CORPO CASES III. Formation and Organization of a Private Corp

CORPO LAWCASES: III. Formation & Org. of Private Corp.

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G.R. No. 101897. March 5, 1993.LYCEUM OF THE PHILIPPINES, INC., petitioner, vs. COURT OF APPEALS, LYCEUM OF APARRI, LYCEUM OF CABAGAN, LYCEUM OF CAMALANIUGAN, INC., LYCEUM OF LALLO, INC., LYCEUM OF TUAO, INC., BUHI LYCEUM, CENTRAL LYCEUM OF CATANDUANES, LYCEUM OF SOUTHERN PHILIPPINES, LYCEUM OF EASTERN MINDANAO, INC. and WESTERN PANGASINAN LYCEUM, INC., respondents.

1. CORPORATION LAW; CORPORATE NAMES; REGISTRATION OF PROPOSED NAME WHICH IS IDENTICAL OR CONFUSINGLY SIMILAR TO THAT OF ANY EXISTING CORPORATION, PROHIBITED; CONFUSION AND DECEPTION EFFECTIVELY PRECLUDED BY THE APPENDING OF GEOGRAPHIC NAMES TO THE WORD "LYCEUM". — The Articles of Incorporation of a corporation must, among other things, set out the name of the corporation. Section 18 of the Corporation Code establishes a restrictive rule insofar as corporate names are concerned: "Section 18. Corporate name. — No corporate name may be allowed by the Securities an Exchange Commission if the proposed name is identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing laws. When a change in the corporate name is approved, the Commission shall issue an amended certificate of incorporation under the amended name." The policy underlying the prohibition in Section 18 against the registration of a corporate name which is "identical or deceptively or confusingly similar" to that of any existing corporation or which is "patently deceptive" or "patently confusing" or "contrary to existing laws," is the avoidance of fraud upon the public which would have occasion to deal with the entity concerned, the evasion of legal obligations and duties, and the reduction of difficulties of administration and supervision over corporations. We do not consider that the corporate names of private respondent institutions are "identical with, or deceptively or confusingly similar" to that of the petitioner institution. True enough, the corporate names of private respondent entities all carry the word "Lyceum" but confusion and deception are effectively precluded by the appending of geographic names to the word "Lyceum." Thus, we do not believe that the "Lyceum of Aparri" can be mistaken by the general public for the Lyceum of the Philippines, or that the "Lyceum of Camalaniugan" would be confused with the Lyceum of the Philippines.

2. ID.; ID.; DOCTRINE OF SECONDARY MEANING; USE OF WORD "LYCEUM," NOT ATTENDED WITH EXCLUSIVITY. — It is claimed, however, by petitioner that the word "Lyceum" has acquired a secondary meaning in relation to petitioner with the result that word, although originally a generic, has become appropriable by petitioner to the exclusion of other institutions like private respondents herein. The doctrine of secondary meaning originated in the field of trademark law. Its application has, however, been extended to corporate names sine the right to use a corporate name to the exclusion of others is based upon the same principle which underlies the right to use a particular trademark or tradename. In Philippine Nut Industry, Inc. v. Standard Brands, Inc., the doctrine of secondary meaning was elaborated in the following terms: " . . . a word or phrase originally incapable of exclusive appropriation with reference to


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an article on the market, because geographically or otherwise descriptive, might nevertheless have been used so long and so exclusively by one producer with reference to his article that, in that trade and to that branch of the purchasing public, the word or phrase has come to mean that the article was his product." The question which arises, therefore, is whether or not the use by petitioner of "Lyceum" in its corporate name has been for such length of time and with such exclusivity as to have become associated or identified with the petitioner institution in the mind of the general public (or at least that portion of the general public which has to do with schools). The Court of Appeals recognized this issue and answered it in the negative: "Under the doctrine of secondary meaning, a word or phrase originally incapable of exclusive appropriation with reference to an article in the market, because geographical or otherwise descriptive might nevertheless have been used so long and so exclusively by one producer with reference to this article that, in that trade and to that group of the purchasing public, the word or phrase has come to mean that the article was his produce (Ana Ang vs. Toribio Teodoro, 74 Phil. 56). This circumstance has been referred to as the distinctiveness into which the name or phrase has evolved through the substantial and exclusive use of the same for a considerable period of time. . . . No evidence was ever presented in the hearing before the Commission which sufficiently proved that the word 'Lyceum' has indeed acquired secondary meaning in favor of the appellant. If there was any of this kind, the same tend to prove only that the appellant had been using the disputed word for a long period of time. . . . In other words, while the appellant may have proved that it had been using the word 'Lyceum' for a long period of time, this fact alone did not amount to mean that the said word had acquired secondary meaning in its favor because the appellant failed to prove that it had been using the same word all by itself to the exclusion of others. More so, there was no evidence presented to prove that confusion will surely arise if the same word were to be used by other educational institutions. Consequently, the allegations of the appellant in its first two assigned errors must necessarily fail." We agree with the Court of Appeals. The number alone of the private respondents in the case at bar suggests strongly that petitioner's use of the word "Lyceum" has not been attended with the exclusivity essential for applicability of the doctrine of secondary meaning. Petitioner's use of the word "Lyceum" was not exclusive but was in truth shared with the Western Pangasinan Lyceum and a little later with other private respondent institutions which registered with the SEC using "Lyceum" as part of their corporation names. There may well be other schools using Lyceum or Liceo in their names, but not registered with the SEC because they have not adopted the corporate form of organization.

3. ID.; ID.; MUST BE EVALUATED IN THEIR ENTIRETY TO DETERMINE WHETHER THEY ARE CONFUSINGLY OR DECEPTIVELY SIMILAR TO ANOTHER CORPORATE ENTITY'S NAME. — petitioner institution is not entitled to a legally enforceable exclusive right to use the word "Lyceum" in its corporate name and that other institutions may use "Lyceum" as part of their corporate names. To determine whether a given corporate name is "identical" or "confusingly or deceptively similar" with another entity's corporate name, it is not enough to ascertain the presence of "Lyceum" or "Liceo" in both names. One must evaluate corporate names in their entirety and when the name of petitioner is juxtaposed with the names


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of private respondents, they are not reasonably regarded as "identical" or "confusingly or deceptively similar" with each other.

D E C I S I O N

FELICIANO, J p:

Petitioner is an educational institution duly registered with the Securities and Exchange Commission ("SEC"). When it first registered with the SEC on 21 September 1950, it used the corporate name Lyceum of the Philippines, Inc. and has used that name ever since.

On 24 February 1984, petitioner instituted proceedings before the SEC to compel the private respondents, which are also educational institutions, to delete the word "Lyceum" from their corporate names and permanently to enjoin them from using "Lyceum" as part of their respective names.

Some of the private respondents actively participated in the proceedings before the SEC. These are the following, the dates of their original SEC registration being set out below opposite their respective names:

Western Pangasinan Lyceum — 27 October 1950

Lyceum of Cabagan — 31 October 1962

Lyceum of Lallo, Inc. — 26 March 1972

Lyceum of Aparri — 28 March 1972

Lyceum of Tuao, Inc. — 28 March 1972

Lyceum of Camalaniugan — 28 March 1972

The following private respondents were declared in default for failure to file an answer despite service of summons:

Buhi Lyceum;

Central Lyceum of Catanduanes;

Lyceum of Eastern Mindanao, Inc.; and

Lyceum of Southern Philippines

Petitioner's original complaint before the SEC had included three (3) other entities:


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1. The Lyceum of Malacanay;

2. The Lyceum of Marbel; and

3. The Lyceum of Araullo

The complaint was later withdrawn insofar as concerned the Lyceum of Malacanay and the Lyceum of Marbel, for failure to serve summons upon these two (2) entities. The case against the Liceum of Araullo was dismissed when that school motu proprio change its corporate name to "Pamantasan ng Araullo."

The background of the case at bar needs some recounting. Petitioner had sometime before commenced in the SEC a proceeding (SEC-Case No. 1241) against the Lyceum of Baguio, Inc. to require it to change its corporate name and to adopt another name not "similar [to] or identical" with that of petitioner. In an Order dated 20 April 1977, Associate Commissioner Julio Sulit held that the corporate name of petitioner and that of the Lyceum of Baguio, Inc. were substantially identical because of the presence of a "dominant" word, i.e., "Lyceum," the name of the geographical location of the campus being the only word which distinguished one from the other corporate name. The SEC also noted that petitioner had registered as a corporation ahead of the Lyceum of Baguio, Inc. in point of time, 1 and ordered the latter to change its name to another name "not similar or identical [with]" the names of previously registered entities.

The Lyceum of Baguio, Inc. assailed the Order of the SEC before the Supreme Court in a case docketed as G.R. No. L-46595. In a Minute Resolution dated 14 September 1977, the Court denied the Petition for Review for lack of merit. Entry of judgment in that case was made on 21 October 1977. 2

Armed with the Resolution of this Court in G.R. No. L-46595, petitioner then wrote all the educational institutions it could find using the word "Lyceum" as part of their corporate name, and advised them to discontinue such use of "Lyceum." When, with the passage of time, it became clear that this recourse had failed, petitioner instituted before the SEC SEC-Case No. 2579 to enforce what petitioner claims as its proprietary right to the word "Lyceum." The SEC hearing officer rendered a decision sustaining petitioner's claim to an exclusive right to use the word "Lyceum." The hearing officer relied upon the SEC ruling in the Lyceum of Baguio, Inc. case (SEC-Case No. 1241) and held that the word "Lyceum" was capable of appropriation and that petitioner had acquired an enforceable exclusive right to the use of that word.

On appeal, however, by private respondents to the SEC En Banc, the decision of the hearing officer was reversed and set aside. The SEC En Banc did not consider the word "Lyceum" to have become so identified with petitioner as to render use thereof by other institutions as productive of confusion about the identity of the schools concerned in the mind of the general public. Unlike its hearing officer, the SEC En Banc held that the attaching of geographical names to the word "Lyceum" served sufficiently to distinguish the schools from one another,


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especially in view of the fact that the campuses of petitioner and those of the private respondents were physically quite remote from each other. 3

Petitioner then went on appeal to the Court of Appeals. In its Decision dated 28 June 1991, however, the Court of Appeals affirmed the questioned Orders of the SEC En Banc. 4 Petitioner filed a motion for reconsideration, without success.

Before this Court, petitioner asserts that the Court of Appeals committed the following errors:

1. The Court of Appeals erred in holding that the Resolution of the Supreme Court in G.R. No. L-46595 did not constitute stare decisis as to apply to this case and in not holding that said Resolution bound subsequent determinations on the right to exclusive use of the word Lyceum.

2. The Court of Appeals erred in holding that respondent Western Pangasinan Lyceum, Inc. was incorporated earlier than petitioner.

3. The Court of Appeals erred in holding that the word Lyceum has not acquired a secondary meaning in favor of petitioner.

4. The Court of Appeals erred in holding that Lyceum as a generic word cannot be appropriated by the petitioner to the exclusion of others. 5

We will consider all the foregoing ascribed errors, though not necessarily seriatim. We begin by noting that the Resolution of the Court in G.R. No. L-46595 does not, of course, constitute res adjudicata in respect of the case at bar, since there is no identity of parties. Neither is stare decisis pertinent, if only because the SEC En Banc itself has re-examined Associate Commissioner Sulit's ruling in the Lyceum of Baguio case. The Minute Resolution of the Court in G.R. No. L-46595 was not a reasoned adoption of the Sulit ruling.

The Articles of Incorporation of a corporation must, among other things, set out the name of the corporation. 6 Section 18 of the Corporation Code establishes a restrictive rule insofar as corporate names are concerned:

"SECTION 18. Corporate name. — No corporate name may be allowed by the Securities an Exchange Commission if the proposed name is identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing laws. When a change in the corporate name is approved, the Commission shall issue an amended certificate of incorporation under the amended name." (Emphasis supplied)

The policy underlying the prohibition in Section 18 against the registration of a corporate name which is "identical or deceptively or confusingly similar" to that of any existing corporation or which is "patently deceptive" or "patently confusing" or "contrary to existing laws," is the avoidance of fraud upon the public which would have occasion to deal with the entity


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concerned, the evasion of legal obligations and duties, and the reduction of difficulties of administration and supervision over corporations. 7

We do not consider that the corporate names of private respondent institutions are "identical with, or deceptively or confusingly similar" to that of the petitioner institution. True enough, the corporate names of private respondent entities all carry the word "Lyceum" but confusion and deception are effectively precluded by the appending of geographic names to the word "Lyceum." Thus, we do not believe that the "Lyceum of Aparri" can be mistaken by the general public for the Lyceum of the Philippines, or that the "Lyceum of Camalaniugan" would be confused with the Lyceum of the Philippines.

Etymologically, the word "Lyceum" is the Latin word for the Greek lykeion which in turn referred to a locality on the river Ilissius in ancient Athens "comprising an enclosure dedicated to Apollo and adorned with fountains and buildings erected by Pisistratus, Pericles and Lycurgus frequented by the youth for exercise and by the philosopher Aristotle and his followers for teaching." 8 In time, the word "Lyceum" became associated with schools and other institutions providing public lectures and concerts and public discussions. Thus today, the word "Lyceum" generally refers to a school or an institution of learning. While the Latin word "lyceum" has been incorporated into the English language, the word is also found in Spanish (liceo) and in French (lycee). As the Court of Appeals noted in its Decision, Roman Catholic schools frequently use the term; e.g., "Liceo de Manila," "Liceo de Baleno" (in Baleno, Masbate), "Liceo de Masbate," "Liceo de Albay." 9 "Lyceum" is in fact as generic in character as the word "university." In the name of the petitioner, "Lyceum" appears to be a substitute for "university;" in other places, however, "Lyceum," or "Liceo" or "Lycee" frequently denotes a secondary school or a college. It may be (though this is a question of fact which we need not resolve) that the use of the word "Lyceum" may not yet be as widespread as the use of "university," but it is clear that a not inconsiderable number of educational institutions have adopted "Lyceum" or "Liceo" as part of their corporate names. Since "Lyceum" or "Liceo" denotes a school or institution of learning, it is not unnatural to use this word to designate an entity which is organized and operating as an educational institution.

