may be served with summons." (Emphasis supplied)

Settled is the principle in corporation law that the residence of a corporation is the place where its principal office is established. Since it is not disputed that the Clavecilla Radio System has its principal office in Manila, it follows that the suit against it may properly be filed in the City of Manila.

The appellee maintain, however, that with the filing of the action in Cagayan de Oro City, venue was properly laid on the principle that the appellant may also be served with summons in that city where it maintains a branch office. This Court has already held in the case of Cohen vs. Benguet Commercial Co., Ltd., 34 Phil. 526; that the term "may be served with summons" does not apply when the defendant resides in the Philippines for, in such case, he may be sued only in the municipality of his residence, regardless of the place where he may be found and served with summons. As any other corporation, the Clavecilla Radio System maintains a residence which is Manila in this case, and a person can have only one residence at a time (See Alcantara vs. Secretary of the Interior, 61 Phil. 459; Evangelists vs. Santos, 86 Phil. 387). The fact that it maintains branch offices in some parts of the country does not mean that it can be sued in any of these places. To allow an action to be instituted in any place where a corporate entity has its branch offices would create confusion and work untold inconvenience to the corporation.

It is important to remember, as was stated by this Court in Evangelista vs. Santos, et al., supra, that the laying of the venue of an action is not left to plaintiff's caprice because the matter is regulated by the Rules of Court. Applying the provision of the Rules of Court, the venue in this case was improperly laid.

The order appealed from is therefore reversed, but without prejudice to the filing of the action in Which the venue shall be laid properly. With costs against the respondents-appellees.

Tayag vs. Benguet Consolidated, Inc.

G.R. No. L-23145, Nov. 29, 1968

PRIVATE INTERNATIONAL LAW: Situs of Shares of Stock: domicile of the corporation

SUCCESSION: Ancillary Administration: The ancillary administration is proper, whenever a person dies, leaving in a country other than that of his last domicile, property to be administered in the nature of assets of thedeceased liable for his individual debts or to be distributed among his heirs.

SUCCESSION: Probate: Probate court has authority to issue the order enforcing the ancillary administrator’s right to the stock certificates when the actual situs of the shares of stocks is in the Philippines.

FACTS:

Idonah Slade Perkins, an American citizen who died in New York City, left among others, two stock certificates issued by Benguet Consolidated, a corporation domiciled in the Philippines. As ancillary administrator of Perkins’ estate in the Philippines, Tayag now wants to take possession of these stock certificates but County Trust Company of New York, the domiciliary administrator, refused to part with them. Thus, the probate court of the Philippines was forced to issue an order declaring the stock certificates as lost and ordering Benguet Consolidated to issue new stock certificates representing Perkins’ shares. Benguet Consolidated appealed the order, arguing that the stock certificates are not lost as they are in existence and currently in the possession of County Trust Company of New York.

ISSUE: Whether or not the order of the lower court is proper

HELD:

The appeal lacks merit.

Tayag, as ancillary administrator, has the power to gain control and possession of all assets of the decedent within the jurisdiction of the Philippines

It is to be noted that the scope of the power of the ancillary administrator was, in an earlier case, set forth by Justice Malcolm. Thus: "It is often necessary to have more than one administration of an estate. When a person dies intestate owning property in the country of his domicile as well as in a foreign country, administration is had in both countries. That which is granted in the jurisdiction of decedent's last domicile is termed the principal administration, while any other administration is termed the ancillary administration. The reason for the latter is because a grant of administration does not ex proprio vigore have any effect beyond the limits of the country in which it is granted.

Hence, an administrator appointed in a foreign state has no authority in the [Philippines]. The ancillary administration is proper, whenever a person dies, leaving in a country other than that of his last domicile, property to be administered in the nature of assets of the deceased liable for his individual debts or to be distributed among his heirs."

Probate court has authority to issue the order enforcing the ancillary administrator’s right to the stock certificates when the actual situs of the shares of stocks is in the Philippines.

It would follow then that the authority of the probate court to require that ancillary administrator's right to "the stock certificates covering the 33,002 shares ... standing in her name in the books of [appellant] Benguet Consolidated, Inc...." be respected is equally beyond question. For appellant is a Philippine corporation owing full allegiance and subject to the unrestricted jurisdiction of local courts. Its shares of stock cannot therefore be considered in any wise as immune from lawful court orders.

Our holding in Wells Fargo Bank and Union v. Collector of Internal Revenue finds application. "In the instant case, the actual situs of the shares of stock is in the Philippines, the corporation being domiciled [here]." To the force of the above undeniable proposition, not even appellant is insensible. It does not dispute it. Nor could it successfully do so even if it were so minded.

G.R. No. L-23145 November 29, 1968

TESTATE ESTATE OF IDONAH SLADE PERKINS, deceased. RENATO D. TAYAG, ancillary administrator-appellee,

vs.

BENGUET CONSOLIDATED, INC., oppositor-appellant.

D E C I S I O N

FERNANDO, J.:

Confronted by an obstinate and adamant refusal of the domiciliary administrator, the County Trust Company of New York, United States of America, of the estate of the deceased Idonah Slade Perkins, who died in New York City on March 27, 1960, to surrender to the ancillary administrator in the Philippines the stock certificates owned by her in a Philippine corporation, Benguet Consolidated, Inc., to satisfy the legitimate claims of local creditors, the lower court, then presided by the Honorable Arsenio Santos, now retired, issued on May 18, 1964, an order of this tenor: “After considering the motion of the ancillary administrator, dated February 11, 1964, as well as the opposition filed by the Benguet Consolidated, Inc., the Court hereby (1) considers as lost for all purposes in connection with the administration and liquidation of the Philippine estate of Idonah Slade Perkins the stock certificates covering the 33,002 shares of stock standing in her name in the books of the Benguet Consolidated, Inc., (2) orders said certificates cancelled, and (3) directs said corporation to issue new certificates in lieu thereof, the same to be delivered by said corporation to either the incumbent ancillary administrator or to the Probate Division of this Court.” 1

From such an order, an appeal was taken to this Court not by the domiciliary administrator, the County Trust Company of New York, but by the Philippine corporation, the Benguet Consolidated, Inc. The appeal cannot possibly prosper. The order challenged represents a response and expresses a policy, to paraphrase Frankfurter, arising out of a specific problem, addressed to the attainment of specific ends by the use of specific remedies, with full and ample support from legal doctrines of weight and significance.

The facts will explain why. As set forth in the brief of appellant Benguet Consolidated, Inc., Idonah Slade Perkins, who died on March 27, 1960 in New York City, left among others, two stock certificates covering 33,002 shares of appellant, the certificates being in the possession of the County Trust Company of New York, which as noted, is the domiciliary administrator of the estate of the deceased2 Then came this portion of the appellant’s brief: “On August 12, 1960, Prospero Sanidad instituted ancillary administration proceedings in the Court of First Instance of Manila; Lazaro A. Marquez was appointed ancillary administrator; and on January 22, 1963, he was substituted by the appellee Renato D. Tayag. A dispute arose between the domiciliary administrator in New York and the ancillary administrator in the Philippines as to which of them was entitled to the possession of the stock certificates in question. On January 27, 1964, the Court of First Instance of Manila ordered the domiciliary administrator, County Trust Company, to `produce and deposit’ them with the ancillary administrator or with the Clerk of Court. The domiciliary administrator did not comply with the order, and on February 11, 1964, the ancillary administrator petitioned the court to “issue an

order declaring the certificate or certificates of stocks covering the 33,002 shares issued in the name of Idonah Slade Perkins by Benguet Consolidated, Inc. be declared [or] considered as lost.” 3

It is to be noted further that appellant Benguet Consolidated, Inc. admits that “it is immaterial” as far as it is concerned as to “who is entitled to the possession of the stock certificates in question; appellant opposed the petition of the ancillary administrator because the said stock certificates are in existence, they are today in the possession of the domiciliary administrator, the County Trust Company, in New York, U.S.A.. . . .” 4

It is its view, therefore, that under the circumstances, the stock certificates cannot be declared or considered as lost. Moreover, it would allege that there was a failure to observe certain requirements of its by-laws before new stock certificates could be issued. Hence, its appeal.

As was made clear at the outset of this opinion, the appeal lacks merit. The challenged order constitutes an emphatic affirmation of judicial authority sought to be emasculated by the willful conduct of the domiciliary administrator in refusing to accord obedience to a court decree. How, then, can this order be stigmatized as illegal?

As is true of many problems confronting the judiciary, such a response was called for by the realities of the situation. What cannot be ignored is that conduct bordering on willful defiance, if it had not actually reached it, cannot without undue loss of judicial prestige, be condoned or tolerated. For the law is not so lacking in flexibility and resourcefulness as to preclude such a solution, the more so as deeper reflection would make clear its being buttressed by indisputable principles and supported by the strongest policy considerations.

It can truly be said then that the result arrived at upheld and vindicated the honor of the judiciary no less than that of the country. Through this challenged order, there is thus dispelled the atmosphere of contingent frustration brought about by the persistence of the domiciliary administrator to hold on to the stock certificates after it had, as admitted, voluntarily submitted itself to the jurisdiction of the lower court by entering its appearance through counsel on June 27, 1963, and filing a petition for relief from a previous order of March 15, 1963. Thus did the lower court, in the order now on appeal, impart vitality and effectiveness to what was decreed. For without it, what it had been decided would be set at naught and nullified. Unless such a blatant disregard by the domiciliary administrator, with residence abroad, of what was previously ordained by a court order could be thus remedied, it would have entailed, insofar as this matter was concerned, not a partial but a well-nigh complete paralysis of judicial authority.

1. Appellant Benguet Consolidated, Inc. did not dispute the power of the appellee ancillary administrator to gain control and possession of all assets of the decedent within the jurisdiction of the Philippines. Nor could it. Such a power is inherent in his duty to settle her estate and satisfy the claims of local creditors. 5 As Justice Tuason speaking for this Court made clear, it is a “general rule universally recognized” that administration, whether principal or ancillary, certainly “extends to the assets of a decedent found within the state or country where it was granted,” the corollary being “that an administrator appointed in one state or country has no power over property in another state or country.” 6

It is to be noted that the scope of the power of the ancillary administrator was, in an earlier case, set forth by Justice Malcolm. Thus: “It is often necessary to have more than one administration of an estate. When a person dies intestate owning property in the country of his domicile as well as in a

foreign country, administration is had in both countries. That which is granted in the jurisdiction of decedent’s last domicile is termed the principal administration, while any other administration is termed the ancillary administration. The reason for the latter is because a grant of administration does not ex proprio vigore have any effect beyond the limits of the country in which it is granted. Hence, an administrator appointed in a foreign state has no authority in the [Philippines]. The ancillary administration is proper, whenever a person dies, leaving in a country other than that of his last domicile, property to be administered in the nature of assets of the deceased liable for his individual debts or to be distributed among his heirs.” 7

It would follow then that the authority of the probate court to require that ancillary administrator’s right to “the stock certificates covering the 33,002 shares .. standing in her name in the books of [appellant] Benguet Consolidated, Inc..” be respected is equally beyond question. For appellant is a Philippine corporation owing full allegiance and subject to the unrestricted jurisdiction of local courts. Its shares of stock cannot therefore be considered in any wise as immune from lawful court orders.

Our holding in Wells Fargo Bank and Union v. Collector of Internal Revenue 8 finds application. “In the instant case, the actual situs of the shares of stock is in the Philippines, the corporation being domiciled [here].” To the force of the above undeniable proposition, not even appellant is insensible. It does not dispute it. Nor could it successfully do so even if it were so minded.

2. In the face of such incontrovertible doctrines that argue in a rather conclusive fashion for the legality of the challenged order, how does appellant Benguet Consolidated, Inc. propose to carry the extremely heavy burden of persuasion of precisely demonstrating the contrary? It would assign as the basic error allegedly committed by the lower court its “considering as lost the stock certificates covering 33,002 shares of Benguet belonging to the deceased Idonah Slade Perkins, . . .” 9More specifically, appellant would stress that the “lower court could not `consider as lost’ the stock certificates in question when, as a matter of fact, his Honor the trial Judge knew, and does know, and it is admitted by the appellee, that the said stock certificates are in existence and are today in the possession of the domiciliary administrator in New York.” 10

There may be an element of fiction in the above view of the lower court. That certainly does not suffice to call for the reversal of the appealed order. Since there is a refusal, persistently adhered to by the domiciliary administrator in New York, to deliver the shares of stocks of appellant corporation owned by the decedent to the ancillary administrator in the Philippines, there was nothing unreasonable or arbitrary in considering them as lost and requiring the appellant to issue new certificates in lieu thereof. Thereby, the task incumbent under the law on the ancillary administrator could be discharged and his responsibility fulfilled.

Any other view would result in the compliance to a valid judicial order being made to depend on the uncontrolled discretion of the party or entity, in this case domiciled abroad, which thus far has shown the utmost persistence in refusing to yield obedience. Certainly, appellant would not be heard to contend in all seriousness that a judicial decree could be treated as a mere scrap of paper, the court issuing it being powerless to remedy its flagrant disregard.