It is claimed, however, by petitioner that the word "Lyceum" has acquired a secondary meaning in relation to petitioner with the result that that word, although originally a generic, has become appropriable by petitioner to the exclusion of other institutions like private respondents herein.

The doctrine of secondary meaning originated in the field of trademark law. Its application has, however, been extended to corporate names sine the right to use a corporate name to the exclusion of others is based upon the same principle which underlies the right to use a particular trademark or tradename. 10 In Philippine Nut Industry, Inc. v. Standard Brands, Inc., 11 the doctrine of secondary meaning was elaborated in the following terms:

" . . . a word or phrase originally incapable of exclusive appropriation with reference to an article on the market, because geographically or otherwise descriptive, might nevertheless have been used so long and so exclusively by one producer with reference to his article that, in that


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trade and to that branch of the purchasing public, the word or phrase has come to mean that the article was his product." 12

The question which arises, therefore, is whether or not the use by petitioner of "Lyceum" in its corporate name has been for such length of time and with such exclusivity as to have become associated or identified with the petitioner institution in the mind of the general public (or at least that portion of the general public which has to do with schools). The Court of Appeals recognized this issue and answered it in the negative:

"Under the doctrine of secondary meaning, a word or phrase originally incapable of exclusive appropriation with reference to an article in the market, because geographical or otherwise descriptive might nevertheless have been used so long and so exclusively by one producer with reference to this article that, in that trade and to that group of the purchasing public, the word or phrase has come to mean that the article was his produce (Ana Ang vs. Toribio Teodoro, 74 Phil. 56). This circumstance has been referred to as the distinctiveness into which the name or phrase has evolved through the substantial and exclusive use of the same for a considerable period of time. Consequently, the same doctrine or principle cannot be made to apply where the evidence did not prove that the business (of the plaintiff) has continued for so long a time that it has become of consequence and acquired a good will of considerable value such that its articles and produce have acquired a well-known reputation, and confusion will result by the use of the disputed name (by the defendant) (Ang Si Heng vs. Wellington Department Store, Inc., 92 Phil. 448).

With the foregoing as a yardstick, [we] believe the appellant failed to satisfy the aforementioned requisites. No evidence was ever presented in the hearing before the Commission which sufficiently proved that the word 'Lyceum' has indeed acquired secondary meaning in favor of the appellant. If there was any of this kind, the same tend to prove only that the appellant had been using the disputed word for a long period of time. Nevertheless, its (appellant) exclusive use of the word (Lyceum) was never established or proven as in fact the evidence tend to convey that the cross-claimant was already using the word 'Lyceum' seventeen (17) years prior to the date the appellant started using the same word in its corporate name. Furthermore, educational institutions of the Roman Catholic Church had been using the same or similar word like 'Liceo de Manila,' 'Liceo de Baleno' (in Baleno, Masbate), 'Liceo de Masbate,' 'Liceo de Albay' long before appellant started using the word 'Lyceum'. The appellant also failed to prove that the word 'Lyceum' has become so identified with its educational institution that confusion will surely arise in the minds of the public if the same word were to be used by other educational institutions.

In other words, while the appellant may have proved that it had been using the word 'Lyceum' for a long period of time, this fact alone did not amount to mean that the said word had acquired secondary meaning in its favor because the appellant failed to prove that it had been using the same word all by itself to the exclusion of others. More so, there was no evidence presented to prove that confusion will surely arise if the same word were to be used by other educational


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institutions. Consequently, the allegations of the appellant in its first two assigned errors must necessarily fail." 13 (Underscoring partly in the original and partly supplied)

We agree with the Court of Appeals. The number alone of the private respondents in the case at bar suggests strongly that petitioner's use of the word "Lyceum" has not been attended with the exclusivity essential for applicability of the doctrine of secondary meaning. It may be noted also that at least one of the private respondents, i.e., the Western Pangasinan Lyceum, Inc., used the term "Lyceum" seventeen (17) years before the petitioner registered its own corporate name with the SEC and began using the word "Lyceum." It follows that if any institution had acquired an exclusive right to the word "Lyceum," that institution would have been the Western Pangasinan Lyceum, Inc. rather than the petitioner institution.

In this connection, petitioner argues that because the Western Pangasinan Lyceum, Inc. failed to reconstruct its records before the SEC in accordance with the provisions of R.A. No. 62, which records had been destroyed during World War II, Western Pangasinan Lyceum should be deemed to have lost all rights it may have acquired by virtue of its past registration. It might be noted that the Western Pangasinan Lyceum, Inc. registered with the SEC soon after petitioner had filed its own registration on 21 September 1950. Whether or not Western Pangasinan Lyceum, Inc. must be deemed to have lost its rights under its original 1933 registration, appears to us to be quite secondary in importance; we refer to this earlier registration simply to underscore the fact that petitioner's use of the word "Lyceum" was neither the first use of that term in the Philippines nor an exclusive use thereof. Petitioner's use of the word "Lyceum" was not exclusive but was in truth shared with the Western Pangasinan Lyceum and a little later with other private respondent institutions which registered with the SEC using "Lyceum" as part of their corporation names. There may well be other schools using Lyceum or Liceo in their names, but not registered with the SEC because they have not adopted the corporate form of organization.

We conclude and so hold that petitioner institution is not entitled to a legally enforceable exclusive right to use the word "Lyceum" in its corporate name and that other institutions may use "Lyceum" as part of their corporate names. To determine whether a given corporate name is "identical" or "confusingly or deceptively similar" with another entity's corporate name, it is not enough to ascertain the presence of "Lyceum" or "Liceo" in both names. One must evaluate corporate names in their entirety and when the name of petitioner is juxtaposed with the names of private respondents, they are not reasonably regarded as "identical" or "confusingly or deceptively similar" with each other.

WHEREFORE, the petitioner having failed to show any reversible error on the part of the public respondent Court of Appeals, the Petition for Review is DENIED for lack of merit, and the Decision of the Court of Appeals dated 28 June 1991 is hereby AFFIRMED. No pronouncement as to costs.


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[G.R. No. 137592. December 12, 2001]ANG MGA KAANIB SA IGLESIA NG DIOS KAY KRISTO HESUS, H.S.K. SA BANSANG PILIPINAS, INC. petitioner, vs. IGLESIA NG DIOS KAY CRISTO JESUS, HALIGI AT SUHAY NG KATOTOHANAN, respondent.This is a petition for review assailing the Decision dated October 7, 1997[1] and the Resolution dated February 16, 1999[2] of the Court of Appeals in CA-G.R. SP No. 40933, which affirmed the Decision of the Securities and Exchange and Commission (SEC) in SEC-AC No. 539.[3]

Respondent Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay ng Katotohanan (Church of God in Christ Jesus, the Pillar and Ground of Truth),[4] is a non-stock religious society or corporation registered in 1936. Sometime in 1976, one Eliseo Soriano and several other members of respondent corporation disassociated themselves from the latter and succeeded in registering on March 30, 1977 a new non-stock religious society or corporation, named Iglesia ng Dios Kay Kristo Hesus, Haligi at Saligan ng Katotohanan.

On July 16, 1979, respondent corporation filed with the SEC a petition to compel the Iglesia ng Dios Kay Kristo Hesus, Haligi at Saligan ng Katotohanan to change its corporate name, which petition was docketed as SEC Case No. 1774. On May 4, 1988, the SEC rendered judgment in favor of respondent, ordering the Iglesia ng Dios Kay Kristo Hesus, Haligi at Saligan ng Katotohanan to change its corporate name to another name that is not similar or identical to any name already used by a corporation, partnership or association registered with the Commission.[5] No appeal was taken from said decision.

It appears that during the pendency of SEC Case No. 1774, Soriano, et al., caused the registration on April 25, 1980 of petitioner corporation, Ang Mga Kaanib sa Iglesia ng Dios Kay Kristo Hesus, H.S.K., sa Bansang Pilipinas. The acronym H.S.K. stands for Haligi at Saligan ng Katotohanan.[6]

On March 2, 1994, respondent corporation filed before the SEC a petition, docketed as SEC Case No. 03-94-4704, praying that petitioner be compelled to change its corporate name and be barred from using the same or similar name on the ground that the same causes confusion among their members as well as the public.

Petitioner filed a motion to dismiss on the ground of lack of cause of action. The motion to dismiss was denied. Thereafter, for failure to file an answer, petitioner was declared in default and respondent was allowed to present its evidence ex parte.

On November 20, 1995, the SEC rendered a decision ordering petitioner to change its corporate name. The dispositive portion thereof reads:

PREMISES CONSIDERED, judgment is hereby rendered in favor of the petitioner (respondent herein).


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Respondent Mga Kaanib sa Iglesia ng Dios Kay Kristo Jesus (sic), H.S.K. sa Bansang Pilipinas (petitioner herein) is hereby MANDATED to change its corporate name to another not deceptively similar or identical to the same already used by the Petitioner, any corporation, association, and/or partnership presently registered with the Commission.

Let a copy of this Decision be furnished the Records Division and the Corporate and Legal Department [CLD] of this Commission for their records, reference and/or for whatever requisite action, if any, to be undertaken at their end.

SO ORDERED.[7]

Petitioner appealed to the SEC En Banc, where its appeal was docketed as SEC-AC No. 539. In a decision dated March 4, 1996, the SEC En Banc affirmed the above decision, upon a finding that petitioner's corporate name was identical or confusingly or deceptively similar to that of respondents corporate name.[8]

Petitioner filed a petition for review with the Court of Appeals. On October 7, 1997, the Court of Appeals rendered the assailed decision affirming the decision of the SEC En Banc. Petitioners motion for reconsideration was denied by the Court of Appeals on February 16, 1992.

Hence, the instant petition for review, raising the following assignment of errors:

I

THE HONORABLE COURT OF APPEALS ERRED IN CONCLUDING THAT PETITIONER HAS NOT BEEN DEPRIVED OF ITS RIGHT TO PROCEDURAL DUE PROCESS, THE HONORABLE COURT OF APPEALS DISREGARDED THE JURISPRUDENCE APPLICABLE TO THE CASE AT BAR AND INSTEAD RELIED ON TOTALLY INAPPLICABLE JURISPRUDENCE.

II

THE HONORABLE COURT OF APPEALS ERRED IN ITS INTEPRETATION OF THE CIVIL CODE PROVISIONS ON EXTINCTIVE PRESCRIPTION, THEREBY RESULTING IN ITS FAILURE TO FIND THAT THE RESPONDENT'S RIGHT OF ACTION TO INSTITUTE THE SEC CASE HAS SINCE PRESCRIBED PRIOR TO ITS INSTITUTION.

III

THE HONORABLE COURT OF APPEALS FAILED TO CONSIDER AND PROPERLY APPLY THE EXCEPTIONS ESTABLISHED BY JURISPRUDENCE IN THE


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APPLICATION OF SECTION 18 OF THE CORPORATION CODE TO THE INSTANT CASE.

IV

THE HONORABLE COURT OF APPEALS FAILED TO PROPERLY APPRECIATE THE SCOPE OF THE CONSTITUTIONAL GUARANTEE ON RELIGIOUS FREEDOM, THEREBY FAILING TO APPLY THE SAME TO PROTECT PETITIONERS RIGHTS.[9]

Invoking the case of Legarda v. Court of Appeals,[10] petitioner insists that the decision of the Court of Appeals and the SEC should be set aside because the negligence of its former counsel of record, Atty. Joaquin Garaygay, in failing to file an answer after its motion to dismiss was denied by the SEC, deprived them of their day in court.

The contention is without merit. As a general rule, the negligence of counsel binds the client. This is based on the rule that any act performed by a lawyer within the scope of his general or implied authority is regarded as an act of his client.[11] An exception to the foregoing is where the reckless or gross negligence of the counsel deprives the client of due process of law.[12] Said exception, however, does not obtain in the present case.

In Legarda v. Court of Appeals, the effort of the counsel in defending his clients cause consisted in filing a motion for extension of time to file answer before the trial court. When his client was declared in default, the counsel did nothing and allowed the judgment by default to become final and executory. Upon the insistence of his client, the counsel filed a petition to annul the judgment with the Court of Appeals, which denied the petition, and again the counsel allowed the denial to become final and executory. This Court found the counsel grossly negligent and consequently declared as null and void the decision adverse to his client.

The factual antecedents of the case at bar are different. Atty. Garaygay filed before the SEC a motion to dismiss on the ground of lack of cause of action. When his client was declared in default for failure to file an answer, Atty. Garaygay moved for reconsideration and lifting of the order of default.[13] After judgment by default was rendered against petitioner corporation, Atty. Garaygay filed a motion for extension of time to appeal/motion for reconsideration, and thereafter a motion to set aside the decision.[14]

Evidently, Atty. Garaygay was only guilty of simple negligence. Although he failed to file an answer that led to the rendition of a judgment by default against petitioner, his efforts were palpably real, albeit bereft of zeal.[15]

Likewise, the issue of prescription, which petitioner raised for the first time on appeal to the Court of Appeals, is untenable. Its failure to raise prescription before the SEC can only be construed as a waiver of that defense.[16] At any rate, the SEC has the authority to de-register at all times and under all circumstances corporate names which in its estimation are likely to


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spawn confusion. It is the duty of the SEC to prevent confusion in the use of corporate names not only for the protection of the corporations involved but more so for the protection of the public.[17]

Section 18 of the Corporation Code provides:

Corporate Name. --- No corporate name may be allowed by the Securities and Exchange Commission if the proposed name is identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or is contrary to existing laws. When a change in the corporate name is approved, the Commission shall issue an amended certificate of incorporation under the amended name.

Corollary thereto, the pertinent portion of the SEC Guidelines on Corporate Names states:

(d) If the proposed name contains a word similar to a word already used as part of the firm name or style of a registered company, the proposed name must contain two other words different from the name of the company already registered;

Parties organizing a corporation must choose a name at their peril; and the use of a name similar to one adopted by another corporation, whether a business or a nonprofit organization, if misleading or likely to injure in the exercise of its corporate functions, regardless of intent, may be prevented by the corporation having a prior right, by a suit for injunction against the new corporation to prevent the use of the name.[18]

Petitioner claims that it complied with the aforecited SEC guideline by adding not only two but eight words to their registered name, to wit: Ang Mga Kaanib" and "Sa Bansang Pilipinas, Inc., which, petitioner argues, effectively distinguished it from respondent corporation.

The additional words Ang Mga Kaanib and Sa Bansang Pilipinas, Inc. in petitioners name are, as correctly observed by the SEC, merely descriptive of and also referring to the members, or kaanib, of respondent who are likewise residing in the Philippines. These words can hardly serve as an effective differentiating medium necessary to avoid confusion or difficulty in distinguishing petitioner from respondent. This is especially so, since both petitioner and respondent corporations are using the same acronym --- H.S.K.;[19] not to mention the fact that both are espousing religious beliefs and operating in the same place. Parenthetically, it is well to mention that the acronym H.S.K. used by petitioner stands for Haligi at Saligan ng Katotohanan.[20]

Then, too, the records reveal that in holding out their corporate name to the public, petitioner highlights the dominant words IGLESIA NG DIOS KAY KRISTO HESUS, HALIGI AT SALIGAN NG KATOTOHANAN, which is strikingly similar to respondent's corporate name, thus making it even more evident that the additional words Ang Mga Kaanib and Sa Bansang


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Pilipinas, Inc., are merely descriptive of and pertaining to the members of respondent corporation.[21]

Significantly, the only difference between the corporate names of petitioner and respondent are the words SALIGAN and SUHAY. These words are synonymous --- both mean ground, foundation or support. Hence, this case is on all fours with Universal Mills Corporation v. Universal Textile Mills, Inc.,[22] where the Court ruled that the corporate names Universal Mills Corporation and Universal Textile Mills, Inc., are undisputably so similar that even under the test of reasonable care and observation confusion may arise.

Furthermore, the wholesale appropriation by petitioner of respondent's corporate name cannot find justification under the generic word rule. We agree with the Court of Appeals conclusion that a contrary ruling would encourage other corporations to adopt verbatim and register an existing and protected corporate name, to the detriment of the public.

The fact that there are other non-stock religious societies or corporations using the names Church of the Living God, Inc., Church of God Jesus Christ the Son of God the Head, Church of God in Christ & By the Holy Spirit, and other similar names, is of no consequence. It does not authorize the use by petitioner of the essential and distinguishing feature of respondent's registered and protected corporate name.[23]

We need not belabor the fourth issue raised by petitioner. Certainly, ordering petitioner to change its corporate name is not a violation of its constitutionally guaranteed right to religious freedom. In so doing, the SEC merely compelled petitioner to abide by one of the SEC guidelines in the approval of partnership and corporate names, namely its undertaking to manifest its willingness to change its corporate name in the event another person, firm, or entity has acquired a prior right to the use of the said firm name or one deceptively or confusingly similar to it.

WHEREFORE, in view of all the foregoing, the instant petition for review is DENIED. The appealed decision of the Court of Appeals is AFFIRMED in toto.

[G.R. No. 122174. October 3, 2002]INDUSTRIAL REFRACTORIES CORPORATION OF THE PHILIPPINES, petitioner, vs. COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION and REFRACTORIES CORPORATION OF THE PHILIPPINES, respondents.Filed before us is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the Decision of the Court of Appeals in CA-G.R. SP No. 35056, denying due course and dismissing the petition filed by Industrial Refractories Corp. of the Philippines (IRCP).


14

Respondent Refractories Corporation of the Philippines (RCP) is a corporation duly organized on October 13, 1976 for the purpose of engaging in the business of manufacturing, producing, selling, exporting and otherwise dealing in any and all refractory bricks, its by-products and derivatives. On June 22, 1977, it registered its corporate and business name with the Bureau of Domestic Trade.

Petitioner IRCP on the other hand, was incorporated on August 23, 1979 originally under the name Synclaire Manufacturing Corporation. It amended its Articles of Incorporation on August 23, 1985 to change its corporate name to Industrial Refractories Corp. of the Philippines. It is engaged in the business of manufacturing all kinds of ceramics and other products, except paints and zincs.

Both companies are the only local suppliers of monolithic gunning mix.[1]

Discovering that petitioner was using such corporate name, respondent RCP filed on April 14, 1988 with the Securities and Exchange Commission (SEC) a petition to compel petitioner to change its corporate name on the ground that its corporate name is confusingly similar with that of petitioners such that the public may be confused or deceived into believing that they are one and the same corporation.[2]

The SEC decided in favor of respondent RCP and rendered judgment on July 23, 1993 with the following dispositive portion:

WHEREFORE, judgment is hereby rendered in favor of the petitioner and against the respondent declaring the latters corporate name Industrial Refractories Corporation of the Philippines as deceptively and confusingly similar to that of petitioners corporate name Refractories Corporation of the Philippines. Accordingly, respondent is hereby directed to amend its Articles of Incorporation by deleting the name Refractories Corporation of the Philippines in its corporate name within thirty (30) days from finality of this Decision. Likewise, respondent is hereby ordered to pay the petitioner the sum of P50,000.00 as attorneys fees.[3]

Petitioner appealed to the SEC En Banc, arguing that it does not have any jurisdiction over the case, and that respondent RCP has no right to the exclusive use of its corporate name as it is composed of generic or common words.[4]

In its Decision dated July 23, 1993, the SEC En Banc modified the appealed decision in that petitioner was ordered to delete or drop from its corporate name only the word Refractories.[5]

Petitioner IRCP elevated the decision of the SEC En Banc through a petition for review on certiorari to the Court of Appeals which then rendered the herein assailed decision. The appellate court upheld the jurisdiction of the SEC over the case and ruled that the corporate names of petitioner IRCP and respondent RCP are confusingly or deceptively similar, and that


15

respondent RCP has established its prior right to use the word Refractories as its corporate name.[6] The appellate court also found that the petition was filed beyond the reglementary period.[7]

Hence, herein petition which we must deny.

Petitioner contends that the petition before the Court of Appeals was timely filed. It must be noted that at the time the SEC En Banc rendered its decision on May 10, 1994, the governing rule on appeals from quasi-judicial agencies like the SEC was Supreme Court Circular No. 1-91. As provided therein, the remedy should have been a petition for review filed before the Court of Appeals within fifteen (15) days from notice, raising questions of fact, of law, or mixed questions of fact and law.[8] A motion for reconsideration suspends the running of the period.[9]

In the case at bench, there is a discrepancy between the dates provided by petitioner and respondent. Petitioner alleges the following dates of receipt and filing:[10]

June 10, 1994 Receipt of SECs Decision dated May 10, 1994June 20, 1994 Filing of Motion for ReconsiderationSeptember 1, 1994 Receipt of SECs Order dated August 3, 1994 denying petitioners motion for reconsiderationSeptember 2, 1994 Filing of Motion for extension of timeSeptember 6, 1994 Filing of Petition

Respondent RCP, however, asserts that the foregoing dates are incorrect as the certifications issued by the SEC show that petitioner received the SECs Decision dated May 10, 1994 on June 9, 1994, filed the motion for reconsideration via registered mail on June 25, 1994, and received the Order dated August 3, 1994 on August 15, 1994.[11] Thus, the petition was filed twenty-one (21) days beyond the reglementary period provided in Supreme Court Circular No. 1-91.[12]

If reckoned from the dates supplied by petitioner, then the petition was timely filed. On the other hand, if reckoned from the dates provided by respondent RCP, then it was filed way beyond the reglementary period. On this score, we agree with the appellate courts finding that petitioner failed to rebut respondent RCPs allegations of material dates of receipt and filing.[13] In addition, the certifications were executed by the SEC officials based on their official records[14] which enjoy the presumption of regularity.[15] As such, these are prima facie evidence of the facts stated therein.[16] And based on such dates, there is no question that the petition was filed with the Court of Appeals beyond the fifteen (15) day period. On this ground alone, the instant petition should be denied as the SEC En Bancs decision had already attained finality and the SECs findings of fact, when supported by substantial evidence, is final.[17]

Nevertheless, to set the matters at rest, we shall delve into the other issues posed by petitioner.


16

Petitioners arguments, substantially, are as follows: (1) jurisdiction is vested with the regular courts as the present case is not one of the instances provided in P.D. 902-A; (2) respondent RCP is not entitled to use the generic name refractories; (3) there is no confusing similarity between their corporate names; and (4) there is no basis for the award of attorneys fees.[18]

Petitioners argument on the SECs jurisdiction over the case is utterly myopic. The jurisdiction of the SEC is not merely confined to the adjudicative functions provided in Section 5 of P.D. 902-A, as amended.[19] By express mandate, it has absolute jurisdiction, supervision and control over all corporations.[20] It also exercises regulatory and administrative powers to implement and enforce the Corporation Code,[21] one of which is Section 18, which provides:

SEC. 18. Corporate name. -- No corporate name may be allowed by the Securities and Exchange Commission if the proposed name is identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing laws. When a change in the corporate name is approved, the Commission shall issue an amended certificate of incorporation under the amended name.

It is the SECs duty to prevent confusion in the use of corporate names not only for the protection of the corporations involved but more so for the protection of the public, and it has authority to de-register at all times and under all circumstances corporate names which in its estimation are likely to generate confusion.[22] Clearly therefore, the present case falls within the ambit of the SECs regulatory powers.[23]

Likewise untenable is petitioners argument that there is no confusing or deceptive similarity between petitioner and respondent RCPs corporate names. Section 18 of the Corporation Code expressly prohibits the use of a corporate name which is identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing laws. The policy behind the foregoing prohibition is to avoid fraud upon the public that will have occasion to deal with the entity concerned, the evasion of legal obligations and duties, and the reduction of difficulties of administration and supervision over corporation.[24]

Pursuant thereto, the Revised Guidelines in the Approval of Corporate and Partnership Names[25] specifically requires that: (1) a corporate name shall not be identical, misleading or confusingly similar to one already registered by another corporation with the Commission;[26] and (2) if the proposed name is similar to the name of a registered firm, the proposed name must contain at least one distinctive word different from the name of the company already registered.[27]

As held in Philips Export B.V. vs. Court of Appeals,[28] to fall within the prohibition of the law, two requisites must be proven, to wit:


17

(1) that the complainant corporation acquired a prior right over the use of such corporate name;

and

(2) the proposed name is either: (a) identical, or (b) deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law; or (c) patently deceptive, confusing or contrary to existing law.

As regards the first requisite, it has been held that the right to the exclusive use of a corporate name with freedom from infringement by similarity is determined by priority of adoption.[29] In this case, respondent RCP was incorporated on October 13, 1976 and since then has been using the corporate name Refractories Corp. of the Philippines. Meanwhile, petitioner was incorporated on August 23, 1979 originally under the name Synclaire Manufacturing Corporation. It only started using the name Industrial Refractories Corp. of the Philippines when it amended its Articles of Incorporation on August 23, 1985, or nine (9) years after respondent RCP started using its name. Thus, being the prior registrant, respondent RCP has acquired the right to use the word Refractories as part of its corporate name.

Anent the second requisite, in determining the existence of confusing similarity in corporate names, the test is whether the similarity is such as to mislead a person using ordinary care and discrimination and the Court must look to the record as well as the names themselves.[30] Petitioners corporate name is Industrial Refractories Corp. of the Phils., while respondents is Refractories Corp. of the Phils. Obviously, both names contain the identical words Refractories, Corporation and Philippines. The only word that distinguishes petitioner from respondent RCP is the word Industrial which merely identifies a corporations general field of activities or operations. We need not linger on these two corporate names to conclude that they are patently similar that even with reasonable care and observation, confusion might arise.[31] It must be noted that both cater to the same clientele, i.e. the steel industry. In fact, the SEC found that there were instances when different steel companies were actually confused between the two, especially since they also have similar product packaging.[32] Such findings are accorded not only great respect but even finality, and are binding upon this Court, unless it is shown that it had arbitrarily disregarded or misapprehended evidence before it to such an extent as to compel a contrary conclusion had such evidence been properly appreciated. [33] And even without such proof of actual confusion between the two corporate names, it suffices that confusion is probable or likely to occur.[34]

Refractory materials are described as follows:

Refractories are structural materials used at high temperatures to [sic] industrial furnaces. They are supplied mainly in the form of brick of standard sizes and of special shapes. Refractories also include refractory cements, bonding mortars, plastic firebrick, castables, ramming


18

mixtures, and other bulk materials such as dead-burned grain magneside, chrome or ground ganister and special clay.[35]

While the word refractories is a generic term, its usage is not widespread and is limited merely to the industry/trade in which it is used, and its continuous use by respondent RCP for a considerable period has made the term so closely identified with it. [36] Moreover, as held in the case of Ang Kaanib sa Iglesia ng Dios kay Kristo Hesus, H.S.K. sa Bansang Pilipinas, Inc. vs. Iglesia ng Dios kay Cristo Jesus, Haligi at Suhay ng Katotohanan, petitioners appropriation of respondent's corporate name cannot find justification under the generic word rule. [37] A contrary ruling would encourage other corporations to adopt verbatim and register an existing and protected corporate name, to the detriment of the public.[38]

Finally, we find the award of P50,000.00 as attorney's fees to be fair and reasonable. Article 2208 of the Civil Code allows the award of such fees when its claimant is compelled to litigate with third persons or to incur expenses to protect its just and valid claim. In this case, despite its undertaking to change its corporate name in case another firm has acquired a prior right to use such name,[39] it refused to do so, thus compelling respondent to undergo litigation and incur expenses to protect its corporate name.

WHEREFORE, the instant petition for review on certiorari is hereby DENIED for lack of merit.

[G.R. No. 124293. September 24, 2003]JG SUMMIT HOLDINGS, INC., petitioner, vs. COURT OF APPEALS, COMMITTEE ON PRIVATIZATION, its Chairman and Members; ASSET PRIVATIZATION TRUST and PHILYARDS HOLDINGS, INC., respondents.The core issue posed by the Motions for Reconsideration is whether a shipyard is a public utility whose capitalization must be sixty percent (60%) owned by Filipinos. Our resolution of this issue will determine the fate of the shipbuilding and ship repair industry. It can either spell the industrys demise or breathe new life to the struggling but potentially healthy partner in the countrys bid for economic growth. It can either kill an initiative yet in its infancy, or harness creativity in the productive disposition of government assets.