It may be admitted of course that such alleged loss as found by the lower court did not correspond exactly with the facts. To be more blunt, the quality of truth may be lacking in such a conclusion arrived at. It is to be remembered however, again to borrow from Frankfurter, “that fictions which the law may rely upon in the pursuit of legitimate ends have played an important part in its development.” 11

Speaking of the common law in its earlier period, Cardozo could state that fictions “were devices to advance the ends of justice, [even if] clumsy and at times offensive.” 12 Some of them have persisted even to the present, that eminent jurist, noting “the quasi contract, the adopted child, the constructive trust, all of flourishing vitality, to attest the empire of `as if’ today.” 13 He likewise noted “a class of fictions of another order, the fiction which is a working tool of thought, but which at times hides itself from view till reflection and analysis have brought it to the light.” 14

What cannot be disputed, therefore, is the at times indispensable role that fictions as such played in the law. There should be then on the part of the appellant a further refinement in the catholicity of its condemnation of such judicial technique. If ever an occasion did call for the employment of a legal fiction to put an end to the anomalous situation of a valid judicial order being disregarded with apparent impunity, this is it. What is thus most obvious is that this particular alleged error does not carry persuasion.

3. Appellant Benguet Consolidated, Inc. would seek to bolster the above contention by its invoking one of the provisions of its by-laws which would set forth the procedure to be followed in case of a lost, stolen or destroyed stock certificate; it would stress that in the event of a contest or the pendency of an action regarding ownership of such certificate or certificates of stock allegedly lost, stolen or destroyed, the issuance of a new certificate or certificates would await the “final decision by [a] court regarding the ownership [thereof].” 15

Such reliance is misplaced. In the first place, there is no such occasion to apply such a by-law. It is admitted that the foreign domiciliary administrator did not appeal from the order now in question. Moreover, there is likewise the express admission of appellant that as far as it is concerned, “it is immaterial . . . who is entitled to the possession of the stock certificates . . .” Even if such were not the case, it would be a legal absurdity to impart to such a provision conclusiveness and finality. Assuming that a contrariety exists between the above by-law and the command of a court decree, the latter is to be followed.

It is understandable, as Cardozo pointed out, that the Constitution overrides a statute, to which, however, the judiciary must yield deference, when appropriately invoked and deemed applicable. It would be most highly unorthodox, however, if a corporate by-law would be accorded such a high estate in the jural order that a court must not only take note of it but yield to its alleged controlling force.

The fear of appellant of a contingent liability with which it could be saddled unless the appealed order be set aside for its inconsistency with one of its by-laws does not impress us. Its obedience to a lawful court order certainly constitutes a valid defense, assuming that such apprehension of a possible court action against it could possibly materialize. Thus far, nothing in the circumstances as they have developed gives substance to such a fear. Gossamer possibilities of a future prejudice to appellant do not suffice to nullify the lawful exercise of judicial authority.

4. What is more the view adopted by appellant Benguet Consolidated, Inc. is fraught with implications at war with the basic postulates of corporate theory.

We start with the undeniable premise that, “a corporation is an artificial being created by operation of law . . .” 16 It owes its life to the state, its birth being purely dependent on its will. As Berle so aptly stated: “Classically, a corporation was conceived as an artificial person, owing its existence through creation by a sovereign power. 17 As a matter of fact, the statutory language employed owes much to

Chief Justice Marshall, who in the Dartmouth College decision, defined a corporation precisely as “an artificial being invisible, intangible, and existing only in contemplation of law.” 18

The well-known authority Fletcher could summarize the matter thus: “A corporation is not in fact and in reality a person, but the law treats it as though it were a person by process of fiction, or by regarding it as an artificial person distinct and separate from its individual stockholders. It owes its existence to law. It is an artificial person created by law for certain specific purposes, the extent of whose existence, powers and liberties is fixed by its charter.” 19 Dean Pound’s terse summary, a juristic person, resulting from an association of human beings granted legal personality by the state, puts the matter neatly. 20

There is thus a rejection of Gierke’s genosssenchaft theory, the basic theme of which to quote from Friedmann, “is the reality of the group as a social and legal entity, independent of state recognition and concession.” 21 A corporation as known to Philippine jurisprudence is a creature without any existence until it has received the imprimatur of the state acting according to law. It is logically inconceivable therefore that it will have rights and privileges of a higher priority than that of its creator. More than that, it cannot legitimately refuse to yield obedience to acts of its state organs, certainly not excluding the judiciary, whenever called upon to do so.

As a matter of fact, a corporation once it comes into being, following American law still of persuasive authority in our jurisdiction, comes more often within the ken of the judiciary than the other two coordinate branches. It institutes the appropriate Court Action to enforce its rights. Correlatively, it is not immune from judicial control in those instances, where a duty under the law as ascertained in an appropriate legal proceeding is cast upon it.

To assert that it can choose which court order to follow and which to disregard is to confer upon it not autonomy which may be conceded but license which cannot be tolerated. It is to argue that it may, when so minded, overrule the state, the source of its very existence; it is to contend that what any of its governmental organs may lawfully require could be ignored at will. So extravagant a claim cannot possibly merit approval.

5. One last point. In Viloria v. Administrator of Veterans Affairs, 22 it was shown that in a guardianship proceeding then pending in a lower court, the United States Veterans Administration filed a motion for the refund of a certain sum of money paid to the minor under guardianship, alleging that the lower court had previously granted its petition to consider the deceased father as not entitled to guerilla benefits according to a determination arrived at by its main office in the United States. The motion was denied. In seeking a reconsideration of such order, the Administrator relied on an American federal statute making his decisions “final and conclusive on all questions of law or fact” precluding any other American official to examine the matter anew, “except a judge or judges of the United States court.” 23 Reconsideration was denied, and the Administrator appealed.

In an opinion by Justice J.B.L. Reyes, we sustained the lower court. Thus: “We are of the opinion that the appeal should be rejected. The provisions of the U.S. Code, invoked by the appellant, make the decisions of U.S. Veteran Administrator final and conclusive when made on claims properly submitted to him for resolution; but they are not applicable to the present case, where the Administrator is not acting as a judge but as a litigant. There is a great difference between actions against the Administrator (which must be filed strictly in accordance with the conditions that are imposed by the Veterans’ Act, including the exclusive review by United States courts), and those actions where the Veterans’ Administrator seeks a remedy from our courts and submits to their jurisdiction by filing

actions therein. Our attention has not been called to any law or treaty that would make the findings of the Veterans’ Administrator, in actions where he is a party, conclusive on our courts. That, in effect, would deprive our tribunals of judicial discretion and render them mere subordinate instrumentalities of the Veterans’ Administrator.”

It is bad enough as the Viloria decision made patent for our judiciary to accept as final and conclusive, determinations made by foreign governmental agencies. It is infinitely worse if through the absence of any coercive power by our courts over juridical persons within our jurisdiction, the force and effectivity of their orders could be made to depend on the whim or caprice of alien entities. It is difficult to imagine of a situation more offensive to the dignity of the bench or the honor of the country.

Yet that would be the effect, even if unintended, of the proposition to which appellant Benguet Consolidated seems to be firmly committed as shown by its failure to accept the validity of the order complained of; it seeks its reversal. Certainly we must at all pains see to it that it does not succeed. The deplorable consequences attendant on appellant prevailing attest to the necessity of a negative response from us. That is what appellant will get.

That is all then that this case presents. It is obvious why the appeal cannot succeed. It is always easy to conjure extreme and even oppressive possibilities. That is not decisive. It does not settle the issue. What carries weight and conviction is the result arrived at, the just solution obtained, grounded in the soundest of legal doctrines and distinguished by its correspondence with what a sense of realism requires. For through the appealed order, the imperative requirement of justice according to law is satisfied and national dignity and honor maintained.

WHEREFORE, the appealed order of the Honorable Arsenio Santos, the Judge of the Court of First Instance, dated May 18, 1964, is affirmed. With costs against oppositor-appellant Benguet Consolidated, Inc.

Makalintal, Zaldivar, and Capistrano, JJ., concur.

Concepcion, C.J., Reyes, J.B.L., Dizon, Sanchez and Ruiz Castro, JJ., concur in the result.

G.R. No. 195580 April 21, 2014

NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND DEVELOPMENT, INC., and MCARTHUR MINING, INC., Petitioners, vs.REDMONT CONSOLIDATED MINES CORP., Respondent.

D E C I S I O N

VELASCO, JR., J.:

Before this Court is a Petition for Review on Certiorari under Rule 45 filed by Narra Nickel and Mining Development Corp. (Narra), Tesoro Mining and Development, Inc. (Tesoro), and McArthur Mining Inc. (McArthur), which seeks to reverse the October 1, 2010 Decision1 and the February 15, 2011 Resolution of the Court of Appeals (CA).

The Facts

Sometime in December 2006, respondent Redmont Consolidated Mines Corp. (Redmont), a domestic corporation organized and existing under Philippine laws, took interest in mining and exploring certain areas of the province of Palawan. After inquiring with the Department of Environment and Natural Resources (DENR), it learned that the areas where it wanted to undertake exploration and mining activities where already covered by Mineral Production Sharing Agreement (MPSA) applications of petitioners Narra, Tesoro and McArthur.

Petitioner McArthur, through its predecessor-in-interest Sara Marie Mining, Inc. (SMMI), filed an application for an MPSA and Exploration Permit (EP) with the Mines and Geo-Sciences Bureau (MGB), Region IV-B, Office of the Department of Environment and Natural Resources (DENR).

Subsequently, SMMI was issued MPSA-AMA-IVB-153 covering an area of over 1,782 hectares in Barangay Sumbiling, Municipality of Bataraza, Province of Palawan and EPA-IVB-44 which includes an area of 3,720 hectares in Barangay Malatagao, Bataraza, Palawan. The MPSA and EP were then transferred to Madridejos Mining Corporation (MMC) and, on November 6, 2006, assigned to petitioner McArthur.2

Petitioner Narra acquired its MPSA from Alpha Resources and Development Corporation and Patricia Louise Mining & Development Corporation (PLMDC) which previously filed an application for an MPSA with the MGB, Region IV-B, DENR on January 6, 1992. Through the said application, the DENR issued MPSA-IV-1-12 covering an area of 3.277 hectares in barangays Calategas and San Isidro, Municipality of Narra, Palawan. Subsequently, PLMDC conveyed, transferred and/or assigned its rights and interests over the MPSA application in favor of Narra.

Another MPSA application of SMMI was filed with the DENR Region IV-B, labeled as MPSA-AMA-IVB-154 (formerly EPA-IVB-47) over 3,402 hectares in Barangays Malinao and Princesa Urduja, Municipality of Narra, Province of Palawan. SMMI subsequently conveyed, transferred and assigned its rights and interest over the said MPSA application to Tesoro.

On January 2, 2007, Redmont filed before the Panel of Arbitrators (POA) of the DENR three (3) separate petitions for the denial of petitioners’ applications for MPSA designated as AMA-IVB-153, AMA-IVB-154 and MPSA IV-1-12.

In the petitions, Redmont alleged that at least 60% of the capital stock of McArthur, Tesoro and Narra are owned and controlled by MBMI Resources, Inc. (MBMI), a 100% Canadian corporation. Redmont reasoned that since MBMI is a considerable stockholder of petitioners, it was the driving force behind petitioners’ filing of the MPSAs over the areas covered by applications since it knows that it can only participate in mining activities through corporations which are deemed Filipino citizens. Redmont argued that given that petitioners’ capital stocks were mostly owned by MBMI, they were likewise disqualified from engaging in mining activities through MPSAs, which are reserved only for Filipino citizens.

In their Answers, petitioners averred that they were qualified persons under Section 3(aq) of Republic Act No. (RA) 7942 or the Philippine Mining Act of 1995 which provided:

Sec. 3 Definition of Terms. As used in and for purposes of this Act, the following terms, whether in singular or plural, shall mean:

x x x x

(aq) "Qualified person" means any citizen of the Philippines with capacity to contract, or a corporation, partnership, association, or cooperative organized or authorized for the purpose of engaging in mining, with technical and financial capability to undertake mineral resources development and duly registered in accordance with law at least sixty per cent (60%) of the capital of which is owned by citizens of the Philippines: Provided, That a legally organized foreign-owned corporation shall be deemed a qualified person for purposes of granting an exploration permit, financial or technical assistance agreement or mineral processing permit.

Additionally, they stated that their nationality as applicants is immaterial because they also applied for Financial or Technical Assistance Agreements (FTAA) denominated as AFTA-IVB-09 for McArthur, AFTA-IVB-08 for Tesoro and AFTA-IVB-07 for Narra, which are granted to foreign-owned corporations. Nevertheless, they claimed that the issue on nationality should not be raised since McArthur, Tesoro and Narra are in fact Philippine Nationals as 60% of their capital is owned by citizens of the Philippines. They asserted that though MBMI owns 40% of the shares of PLMC (which owns 5,997 shares of Narra),3 40% of the shares of MMC (which owns 5,997 shares of McArthur)4and 40% of the shares of SLMC (which, in turn, owns 5,997 shares of Tesoro),5 the shares of MBMI will not make it the owner of at least 60% of the capital stock of each of petitioners. They added that the best tool used in determining the nationality of a corporation is the "control test," embodied in Sec. 3 of RA 7042 or the Foreign Investments Act of 1991. They also claimed that the POA of DENR did not have jurisdiction over the issues in Redmont’s petition since they are not enumerated in Sec. 77 of RA 7942. Finally, they stressed that Redmont has no personality to sue them because it has no pending claim or application over the areas applied for by petitioners.