The facts are undisputed and can be summarized briefly as follows:

On January 27, 1977, the National Investment and Development Corporation (NIDC), a government corporation, entered into a Joint Venture Agreement (JVA) with Kawasaki Heavy Industries, Ltd. of Kobe, Japan (KAWASAKI) for the construction, operation and management of the Subic National Shipyard, Inc. (SNS) which subsequently became the Philippine Shipyard and Engineering Corporation (PHILSECO). Under the JVA, the NIDC and KAWASAKI will contribute P330 million for the capitalization of PHILSECO in the proportion of 60%-40% respectively.[1] One of its salient features is the grant to the parties of the right of first refusal should either of them decide to sell, assign or transfer its interest in the joint venture, viz:


19

1.4 Neither party shall sell, transfer or assign all or any part of its interest in SNS [PHILSECO] to any third party without giving the other under the same terms the right of first refusal. This provision shall not apply if the transferee is a corporation owned or controlled by the GOVERNMENT or by a KAWASAKI affiliate.[2]

On November 25, 1986, NIDC transferred all its rights, title and interest in PHILSECO to the Philippine National Bank (PNB). Such interests were subsequently transferred to the National Government pursuant to Administrative Order No. 14. On December 8, 1986, President Corazon C. Aquino issued Proclamation No. 50 establishing the Committee on Privatization (COP) and the Asset Privatization Trust (APT) to take title to, and possession of, conserve, manage and dispose of non-performing assets of the National Government. Thereafter, on February 27, 1987, a trust agreement was entered into between the National Government and the APT wherein the latter was named the trustee of the National Governments share in PHILSECO. In 1989, as a result of a quasi-reorganization of PHILSECO to settle its huge obligations to PNB, the National Governments shareholdings in PHILSECO increased to 97.41% thereby reducing KAWASAKIs shareholdings to 2.59%.[3]

In the interest of the national economy and the government, the COP and the APT deemed it best to sell the National Governments share in PHILSECO to private entities. After a series of negotiations between the APT and KAWASAKI, they agreed that the latters right of first refusal under the JVA be exchanged for the right to top by five percent (5%) the highest bid for the said shares. They further agreed that KAWASAKI would be entitled to name a company in which it was a stockholder, which could exercise the right to top. On September 7, 1990, KAWASAKI informed APT that Philyards Holdings, Inc. (PHI) would exercise its right to top.[4]

At the pre-bidding conference held on September 18, 1993, interested bidders were given copies of the JVA between NIDC and KAWASAKI, and of the Asset Specific Bidding Rules (ASBR) drafted for the National Governments 87.6% equity share in PHILSECO.[5] The provisions of the ASBR were explained to the interested bidders who were notified that the bidding would be held on December 2, 1993. A portion of the ASBR reads:

1.0 The subject of this Asset Privatization Trust (APT) sale through public bidding is the National Governments equity in PHILSECO consisting of 896,869,942 shares of stock (representing 87.67% of PHILSECOs outstanding capital stock), which will be sold as a whole block in accordance with the rules herein enumerated.. . .

2.0 The highest bid, as well as the buyer, shall be subject to the final approval of both the APT Board of Trustees and the Committee on Privatization (COP).

2.1 APT reserves the right in its sole discretion, to reject any or all bids.


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3.0 This public bidding shall be on an Indicative Price Bidding basis. The Indicative price set for the National Governments 87.67% equity in PHILSECO is PESOS: ONE BILLION THREE HUNDRED MILLION (P1,300,000,000.00).

. . .6.0 The highest qualified bid will be submitted to the APT Board of Trustees at its regular meeting following the bidding, for the purpose of determining whether or not it should be endorsed by the APT Board of Trustees to the COP, and the latter approves the same. The APT shall advise Kawasaki Heavy Industries, Inc. and/or its nominee, Philyards Holdings, Inc., that the highest bid is acceptable to the National Government. Kawasaki Heavy Industries, Inc. and/or Philyards Holdings, Inc. shall then have a period of thirty (30) calendar days from the date of receipt of such advice from APT within which to exercise their Option to Top the Highest Bid by offering a bid equivalent to the highest bid plus five (5%) percent thereof.

6.1 Should Kawasaki Heavy Industries, Inc. and/or Philyards Holdings, Inc. exercise their Option to Top the Highest Bid, they shall so notify the APT about such exercise of their option and deposit with APT the amount equivalent to ten percent (10%) of the highest bid plus five percent (5%) thereof within the thirty (30)-day period mentioned in paragraph 6.0 above. APT will then serve notice upon Kawasaki Heavy Industries, Inc. and/or Philyards Holdings, Inc. declaring them as the preferred bidder and they shall have a period of ninety (90) days from the receipt of the APTs notice within which to pay the balance of their bid price.

6.2 Should Kawasaki Heavy Industries, Inc. and/or Philyards Holdings, Inc. fail to exercise their Option to Top the Highest Bid within the thirty (30)-day period, APT will declare the highest bidder as the winning bidder.

. . .

12.0 The bidder shall be solely responsible for examining with appropriate care these rules, the official bid forms, including any addenda or amendments thereto issued during the bidding period. The bidder shall likewise be responsible for informing itself with respect to any and all conditions concerning the PHILSECO Shares which may, in any manner, affect the bidders proposal. Failure on the part of the bidder to so examine and inform itself shall be its sole risk and no relief for error or omission will be given by APT or COP. . ..[6]

At the public bidding on the said date, petitioner J.G. Summit Holdings, Inc. submitted a bid of Two Billion and Thirty Million Pesos (P2,030,000,000.00) with an acknowledgement of KAWASAKI/Philyards right to top, viz:

4. I/We understand that the Committee on Privatization (COP) has up to thirty (30) days to act on APTs recommendation based on the result of this bidding. Should the COP approve the highest bid, APT shall advise Kawasaki Heavy Industries, Inc. and/or its nominee, Philyards


21

Holdings, Inc. that the highest bid is acceptable to the National Government. Kawasaki Heavy Industries, Inc. and/or Philyards Holdings, Inc. shall then have a period of thirty (30) calendar days from the date of receipt of such advice from APT within which to exercise their Option to Top the Highest Bid by offering a bid equivalent to the highest bid plus five (5%) percent thereof.[7]

As petitioner was declared the highest bidder, the COP approved the sale on December 3, 1993 subject to the right of Kawasaki Heavy Industries, Inc./Philyards Holdings, Inc. to top JGSMIs bid by 5% as specified in the bidding rules.[8]

On December 29, 1993, petitioner informed APT that it was protesting the offer of PHI to top its bid on the grounds that: (a) the KAWASAKI/PHI consortium composed of Kawasaki, Philyards, Mitsui, Keppel, SM Group, ICTSI and Insular Life violated the ASBR because the last four (4) companies were the losing bidders thereby circumventing the law and prejudicing the weak winning bidder; (b) only KAWASAKI could exercise the right to top; (c) giving the same option to top to PHI constituted unwarranted benefit to a third party; (d) no right of first refusal can be exercised in a public bidding or auction sale; and (e) the JG Summit consortium was not estopped from questioning the proceedings.[9]

On February 2, 1994, petitioner was notified that PHI had fully paid the balance of the purchase price of the subject bidding. On February 7, 1994, the APT notified petitioner that PHI had exercised its option to top the highest bid and that the COP had approved the same on January 6, 1994. On February 24, 1994, the APT and PHI executed a Stock Purchase Agreement.[10] Consequently, petitioner filed with this Court a Petition for Mandamus under G.R. No. 114057. On May 11, 1994, said petition was referred to the Court of Appeals. On July 18, 1995, the Court of Appeals denied the same for lack of merit. It ruled that the petition for mandamus was not the proper remedy to question the constitutionality or legality of the right of first refusal and the right to top that was exercised by KAWASAKI/PHI, and that the matter must be brought by the proper party in the proper forum at the proper time and threshed out in a full blown trial. The Court of Appeals further ruled that the right of first refusal and the right to top are prima facie legal and that the petitioner, by participating in the public bidding, with full knowledge of the right to top granted to KASAWASAKI/Philyards is . . .estopped from questioning the validity of the award given to Philyards after the latter exercised the right to top and had paid in full the purchase price of the subject shares, pursuant to the ASBR. Petitioner filed a Motion for Reconsideration of said Decision which was denied on March 15, 1996. Petitioner thus filed a Petition for Certiorari with this Court alleging grave abuse of discretion on the part of the appellate court.[11]

On November 20, 2000, this Court rendered the now assailed Decision ruling among others that the Court of Appeals erred when it dismissed the petition on the sole ground of the impropriety of the special civil action of mandamus because the petition was also one of certiorari.[12] It further ruled that a shipyard like PHILSECO is a public utility whose capitalization must be sixty percent (60%) Filipino-owned.[13] Consequently, the right to top granted to KAWASAKI


22

under the Asset Specific Bidding Rules (ASBR) drafted for the sale of the 87.67% equity of the National Government in PHILSECO is illegal---not only because it violates the rules on competitive bidding--- but more so, because it allows foreign corporations to own more than 40% equity in the shipyard.[14] It also held that although the petitioner had the opportunity to examine the ASBR before it participated in the bidding, it cannot be estopped from questioning the unconstitutional, illegal and inequitable provisions thereof.[15] Thus, this Court voided the transfer of the national governments 87.67% share in PHILSECO to Philyard Holdings, Inc., and upheld the right of JG Summit, as the highest bidder, to take title to the said shares, viz:

WHEREFORE, the instant petition for review on certiorari is GRANTED. The assailed Decision and Resolution of the Court of Appeals are REVERSED and SET ASIDE. Petitioner is ordered to pay to APT its bid price of Two Billion Thirty Million Pesos (P2,030,000,000.00 ), less its bid deposit plus interests upon the finality of this Decision. In turn, APT is ordered to:

(a) accept the said amount of P2,030,000,000.00 less bid deposit and interests from petitioner;

(b) execute a Stock Purchase Agreement with petitioner;

(c) cause the issuance in favor of petitioner of the certificates of stocks representing 87.6% of PHILSECOs total capitalization;

(d) return to private respondent PHGI the amount of Two Billion One Hundred Thirty-One Million Five Hundred Thousand Pesos (P2,131,500,000.00); and

(e) cause the cancellation of the stock certificates issued to PHI.

SO ORDERED.[16]

In separate Motions for Reconsideration,[17] respondents submit three basic issues for our resolution: (1) Whether PHILSECO is a public utility; (2) Whether under the 1977 JVA, KAWASAKI can exercise its right of first refusal only up to 40% of the total capitalization of PHILSECO; and (3) Whether the right to top granted to KAWASAKI violates the principles of competitive bidding.

I.Whether PHILSECO is a Public Utility.

After carefully reviewing the applicable laws and jurisprudence, we hold that PHILSECO is not a public utility for the following reasons:

First. By nature, a shipyard is not a public utility.


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A public utility is a business or service engaged in regularly supplying the public with some commodity or service of public consequence such as electricity, gas, water, transportation, telephone or telegraph service.[18] To constitute a public utility, the facility must be necessary for the maintenance of life and occupation of the residents. However, the fact that a business offers services or goods that promote public good and serve the interest of the public does not automatically make it a public utility. Public use is not synonymous with public interest. As its name indicates, the term public utility implies public use and service to the public. The principal determinative characteristic of a public utility is that of service to, or readiness to serve, an indefinite public or portion of the public as such which has a legal right to demand and receive its services or commodities. Stated otherwise, the owner or person in control of a public utility must have devoted it to such use that the public generally or that part of the public which has been served and has accepted the service, has the right to demand that use or service so long as it is continued, with reasonable efficiency and under proper charges.[19] Unlike a private enterprise which independently determines whom it will serve, a public utility holds out generally and may not refuse legitimate demand for service.[20] Thus, in Iloilo Ice and Cold Storage Co. vs. Public Utility Board,[21] this Court defined public use, viz:

Public use means the same as use by the public. The essential feature of the public use is that it is not confined to privileged individuals, but is open to the indefinite public. It is this indefinite or unrestricted quality that gives it its public character. In determining whether a use is public, we must look not only to the character of the business to be done, but also to the proposed mode of doing it. If the use is merely optional with the owners, or the public benefit is merely incidental, it is not a public use, authorizing the exercise of jurisdiction of the public utility commission. There must be, in general, a right which the law compels the owner to give to the general public. It is not enough that the general prosperity of the public is promoted. Public use is not synonymous with public interest. The true criterion by which to judge the character of the use is whether the public may enjoy it by right or only by permission.[22] (emphasis supplied)

Applying the criterion laid down in Iloilo to the case at bar, it is crystal clear that a shipyard cannot be considered a public utility.

A shipyard is a place or enclosure where ships are built or repaired.[23] Its nature dictates that it serves but a limited clientele whom it may choose to serve at its discretion. While it offers its facilities to whoever may wish to avail of its services, a shipyard is not legally obliged to render its services indiscriminately to the public. It has no legal obligation to render the services sought by each and every client. The fact that it publicly offers its services does not give the public a legal right to demand that such services be rendered.

There can be no disagreement that the shipbuilding and ship repair industry is imbued with public interest as it involves the maintenance of the seaworthiness of vessels dedicated to the transportation of either persons or goods. Nevertheless, the fact that a business is affected with public interest does not imply that it is under a duty to serve the public. While the business may be regulated for public good, the regulation cannot justify the classification of a purely private


24

enterprise as a public utility. The legislature cannot, by its mere declaration, make something a public utility which is not in fact such; and a private business operated under private contracts with selected customers and not devoted to public use cannot, by legislative fiat or by order of a public service commission, be declared a public utility, since that would be taking private property for public use without just compensation, which cannot be done consistently with the due process clause.[24]

It is worthy to note that automobile and aircraft manufacturers, which are of similar nature to shipyards, are not considered public utilities despite the fact that their operations greatly impact on land and air transportation. The reason is simple. Unlike commodities or services traditionally regarded as public utilities such as electricity, gas, water, transportation, telephone or telegraph service, automobile and aircraft manufacturing---and for that matter ship building and ship repair--- serve the public only incidentally.

Second. There is no law declaring a shipyard as a public utility.

History provides us hindsight and hindsight ought to give us a better view of the intent of any law. The succession of laws affecting the status of shipyards ought not to obliterate, but rather, give us full picture of the intent of the legislature. The totality of the circumstances, including the contemporaneous interpretation accorded by the administrative bodies tasked with the enforcement of the law all lead to a singular conclusion: that shipyards are not public utilities.