On December 14, 2007, the POA issued a Resolution disqualifying petitioners from gaining MPSAs. It held:

[I]t is clearly established that respondents are not qualified applicants to engage in mining activities. On the other hand, [Redmont] having filed its own applications for an EPA over the areas earlier

covered by the MPSA application of respondents may be considered if and when they are qualified under the law. The violation of the requirements for the issuance and/or grant of permits over mining areas is clearly established thus, there is reason to believe that the cancellation and/or revocation of permits already issued under the premises is in order and open the areas covered to other qualified applicants.

x x x x

WHEREFORE, the Panel of Arbitrators finds the Respondents, McArthur Mining Inc., Tesoro Mining and Development, Inc., and Narra Nickel Mining and Development Corp. as, DISQUALIFIED for being considered as Foreign Corporations. Their Mineral Production Sharing Agreement (MPSA) are hereby x x x DECLARED NULL AND VOID.6

The POA considered petitioners as foreign corporations being "effectively controlled" by MBMI, a 100% Canadian company and declared their MPSAs null and void. In the same Resolution, it gave due course to Redmont’s EPAs. Thereafter, on February 7, 2008, the POA issued an Order7 denying the Motion for Reconsideration filed by petitioners.

Aggrieved by the Resolution and Order of the POA, McArthur and Tesoro filed a joint Notice of Appeal8 and Memorandum of Appeal9 with the Mines Adjudication Board (MAB) while Narra separately filed its Notice of Appeal10 and Memorandum of Appeal.11

In their respective memorandum, petitioners emphasized that they are qualified persons under the law. Also, through a letter, they informed the MAB that they had their individual MPSA applications converted to FTAAs. McArthur’s FTAA was denominated as AFTA-IVB-0912 on May 2007, while Tesoro’s MPSA application was converted to AFTA-IVB-0813 on May 28, 2007, and Narra’s FTAA was converted to AFTA-IVB-0714 on March 30, 2006.

Pending the resolution of the appeal filed by petitioners with the MAB, Redmont filed a Complaint15 with the Securities and Exchange Commission (SEC), seeking the revocation of the certificates for registration of petitioners on the ground that they are foreign-owned or controlled corporations engaged in mining in violation of Philippine laws. Thereafter, Redmont filed on September 1, 2008 a Manifestation and Motion to Suspend Proceeding before the MAB praying for the suspension of the proceedings on the appeals filed by McArthur, Tesoro and Narra.

Subsequently, on September 8, 2008, Redmont filed before the Regional Trial Court of Quezon City, Branch 92 (RTC) a Complaint16 for injunction with application for issuance of a temporary restraining order (TRO) and/or writ of preliminary injunction, docketed as Civil Case No. 08-63379. Redmont prayed for the deferral of the MAB proceedings pending the resolution of the Complaint before the SEC.

But before the RTC can resolve Redmont’s Complaint and applications for injunctive reliefs, the MAB issued an Order on September 10, 2008, finding the appeal meritorious. It held:

WHEREFORE, in view of the foregoing, the Mines Adjudication Board hereby REVERSES and SETS ASIDE the Resolution dated 14 December 2007 of the Panel of Arbitrators of Region IV-B (MIMAROPA) in POA-DENR Case Nos. 2001-01, 2007-02 and 2007-03, and its Order dated 07 February 2008 denying the Motions for Reconsideration of the Appellants. The Petition filed by Redmont Consolidated Mines Corporation on 02 January 2007 is hereby ordered DISMISSED.17

Belatedly, on September 16, 2008, the RTC issued an Order18 granting Redmont’s application for a TRO and setting the case for hearing the prayer for the issuance of a writ of preliminary injunction on September 19, 2008.

Meanwhile, on September 22, 2008, Redmont filed a Motion for Reconsideration19 of the September 10, 2008 Order of the MAB. Subsequently, it filed a Supplemental Motion for Reconsideration20 on September 29, 2008.

Before the MAB could resolve Redmont’s Motion for Reconsideration and Supplemental Motion for Reconsideration, Redmont filed before the RTC a Supplemental Complaint21 in Civil Case No. 08-63379.

On October 6, 2008, the RTC issued an Order22 granting the issuance of a writ of preliminary injunction enjoining the MAB from finally disposing of the appeals of petitioners and from resolving Redmont’s Motion for Reconsideration and Supplement Motion for Reconsideration of the MAB’s September 10, 2008 Resolution.

On July 1, 2009, however, the MAB issued a second Order denying Redmont’s Motion for Reconsideration and Supplemental Motion for Reconsideration and resolving the appeals filed by petitioners.

Hence, the petition for review filed by Redmont before the CA, assailing the Orders issued by the MAB. On October 1, 2010, the CA rendered a Decision, the dispositive of which reads:

WHEREFORE, the Petition is PARTIALLY GRANTED. The assailed Orders, dated September 10, 2008 and July 1, 2009 of the Mining Adjudication Board are reversed and set aside. The findings of the Panel of Arbitrators of the Department of Environment and Natural Resources that respondents McArthur, Tesoro and Narra are foreign corporations is upheld and, therefore, the rejection of their applications for Mineral Product Sharing Agreement should be recommended to the Secretary of the DENR.

With respect to the applications of respondents McArthur, Tesoro and Narra for Financial or Technical Assistance Agreement (FTAA) or conversion of their MPSA applications to FTAA, the matter for its rejection or approval is left for determination by the Secretary of the DENR and the President of the Republic of the Philippines.

SO ORDERED.23

In a Resolution dated February 15, 2011, the CA denied the Motion for Reconsideration filed by petitioners.

After a careful review of the records, the CA found that there was doubt as to the nationality of petitioners when it realized that petitioners had a common major investor, MBMI, a corporation composed of 100% Canadians. Pursuant to the first sentence of paragraph 7 of Department of Justice (DOJ) Opinion No. 020, Series of 2005, adopting the 1967 SEC Rules which implemented the requirement of the Constitution and other laws pertaining to the exploitation of natural resources, the CA used the "grandfather rule" to determine the nationality of petitioners. It provided:

Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality, but if the percentage of Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as of Philippine nationality. Thus, if 100,000 shares are registered in the name of a corporation or partnership at least 60% of the capital stock or capital, respectively, of which belong to Filipino citizens, all of the shares shall be recorded as owned by Filipinos. But if less than 60%, or say, 50% of the capital stock or capital of the corporation or partnership, respectively, belongs to Filipino citizens, only 50,000 shares shall be recorded as belonging to aliens.24 (emphasis supplied)

In determining the nationality of petitioners, the CA looked into their corporate structures and their corresponding common shareholders. Using the grandfather rule, the CA discovered that MBMI in effect owned majority of the common stocks of the petitioners as well as at least 60% equity interest of other majority shareholders of petitioners through joint venture agreements. The CA found that through a "web of corporate layering, it is clear that one common controlling investor in all mining corporations involved x x x is MBMI."25 Thus, it concluded that petitioners McArthur, Tesoro and Narra are also in partnership with, or privies-in-interest of, MBMI.

Furthermore, the CA viewed the conversion of the MPSA applications of petitioners into FTAA applications suspicious in nature and, as a consequence, it recommended the rejection of petitioners’ MPSA applications by the Secretary of the DENR.

With regard to the settlement of disputes over rights to mining areas, the CA pointed out that the POA has jurisdiction over them and that it also has the power to determine the of nationality of petitioners as a prerequisite of the Constitution prior the conferring of rights to "co-production, joint venture or production-sharing agreements" of the state to mining rights. However, it also stated that the POA’s jurisdiction is limited only to the resolution of the dispute and not on the approval or rejection of the MPSAs. It stipulated that only the Secretary of the DENR is vested with the power to approve or reject applications for MPSA.

Finally, the CA upheld the findings of the POA in its December 14, 2007 Resolution which considered petitioners McArthur, Tesoro and Narra as foreign corporations. Nevertheless, the CA determined that the POA’s declaration that the MPSAs of McArthur, Tesoro and Narra are void is highly improper.

While the petition was pending with the CA, Redmont filed with the Office of the President (OP) a petition dated May 7, 2010 seeking the cancellation of petitioners’ FTAAs. The OP rendered a Decision26 on April 6, 2011, wherein it canceled and revoked petitioners’ FTAAs for violating and circumventing the "Constitution x x x[,] the Small Scale Mining Law and Environmental Compliance Certificate as well as Sections 3 and 8 of the Foreign Investment Act and E.O. 584."27 The OP, in affirming the cancellation of the issued FTAAs, agreed with Redmont stating that petitioners committed violations against the abovementioned laws and failed to submit evidence to negate them. The Decision further quoted the December 14, 2007 Order of the POA focusing on the alleged misrepresentation and claims made by petitioners of being domestic or Filipino corporations and the admitted continued mining operation of PMDC using their locally secured Small Scale Mining Permit inside the area earlier applied for an MPSA application which was eventually transferred to Narra. It also agreed with the POA’s estimation that the filing of the FTAA applications by petitioners is a clear admission that they are "not capable of conducting a large scale mining operation and that they need the financial and technical assistance of a foreign entity in their operation, that is why they sought the participation of MBMI Resources, Inc."28 The Decision further quoted:

The filing of the FTAA application on June 15, 2007, during the pendency of the case only demonstrate the violations and lack of qualification of the respondent corporations to engage in mining. The filing of the FTAA application conversion which is allowed foreign corporation of the earlier MPSA is an admission that indeed the respondent is not Filipino but rather of foreign nationality who is disqualified under the laws. Corporate documents of MBMI Resources, Inc. furnished its stockholders in their head office in Canada suggest that they are conducting operation only through their local counterparts.29

The Motion for Reconsideration of the Decision was further denied by the OP in a Resolution30 dated July 6, 2011. Petitioners then filed a Petition for Review on Certiorari of the OP’s Decision and Resolution with the CA, docketed as CA-G.R. SP No. 120409. In the CA Decision dated February 29, 2012, the CA affirmed the Decision and Resolution of the OP. Thereafter, petitioners appealed the same CA decision to this Court which is now pending with a different division.

Thus, the instant petition for review against the October 1, 2010 Decision of the CA. Petitioners put forth the following errors of the CA:

I.

The Court of Appeals erred when it did not dismiss the case for mootness despite the fact that the subject matter of the controversy, the MPSA Applications, have already been converted into FTAA applications and that the same have already been granted.

II.

The Court of Appeals erred when it did not dismiss the case for lack of jurisdiction considering that the Panel of Arbitrators has no jurisdiction to determine the nationality of Narra, Tesoro and McArthur.

III.

The Court of Appeals erred when it did not dismiss the case on account of Redmont’s willful forum shopping.

IV.

The Court of Appeals’ ruling that Narra, Tesoro and McArthur are foreign corporations based on the "Grandfather Rule" is contrary to law, particularly the express mandate of the Foreign Investments Act of 1991, as amended, and the FIA Rules.

V.

The Court of Appeals erred when it applied the exceptions to the res inter alios acta rule.

VI.

The Court of Appeals erred when it concluded that the conversion of the MPSA Applications into FTAA Applications were of "suspicious nature" as the same is based on mere conjectures and surmises without any shred of evidence to show the same.31

We find the petition to be without merit.

This case not moot and academic

The claim of petitioners that the CA erred in not rendering the instant case as moot is without merit.

Basically, a case is said to be moot and/or academic when it "ceases to present a justiciable controversy by virtue of supervening events, so that a declaration thereon would be of no practical use or value."32 Thus, the courts "generally decline jurisdiction over the case or dismiss it on the ground of mootness."33

The "mootness" principle, however, does accept certain exceptions and the mere raising of an issue of "mootness" will not deter the courts from trying a case when there is a valid reason to do so. In David v. Macapagal-Arroyo (David), the Court provided four instances where courts can decide an otherwise moot case, thus:

1.) There is a grave violation of the Constitution;

2.) The exceptional character of the situation and paramount public interest is involved;

3.) When constitutional issue raised requires formulation of controlling principles to guide the bench, the bar, and the public; and

4.) The case is capable of repetition yet evading review.34

All of the exceptions stated above are present in the instant case. We of this Court note that a grave violation of the Constitution, specifically Section 2 of Article XII, is being committed by a foreign corporation right under our country’s nose through a myriad of corporate layering under different, allegedly, Filipino corporations. The intricate corporate layering utilized by the Canadian company, MBMI, is of exceptional character and involves paramount public interest since it undeniably affects the exploitation of our Country’s natural resources. The corresponding actions of petitioners during the lifetime and existence of the instant case raise questions as what principle is to be applied to cases with similar issues. No definite ruling on such principle has been pronounced by the Court; hence, the disposition of the issues or errors in the instant case will serve as a guide "to the bench, the bar and the public."35 Finally, the instant case is capable of repetition yet evading review, since the Canadian company, MBMI, can keep on utilizing dummy Filipino corporations through various schemes of corporate layering and conversion of applications to skirt the constitutional prohibition against foreign mining in Philippine soil.