Since the enactment of Act No. 2307 which created the Public Utility Commission (PUC) until its repeal by Commonwealth Act No. 146, establishing the Public Service Commission (PSC), a shipyard, by legislative declaration, has been considered a public utility.[25] A Certificate of Public Convenience (CPC) from the PSC to the effect that the operation of the said service and the authorization to do business will promote the public interests in a proper and suitable manner is required before any person or corporation may operate a shipyard.[26] In addition, such persons or corporations should abide by the citizenship requirement provided in Article XIII, section 8 of the 1935 Constitution,[27] viz:

Sec. 8. No franchise, certificate, or any other form or authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or other entities organized under the laws of the Philippines, sixty per centum of the capital of which is owned by citizens of the Philippines, nor shall such franchise, certificate or authorization be exclusive in character or for a longer period than fifty years. No franchise or right shall be granted to any individual, firm or corporation, except under the condition that it shall be subject to amendment, alteration, or repeal by the National Assembly when the public interest so requires. (emphasis supplied)

To accelerate the development of shipbuilding and ship repair industry, former President Ferdinand E. Marcos issued P.D. No. 666 granting the following incentives:


25

SECTION 1. Shipbuilding and ship repair yards duly registered with the Maritime Industry Authority shall be entitled to the following incentive benefits:

(a) Exemption from import duties and taxes.- The importation of machinery, equipment and materials for shipbuilding, ship repair and/or alteration, including indirect import, as well as replacement and spare parts for the repair and overhaul of vessels such as steel plates, electrical machinery and electronic parts, shall be exempt from the payment of customs duty and compensating tax: Provided, however, That the Maritime Industry Authority certifies that the item or items imported are not produced locally in sufficient quantity and acceptable quality at reasonable prices, and that the importation is directly and actually needed and will be used exclusively for the construction, repair, alteration, or overhaul of merchant vessels, and other watercrafts; Provided, further, That if the above machinery, equipment, materials and spare parts are sold to non-tax exempt persons or entities, the corresponding duties and taxes shall be paid by the original importer; Provided, finally, That local dealers and/or agents who sell machinery, equipment, materials and accessories to shipyards for shipbuilding and ship repair are entitled to tax credits, subject to approval by the total tariff duties and compensating tax paid for said machinery, equipment, materials and accessories.

(b) Accelerated depreciation.- Industrial plant and equipment may, at the option of the shipbuilder and ship repairer, be depreciated for any number of years between five years and expected economic life.

(c) Exemption from contractors percentage tax.- The gross receipts derived by shipbuilders and ship repairers from shipbuilding and ship repairing activities shall be exempt from the Contractors Tax provided in Section 91 of the National Internal Revenue Code during the first ten years from registration with the Maritime Industry Authority, provided that such registration is effected not later than the year 1990; Provided, That any and all amounts which would otherwise have been paid as contractors tax shall be set aside as a separate fund, to be known as Shipyard Development Fund, by the contractor for the purpose of expansion, modernization and/or improvement of the contractors own shipbuilding or ship repairing facilities; Provided, That, for this purpose, the contractor shall submit an annual statement of its receipts to the Maritime Industry Authority; and Provided, further, That any disbursement from such fund for any of the purposes hereinabove stated shall be subject to approval by the Maritime Industry Authority.

In addition, P.D. No. 666 removed the shipbuilding and ship repair industry from the list of public utilities, thereby freeing the industry from the 60% citizenship requirement under the Constitution and from the need to obtain Certificate of Public Convenience pursuant to section 15 of C.A No. 146. Section 1 (d) of P.D. 666 reads:

(d) Registration required but not as a Public Utility.- The business of constructing and repairing vessels or parts thereof shall not be considered a public utility and no Certificate of Public Convenience shall be required therefor. However, no shipyard, graving dock, marine railway or


26

marine repair shop and no person or enterprise shall engage in construction and/or repair of any vessel, or any phase or part thereof, without a valid Certificate of Registration and license for this purpose from the Maritime Industry Authority, except those owned or operated by the Armed Forces of the Philippines or by foreign governments pursuant to a treaty or agreement. (emphasis supplied)

Any law, decree, executive order, or rules and regulations inconsistent with P.D. No. 666 were repealed or modified accordingly.[28] Consequently, sections 13 (b) and 15 of C.A. No. 146 were repealed in so far as the former law included shipyards in the list of public utilities and required the certificate of public convenience for their operation. Simply stated, the repeal was due to irreconcilable inconsistency, and by definition, this kind of repeal falls under the category of an implied repeal.[29]

On April 28, 1983, Batas Pambansa Blg. 391, also known as the Investment Incentive Policy Act of 1983, was enacted. It laid down the general policy of the government to encourage private domestic and foreign investments in the various sectors of the economy, to wit:

Sec. 2. Declaration of Investment Policy.- It is the policy of the State to encourage private domestic and foreign investments in industry, agriculture, mining and other sectors of the economy which shall: provide significant employment opportunities relative to the amount of the capital being invested; increase productivity of the land, minerals, forestry, aquatic and other resources of the country, and improve utilization of the products thereof; improve technical skills of the people employed in the enterprise; provide a foundation for the future development of the economy; accelerate development of less developed regions of the country; and result in increased volume and value of exports for the economy.

It is the policy of the State to extend to projects which will significantly contribute to the attainment of these objectives, fiscal incentives without which said projects may not be established in the locales, number and/or pace required for optimum national economic development. Fiscal incentive systems shall be devised to compensate for market imperfections, reward performance of making contributions to economic development, cost-efficient and be simple to administer.

The fiscal incentives shall be extended to stimulate establishment and assist initial operations of the enterprise, and shall terminate after a period of not more than 10 years from registration or start-up of operation unless a special period is otherwise stated.

The foregoing declaration shall apply to all investment incentive schemes and in particular will supersede article 2 of Presidential Decree No. 1789. (emphases supplied)

With the new investment incentive regime, Batas Pambansa Blg. 391 repealed the following laws, viz:


27

Sec. 20. The following provisions are hereby repealed:

1) Section 53, P.D. 463 (Mineral Resources Development Decree);

2.) Section 1, P.D. 666 (Shipbuilding and Ship Repair Industry);

3) Section 6, P.D. 1101 (Radioactive Minerals);

4) LOI 508 extending P.D. 791 and P.D. 924 (Sugar); and

5) The following articles of Presidential Decree 1789: 2, 18, 19, 22, 28, 30, 39, 49 (d), 62, and 77. Articles 45, 46 and 48 are hereby amended only with respect to domestic and export producers.

All other laws, decrees, executive orders, administrative orders, rules and regulations or parts thereof which are inconsistent with the provisions of this Act are hereby repealed, amended or modified accordingly.

All other incentive systems which are not in any way affected by the provisions of this Act may be restructured by the President so as to render them cost-efficient and to make them conform with the other policy guidelines in the declaration of policy provided in Section 2 of this Act. (emphasis supplied)

From the language of the afore-quoted provision, the whole of P.D. No. 666, section 1 was expressly and categorically repealed. As a consequence, the provisions of C.A. No. 146, which were impliedly repealed by P.D. No. 666, section 1 were revived.[30] In other words, with the enactment of Batas Pambansa Blg. 391, a shipyard reverted back to its status as a public utility and as such, requires a CPC for its operation.

The crux of the present controversy is the effect of the express repeal of Batas Pambansa Blg. 391 by Executive Order No. 226 issued by former President Corazon C. Aquino under her emergency powers.

We rule that the express repeal of Batas Pambansa Blg. 391 by E.O. No. 226 did not revive Section 1 of P.D. No. 666. But more importantly, it also put a period to the existence of sections 13 (b) and 15 of C.A. No. 146. It bears emphasis that sections 13 (b) and 15 of C.A. No. 146, as originally written, owed their continued existence to Batas Pambansa Blg. 391. Had the latter not repealed P.D. No. 666, the former should have been modified accordingly and shipyards effectively removed from the list of public utilities. Ergo, with the express repeal of Batas Pambansa Blg. 391 by E.O. No. 226, the revival of sections 13 (b) and 15 of C.A. No. 146 had no more leg to stand on. A law that has been expressly repealed ceases to exist and becomes inoperative from the moment the repealing law becomes effective.[31] Hence, there is simply


28

no basis in the conclusion that shipyards remain to be a public utility. A repealed statute cannot be the basis for classifying shipyards as public utilities.

In view of the foregoing, there can be no other conclusion than to hold that a shipyard is not a pubic utility. A shipyard has been considered a public utility merely by legislative declaration. Absent this declaration, there is no more reason why it should continuously be regarded as such. The fact that the legislature did not clearly and unambiguously express its intention to include shipyards in the list of public utilities indicates that that it did not intend to do so. Thus, a shipyard reverts back to its status as non-public utility prior to the enactment of the Public Service Law.

This interpretation is in accord with the uniform interpretation placed upon it by the Board of Investments (BOI), which was entrusted by the legislature with the preparation of annual Investment Priorities Plan (IPPs). The BOI has consistently classified shipyards as part of the manufacturing sector and not of the public utilities sector. The enactment of Batas Pambansa Blg. 391 did not alter the treatment of the BOI on shipyards. It has been, as at present, classified as part of the manufacturing and not of the public utilities sector.[32]

Furthermore, of the 441 Ship Building and Ship Repair (SBSR) entities registered with the MARINA,[33] none appears to have an existing franchise. If we continue to hold that a shipyard is a pubic utility, it is a necessary consequence that all these entities should have obtained a franchise as was the rule prior to the enactment of P.D. No. 666. But MARINA remains without authority, pursuant to P.D. No. 474[34] to issue franchises for the operation of shipyards. Surely,

the legislature did not intend to create a vacuum by continuously treating a shipyard as a public utility without giving MARINA the power to issue a Certificate of Public Convenience (CPC) or a Certificate of Public Convenience and Necessity (CPCN) as required by section 15 of C.A. No. 146.

II.Whether under the 1977 Joint Venture Agreement,KAWASAKI can purchase only a maximum of 40%of PHILSECOs total capitalization.

A careful reading of the 1977 Joint Venture Agreement reveals that there is nothing that prevents KAWASAKI from acquiring more than 40% of PHILSECOs total capitalization. Section 1 of the 1977 JVA states:

1.3 The authorized capital stock of Philseco shall be P330 million. The parties shall thereafter increase their subscription in Philseco as may be necessary and as called by the Board of Directors, maintaining a proportion of 60%-40% for NIDC and KAWASAKI respectively, up to a total subscribed and paid-up capital stock of P312 million.


29

1.4 Neither party shall sell, transfer or assign all or any part of its interest in SNS [renamed PHILSECO] to any third party without giving the other under the same terms the right of first refusal. This provision shall not apply if the transferee is a corporation owned and controlled by the GOVERMENT [of the Philippines] or by a Kawasaki affiliate.

1.5 The By-Laws of SNS [PHILSECO] shall grant the parties preemptive rights to unissued shares of SNS [PHILSECO].[35]

Under section 1.3, the parties agreed to the amount of P330 million as the total capitalization of their joint venture. There was no mention of the amount of their initial subscription. What is clear is that they are to infuse the needed capital from time to time until the total subscribed and paid-up capital reaches P312 million. The phrase maintaining a proportion of 60%-40% refers to their respective share of the burden each time the Board of Directors decides to increase the subscription to reach the target paid-up capital of P312 million. It does not bind the parties to maintain the sharing scheme all throughout the existence of their partnership.

The parties likewise agreed to arm themselves with protective mechanisms to preserve their respective interests in the partnership in the event that (a) one party decides to sell its shares to third parties; and (b) new Philseco shares are issued. Anent the first situation, the non-selling party is given the right of first refusal under section 1.4 to have a preferential right to buy or to refuse the selling partys shares. The right of first refusal is meant to protect the original or remaining joint venturer(s) or shareholder(s) from the entry of third persons who are not acceptable to it as co-venturer(s) or co-shareholder(s). The joint venture between the Philippine Government and KAWASAKI is in the nature of a partnership[36] which, unlike an ordinary corporation, is based on delectus personae.[37] No one can become a member of the partnership association without the consent of all the other associates. The right of first refusal thus ensures that the parties are given control over who may become a new partner in substitution of or in addition to the original partners. Should the selling partner decide to dispose all its shares, the non-selling partner may acquire all these shares and terminate the partnership. No person or corporation can be compelled to remain or to continue the partnership. Of course, this presupposes that there are no other restrictions in the maximum allowable share that the non-selling partner may acquire such as the constitutional restriction on foreign ownership in public utility. The theory that KAWASAKI can acquire, as a maximum, only 40% of PHILSECOs shares is correct only if a shipyard is a public utility. In such instance, the non-selling partner who is an alien can acquire only a maximum of 40% of the total capitalization of a public utility despite the grant of first refusal. The partners cannot, by mere agreement, avoid the constitutional proscription. But as afore-discussed, PHILSECO is not a public utility and no other restriction is present that would limit the right of KAWASAKI to purchase the Governments share to 40% of Philsecos total capitalization.

Furthermore, the phrase under the same terms in section 1.4 cannot be given an interpretation that would limit the right of KAWASAKI to purchase PHILSECO shares only to the extent of


30

its original proportionate contribution of 40% to the total capitalization of the PHILSECO. Taken together with the whole of section 1.4, the phrase under the same terms means that a partner to the joint venture that decides to sell its shares to a third party shall make a similar offer to the non-selling partner. The selling partner cannot make a different or a more onerous offer to the non-selling partner.

The exercise of first refusal presupposes that the non-selling partner is aware of the terms of the conditions attendant to the sale for it to have a guided choice. While the right of first refusal protects the non-selling partner from the entry of third persons, it cannot also deprive the other partner the right to sell its shares to third persons if, under the same offer, it does not buy the shares.

Apart from the right of first refusal, the parties also have preemptive rights under section 1.5 in the unissued shares of Philseco. Unlike the former, this situation does not contemplate transfer of a partners shares to third parties but the issuance of new Philseco shares. The grant of preemptive rights preserves the proportionate shares of the original partners so as not to dilute their respective interests with the issuance of the new shares. Unlike the right of first refusal, a preemptive right gives a partner a preferential right over the newly issued shares only to the extent that it retains its original proportionate share in the joint venture.

The case at bar does not concern the issuance of new shares but the transfer of a partners share in the joint venture. Verily, the operative protective mechanism is the right of first refusal which does not impose any limitation in the maximum shares that the non-selling partner may acquire.

III.Whether the right to top granted to KAWASAKIin exchange for its right of first refusal violatesthe principles of competitive bidding.

We also hold that the right to top granted to KAWASAKI and exercised by private respondent did not violate the rules of competitive bidding.

The word bidding in its comprehensive sense means making an offer or an invitation to prospective contractors whereby the government manifests its intention to make proposals for the purpose of supplies, materials and equipment for official business or public use, or for public works or repair.[38] The three principles of public bidding are: (1) the offer to the public; (2) an opportunity for competition; and (3) a basis for comparison of bids.[39] As long as these three principles are complied with, the public bidding can be considered valid and legal. It is not necessary that the highest bid be automatically accepted. The bidding rules may specify other conditions or the bidding process be subjected to certain reservation or qualification such as when the owner reserves to himself openly at the time of the sale the right to bid upon the property, or openly announces a price below which the property will not be sold. Hence, where the seller reserves the right to refuse to accept any bid made, a binding sale is not consummated


31

between the seller and the bidder until the seller accepts the bid. Furthermore, where a right is reserved in the seller to reject any and all bids received, the owner may exercise the right even after the auctioneer has accepted a bid, and this applies to the auction of public as well as private property. [40] Thus:

It is a settled rule that where the invitation to bid contains a reservation for the Government to reject any or all bids, the lowest or the highest bidder, as the case may be, is not entitled to an award as a matter of right for it does not become a ministerial duty of the Government to make such an award. Thus, it has been held that where the right to reject is so reserved, the lowest bid or any bid for that matter may be rejected on a mere technicality, that all bids may be rejected, even if arbitrarily and unwisely, or under a mistake, and that in the exercise of a sound discretion, the award may be made to another than the lowest bidder. And so, where the Government as advertiser, availing itself of that right, makes its choice in rejecting any or all bids, the losing bidder has no cause to complain nor right to dispute that choice, unless an unfairness or injustice is shown. Accordingly, he has no ground of action to compel the Government to award the contract in his favor, nor compel it to accept his bid.[41]

In the instant case, the sale of the Government shares in PHILSECO was publicly known. All interested bidders were welcomed. The basis for comparing the bids were laid down. All bids were accepted sealed and were opened and read in the presence of the COAs official representative and before all interested bidders. The only question that remains is whether or not the existence of KAWASAKIs right to top destroys the essence of competitive bidding so as to say that the bidders did not have an opportunity for competition. We hold that it does not.

The essence of competition in public bidding is that the bidders are placed on equal footing. This means that all qualified bidders have an equal chance of winning the auction through their bids. In the case at bar, all of the bidders were exposed to the same risk and were subjected to the same condition, i.e., the existence of KAWASAKIs right to top. Under the ASBR, the Government expressly reserved the right to reject any or all bids, and manifested its intention not to accept the highest bid should KAWASAKI decide to exercise its right to top under the ABSR. This reservation or qualification was made known to the bidders in a pre-bidding conference held on September 28, 1993. They all expressly accepted this condition in writing without any qualification. Furthermore, when the Committee on Privatization notified petitioner of the approval of the sale of the National Government shares of stock in PHILSECO, it specifically stated that such approval was subject to the right of KAWASAKI Heavy Industries, Inc./Philyards Holdings, Inc. to top JGSMIs bid by 5% as specified in the bidding rules. Clearly, the approval of the sale was a conditional one. Since Philyards eventually exercised its right to top petitioners bid by 5%, the sale was not consummated. Parenthetically, it cannot be argued that the existence of the right to top set for naught the entire public bidding. Had Philyards Holdings, Inc. failed or refused to exercise its right to top, the sale between the petitioner and the National Government would have been consummated. In like manner, the existence of the right to top cannot be likened to a second bidding, which is countenanced, except when there is failure to bid as when there is only one bidder or none at all. A prohibited


32

second bidding presupposes that based on the terms and conditions of the sale, there is already a highest bidder with the right to demand that the seller accept its bid. In the instant case, the highest bidder was well aware that the acceptance of its bid was conditioned upon the non-exercise of the right to top.

To be sure, respondents did not circumvent the requirements for bidding by granting KAWASAKI, a non-bidder, the right to top the highest bidder. The fact that KAWASAKIs nominee to exercise the right to top has among its stockholders some losing bidders cannot also be deemed unfair.

It must be emphasized that none of the parties questions the existence of KAWASAKIs right of first refusal, which is concededly the basis for the grant of the right to top. Under KAWASAKIs right of first refusal, the National Government is under the obligation to give preferential right to KAWASAKI in the event it decides to sell its shares in PHILSECO. It has to offer to KAWASAKI the shares and give it the option to buy or refuse under the same terms for which it is willing to sell the said shares to third parties. KAWASAKI is not a mere non-bidder. It is a partner in the joint venture; the incidents of which are governed by the law on contracts and on partnership.

It is true that properties of the National Government, as a rule, may be sold only after a public bidding is held. Public bidding is the accepted method in arriving at a fair and reasonable price and ensures that overpricing, favoritism and other anomalous practices are eliminated or minimized.[42] But the requirement for public bidding does not negate the exercise of the right of first refusal. In fact, public bidding is an essential first step in the exercise of the right of first refusal because it is only after the public bidding that the terms upon which the Government may be said to be willing to sell its shares to third parties may be known. It is only after the public bidding that the Government will have a basis with which to offer KAWASAKI the option to buy or forego the shares.

Assuming that the parties did not swap KAWASAKIs right of first refusal with the right to top, KAWASAKI would have been able to buy the National Governments shares in PHILSECO under the same terms as offered by the highest bidder. Stated otherwise, by exercising its right of first refusal, KAWASAKI could have bought the shares for only P2.03 billion and not the higher amount of P2.1315 billion. There is, thus, no basis in the submission that the right to top unfairly favored KAWASAKI. In fact, with the right to top, KAWASAKI stands to pay higher than it should had it settled with its right of first refusal. The obvious beneficiary of the scheme is the National Government.

If at all, the obvious consideration for the exchange of the right of first refusal with the right to top is that KAWASAKI can name a nominee, which it is a shareholder, to exercise the right to top. This is a valid contractual stipulation; the right to top is an assignable right and both parties are aware of the full legal consequences of its exercise. As aforesaid, all bidders were aware of the existence of the right to top, and its possible effects on the result of the public bidding was


33

fully disclosed to them. The petitioner, thus, cannot feign ignorance nor can it be allowed to repudiate its acts and question the proceedings it had fully adhered to.[43]

The fact that the losing bidder, Keppel Consortium (composed of Keppel, SM Group, Insular Life Assurance, Mitsui and ICTSI), has joined Philyards in the latters effort to raise P2.131 billion necessary in exercising the right to top is not contrary to law, public policy or public morals. There is nothing in the ASBR that bars the losing bidders from joining either the winning bidder (should the right to top is not exercised) or KAWASAKI/PHI (should it exercise its right to top as it did), to raise the purchase price. The petitioner did not allege, nor was it shown by competent evidence, that the participation of the losing bidders in the public bidding was done with fraudulent intent. Absent any proof of fraud, the formation by Philyards of a consortium is legitimate in a free enterprise system. The appellate court is thus correct in holding the petitioner estopped from questioning the validity of the transfer of the National Governments shares in PHILSECO to respondent.

Finally, no factual basis exists to support the view that the drafting of the ASBR was illegal because no prior approval was given by the COA for it, specifically the provision on the right to top the highest bidder and that the public auction on December 2, 1993 was not witnessed by a COA representative. No evidence was proffered to prove these allegations and the Court cannot make legal conclusions out of mere allegations. Regularity in the performance of official duties is presumed[44] and in the absence of competent evidence to rebut this presumption, this Court is duty bound to uphold this presumption.

IN VIEW OF THE FOREGOING, the Motion for Reconsideration is hereby GRANTED. The impugned

G.R. No. 104175 June 25, 1993YOUNG AUTO SUPPLY CO. AND NEMESIO GARCIA, petitioners, vs.THE HONORABLE COURT OF APPEALS (THIRTEENTH DIVISION) AND GEORGE CHIONG ROXAS, respondents.

Petitioners seek to set aside the decision of respondent Court of Appeals in CA-G.R. SP No. 25237, which reversed the Order dated February 8, 1991 issued by the Regional Trial Court, Branch 11, Cebu City in Civil Case No. CEB 6967. The order of the trial court denied the motion to dismiss filed by respondent George C. Roxas of the complaint for collection filed by petitioners.

It appears that sometime on October 28, 1987, Young Auto Supply Co. Inc. (YASCO) represented by Nemesio Garcia, its president, Nelson Garcia and Vicente Sy, sold all of their shares of stock in Consolidated Marketing & Development Corporation (CMDC) to Roxas. The


34

purchase price was P8,000,000.00 payable as follows: a downpayment of P4,000,000.00 and the balance of P4,000,000.00 in four post dated checks of P1,000,000.00 each.

Immediately after the execution of the agreement, Roxas took full control of the four markets of CMDC. However, the vendors held on to the stock certificates of CMDC as security pending full payment of the balance of the purchase price.

The first check of P4,000,000.00, representing the down-payment, was honored by the drawee bank but the four other checks representing the balance of P4,000,000.00 were dishonored. In the meantime, Roxas sold one of the markets to a third party. Out of the proceeds of the sale, YASCO received P600,000.00, leaving a balance of P3,400,000.00 (Rollo, p. 176).

Subsequently, Nelson Garcia and Vicente Sy assigned all their rights and title to the proceeds of the sale of the CMDC shares to Nemesio Garcia.

On June 10, 1988, petitioners filed a complaint against Roxas in the Regional Trial Court, Branch 11, Cebu City, praying that Roxas be ordered to pay petitioners the sum of P3,400,00.00 or that full control of the three markets be turned over to YASCO and Garcia. The complaint also prayed for the forfeiture of the partial payment of P4,600,000.00 and the payment of attorney's fees and costs (Rollo, p. 290).

Roxas filed two motions for extension of time to submit his answer. But despite said motion, he failed to do so causing petitioners to file a motion to have him declared in default. Roxas then filed, through a new counsel, a third motion for extension of time to submit a responsive pleading.

On August 19, 1988, the trial court declared Roxas in default. The order of default was, however, lifted upon motion of Roxas.

On August 22, 1988, Roxas filed a motion to dismiss on the grounds that:

1. The complaint did not state a cause of action due to non-joinder of indispensable parties;

2. The claim or demand set forth in the complaint had been waived, abandoned or otherwise extinguished; and

3. The venue was improperly laid (Rollo, p. 299).

After a hearing, wherein testimonial and documentary evidence were presented by both parties, the trial court in an Order dated February 8, 1991 denied Roxas' motion to dismiss. After receiving said order, Roxas filed another motion for extension of time to submit his answer. He also filed a motion for reconsideration, which the trial court denied in its Order dated April 10,


35

1991 for being pro-forma (Rollo, p. 17). Roxas was again declared in default, on the ground that his motion for reconsideration did not toll the running of the period to file his answer.

On May 3, 1991, Roxas filed an unverified Motion to Lift the Order of Default which was not accompanied with the required affidavit or merit. But without waiting for the resolution of the motion, he filed a petition for certiorari with the Court of Appeals.

The Court of Appeals sustained the findings of the trial court with regard to the first two grounds raised in the motion to dismiss but ordered the dismissal of the complaint on the ground of improper venue (Rollo, p. 49).

A subsequent motion for reconsideration by petitioner was to no avail.

Petitioners now come before us, alleging that the Court of Appealserred in:

1. holding the venue should be in Pasay City, and not in Cebu City (where both petitioners/plaintiffs are residents;

2. not finding that Roxas is estopped from questioning the choice of venue (Rollo, p. 19).

The petition is meritorious.

In holding that the venue was improperly laid in Cebu City, the Court of Appeals relied on the address of YASCO, as appearing in the Deed of Sale dated October 28, 1987, which is "No. 1708 Dominga Street, Pasay City." This was the same address written in YASCO's letters and several commercial documents in the possession of Roxas (Decision, p. 12; Rollo, p. 48).

In the case of Garcia, the Court of Appeals said that he gave Pasay City as his address in three letters which he sent to Roxas' brothers and sisters (Decision, p. 12; Rollo, p. 47). The appellate court held that Roxas was led by petitioners to believe that their residence is in Pasay City and that he had relied upon those representations (Decision, p. 12, Rollo, p. 47).

The Court of Appeals erred in holding that the venue was improperly laid in Cebu City.

In the Regional Trial Courts, all personal actions are commenced and tried in the province or city where the defendant or any of the defendants resides or may be found, or where the plaintiff or any of the plaintiffs resides, at the election of the plaintiff [Sec. 2(b) Rule 4, Revised Rules of Court].

There are two plaintiffs in the case at bench: a natural person and a domestic corporation. Both plaintiffs aver in their complaint that they are residents of Cebu City, thus:


36

1.1. Plaintiff Young Auto Supply Co., Inc., ("YASCO") is a domestic corporation duly organized and existing under Philippine laws with principal place of business at M. J. Cuenco Avenue, Cebu City. It also has a branch office at 1708 Dominga Street, Pasay City, Metro Manila.

Plaintiff Nemesio Garcia is of legal age, married, Filipino citizen and with business address at Young Auto Supply Co., Inc., M. J. Cuenco Avenue, Cebu City. . . . (Complaint, p. 1; Rollo, p. 81).

The Article of Incorporation of YASCO (SEC Reg. No. 22083) states:

THIRD That the place where the principal office of the corporation is to be established or located is at Cebu City, Philippines (as amended on December 20, 1980 and further amended on December 20, 1984) (Rollo, p. 273).

A corporation has no residence in the same sense in which this term is applied to a natural person. But 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 (Cohen v. Benguet Commercial Co., Ltd., 34 Phil. 256 [1916] Clavecilla Radio System v. Antillon, 19 SCRA 379 [1967]). The Corporation Code precisely requires each corporation to specify in its articles of incorporation the "place where the principal office of the corporation is to be located which must be within the Philippines" (Sec. 14 [3]). The purpose of this requirement is to fix the residence of a corporation in a definite place, instead of allowing it to be ambulatory.