Conversion of MPSA applications to FTAA applications

We shall discuss the first error in conjunction with the sixth error presented by petitioners since both involve the conversion of MPSA applications to FTAA applications. Petitioners propound that the CA erred in ruling against them since the questioned MPSA applications were already converted into FTAA applications; thus, the issue on the prohibition relating to MPSA applications of foreign mining corporations is academic. Also, petitioners would want us to correct the CA’s finding which deemed the aforementioned conversions of applications as suspicious in nature, since it is based on mere conjectures and surmises and not supported with evidence.

We disagree.

The CA’s analysis of the actions of petitioners after the case was filed against them by respondent is on point. The changing of applications by petitioners from one type to another just because a case was filed against them, in truth, would raise not a few sceptics’ eyebrows. What is the reason for such conversion? Did the said conversion not stem from the case challenging their citizenship and to have the case dismissed against them for being "moot"? It is quite obvious that it is petitioners’ strategy to have the case dismissed against them for being "moot."

Consider the history of this case and how petitioners responded to every action done by the court or appropriate government agency: on January 2, 2007, Redmont filed three separate petitions for denial of the MPSA applications of petitioners before the POA. On June 15, 2007, petitioners filed a conversion of their MPSA applications to FTAAs. The POA, in its December 14, 2007 Resolution, observed this suspect change of applications while the case was pending before it and held:

The filing of the Financial or Technical Assistance Agreement application is a clear admission that the respondents are not capable of conducting a large scale mining operation and that they need the financial and technical assistance of a foreign entity in their operation that is why they sought the participation of MBMI Resources, Inc. The participation of MBMI in the corporation only proves the fact that it is the Canadian company that will provide the finances and the resources to operate the mining areas for the greater benefit and interest of the same and not the Filipino stockholders who only have a less substantial financial stake in the corporation.

x x x x

x x x The filing of the FTAA application on June 15, 2007, during the pendency of the case only demonstrate the violations and lack of qualification of the respondent corporations to engage in mining. The filing of the FTAA application conversion which is allowed foreign corporation of the earlier MPSA is an admission that indeed the respondent is not Filipino but rather of foreign nationality who is disqualified under the laws. Corporate documents of MBMI Resources, Inc. furnished its stockholders in their head office in Canada suggest that they are conducting operation only through their local counterparts.36

On October 1, 2010, the CA rendered a Decision which partially granted the petition, reversing and setting aside the September 10, 2008 and July 1, 2009 Orders of the MAB. In the said Decision, the CA upheld the findings of the POA of the DENR that the herein petitioners are in fact foreign corporations thus a recommendation of the rejection of their MPSA applications were recommended to the Secretary of the DENR. With respect to the FTAA applications or conversion of the MPSA applications to FTAAs, the CA deferred the matter for the determination of the Secretary of the DENR and the President of the Republic of the Philippines.37

In their Motion for Reconsideration dated October 26, 2010, petitioners prayed for the dismissal of the petition asserting that on April 5, 2010, then President Gloria Macapagal-Arroyo signed and issued in their favor FTAA No. 05-2010-IVB, which rendered the petition moot and academic. However, the CA, in a Resolution dated February 15, 2011 denied their motion for being a mere "rehash of their claims and defenses."38 Standing firm on its Decision, the CA affirmed the ruling that petitioners are, in fact, foreign corporations. On April 5, 2011, petitioners elevated the case to us via a Petition for Review on Certiorari under Rule 45, questioning the Decision of the CA. Interestingly, the OP rendered a Decision dated April 6, 2011, a day after this petition for review was filed,

cancelling and revoking the FTAAs, quoting the Order of the POA and stating that petitioners are foreign corporations since they needed the financial strength of MBMI, Inc. in order to conduct large scale mining operations. The OP Decision also based the cancellation on the misrepresentation of facts and the violation of the "Small Scale Mining Law and Environmental Compliance Certificate as well as Sections 3 and 8 of the Foreign Investment Act and E.O. 584."39 On July 6, 2011, the OP issued a Resolution, denying the Motion for Reconsideration filed by the petitioners.

Respondent Redmont, in its Comment dated October 10, 2011, made known to the Court the fact of the OP’s Decision and Resolution. In their Reply, petitioners chose to ignore the OP Decision and continued to reuse their old arguments claiming that they were granted FTAAs and, thus, the case was moot. Petitioners filed a Manifestation and Submission dated October 19, 2012,40 wherein they asserted that the present petition is moot since, in a remarkable turn of events, MBMI was able to sell/assign all its shares/interest in the "holding companies" to DMCI Mining Corporation (DMCI), a Filipino corporation and, in effect, making their respective corporations fully-Filipino owned.

Again, it is quite evident that petitioners have been trying to have this case dismissed for being "moot." Their final act, wherein MBMI was able to allegedly sell/assign all its shares and interest in the petitioner "holding companies" to DMCI, only proves that they were in fact not Filipino corporations from the start. The recent divesting of interest by MBMI will not change the stand of this Court with respect to the nationality of petitioners prior the suspicious change in their corporate structures. The new documents filed by petitioners are factual evidence that this Court has no power to verify.

The only thing clear and proved in this Court is the fact that the OP declared that petitioner corporations have violated several mining laws and made misrepresentations and falsehood in their applications for FTAA which lead to the revocation of the said FTAAs, demonstrating that petitioners are not beyond going against or around the law using shifty actions and strategies. Thus, in this instance, we can say that their claim of mootness is moot in itself because their defense of conversion of MPSAs to FTAAs has been discredited by the OP Decision.

Grandfather test

The main issue in this case is centered on the issue of petitioners’ nationality, whether Filipino or foreign. In their previous petitions, they had been adamant in insisting that they were Filipino corporations, until they submitted their Manifestation and Submission dated October 19, 2012 where they stated the alleged change of corporate ownership to reflect their Filipino ownership. Thus, there is a need to determine the nationality of petitioner corporations.

Basically, there are two acknowledged tests in determining the nationality of a corporation: the control test and the grandfather rule. Paragraph 7 of DOJ Opinion No. 020, Series of 2005, adopting the 1967 SEC Rules which implemented the requirement of the Constitution and other laws pertaining to the controlling interests in enterprises engaged in the exploitation of natural resources owned by Filipino citizens, provides:

Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality, but if the percentage of Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as of Philippine nationality. Thus, if 100,000 shares are registered in the name of a corporation or partnership at least 60% of the capital stock or

capital, respectively, of which belong to Filipino citizens, all of the shares shall be recorded as owned by Filipinos. But if less than 60%, or say, 50% of the capital stock or capital of the corporation or partnership, respectively, belongs to Filipino citizens, only 50,000 shares shall be counted as owned by Filipinos and the other 50,000 shall be recorded as belonging to aliens.

The first part of paragraph 7, DOJ Opinion No. 020, stating "shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality," pertains to the control test or the liberal rule. On the other hand, the second part of the DOJ Opinion which provides, "if the percentage of the Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as Philippine nationality," pertains to the stricter, more stringent grandfather rule.

Prior to this recent change of events, petitioners were constant in advocating the application of the "control test" under RA 7042, as amended by RA 8179, otherwise known as the Foreign Investments Act (FIA), rather than using the stricter grandfather rule. The pertinent provision under Sec. 3 of the FIA provides:

SECTION 3. Definitions. - As used in this Act:

a.) The term Philippine national shall mean a citizen of the Philippines; or a domestic partnership or association wholly owned by the citizens of the Philippines; a corporation organized under the laws of the Philippines of which at least sixty percent (60%) of the capital stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty percent (60%) of the fund will accrue to the benefit of Philippine nationals: Provided, That were a corporation and its non-Filipino stockholders own stocks in a Securities and Exchange Commission (SEC) registered enterprise, at least sixty percent (60%) of the capital stock outstanding and entitled to vote of each of both corporations must be owned and held by citizens of the Philippines and at least sixty percent (60%) of the members of the Board of Directors, in order that the corporation shall be considered a Philippine national. (emphasis supplied)

The grandfather rule, petitioners reasoned, has no leg to stand on in the instant case since the definition of a "Philippine National" under Sec. 3 of the FIA does not provide for it. They further claim that the grandfather rule "has been abandoned and is no longer the applicable rule."41 They also opined that the last portion of Sec. 3 of the FIA admits the application of a "corporate layering" scheme of corporations. Petitioners claim that the clear and unambiguous wordings of the statute preclude the court from construing it and prevent the court’s use of discretion in applying the law. They said that the plain, literal meaning of the statute meant the application of the control test is obligatory.

We disagree. "Corporate layering" is admittedly allowed by the FIA; but if it is used to circumvent the Constitution and pertinent laws, then it becomes illegal. Further, the pronouncement of petitioners that the grandfather rule has already been abandoned must be discredited for lack of basis.

Art. XII, Sec. 2 of the Constitution provides:

Sec. 2. All lands of the public domain, waters, minerals, coal, petroleum and other mineral oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural

resources are owned by the State. With the exception of agricultural lands, all other natural resources shall not be alienated. The exploration, development, and utilization of natural resources shall be under the full control and supervision of the State. The State may directly undertake such activities, or it may enter into co-production, joint venture or production-sharing agreements with Filipino citizens, or corporations or associations at least sixty per centum of whose capital is owned by such citizens. Such agreements may be for a period not exceeding twenty-five years, renewable for not more than twenty-five years, and under such terms and conditions as may be provided by law.

x x x x

The President may enter into agreements with Foreign-owned corporations involving either technical or financial assistance for large-scale exploration, development, and utilization of minerals, petroleum, and other mineral oils according to the general terms and conditions provided by law, based on real contributions to the economic growth and general welfare of the country. In such agreements, the State shall promote the development and use of local scientific and technical resources. (emphasis supplied)

The emphasized portion of Sec. 2 which focuses on the State entering into different types of agreements for the exploration, development, and utilization of natural resources with entities who are deemed Filipino due to 60 percent ownership of capital is pertinent to this case, since the issues are centered on the utilization of our country’s natural resources or specifically, mining. Thus, there is a need to ascertain the nationality of petitioners since, as the Constitution so provides, such agreements are only allowed corporations or associations "at least 60 percent of such capital is owned by such citizens." The deliberations in the Records of the 1986 Constitutional Commission shed light on how a citizenship of a corporation will be determined:

Mr. BENNAGEN: Did I hear right that the Chairman’s interpretation of an independent national economy is freedom from undue foreign control? What is the meaning of undue foreign control?

MR. VILLEGAS: Undue foreign control is foreign control which sacrifices national sovereignty and the welfare of the Filipino in the economic sphere.

MR. BENNAGEN: Why does it have to be qualified still with the word "undue"? Why not simply freedom from foreign control? I think that is the meaning of independence, because as phrased, it still allows for foreign control.

MR. VILLEGAS: It will now depend on the interpretation because if, for example, we retain the 60/40 possibility in the cultivation of natural resources, 40 percent involves some control; not total control, but some control.

MR. BENNAGEN: In any case, I think in due time we will propose some amendments.

MR. VILLEGAS: Yes. But we will be open to improvement of the phraseology.

Mr. BENNAGEN: Yes.

Thank you, Mr. Vice-President.

x x x x

MR. NOLLEDO: In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign equity; namely, 60-40 in Section 3, 60-40 in Section 9, and 2/3-1/3 in Section 15.

MR. VILLEGAS: That is right.

MR. NOLLEDO: In teaching law, we are always faced with the question: ‘Where do we base the equity requirement, is it on the authorized capital stock, on the subscribed capital stock, or on the paid-up capital stock of a corporation’? Will the Committee please enlighten me on this?

MR. VILLEGAS: We have just had a long discussion with the members of the team from the UP Law Center who provided us with a draft. The phrase that is contained here which we adopted from the UP draft is ‘60 percent of the voting stock.’

MR. NOLLEDO: That must be based on the subscribed capital stock, because unless declared delinquent, unpaid capital stock shall be entitled to vote.

MR. VILLEGAS: That is right.

MR. NOLLEDO: Thank you.

With respect to an investment by one corporation in another corporation, say, a corporation with 60-40 percent equity invests in another corporation which is permitted by the Corporation Code, does the Committee adopt the grandfather rule?

MR. VILLEGAS: Yes, that is the understanding of the Committee.

MR. NOLLEDO: Therefore, we need additional Filipino capital?

MR. VILLEGAS: Yes.42 (emphasis supplied)

It is apparent that it is the intention of the framers of the Constitution to apply the grandfather rule in cases where corporate layering is present.

Elementary in statutory construction is when there is conflict between the Constitution and a statute, the Constitution will prevail. In this instance, specifically pertaining to the provisions under Art. XII of the Constitution on National Economy and Patrimony, Sec. 3 of the FIA will have no place of application. As decreed by the honorable framers of our Constitution, the grandfather rule prevails and must be applied.

Likewise, paragraph 7, DOJ Opinion No. 020, Series of 2005 provides:

The above-quoted SEC Rules provide for the manner of calculating the Filipino interest in a corporation for purposes, among others, of determining compliance with nationality requirements (the ‘Investee Corporation’). Such manner of computation is necessary since the shares in the Investee Corporation may be owned both by individual stockholders (‘Investing Individuals’) and by corporations and partnerships (‘Investing Corporation’). The said rules thus provide for the determination of nationality depending on the ownership of the Investee Corporation and, in certain instances, the Investing Corporation.

Under the above-quoted SEC Rules, there are two cases in determining the nationality of the Investee Corporation. The first case is the ‘liberal rule’, later coined by the SEC as the Control Test in its 30 May 1990 Opinion, and pertains to the portion in said Paragraph 7 of the 1967 SEC Rules which states, ‘(s)hares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality.’ Under the liberal Control Test, there is no need to further trace the ownership of the 60% (or more) Filipino stockholdings of the Investing Corporation since a corporation which is at least 60% Filipino-owned is considered as Filipino.

The second case is the Strict Rule or the Grandfather Rule Proper and pertains to the portion in said Paragraph 7 of the 1967 SEC Rules which states, "but if the percentage of Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as of Philippine nationality." Under the Strict Rule or Grandfather Rule Proper, the combined totals in the Investing Corporation and the Investee Corporation must be traced (i.e., "grandfathered") to determine the total percentage of Filipino ownership.

Moreover, the ultimate Filipino ownership of the shares must first be traced to the level of the Investing Corporation and added to the shares directly owned in the Investee Corporation x x x.

x x x x

In other words, based on the said SEC Rule and DOJ Opinion, the Grandfather Rule or the second part of the SEC Rule applies only when the 60-40 Filipino-foreign equity ownership is in doubt (i.e., in cases where the joint venture corporation with Filipino and foreign stockholders with less than 60% Filipino stockholdings [or 59%] invests in other joint venture corporation which is either 60-40% Filipino-alien or the 59% less Filipino). Stated differently, where the 60-40 Filipino- foreign equity ownership is not in doubt, the Grandfather Rule will not apply. (emphasis supplied)

After a scrutiny of the evidence extant on record, the Court finds that this case calls for the application of the grandfather rule since, as ruled by the POA and affirmed by the OP, doubt prevails and persists in the corporate ownership of petitioners. Also, as found by the CA, doubt is present in the 60-40 Filipino equity ownership of petitioners Narra, McArthur and Tesoro, since their common investor, the 100% Canadian corporation––MBMI, funded them. However, petitioners also claim that there is "doubt" only when the stockholdings of Filipinos are less than 60%.43

The assertion of petitioners that "doubt" only exists when the stockholdings are less than 60% fails to convince this Court. DOJ Opinion No. 20, which petitioners quoted in their petition, only made an example of an instance where "doubt" as to the ownership of the corporation exists. It would be ludicrous to limit the application of the said word only to the instances where the stockholdings of non-Filipino stockholders are more than 40% of the total stockholdings in a corporation. The corporations interested in circumventing our laws would clearly strive to have "60% Filipino Ownership" at face value. It would be senseless for these applying corporations to state in their respective articles of incorporation that they have less than 60% Filipino stockholders since the applications will be denied instantly. Thus, various corporate schemes and layerings are utilized to circumvent the application of the Constitution.

Obviously, the instant case presents a situation which exhibits a scheme employed by stockholders to circumvent the law, creating a cloud of doubt in the Court’s mind. To determine, therefore, the actual participation, direct or indirect, of MBMI, the grandfather rule must be used.

McArthur Mining, Inc.

To establish the actual ownership, interest or participation of MBMI in each of petitioners’ corporate structure, they have to be "grandfathered."

As previously discussed, McArthur acquired its MPSA application from MMC, which acquired its application from SMMI. McArthur has a capital stock of ten million pesos (PhP 10,000,000) divided into 10,000 common shares at one thousand pesos (PhP 1,000) per share, subscribed to by the following:44

Name Nationality

Number of Shares

Amount Subscribed

Amount Paid

Madridejos MiningCorporation

Filipino 5,997 PhP 5,997,000.00 PhP 825,000.00

MBMI Resources, Inc.

Canadian 3,998 PhP 3,998,000.0 PhP 1,878,174.60

Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernando B. Esguerra

Filipino 1 PhP 1,000.00 PhP 1,000.00

Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00

Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP 10,000,000.00 PhP 2,708,174.60(emphasis supplied)

Interestingly, looking at the corporate structure of MMC, we take note that it has a similar structure and composition as McArthur. In fact, it would seem that MBMI is also a major investor and "controls"45 MBMI and also, similar nominal shareholders were present, i.e. Fernando B. Esguerra (Esguerra), Lauro L. Salazar (Salazar), Michael T. Mason (Mason) and Kenneth Cawkell (Cawkell):

Madridejos Mining Corporation

Name Nationality Number of Shares Amount Subscribed Amount Paid

Olympic Mines &

Development

Corp.

Filipino 6,663 PhP 6,663,000.00 PhP 0

MBMI Resources,

Inc.

Canadian 3,331 PhP 3,331,000.00 PhP 2,803,900.00

Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernando B.

Esguerra

Filipino 1 PhP 1,000.00 PhP 1,000.00

Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Emmanuel G.

Hernando

Filipino 1 PhP 1,000.00 PhP 1,000.00

Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP 10,000,000.00 PhP 2,809,900.00

(emphasis supplied)

Noticeably, Olympic Mines & Development Corporation (Olympic) did not pay any amount with respect to the number of shares they subscribed to in the corporation, which is quite absurd since Olympic is the major stockholder in MMC. MBMI’s 2006 Annual Report sheds light on why Olympic failed to pay any amount with respect to the number of shares it subscribed to. It states that Olympic entered into joint venture agreements with several Philippine companies, wherein it holds directly and indirectly a 60% effective equity interest in the Olympic Properties.46 Quoting the said Annual report:

On September 9, 2004, the Company and Olympic Mines & Development Corporation ("Olympic") entered into a series of agreements including a Property Purchase and Development Agreement (the Transaction Documents) with respect to three nickel laterite properties in Palawan, Philippines (the "Olympic Properties"). The Transaction Documents effectively establish a joint venture between the Company and Olympic for purposes of developing the Olympic Properties. The Company holds directly and indirectly an initial 60% interest in the joint venture. Under certain circumstances and upon achieving certain milestones, the Company may earn up to a 100% interest, subject to a 2.5% net revenue royalty.47 (emphasis supplied)

Thus, as demonstrated in this first corporation, McArthur, when it is "grandfathered," company layering was utilized by MBMI to gain control over McArthur. It is apparent that MBMI has more than 60% or more equity interest in McArthur, making the latter a foreign corporation.

Tesoro Mining and Development, Inc.

Tesoro, which acquired its MPSA application from SMMI, has a capital stock of ten million pesos (PhP 10,000,000) divided into ten thousand (10,000) common shares at PhP 1,000 per share, as demonstrated below:

[[reference = http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pdf]]

Name Nationality Number of

Shares

Amount

Subscribed

Amount Paid

Sara Marie

Mining, Inc.

Filipino 5,997 PhP 5,997,000.00 PhP 825,000.00

MBMI

Resources, Inc.

Canadian 3,998 PhP 3,998,000.00 PhP 1,878,174.60

Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernando B.

Esguerra

Filipino 1 PhP 1,000.00 PhP 1,000.00

Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00

Agcaoili

Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP 10,000,000.00 PhP 2,708,174.60

(emphasis supplied)

Except for the name "Sara Marie Mining, Inc.," the table above shows exactly the same figures as the corporate structure of petitioner McArthur, down to the last centavo. All the other shareholders are the same: MBMI, Salazar, Esguerra, Agcaoili, Mason and Cawkell. The figures under "Nationality," "Number of Shares," "Amount Subscribed," and "Amount Paid" are exactly the same. Delving deeper, we scrutinize SMMI’s corporate structure:

Sara Marie Mining, Inc.

[[reference = http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pdf]]

Name Nationality Number of

Shares

Amount

Subscribed

Amount Paid

Olympic Mines &

Development

Corp.

Filipino 6,663 PhP 6,663,000.00 PhP 0

MBMI Resources,

Inc.

Canadian 3,331 PhP 3,331,000.00 PhP 2,794,000.00

Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00

Esguerra

Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Emmanuel G.

Hernando

Filipino 1 PhP 1,000.00 PhP 1,000.00

Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP 10,000,000.00 PhP 2,809,900.00

(emphasis supplied)

After subsequently studying SMMI’s corporate structure, it is not farfetched for us to spot the glaring similarity between SMMI and MMC’s corporate structure. Again, the presence of identical stockholders, namely: Olympic, MBMI, Amanti Limson (Limson), Esguerra, Salazar, Hernando, Mason and Cawkell. The figures under the headings "Nationality," "Number of Shares," "Amount Subscribed," and "Amount Paid" are exactly the same except for the amount paid by MBMI which now reflects the amount of two million seven hundred ninety four thousand pesos (PhP 2,794,000). Oddly, the total value of the amount paid is two million eight hundred nine thousand nine hundred pesos (PhP 2,809,900).

Accordingly, after "grandfathering" petitioner Tesoro and factoring in Olympic’s participation in SMMI’s corporate structure, it is clear that MBMI is in control of Tesoro and owns 60% or more equity interest in Tesoro. This makes petitioner Tesoro a non-Filipino corporation and, thus, disqualifies it to participate in the exploitation, utilization and development of our natural resources.

Narra Nickel Mining and Development Corporation

Moving on to the last petitioner, Narra, which is the transferee and assignee of PLMDC’s MPSA application, whose corporate structure’s arrangement is similar to that of the first two petitioners discussed. The capital stock of Narra is ten million pesos (PhP 10,000,000), which is divided into ten thousand common shares (10,000) at one thousand pesos (PhP 1,000) per share, shown as follows:

[[reference = http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pdf]]

Name Nationality Number of

Shares

Amount

Subscribed

Amount Paid

Patricia Louise

Mining &

Development

Corp.

Filipino 5,997 PhP 5,997,000.00 PhP 1,677,000.00

MBMI

Resources, Inc.

Canadian 3,998 PhP 3,996,000.00 PhP 1,116,000.00

Higinio C.

Mendoza, Jr.

Filipino 1 PhP 1,000.00 PhP 1,000.00

Henry E.

Fernandez

Filipino 1 PhP 1,000.00 PhP 1,000.00

Manuel A.

Agcaoili

Filipino 1 PhP 1,000.00 PhP 1,000.00

Ma. Elena A.

Bocalan

Filipino 1 PhP 1,000.00 PhP 1,000.00

Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1,000.00

Robert L.

McCurdy

American 1 PhP 1,000.00 PhP 1,000.00

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP 10,000,000.00 PhP 2,800,000.00(emphasis supplied)

Again, MBMI, along with other nominal stockholders, i.e., Mason, Agcaoili and Esguerra, is present in this corporate structure.

Patricia Louise Mining & Development Corporation

Using the grandfather method, we further look and examine PLMDC’s corporate structure:

Name Nationality

Number of Shares

Amount Subscribed

Amount Paid

Palawan Alpha South Resources Development Corporation

Filipino 6,596 PhP 6,596,000.00

PhP 0

MBMI Resources,

Inc.

Canadian 3,396 PhP 3,396,000.00

PhP 2,796,000.00

Higinio C. Mendoza, Jr. Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernando B. Esguerra Filipino 1 PhP 1,000.00 PhP 1,000.00

Henry E. Fernandez Filipino 1 PhP 1,000.00 PhP 1,000.00

Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00

Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1,000.00

Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP 10,000,000.00

PhP 2,708,174.60(emphasis supplied)

Yet again, the usual players in petitioners’ corporate structures are present. Similarly, the amount of money paid by the 2nd tier majority stock holder, in this case, Palawan Alpha South Resources and Development Corp. (PASRDC), is zero.

Studying MBMI’s Summary of Significant Accounting Policies dated October 31, 2005 explains the reason behind the intricate corporate layering that MBMI immersed itself in:

JOINT VENTURES The Company’s ownership interests in various mining ventures engaged in the acquisition, exploration and development of mineral properties in the Philippines is described as follows:

(a) Olympic Group

The Philippine companies holding the Olympic Property, and the ownership and interests therein, are as follows:

Olympic- Philippines (the "Olympic Group")

Sara Marie Mining Properties Ltd. ("Sara Marie") 33.3%

Tesoro Mining & Development, Inc. (Tesoro) 60.0%

Pursuant to the Olympic joint venture agreement the Company holds directly and indirectly an effective equity interest in the Olympic Property of 60.0%. Pursuant to a shareholders’ agreement, the Company exercises joint control over the companies in the Olympic Group.