In Clavencilla Radio System v. Antillon, 19 SCRA 379 ([1967]), this Court explained why actions cannot be filed against a corporation in any place where the corporation maintains its branch offices. The Court ruled that to allow an action to be instituted in any place where the corporation has branch offices, would create confusion and work untold inconvenience to said entity. By the same token, a corporation cannot be allowed to file personal actions in a place other than its principal place of business unless such a place is also the residence of a co-plaintiff or a defendant.

If it was Roxas who sued YASCO in Pasay City and the latter questioned the venue on the ground that its principal place of business was in Cebu City, Roxas could argue that YASCO was in estoppel because it misled Roxas to believe that Pasay City was its principal place of business. But this is not the case before us.

With the finding that the residence of YASCO for purposes of venue is in Cebu City, where its principal place of business is located, it becomes unnecessary to decide whether Garcia is also a resident of Cebu City and whether Roxas was in estoppel from questioning the choice of Cebu City as the venue.


37

WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals appealed from is SET ASIDE and the Order dated February 8, 1991 of the Regional Trial Court is REINSTATED.

[G.R. No. 51765. March 3, 1997]REPUBLIC PLANTERS BANK, petitioner, vs. HON. ENRIQUE A. AGANA, SR., as Presiding Judge, Court of First Instance of Rizal, Branch XXVIII, Pasay City, ROBES-FRANCISCO REALTY & DEVELOPMENT CORPORATION and ADALIA F. ROBES, respondents.

This is a petition for certiorari seeking the annulment of the Decision[1] of the then Court of First Instance of Rizal[2] for having been rendered in grave abuse of discretion. Private respondents Robes-Francisco Realty and Development Corporation (hereafter, "the Corporation") and Adalia F. Robes filed in the court a quo, an action for specific performance to compel petitioner to redeem 800 preferred shares of stock with a face value of P8,000.00 and to pay 1% quarterly interest thereon as quarterly dividend owing them under the terms and conditions of the certificates of stock.

The court a quo rendered judgment in favor of private respondents; hence, this instant petition.

Herein parties debate only legal issues, no issues of fact having been raised by them in the court a quo. For ready reference, however, the following narration of pertinent transactions and events is in order:

On September 18, 1961, private respondent Corporation secured a loan from petitioner in the amount of P120,000.00. As part of the proceeds of the loan, preferred shares of stocks were issued to private respondent Corporation, through its officers then, private respondent Adalia F. Robes and one Carlos F. Robes. In other words, instead of giving the legal tender totaling to the full amount of the loan, which is P120,000.00, petitioner lent such amount partially in the form of money and partially in the form of stock certificates numbered 3204 and 3205, each for 400 shares with a par value of P10.00 per share, or for P4,000.00 each, for a total of P8,000.00. Said stock certificates were in the name of private respondent Adalia F. Robes and Carlos F. Robes, who subsequently, however, endorsed his shares in favor of Adalia F. Robes.

Said certificates of stock bear the following terms and conditions:

"The Preferred Stock shall have the following rights, preferences, qualifications and limitations, to wit:

1. Of the right to receive a quarterly dividend of One Per Centum (1%), cumulative and participating.


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xxx2. That such preferred shares may be redeemed, by the system of drawing lots, at any time after two (2) years from the date of issue at the option of the Corporation. x x x."On January 31, 1979, private respondents proceeded against petitioner and filed a Complaint anchored on private respondents' alleged rights to collect dividends under the preferred shares in question and to have petitioner redeem the same under the terms and conditions of the stock certificates. Private respondents attached to their complaint, a letter-demand dated January 5, 1979 which, significantly, was not formally offered in evidence.

Petitioner filed a Motion to Dismiss[3] private respondents' Complaint on the following grounds: (1) that the trial court had no jurisdiction over the subject-matter of the action; (2) that the action was unenforceable under substantive law; and (3) that the action was barred by the statute of limitations and/or laches.

Petitioner's Motion to Dismiss was denied by the trial court in an Order dated March 16, 1979.[4] Petitioner then filed its Answer on May 2, 1979.[5] Thereafter, the trial court gave the parties ten (10) days from July 30, 1979 to submit their respective memoranda after the submission of which the case would be deemed submitted for resolution.[6]

On September 7, 1979, the trial court rendered the herein assailed decision in favor of private respondents. In ordering petitioner to pay private respondents the face value of the stock certificates as redemption price, plus 1% quarterly interest thereon until full payment, the trial court ruled:

"There being no issue of fact raised by either of the parties who filed their respective memoranda delineating their respective contentions, a judgment on the pleadings, conformably with an earlier order of the Court, appears to be in order.

From a further perusal of the pleadings, it appears that the provision of the stock certificates in question to the effect that the plaintiffs shall have the right to receive a quarterly dividend of One Per Centum (1%), cumulative and participating, clearly and unequivocably [sic] indicates that the same are 'interest bearing stocks' which are stocks issued by a corporation under an agreement to pay a certain rate of interest thereon (5 Thompson, Sec. 3439). As such, plaintiffs become entitled to the payment thereof as a matter of right without necessity of a prior declaration of dividend.

On the question of the redemption by the defendant of said preferred shares of stock, the very wordings of the terms and conditions in said stock certificates clearly allows the same.

To allow the herein defendant not to redeem said preferred shares of stock and/or pay the interest due thereon despite the clear import of said provisions by the mere invocation of alleged Central Bank Circulars prohibiting the same is tantamount to an impairment of the obligation of contracts enshrined in no less than the fundamental law itself.


39

Moreover, the herein defendant is considered in estoppel from taking shelter behind a General Banking Act provision to the effect that it cannot buy its own shares of stocks considering that the very terms and conditions in said stock certificates allowing their redemption are its own handiwork.

As to the claim by the defendant that plaintiffs' cause of action is barred by prescription, suffice it to state that the running of the prescriptive period was considered interrupted by the written extrajudicial demands made by the plaintiffs from the defendant."[7]

Aggrieved by the decision of the trial court, petitioner elevated the case before us essentially on pure questions of law. Petitioner's statement of the issues that it submits for us to adjudicate upon, is as follows:

"A. RESPONDENT JUDGE COMMITTED A GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN ORDERING PETITIONER TO PAY RESPONDENT ADALIA F. ROBES THE AMOUNT OF P8,213.69 AS INTERESTS FROM 1961 To 1979 ON HER PREFERRED SHARES.

B. RESPONDENT JUDGE COMMITTED A GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN ORDERING PETITIONER TO REDEEM RESPONDENT ADALIA F. ROBES' PREFERRED SHARES FOR P8,000.00

C. RESPONDENT JUDGE COMMITTED A GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN DISREGARDING THE ORDER OF THE CENTRAL BANK TO PETITIONER TO DESIST FROM REDEEMING ITS PREFERRED SHARES AND FROM PAYING DIVIDENDS THEREON x x x.

D. THE TRIAL COURT ERRED IN NOT HOLDING THAT THE COMPLAINT DOES NOT STATE A CAUSE OF ACTION.

E. THE TRIAL COURT ERRED IN NOT HOLDING THAT THE CLAIM OF RESPONDENT ADALIA F. ROBES IS BARRED BY PRESCRIPTION OR LACHES."[8]

The petition is meritorious.

Before passing upon the merits of this petition, it may be pertinent to provide an overview on the nature of preferred shares and the redemption thereof, considering that these issues lie at the heart of the dispute.

A preferred share of stock, on one hand, is one which entitles the holder thereof to certain preferences over the holders of common stock. The preferences are designed to induce persons


40

to subscribe for shares of a corporation.[9] Preferred shares take a multiplicity of forms. The most common forms may be classified into two: (1) preferred shares as to assets; and (2) preferred shares as to dividends. The former is a share which gives the holder thereof preference in the distribution of the assets of the corporation in case of liquidation;[10] the latter is a share the holder of which is entitled to receive dividends on said share to the extent agreed upon before any dividends at all are paid to the holders of common stock.[11] There is no guaranty, however, that the share will receive any dividends. Under the old Corporation Law in force at the time the contract between the petitioner and the private respondents was entered into, it was provided that "no corporation shall make or declare any dividend except from the surplus profits arising from its business, or distribute its capital stock or property other than actual profits among its members or stockholders until after the payment of its debts and the termination of its existence by limitation or lawful dissolution."[12] Similarly, the present Corporation Code[13] provides that the board of directors of a stock corporation may declare dividends only out of unrestricted retained earnings.[14] The Code, in Section 43, adopting the change made in accounting terminology, substituted the phrase unrestricted retained earnings," which may be a more precise term, in place of "surplus profits arising from its business" in the former law. Thus, the declaration of dividends is dependent upon the availability of surplus profit or unrestricted retained earnings, as the case may be. Preferences granted to preferred stockholders, moreover, do not give them a lien upon the property of the corporation nor make them creditors of the corporation, the right of the former being always subordinate to the latter. Dividends are thus payable only when there are profits earned by the corporation and as a general rule, even if there are existing profits, the board of directors has the discretion to determine whether or not dividends are to be declared.[15] Shareholders, both common and preferred, are considered risk takers who invest capital in the business and who can look only to what is left after corporate debts and liabilities are fully paid.[16]

Redeemable shares, on the other hand, are shares usually preferred, which by their terms are redeemable at a fixed date, or at the option of either issuing corporation, or the stockholder, or both at a certain redemption price.[17] A redemption by the corporation of its stock is, in a sense, a repurchase of it for cancellation.[18] The present Code allows redemption of shares even if there are no unrestricted retained earnings on the books of the corporation. This is a new provision which in effect qualifies the general rule that the corporation cannot purchase its own shares except out of current retained earnings.[19] However, while redeemable shares may be redeemed regardless of the existence of unrestricted retained earnings, this is subject to the condition that the corporation has, after such redemption, assets in its books to cover debts and liabilities inclusive of capital stock. Redemption, therefore, may not be made where the corporation is insolvent or if such redemption will cause insolvency or inability of the corporation to meet its debts as they mature.[20]

We come now to the merits of the case. The petitioner argues that it cannot be compelled to redeem the preferred shares issued to the private respondent. We agree. Respondent judge, in ruling that petitioner must redeem the shares in question, stated that:


41

"On the question of the redemption by the defendant of said preferred shares of stock, the very wordings of the terms and conditions in said stock certificates clearly allows the same."[21]

What respondent Judge failed to recognize was that while the stock certificate does allow redemption, the option to do so was clearly vested in the petitioner bank. The redemption therefore is clearly the type known as "optional". Thus, except as otherwise provided in the stock certificate, the redemption rests entirely with the corporation and the stockholder is without right to either compel or refuse the redemption of its stock.[22] Furthermore, the terms and conditions set forth therein use the word "may". It is a settled doctrine in statutory construction that the word "may" denotes discretion, and cannot be construed as having a mandatory effect. We fail to see how respondent judge can ignore what, in his words, are the "very wordings of the terms and conditions in said stock certificates" and construe what is clearly a mere option to be his legal basis for compelling the petitioner to redeem the shares in question.

The redemption of said shares cannot be allowed. As pointed out by the petitioner, the Central Bank made a finding that said petitioner has been suffering from chronic reserve deficiency,[23] and that such finding resulted in a directive, issued on January 31, 1973 by then Gov. G. S. Licaros of the Central Bank, to the President and Acting Chairman of the Board of the petitioner bank prohibiting the latter from redeeming any preferred share, on the ground that said redemption would reduce the assets of the Bank to the prejudice of its depositors and creditors.[24] Redemption of preferred shares was prohibited for a just and valid reason. The directive issued by the Central Bank Governor was obviously meant to preserve the status quo, and to prevent the financial ruin of a banking institution that would have resulted in adverse repercussions, not only to its depositors and creditors, but also to the banking industry as a whole. The directive, in limiting the exercise of a right granted by law to a corporate entity, may thus be considered as an exercise of police power. The respondent judge insists that the directive constitutes an impairment of the obligation of contracts. It has, however, been settled that the Constitutional guaranty of non-impairment of obligations of contract is limited by the exercise of the police power of the state, the reason being that public welfare is superior to private rights.[25]

The respondent judge also stated that since the stock certificate granted the private respondents the right to receive a quarterly dividend of one Per Centum (1%), cumulative and participating, it "clearly and unequivocably (sic) indicates that the same are 'interest bearing stocks' or stocks issued by a corporation under an agreement to pay a certain rate of interest thereon. As such, plaintiffs (private respondents herein) become entitled to the payment thereof as a matter of right without necessity of a prior declaration of dividend."[26] There is no legal basis for this observation. Both Sec. 16 of the Corporation Law and Sec. 43 of the present Corporation Code prohibit the issuance of any stock dividend without the approval of stockholders, representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. These provisions underscore the fact that payment of dividends to a stockholder is not a matter of right but a matter of consensus. Furthermore, "interest bearing


42

stocks", on which the corporation agrees absolutely to pay interest before dividends are paid to common stockholders, is legal only when construed as requiring payment of interest as dividends from net earnings or surplus only.[27] Clearly, the respondent judge, in compelling the petitioner to redeem the shares in question and to pay the corresponding dividends, committed grave abuse of discretion amounting to lack or excess of jurisdiction in ignoring both the terms and conditions specified in the stock certificate, as well as the clear mandate of the law.