(b) Alpha Group

The Philippine companies holding the Alpha Property, and the ownership interests therein, are as follows:

Alpha- Philippines (the "Alpha Group")

Patricia Louise Mining Development Inc. ("Patricia") 34.0%

Narra Nickel Mining & Development Corporation (Narra) 60.4%

Under a joint venture agreement the Company holds directly and indirectly an effective equity interest in the Alpha Property of 60.4%. Pursuant to a shareholders’ agreement, the Company exercises joint control over the companies in the Alpha Group.48 (emphasis supplied)

Concluding from the above-stated facts, it is quite safe to say that petitioners McArthur, Tesoro and Narra are not Filipino since MBMI, a 100% Canadian corporation, owns 60% or more of their equity interests. Such conclusion is derived from grandfathering petitioners’ corporate owners, namely: MMI, SMMI and PLMDC. Going further and adding to the picture, MBMI’s Summary of Significant Accounting Policies statement– –regarding the "joint venture" agreements that it entered into with the "Olympic" and "Alpha" groups––involves SMMI, Tesoro, PLMDC and Narra. Noticeably, the ownership of the "layered" corporations boils down to MBMI, Olympic or corporations under the "Alpha" group wherein MBMI has joint venture agreements with, practically exercising majority control over the corporations mentioned. In effect, whether looking at the capital structure or the underlying relationships between and among the corporations, petitioners are NOT Filipino nationals and must be considered foreign since 60% or more of their capital stocks or equity interests are owned by MBMI.

Application of the res inter alios acta rule

Petitioners question the CA’s use of the exception of the res inter alios acta or the "admission by co-partner or agent" rule and "admission by privies" under the Rules of Court in the instant case, by pointing out that statements made by MBMI should not be admitted in this case since it is not a party to the case and that it is not a "partner" of petitioners.

Secs. 29 and 31, Rule 130 of the Revised Rules of Court provide:

Sec. 29. Admission by co-partner or agent.- The act or declaration of a partner or agent of the party within the scope of his authority and during the existence of the partnership or agency, may be given in evidence against such party after the partnership or agency is shown by evidence other than such act or declaration itself. The same rule applies to the act or declaration of a joint owner, joint debtor, or other person jointly interested with the party.

Sec. 31. Admission by privies.- Where one derives title to property from another, the act, declaration, or omission of the latter, while holding the title, in relation to the property, is evidence against the former.

Petitioners claim that before the above-mentioned Rule can be applied to a case, "the partnership relation must be shown, and that proof of the fact must be made by evidence other than the admission itself."49 Thus, petitioners assert that the CA erred in finding that a partnership relationship exists between them and MBMI because, in fact, no such partnership exists.

Partnerships vs. joint venture agreements

Petitioners claim that the CA erred in applying Sec. 29, Rule 130 of the Rules by stating that "by entering into a joint venture, MBMI have a joint interest" with Narra, Tesoro and McArthur. They challenged the conclusion of the CA which pertains to the close characteristics of

"partnerships" and "joint venture agreements." Further, they asserted that before this particular partnership can be formed, it should have been formally reduced into writing since the capital involved is more than three thousand pesos (PhP 3,000). Being that there is no evidence of written agreement to form a partnership between petitioners and MBMI, no partnership was created.

We disagree.

A partnership is defined as two or more persons who bind themselves to contribute money, property, or industry to a common fund with the intention of dividing the profits among themselves.50 On the other hand, joint ventures have been deemed to be "akin" to partnerships since it is difficult to distinguish between joint ventures and partnerships. Thus:

[T]he relations of the parties to a joint venture and the nature of their association are so similar and closely akin to a partnership that it is ordinarily held that their rights, duties, and liabilities are to be tested by rules which are closely analogous to and substantially the same, if not exactly the same, as those which govern partnership. In fact, it has been said that the trend in the law has been to blur the distinctions between a partnership and a joint venture, very little law being found applicable to one that does not apply to the other.51

Though some claim that partnerships and joint ventures are totally different animals, there are very few rules that differentiate one from the other; thus, joint ventures are deemed "akin" or similar to a partnership. In fact, in joint venture agreements, rules and legal incidents governing partnerships are applied.52

Accordingly, culled from the incidents and records of this case, it can be assumed that the relationships entered between and among petitioners and MBMI are no simple "joint venture agreements." As a rule, corporations are prohibited from entering into partnership agreements; consequently, corporations enter into joint venture agreements with other corporations or partnerships for certain transactions in order to form "pseudo partnerships."

Obviously, as the intricate web of "ventures" entered into by and among petitioners and MBMI was executed to circumvent the legal prohibition against corporations entering into partnerships, then the relationship created should be deemed as "partnerships," and the laws on partnership should be applied. Thus, a joint venture agreement between and among corporations may be seen as similar to partnerships since the elements of partnership are present.

Considering that the relationships found between petitioners and MBMI are considered to be partnerships, then the CA is justified in applying Sec. 29, Rule 130 of the Rules by stating that "by entering into a joint venture, MBMI have a joint interest" with Narra, Tesoro and McArthur.

Panel of Arbitrators’ jurisdiction

We affirm the ruling of the CA in declaring that the POA has jurisdiction over the instant case. The POA has jurisdiction to settle disputes over rights to mining areas which definitely involve the petitions filed by Redmont against petitioners Narra, McArthur and Tesoro. Redmont, by filing its petition against petitioners, is asserting the right of Filipinos over mining areas in the Philippines against alleged foreign-owned mining corporations. Such claim constitutes a "dispute" found in Sec. 77 of RA 7942:

Within thirty (30) days, after the submission of the case by the parties for the decision, the panel shall have exclusive and original jurisdiction to hear and decide the following:

(a) Disputes involving rights to mining areas

(b) Disputes involving mineral agreements or permits

We held in Celestial Nickel Mining Exploration Corporation v. Macroasia Corp.:53

The phrase "disputes involving rights to mining areas" refers to any adverse claim, protest, or opposition to an application for mineral agreement. The POA therefore has the jurisdiction to resolve any adverse claim, protest, or opposition to a pending application for a mineral agreement filed with the concerned Regional Office of the MGB. This is clear from Secs. 38 and 41 of the DENR AO 96-40, which provide:

Sec. 38.

x x x x

Within thirty (30) calendar days from the last date of publication/posting/radio announcements, the authorized officer(s) of the concerned office(s) shall issue a certification(s) that the publication/posting/radio announcement have been complied with. Any adverse claim, protest, opposition shall be filed directly, within thirty (30) calendar days from the last date of publication/posting/radio announcement, with the concerned Regional Office or through any concerned PENRO or CENRO for filing in the concerned Regional Office for purposes of its resolution by the Panel of Arbitrators pursuant to the provisions of this Act and these implementing rules and regulations. Upon final resolution of any adverse claim, protest or opposition, the Panel of Arbitrators shall likewise issue a certification to that effect within five (5) working days from the date of finality of resolution thereof. Where there is no adverse claim, protest or opposition, the Panel of Arbitrators shall likewise issue a Certification to that effect within five working days therefrom.

x x x x

No Mineral Agreement shall be approved unless the requirements under this Section are fully complied with and any adverse claim/protest/opposition is finally resolved by the Panel of Arbitrators.

Sec. 41.

x x x x

Within fifteen (15) working days form the receipt of the Certification issued by the Panel of Arbitrators as provided in Section 38 hereof, the concerned Regional Director shall initially evaluate the Mineral Agreement applications in areas outside Mineral reservations. He/She shall thereafter endorse his/her findings to the Bureau for further evaluation by the Director within fifteen (15) working days from receipt of forwarded documents. Thereafter, the Director shall endorse the same to the secretary for consideration/approval within fifteen working days from receipt of such endorsement.

In case of Mineral Agreement applications in areas with Mineral Reservations, within fifteen (15) working days from receipt of the Certification issued by the Panel of Arbitrators as provided for in Section 38 hereof, the same shall be evaluated and endorsed by the Director to the Secretary for consideration/approval within fifteen days from receipt of such endorsement. (emphasis supplied)

It has been made clear from the aforecited provisions that the "disputes involving rights to mining areas" under Sec. 77(a) specifically refer only to those disputes relative to the applications for a mineral agreement or conferment of mining rights.

The jurisdiction of the POA over adverse claims, protest, or oppositions to a mining right application is further elucidated by Secs. 219 and 43 of DENR AO 95-936, which read:

Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the provisions of Sections 28, 43 and 57 above, any adverse claim, protest or opposition specified in said sections may also be filed directly with the Panel of Arbitrators within the concerned periods for filing such claim, protest or opposition as specified in said Sections.

Sec. 43. Publication/Posting of Mineral Agreement.-

x x x x

The Regional Director or concerned Regional Director shall also cause the posting of the application on the bulletin boards of the Bureau, concerned Regional office(s) and in the concerned province(s) and municipality(ies), copy furnished the barangays where the proposed contract area is located once a week for two (2) consecutive weeks in a language generally understood in the locality. After forty-five (45) days from the last date of publication/posting has been made and no adverse claim, protest or opposition was filed within the said forty-five (45) days, the concerned offices shall issue a certification that publication/posting has been made and that no adverse claim, protest or opposition of whatever nature has been filed. On the other hand, if there be any adverse claim, protest or opposition, the same shall be filed within forty-five (45) days from the last date of publication/posting, with the Regional Offices concerned, or through the Department’s Community Environment and Natural Resources Officers (CENRO) or Provincial Environment and Natural Resources Officers (PENRO), to be filed at the Regional Office for resolution of the Panel of Arbitrators. However previously published valid and subsisting mining claims are exempted from posted/posting required under this Section.

No mineral agreement shall be approved unless the requirements under this section are fully complied with and any opposition/adverse claim is dealt with in writing by the Director and resolved by the Panel of Arbitrators. (Emphasis supplied.)

It has been made clear from the aforecited provisions that the "disputes involving rights to mining areas" under Sec. 77(a) specifically refer only to those disputes relative to the applications for a mineral agreement or conferment of mining rights.

The jurisdiction of the POA over adverse claims, protest, or oppositions to a mining right application is further elucidated by Secs. 219 and 43 of DENRO AO 95-936, which reads:

Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the provisions of Sections 28, 43 and 57 above, any adverse claim, protest or opposition specified in said sections may also be

filed directly with the Panel of Arbitrators within the concerned periods for filing such claim, protest or opposition as specified in said Sections.

Sec. 43. Publication/Posting of Mineral Agreement Application.-

x x x x

The Regional Director or concerned Regional Director shall also cause the posting of the application on the bulletin boards of the Bureau, concerned Regional office(s) and in the concerned province(s) and municipality(ies), copy furnished the barangays where the proposed contract area is located once a week for two (2) consecutive weeks in a language generally understood in the locality. After forty-five (45) days from the last date of publication/posting has been made and no adverse claim, protest or opposition was filed within the said forty-five (45) days, the concerned offices shall issue a certification that publication/posting has been made and that no adverse claim, protest or opposition of whatever nature has been filed. On the other hand, if there be any adverse claim, protest or opposition, the same shall be filed within forty-five (45) days from the last date of publication/posting, with the Regional offices concerned, or through the Department’s Community Environment and Natural Resources Officers (CENRO) or Provincial Environment and Natural Resources Officers (PENRO), to be filed at the Regional Office for resolution of the Panel of Arbitrators. However, previously published valid and subsisting mining claims are exempted from posted/posting required under this Section.

No mineral agreement shall be approved unless the requirements under this section are fully complied with and any opposition/adverse claim is dealt with in writing by the Director and resolved by the Panel of Arbitrators. (Emphasis supplied.)

These provisions lead us to conclude that the power of the POA to resolve any adverse claim, opposition, or protest relative to mining rights under Sec. 77(a) of RA 7942 is confined only to adverse claims, conflicts and oppositions relating to applications for the grant of mineral rights.

POA’s jurisdiction is confined only to resolutions of such adverse claims, conflicts and oppositions and it has no authority to approve or reject said applications. Such power is vested in the DENR Secretary upon recommendation of the MGB Director. Clearly, POA’s jurisdiction over "disputes involving rights to mining areas" has nothing to do with the cancellation of existing mineral agreements. (emphasis ours)

Accordingly, as we enunciated in Celestial, the POA unquestionably has jurisdiction to resolve disputes over MPSA applications subject of Redmont’s petitions. However, said jurisdiction does not include either the approval or rejection of the MPSA applications, which is vested only upon the Secretary of the DENR. Thus, the finding of the POA, with respect to the rejection of petitioners’ MPSA applications being that they are foreign corporation, is valid.

Justice Marvic Mario Victor F. Leonen, in his Dissent, asserts that it is the regular courts, not the POA, that has jurisdiction over the MPSA applications of petitioners.

This postulation is incorrect.

It is basic that the jurisdiction of the court is determined by the statute in force at the time of the commencement of the action.54

Sec. 19, Batas Pambansa Blg. 129 or "The Judiciary Reorganization

Act of 1980" reads:

Sec. 19. Jurisdiction in Civil Cases.—Regional Trial Courts shall exercise exclusive original jurisdiction:

1. In all civil actions in which the subject of the litigation is incapable of pecuniary estimation.

On the other hand, the jurisdiction of POA is unequivocal from Sec. 77 of RA 7942:

Section 77. Panel of Arbitrators.—

x x x Within thirty (30) days, after the submission of the case by the parties for the decision, the panel shall have exclusive and original jurisdiction to hear and decide the following:

(c) Disputes involving rights to mining areas

(d) Disputes involving mineral agreements or permits

It is clear that POA has exclusive and original jurisdiction over any and all disputes involving rights to mining areas. One such dispute is an MPSA application to which an adverse claim, protest or opposition is filed by another interested applicant.1âwphi1 In the case at bar, the dispute arose or originated from MPSA applications where petitioners are asserting their rights to mining areas subject of their respective MPSA applications. Since respondent filed 3 separate petitions for the denial of said applications, then a controversy has developed between the parties and it is POA’s jurisdiction to resolve said disputes.

Moreover, the jurisdiction of the RTC involves civil actions while what petitioners filed with the DENR Regional Office or any concerned DENRE or CENRO are MPSA applications. Thus POA has jurisdiction.

Furthermore, the POA has jurisdiction over the MPSA applications under the doctrine of primary jurisdiction. Euro-med Laboratories v. Province of Batangas55 elucidates:

The doctrine of primary jurisdiction holds that if a case is such that its determination requires the expertise, specialized training and knowledge of an administrative body, relief must first be obtained in an administrative proceeding before resort to the courts is had even if the matter may well be within their proper jurisdiction.

Whatever may be the decision of the POA will eventually reach the court system via a resort to the CA and to this Court as a last recourse.

Selling of MBMI’s shares to DMCI

As stated before, petitioners’ Manifestation and Submission dated October 19, 2012 would want us to declare the instant petition moot and academic due to the transfer and conveyance of all the shareholdings and interests of MBMI to DMCI, a corporation duly organized and existing under Philippine laws and is at least 60% Philippine-owned.56 Petitioners reasoned that they now cannot be considered as foreign-owned; the transfer of their shares supposedly cured the "defect" of their previous nationality. They claimed that their current FTAA contract with the State should stand since

"even wholly-owned foreign corporations can enter into an FTAA with the State."57Petitioners stress that there should no longer be any issue left as regards their qualification to enter into FTAA contracts since they are qualified to engage in mining activities in the Philippines. Thus, whether the "grandfather rule" or the "control test" is used, the nationalities of petitioners cannot be doubted since it would pass both tests.

The sale of the MBMI shareholdings to DMCI does not have any bearing in the instant case and said fact should be disregarded. The manifestation can no longer be considered by us since it is being tackled in G.R. No. 202877 pending before this Court.1âwphi1 Thus, the question of whether petitioners, allegedly a Philippine-owned corporation due to the sale of MBMI's shareholdings to DMCI, are allowed to enter into FTAAs with the State is a non-issue in this case.

In ending, the "control test" is still the prevailing mode of determining whether or not a corporation is a Filipino corporation, within the ambit of Sec. 2, Art. II of the 1987 Constitution, entitled to undertake the exploration, development and utilization of the natural resources of the Philippines. When in the mind of the Court there is doubt, based on the attendant facts and circumstances of the case, in the 60-40 Filipino-equity ownership in the corporation, then it may apply the "grandfather rule."

WHEREFORE, premises considered, the instant petition is DENIED. The assailed Court of Appeals Decision dated October 1, 2010 and Resolution dated February 15, 2011 are hereby AFFIRMED.

SO ORDERED.

CASE 2012-0072: HEIRS OF WILSON P. GAMBOA, PETITIONERS, VS. FINANCE SECRETARY MARGARITO B. TEVES, FINANCE UNDERSECRETARY JOHN P. SEVILLA, AND COMMISSIONER RICARDO ABCEDE OF THE PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT (PCGG) IN THEIR CAPACITIES AS CHAIR AND MEMBERS, RESPECTIVELY, OF THE PRIVATIZATION COUNCIL, CHAIRMAN ANTHONI SALIM OF FIRST PACIFIC CO., LTD. IN HIS CAPACITY AS DIRECTOR OF METRO PACIFIC ASSET HOLDINGS INC., CHAIRMAN MANUEL V. PANGILINAN OF PHILIPPINE LONG DISTANCE TELEPHONE COMPANY (PLDT) IN HIS CAPACITY AS MANAGING DIRECTOR OF FIRST PACIFIC CO., LTD., PRESIDENT NAPOLEON L. NAZARENO OF PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, CHAIR FE BARIN OF THE SECURITIES AND EXCHANGE COMMISSION, AND PRESIDENT FRANCIS LIM OF THE PHILIPPINE STOCK EXCHANGE, RESPONDENTS. (G.R. NO. 176579, 09 OCTOBER 2012, CARPIO, J.) SUBJECT/S: DEFINITION OF CAPITAL IN CORPORATION LAW; THE GODFATHER RULE (BRIEF TITLE: HEIRS OF GAMBOA VS. TEVES)

November 4, 2012

CASE 2012-0072: HEIRS OF WILSON P. GAMBOA, PETITIONERS, VS. FINANCE SECRETARY MARGARITO B. TEVES, FINANCE UNDERSECRETARY JOHN P. SEVILLA, AND COMMISSIONER RICARDO ABCEDE OF THE PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT (PCGG) IN THEIR CAPACITIES AS CHAIR AND MEMBERS, RESPECTIVELY, OF THE PRIVATIZATION COUNCIL, CHAIRMAN ANTHONI SALIM OF FIRST PACIFIC CO., LTD. IN HIS CAPACITY AS DIRECTOR OF METRO PACIFIC ASSET HOLDINGS INC., CHAIRMAN MANUEL V. PANGILINAN OF PHILIPPINE LONG DISTANCE TELEPHONE COMPANY (PLDT) IN HIS CAPACITY AS MANAGING DIRECTOR OF FIRST PACIFIC CO., LTD., PRESIDENT NAPOLEON L. NAZARENO OF PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, CHAIR FE BARIN OF THE SECURITIES AND EXCHANGE COMMISSION, AND PRESIDENT FRANCIS LIM OF THE PHILIPPINE STOCK EXCHANGE, RESPONDENTS. (G.R. NO. 176579, 09 OCTOBER 2012, CARPIO, J.) SUBJECT/S: DEFINITION OF CAPITAL IN CORPORATION LAW; THE GODFATHER RULE (BRIEF TITLE: HEIRS OF GAMBOA VS. TEVES)

=====================

DISPOSITIVE:

WHEREFORE, we DENY the motions for reconsideration WITH FINALITY. No further pleadings shall be entertained.

SO ORDERED.

=====================

SUBJECTS/DOCTRINES/DIGEST:

SUPPOSE A PETITION FOR REVIEW IS PROCEDURALLY DEFECTIVE. WILL THE SUPREME STILL ENTERTAIN THE PETITION?

YES, IF THE MAIN ISSUE IN THE CASE IS OF TRANSCENDENTAL IMPORTANCE.

In Luzon Stevedoring Corp. v. Anti-Dummy Board,8 the Court deemed it wise and expedient to resolve the case although the petition for declaratory relief could be outrightly dismissed for being procedurally defective. There, appellant admittedly had already committed a breach of the Public Service Act in relation to the Anti-Dummy Law since it had been employing non-American aliens long before the decision in a prior similar case. However, the main issue in Luzon Stevedoring was of transcendental importance, involving the exercise or enjoyment of rights, franchises, privileges, properties and businesses which only Filipinos and qualified corporations could exercise or enjoy under the Constitution and the statutes.

XXXXXXXXXXXXXXXXXXXXXXX

WHAT IS TRANSCENDENTAL IN THE CASE AT HAND AND WHY?

THE INTERPRETATION OF THE TERM “CAPITAL” IN SECTION 11, ARTICLE XII OF THE CONSTITUTION HAS FAR-REACHING IMPLICATIONS TO THE NATIONAL ECONOMY. IN FACT, A RESOLUTION OF THIS ISSUE WILL DETERMINE WHETHER FILIPINOS ARE MASTERS, OR SECOND-CLASS CITIZENS, IN THEIR OWN COUNTRY. WHAT IS AT STAKE HERE IS WHETHER FILIPINOS OR FOREIGNERS WILL HAVE EFFECTIVE CONTROL OF THE PHILIPPINE NATIONAL ECONOMY.

XXXXXXXXXXXXXXXXXXXXXXX

PANGILINAN ET AL CONTEND THAT THE TERM “CAPITAL” IN SECTION 11, ARTICLE XII OF THE CONSTITUTION HAS LONG BEEN SETTLED AND DEFINED TO REFER TO THE TOTAL OUTSTANDING SHARES OF STOCK, WHETHER VOTING OR NON-VOTING. IS THEIR CONTENTION CORRECT?

NO. THE SUPREME COURT HAS NEVER YET INTERPRETED THE MEANING OF “CAPITAL” IN THE CONTEXT OF SECTION 11, ARTICLE XII OF THE CONSTITUTION.

For more than 75 years since the 1935 Constitution, the Court has not interpreted or defined the term “capital” found in various economic provisions of the 1935, 1973 and 1987 Constitutions. There has never been a judicial precedent interpreting the term “capital” in the 1935, 1973 and 1987 Constitutions, until now. Hence, it is patently wrong and utterly baseless to claim that the Court in defining the term “capital” in its 28 June 2011 Decision modified, reversed, or set aside the purported long-standing

definition of the term “capital,” which supposedly refers to the total outstanding shares of stock, whether voting or non-voting.

……………………

To repeat, until the present case there has never been a Court ruling categorically defining the term “capital” found in the various economic provisions of the 1935, 1973 and 1987 Philippine Constitutions.

XXXXXXXXXXXXXXXXXX

PANGILINAN ET AL CONTENDS THAT SEC AND DOJ HAVE ALWAYS INTERPRETED CAPITAL TO REFER TO THE TOTAL OUTSTANDING SHARES OF STOCK WHETHER VOTING OR NOT. IS THEIR CONTENTION CORRECT?

NO. DOJ AND SEC HAVE ISSUED CONFLICTING INTERPRETATIONS.

. . . . .

The opinions of the SEC, as well as of the Department of Justice (DOJ), on the definition of the term “capital” as referring to both voting and non-voting shares (combined total of common and preferred shares) are, in the first place, conflicting and inconsistent.

XXXXXXXXXXXXXXX

IS THERE ANY DOJ OPINION WHICH IS CONSISTENT WITH THE SC RULING, BEING NOW CONTESTED, ON THE MATTER?

YES IN DOJ OPINION NO. 130 DATED 07 OCTOBER 1985, DOJ RULED THAT THE RESULTING OWNERSHIP STRUCTURE OF THE SUBJECT CORPORATION WOULD BE UNCONSTITUTIONAL BECAUSE 60% OF THE VOTING STOCK WOULD BE OWNED BY JAPANESE WHILE FILIPINOS WOULD OWN ONLY 40% OF THE VOTING STOCK, ALTHOUGH WHEN THE NON-VOTING STOCK IS ADDED, FILIPINOS WOULD OWN 60% OF THE COMBINED VOTING AND NON-VOTING STOCK.

In DOJ Opinion No. 130, s. 1985,10 dated 7 October 1985, the scope of the term “capital” in Section 9, Article XIV of the 1973 Constitution was raised, that is, whether the term “capital” includes “both preferred and common stocks.” The issue was raised in relation to a stock-swap transaction between a Filipino and a Japanese corporation, both stockholders of a domestic corporation that owned lands in the Philippines. Then Minister of Justice Estelito P. Mendoza ruled that the resulting ownership structure of the corporation would be unconstitutional because 60% of the voting stock would be owned by Japanese while Filipinos would own only 40% of the voting stock, although when the non-voting stock is added, Filipinos would own 60% of the combined voting and non-voting stock.

………………

In short, Minister Mendoza categorically rejected the theory that the term “capital” in Section 9, Article XIV of the 1973 Constitution includes “both preferred and common stocks” treated as the same class of shares regardless of differences in voting rights and privileges. Minister Mendoza stressed that the 60-40 ownership requirement in favor of Filipino citizens in the Constitution is not complied with unless the corporation “satisfies the criterion of beneficial ownership” and that in applying the same “the primordial consideration is situs of control.”

XXXXXXXXXXXXX

IS THERE ANY SEC OPINION WHICH IS CONSISTENT WITH THE SC RULING, BEING NOW CONTESTED, ON THE MATTER?

YES. IN OPINION NO. 23-10 DATED18 AUGUST 2012, SEC APPLIED THE VOTING CONTROL TEST, THAT IS USING ONLY THE VOTING STOCK TO DETERMINE WHETHER A CORPORATION IS A PHILIPPINE NATIONAL.

On the other hand, in Opinion No. 23-10 dated 18 August 2010, addressed to Castillo Laman Tan Pantaleon & San Jose, then SEC General Counsel Vernette G. Umali-Paco applied the Voting Control Test, that is, using only the voting stock to determine whether a corporation is a Philippine national.

XXXXXXXXXXXXXXXXXXX

WILL THE OPINION ISSUED BY A SEC LEGAL OFFICER OR A SEC COMMISSIONER ESTABLISH PRECEDENCE?

NO. THEIR OPINION APPLIES ONLY TO A PARTICULAR CASE. IT IS THE OPINION OF THE WHOLE COMMISSION THAT ESTABLISHES A PRECEDENCE.

XXXXXXXXXXXXXX

The opinions issued by SEC legal officers do not have the force and effect of SEC rules and regulations because only the SEC en banc can adopt rules and regulations. As expressly provided in Section 4.6 of the Securities Regulation Code,12 the SEC cannot delegate to any of its individual Commissioner or staff the power to adopt any rule or regulation. Further, under Section 5.1 of the same Code, it is the SEC as a collegial body, and not any of its legal officers, that is empowered to issue opinions and approve rules and regulations.

XXXXXXXXXXXXXXXXXXXX

IS THE GRANDFATHER RULE APPLICABLE TO THIS CASE?

YES. EVEN SEC APPLIED IT.

Significantly, the SEC en banc, which is the collegial body statutorily empowered to issue rules and opinions on behalf of the SEC, has adopted the 60-40 ownership requirement in favor of Filipino citizens mandated by the Constitution for certain economic activities. This prevailing SEC ruling, which the SEC correctly adopted to thwart any circumvention of the required Filipino “ownership and control,” is laid down in the 25 March 2010 SEC en banc ruling in Redmont Consolidated Mines, Corp. v. McArthur Mining, Inc., et al.,15 to wit:

The avowed purpose of the Constitution is to place in the hands of Filipinos the exploitation of our natural resources. Necessarily, therefore, the Rule interpreting the constitutional provision should not diminish that right through the legal fiction of corporate ownership and control. But the constitutional provision, as interpreted and practiced via the 1967 SEC Rules, has favored foreigners contrary to the command of the Constitution. Hence, the Grandfather Rule must be applied to accurately determine the actual participation, both direct and indirect, of foreigners in a corporation engaged in a nationalized activity or business.

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WHAT IS THE GRANDFATHER RULE?

COMPLIANCE WITH THE CONSTITUTIONAL LIMITATION(S) ON ENGAGING IN NATIONALIZED ACTIVITIES MUST BE DETERMINED BY ASCERTAINING IF 60% OF THE INVESTING CORPORATION’S OUTSTANDING CAPITAL STOCK IS OWNED BY “FILIPINO CITIZENS”, OR AS INTERPRETED, BY NATURAL

OR INDIVIDUAL FILIPINO CITIZENS. IF SUCH INVESTING CORPORATION IS IN TURN OWNED TO SOME EXTENT BY ANOTHER INVESTING CORPORATION, THE SAME PROCESS MUST BE OBSERVED. ONE MUST NOT STOP UNTIL THE CITIZENSHIPS OF THE INDIVIDUAL OR NATURAL STOCKHOLDERS OF LAYER AFTER LAYER OF INVESTING CORPORATIONS HAVE BEEN ESTABLISHED.

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WHAT WAS THE MAIN RULING IN THE 28 JUNE 2011 DECISION OF THE SC REGARDING THIS CASE?

THAT THE 60-40 OWNERSHIP REQUIREMENT IN FAVOR OF FILIPINO CITIZENS IN THE CONSTITUTION TO ENGAGE IN CERTAIN ECONOMIC ACTIVITIES APPLIES NOT ONLY TO VOTING CONTROL OF THE CORPORATION, BUT ALSO TO THE BENEFICIAL OWNERSHIP OF THE CORPORATION. MERE LEGAL TITLE IS INSUFFICIENT TO MEET THE 60 PERCENT FILIPINO OWNED “CAPITAL” REQUIRED IN THE CONSTITUTION. FULL BENEFICIAL OWNERSHIP OF 60 PERCENT OF THE OUTSTANDING CAPITAL STOCK, COUPLED WITH 60 PERCENT OF THE VOTING RIGHTS, IS REQUIRED. THE LEGAL AND BENEFICIAL OWNERSHIP OF 60 PERCENT OF THE OUTSTANDING CAPITAL STOCK MUST REST IN THE HANDS OF FILIPINO NATIONALS IN ACCORDANCE WITH THE CONSTITUTIONAL MANDATE. OTHERWISE, THE CORPORATION IS “CONSIDERED AS NON-PHILIPPINE NATIONAL[S]. BOTH THE VOTING CONTROL TEST AND THE BENEFICIAL OWNERSHIP TEST MUST BE APPLIED TO DETERMINE WHETHER A CORPORATION IS A “PHILIPPINE NATIONAL.”

I. THE FACTS

This is a petition to nullify the sale of shares of stock of Philippine Telecommunications Investment Corporation (PTIC) by the government of the Republic of the Philippines, acting through the Inter-Agency Privatization Council (IPC), to Metro Pacific Assets Holdings, Inc. (MPAH), an affiliate of First Pacific Company Limited (First Pacific), a Hong Kong-based investment management and holding company and a shareholder of the Philippine Long Distance Telephone Company (PLDT).

The petitioner questioned the sale on the ground that it also involved an indirect sale of 12 million shares (or about 6.3 percent of the outstanding common shares) of PLDT owned by PTIC to First Pacific. With the this sale, First Pacific’s common shareholdings in PLDT increased from 30.7 percent to 37 percent, thereby increasing the total common shareholdings of foreigners in PLDT to about 81.47%. This, according to the petitioner, violates Section 11, Article XII of the 1987 Philippine Constitution which limits foreign ownership of the capital of a public utility to not more than 40%.

II. THE ISSUE

Does the term “capital” in Section 11, Article XII of the Constitution refer to the total common shares only, or to the total outstanding capital stock (combined total of common and non-voting preferred shares) of PLDT, a public utility?

III. THE RULING

[The Court partly granted the petition and held that the term “capital” in Section 11, Article XII of the Constitution refers only to shares of stock entitled to vote in the election of directors of a public utility, or in the instant case, to the total common shares of PLDT.]

Section 11, Article XII (National Economy and Patrimony) of the 1987 Constitution mandates the Filipinization of public utilities, to wit:

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

The term “capital” in Section 11, Article XII of the Constitution refers only to shares of stock entitled to vote in the election of directors, and thus in the present case only to common shares, and not to the total outstanding capital stock comprising both common and non-voting preferred shares [of PLDT].

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Indisputably, one of the rights of a stockholder is the right to participate in the control or management of the corporation. This is exercised through his vote in the election of directors because it is the board of directors that controls or manages the corporation. In the absence of provisions in the articles of incorporation denying voting rights to preferred shares, preferred shares have the same voting rights as common shares. However, preferred shareholders are often excluded from any control, that is, deprived of the right to vote in the election of directors and on other matters, on the theory that the preferred shareholders are merely investors in the corporation for income in the same manner as bondholders. xxx.

Considering that common shares have voting rights which translate to control, as opposed to preferred shares which usually have no voting rights, the term “capital” in Section 11, Article XII of the Constitution refers only to common shares. However, if the preferred shares also have the right to vote in the election of directors, then the term “capital” shall include such preferred shares because the right to participate in the control or management of the corporation is exercised through the right to vote in the election of directors. In short, the term “capital” in Section 11, Article XII of the Constitution refers only to shares of stock that can vote in the election of directors.

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Mere legal title is insufficient to meet the 60 percent Filipino-owned “capital” required in the Constitution. Full beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60 percent of the voting rights, is required. The legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the hands of Filipino nationals in accordance with the constitutional mandate. Otherwise, the corporation is “considered as non-Philippine national[s].”

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To construe broadly the term “capital” as the total outstanding capital stock, including both common and non-voting preferred shares, grossly contravenes the intent and letter of the Constitution that the “State shall develop a self-reliant and independent national economy effectively controlled by Filipinos.” A broad definition unjustifiably disregards who owns the all-important voting stock, which necessarily equates to control of the public utility.

We shall illustrate the glaring anomaly in giving a broad definition to the term “capital.” Let us assume that a corporation has 100 common shares owned by foreigners and 1,000,000 non-voting preferred shares owned by Filipinos, with both classes of share having a par value of one peso (P1.00) per share. Under the broad definition of the term “capital,” such corporation would be considered compliant with the 40 percent constitutional limit on foreign equity of public utilities since the overwhelming majority, or more than 99.999 percent, of the total outstanding capital stock is Filipino owned. This is obviously absurd.

In the example given, only the foreigners holding the common shares have voting rights in the election of directors, even if they hold only 100 shares. The foreigners, with a minuscule equity of less than 0.001 percent, exercise control over the public utility. On the other hand, the Filipinos, holding more than 99.999 percent of the equity, cannot vote in the election of directors and hence, have no control over the public utility. This starkly circumvents the intent of the framers of the Constitution, as well as the clear language of the Constitution, to place the control of public utilities in the hands of Filipinos. It also renders illusory the State policy of an independent national economy effectively controlled by Filipinos.

The example given is not theoretical but can be found in the real world, and in fact exists in the present case.

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[O]nly holders of common shares can vote in the election of directors [of PLDT], meaning only common shareholders exercise control over PLDT. Conversely, holders of preferred shares, who have no voting rights in the election of directors, do not have any control over PLDT. In fact, under PLDT’s Articles of Incorporation, holders of common shares have voting rights for all purposes, while holders of preferred shares have no voting right for any purpose whatsoever.

It must be stressed, and respondents do not dispute, that foreigners hold a majority of the common shares of PLDT. In fact, based on PLDT’s 2010 General Information Sheet (GIS), which is a document required to be submitted annually to the Securities and Exchange Commission, foreigners hold 120,046,690 common shares of PLDT whereas Filipinos hold only 66,750,622 common shares. In other words, foreigners hold 64.27% of the total number of PLDT’s common shares, while Filipinos hold only 35.73%. Since holding a majority of the common shares equates to control, it is clear that foreigners exercise control over PLDT. Such amount of control unmistakably exceeds the allowable 40 percent limit on foreign ownership of public utilities expressly mandated in Section 11, Article XII of the Constitution.

As shown in PLDT’s 2010 GIS, as submitted to the SEC, the par value of PLDT common shares is P5.00 per share, whereas the par value of preferred shares is P10.00 per share. In other words, preferred shares have twice the par value of common shares but cannot elect directors and have only 1/70 of

the dividends of common shares. Moreover, 99.44% of the preferred shares are owned by Filipinos while foreigners own only a minuscule 0.56% of the preferred shares. Worse, preferred shares constitute 77.85% of the authorized capital stock of PLDT while common shares constitute only 22.15%. This undeniably shows that beneficial interest in PLDT is not with the non-voting preferred shares but with the common shares, blatantly violating the constitutional requirement of 60 percent Filipino control and Filipino beneficial ownership in a public utility.

The legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the hands of Filipinos in accordance with the constitutional mandate. Full beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60 percent of the voting rights, is constitutionally required for the State’s grant of authority to operate a public utility. The undisputed fact that the PLDT preferred shares, 99.44% owned by Filipinos, are non-voting and earn only 1/70 of the dividends that PLDT common shares earn, grossly violates the constitutional requirement of 60 percent Filipino control and Filipino beneficial ownership of a public utility.

In short, Filipinos hold less than 60 percent of the voting stock, and earn less than 60 percent of the dividends, of PLDT. This directly contravenes the express command in Section 11, Article XII of the Constitution that “[n]o franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to x x x corporations x x x organized under the laws of the Philippines, at least sixty per centum of whose capital is owned by such citizens x x x.”

To repeat, (1) foreigners own 64.27% of the common shares of PLDT, which class of shares exercises the sole right to vote in the election of directors, and thus exercise control over PLDT; (2) Filipinos own only 35.73% of PLDT’s common shares, constituting a minority of the voting stock, and thus do not exercise control over PLDT; (3) preferred shares, 99.44% owned by Filipinos, have no voting rights; (4) preferred shares earn only 1/70 of the dividends that common shares earn; (5) preferred shares have twice the par value of common shares; and (6) preferred shares constitute 77.85% of the authorized capital stock of PLDT and common shares only 22.15%. This kind of ownership and control of a public utility is a mockery of the Constitution.

Incidentally, the fact that PLDT common shares with a par value of P5.00 have a current stock market value of P2,328.00 per share, while PLDT preferred shares with a par value of P10.00 per share have a current stock market value ranging from only P10.92 to P11.06 per share, is a glaring confirmation by the market that control and beneficial ownership of PLDT rest with the common shares, not with the preferred shares.

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WHEREFORE, we PARTLY GRANT the petition and rule that the term “capital” in Section 11, Article XII of the 1987 Constitution refers only to shares of stock entitled to vote in the election of directors, and thus in the present case only to common shares, and not to the total outstanding capital stock (common and non-voting preferred shares). Respondent Chairperson of the Securities and Exchange Commission is DIRECTED to apply this definition of the term “capital” in determining the extent of allowable foreign ownership in respondent Philippine Long Distance Telephone Company, and if there is a violation of Section 11, Article XII of the Constitution, to impose the appropriate sanctions under the law.