Anent the issue of prescription, this Court so holds that the claim of private respondent is already barred by prescription as well as laches. Art. 1144 of the New Civil Code provides that a right of action that is founded upon a written contract prescribes in ten (10) years. The letter-demand made by the private respondents to the petitioner was made only on January 5, 1979, or almost eighteen years after receipt of the written contract in the form of the stock certificate. As noted earlier, this letter-demand, significantly, was not formally offered in evidence, nor were any other evidence of demand presented. Therefore, we conclude that the only time the private respondents saw it fit to assert their rights, if any, to the preferred shares of stock, was after the lapse of almost eighteen years. The same clearly indicates that the right of the private respondents to any relief under the law has already prescribed. Moreover, the claim of the private respondents is also barred by laches. Laches has been defined as the failure or neglect, for an unreasonable length of time, to do that which by exercising due diligence could or should have been done earlier; it is negligence or omission to assert a right within a reasonable time, warranting a presumption that the party entitled to assert it either has abandoned it or declined to assert it.[28]

Considering that the terms and conditions set forth in the stock certificate clearly indicate that redemption of the preferred shares may be made at any time after the lapse of two years from the date of issue, private respondents should have taken it upon themselves, after the lapse of the said period, to inquire from the petitioner the reason why the said shares have not been redeemed. As it is, not only two years had lapsed, as agreed upon, but an additional sixteen years passed before the private respondents saw it fit to demand their right. The petitioner, at the time it issued said preferred shares to the private respondents in 1961, could not have known that it would be suffering from chronic reserve deficiency twelve years later. Had the private respondents been vigilant in asserting their rights, the redemption could have been effected at a time when the petitioner bank was not suffering from any financial crisis.

WHEREFORE, the instant petition, being impressed with merit, is hereby GRANTED. The challenged decision of respondent judge is set aside and the complaint against the petitioner is dismissed.


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[G.R. No. 150976. October 18, 2004]CECILIA CASTILLO, OSCAR DEL ROSARIO, ARTURO S. FLORES, XERXES NAVARRO, MARIA ANTONIA TEMPLO and MEDICAL CENTER PARAAQUE, INC., petitioners, vs. ANGELES BALINGHASAY, RENATO BERNABE, ALODIA DEL ROSARIO, ROMEO FUNTILA, TERESITA GAYANILO, RUSTICO JIMENEZ, ARACELI** JO, ESMERALDA MEDINA, CECILIA MONTALBAN, VIRGILIO OBLEPIAS, CARMENCITA PARRENO, CESAR REYES, REYNALDO SAVET, SERAPIO TACCAD, VICENTE VALDEZ, SALVACION VILLAMORA, and HUMBERTO VILLAREAL, respondents.

For review on certiorari is the Partial Judgment[1] dated November 26, 2001 in Civil Case No. 01-0140, of the Regional Trial Court (RTC) of Paraaque City, Branch 258. The trial court declared the February 9, 2001, election of the board of directors of the Medical Center Paraaque, Inc. (MCPI) valid. The Partial Judgment dismissed petitioners first cause of action, specifically, to annul said election for depriving petitioners their voting rights and to be voted on as members of the board.

The facts, as culled from records, are as follows:

Petitioners and the respondents are stockholders of MCPI, with the former holding Class B shares and the latter owning Class A shares.

MCPI is a domestic corporation with offices at Dr. A. Santos Avenue, Sucat, Paraaque City. It was organized sometime in September 1977. At the time of its incorporation, Act No. 1459, the old Corporation Law was still in force and effect. Article VII of MCPIs original Articles of Incorporation, as approved by the Securities and Exchange Commission (SEC) on October 26, 1977, reads as follows:

SEVENTH. That the authorized capital stock of the corporation is TWO MILLION (P2,000,000.00) PESOS, Philippine Currency, divided into TWO THOUSAND (2,000) SHARES at a par value of P100 each share, whereby the ONE THOUSAND SHARES issued to, and subscribed by, the incorporating stockholders shall be classified as Class A shares while the other ONE THOUSAND unissued shares shall be considered as Class B shares. Only holders of Class A shares can have the right to vote and the right to be elected as directors or as corporate officers.[2] (Stress supplied)

On July 31, 1981, Article VII of the Articles of Incorporation of MCPI was amended, to read thus:

SEVENTH. That the authorized capital stock of the corporation is FIVE MILLION (P5,000,000.00) PESOS, divided as follows:

CLASS NO. OF SHARES PAR VALUE


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A 1,000 P1,000.00B 4,000 P1,000.00Only holders of Class A shares have the right to vote and the right to be elected as directors or as corporate officers.[3] (Emphasis supplied)

The foregoing amendment was approved by the SEC on June 7, 1983. While the amendment granted the right to vote and to be elected as directors or corporate officers only to holders of Class A shares, holders of Class B stocks were granted the same rights and privileges as holders of Class A stocks with respect to the payment of dividends.

On September 9, 1992, Article VII was again amended to provide as follows:

SEVENTH: That the authorized capital stock of the corporation is THIRTY TWO MILLION PESOS (P32,000,000.00) divided as follows:

CLASS NO. OF SHARES PAR VALUEA 1,000 P1,000.00B 31,000 1,000.00Except when otherwise provided by law, only holders of Class A shares have the right to vote and the right to be elected as directors or as corporate officers[4] (Stress and underscoring supplied).

The SEC approved the foregoing amendment on September 22, 1993.

On February 9, 2001, the shareholders of MCPI held their annual stockholders meeting and election for directors. During the course of the proceedings, respondent Rustico Jimenez, citing Article VII, as amended, and notwithstanding MCPIs history, declared over the objections of herein petitioners, that no Class B shareholder was qualified to run or be voted upon as a director. In the past, MCPI had seen holders of Class B shares voted for and serve as members of the corporate board and some Class B share owners were in fact nominated for election as board members. Nonetheless, Jimenez went on to announce that the candidates holding Class A shares were the winners of all seats in the corporate board. The petitioners protested, claiming that Article VII was null and void for depriving them, as Class B shareholders, of their right to vote and to be voted upon, in violation of the Corporation Code (Batas Pambansa Blg. 68), as amended.

On March 22, 2001, after their protest was given short shrift, herein petitioners filed a Complaint for Injunction, Accounting and Damages, docketed as Civil Case No. CV-01-0140 before the RTC of Paraaque City, Branch 258. Said complaint was founded on two (2) principal causes of action, namely:

a. Annulment of the declaration of directors of the MCPI made during the February 9, 2001 Annual Stockholders Meeting, and for the conduct of an election whereat all stockholders,


45

irrespective of the classification of the shares they hold, should be afforded their right to vote and be voted for; and

b. Stockholders derivative suit challenging the validity of a contract entered into by the Board of Directors of MCPI for the operation of the ultrasound unit.[5]

Subsequently, the complaint was amended to implead MCPI as party-plaintiff for purposes only of the second cause of action.

Before the trial court, the herein petitioners alleged that they were deprived of their right to vote and to be voted on as directors at the annual stockholders meeting held on February 9, 2001, because respondents had erroneously relied on Article VII of the Articles of Incorporation of MCPI, despite Article VII being contrary to the Corporation Code, thus null and void. Additionally, respondents were in estoppel, because in the past, petitioners were allowed to vote and to be elected as members of the board. They further claimed that the privilege granted to the Class A shareholders was more in the nature of a right granted to founders shares.

In their Answer, the respondents averred that the provisions of Article VII clearly and categorically state that only holders of Class A shares have the exclusive right to vote and be elected as directors and officers of the corporation. They denied that the exclusivity was intended only as a privilege granted to founders shares, as no such proviso is found in the Articles of Incorporation. The respondents further claimed that the exclusivity of the right granted to Class A holders cannot be defeated or impaired by any subsequent legislative enactment, e.g. the New Corporation Code, as the Articles of Incorporation is an intra-corporate contract between the corporation and its members; between the corporation and its stockholders; and among the stockholders. They submit that to allow Class B shareholders to vote and be elected as directors would constitute a violation of MCPIs franchise or charter as granted by the State.

At the pre-trial, the trial court ruled that a partial judgment could be rendered on the first cause of action and required the parties to submit their respective position papers or memoranda.

On November 26, 2001, the RTC rendered the Partial Judgment, the dispositive portion of which reads:

WHEREFORE, viewed in the light of the foregoing, the election held on February 9, 2001 is VALID as the holders of CLASS B shares are not entitled to vote and be voted for and this case based on the First Cause of Action is DISMISSED.

SO ORDERED.[6]

In finding for the respondents, the trial court ruled that corporations had the power to classify their shares of stocks, such as voting and non-voting shares, conformably with Section 6[7] of


46

the Corporation Code of the Philippines. It pointed out that Article VII of both the original and amended Articles of Incorporation clearly provided that only Class A shareholders could vote and be voted for to the exclusion of Class B shareholders, the exception being in instances provided by law, such as those enumerated in Section 6, paragraph 6 of the Corporation Code. The RTC found merit in the respondents theory that the Articles of Incorporation, which defines the rights and limitations of all its shareholders, is a contract between MCPI and its shareholders. It is thus the law between the parties and should be strictly enforced as to them. It brushed aside the petitioners claim that the Class A shareholders were in estoppel, as the election of Class B shareholders to the corporate board may be deemed as a mere act of benevolence on the part of the officers. Finally, the court brushed aside the founders shares theory of the petitioners for lack of factual basis.

Hence, this petition submitting the sole legal issue of whether or not the Court a quo, in rendering the Partial Judgment dated November 26, 2001, has decided a question of substance in a way not in accord with law and jurisprudence considering that:

1. Under the Corporation Code, the exclusive voting right and right to be voted granted by the Articles of Incorporation of the MCPI to Class A shareholders is null and void, or already extinguished;

2. Hence, the declaration of directors made during the February 9, 2001 Annual Stockholders Meeting on the basis of the purported exclusive voting rights is null and void for having been done without the benefit of an election and in violation of the rights of plaintiffs and Class B shareholders; and

3. Perforce, another election should be conducted to elect the directors of the MCPI, this time affording the holders of Class B shares full voting right and the right to be voted.[8]

The issue for our resolution is whether or not holders of Class B shares of the MCPI may be deprived of the right to vote and be voted for as directors in MCPI.

Before us, petitioners assert that Article VII of the Articles of Incorporation of MCPI, which denied them voting rights, is null and void for being contrary to Section 6 of the Corporation Code. They point out that Section 6 prohibits the deprivation of voting rights except as to preferred and redeemable shares only. Hence, under the present law on corporations, all shareholders, regardless of classification, other than holders of preferred or redeemable shares, are entitled to vote and to be elected as corporate directors or officers. Since the Class B shareholders are not classified as holders of either preferred or redeemable shares, then it necessarily follows that they are entitled to vote and to be voted for as directors or officers.

The respondents, in turn, maintain that the grant of exclusive voting rights to Class A shares is clearly provided in the Articles of Incorporation and is in accord with Section 5[9] of the Corporation Law (Act No. 1459), which was the prevailing law when MCPI was incorporated


47

in 1977. They likewise submit that as the Articles of Incorporation of MCPI is in the nature of a contract between the corporation and its shareholders and Section 6 of the Corporation Code could not retroactively apply to it without violating the non-impairment clause[10] of the Constitution.

We find merit in the petition.

When Article VII of the Articles of Incorporation of MCPI was amended in 1992, the phrase except when otherwise provided by law was inserted in the provision governing the grant of voting powers to Class A shareholders. This particular amendment is relevant for it speaks of a law providing for exceptions to the exclusive grant of voting rights to Class A stockholders. Which law was the amendment referring to? The determination of which law to apply is necessary. There are two laws being cited and relied upon by the parties in this case. In this instance, the law in force at the time of the 1992 amendment was the Corporation Code (B.P. Blg. 68), not the Corporation Law (Act No. 1459), which had been repealed by then.

We find and so hold that the law referred to in the amendment to Article VII refers to the Corporation Code and no other law. At the time of the incorporation of MCPI in 1977, the right of a corporation to classify its shares of stock was sanctioned by Section 5 of Act No. 1459. The law repealing Act No. 1459, B.P. Blg. 68, retained the same grant of right of classification of stock shares to corporations, but with a significant change. Under Section 6 of B.P. Blg. 68, the requirements and restrictions on voting rights were explicitly provided for, such that no share may be deprived of voting rights except those classified and issued as preferred or redeemable shares, unless otherwise provided in this Code and that there shall always be a class or series of shares which have complete voting rights. Section 6 of the Corporation Code being deemed written into Article VII of the Articles of Incorporation of MCPI, it necessarily follows that unless Class B shares of MCPI stocks are clearly categorized to be preferred or redeemable shares, the holders of said Class B shares may not be deprived of their voting rights. Note that there is nothing in the Articles of Incorporation nor an iota of evidence on record to show that Class B shares were categorized as either preferred or redeemable shares. The only possible conclusion is that Class B shares fall under neither category and thus, under the law, are allowed to exercise voting rights.

One of the rights of a stockholder is the right to participate in the control and management of the corporation that is exercised through his vote. The right to vote is a right inherent in and incidental to the ownership of corporate stock, and as such is a property right. The stockholder cannot be deprived of the right to vote his stock nor may the right be essentially impaired, either by the legislature or by the corporation, without his consent, through amending the charter, or the by-laws.[11]

Neither do we find merit in respondents position that Section 6 of the Corporation Code cannot apply to MCPI without running afoul of the non-impairment clause of the Bill of Rights. Section 148[12] of the Corporation Code expressly provides that it shall apply to corporations


48

in existence at the time of the effectivity of the Code. Hence, the non-impairment clause is inapplicable in this instance. When Article VII of the Articles of Incorporation of MCPI were amended in 1992, the board of directors and stockholders must have been aware of Section 6 of the Corporation Code and intended that Article VII be construed in harmony with the Code, which was then already in force and effect. Since Section 6 of the Corporation Code expressly prohibits the deprivation of voting rights, except as to preferred and redeemable shares, then Article VII of the Articles of Incorporation cannot be construed as granting exclusive voting rights to Class A shareholders, to the prejudice of Class B shareholders, without running afoul of the letter and spirit of the Corporation Code.

The respondents then take the tack that the phrase except when otherwise provided by law found in the amended Articles is only a handwritten insertion and could have been inserted by anybody and that no board resolution was ever passed authorizing or approving said amendment.

Said contention is not for this Court to pass upon, involving as it does a factual question, which is not proper in this petition. In an appeal via certiorari, only questions of law may be reviewed.[13] Besides, respondents did not adduce persuasive evidence, but only bare allegations, to support their suspicion. The presumption that in the amendment process, the ordinary course of business has been followed[14] and that official duty has been regularly performed[15] on the part of the SEC, applies in this case.

WHEREFORE, the petition is GRANTED. The Partial Judgment dated November 26, 2001 of the Regional Trial Court of Paraaque City, Branch 258, in Civil Case No. 01-0140 is REVERSED AND SET ASIDE. No pronouncement as to costs.

Documents

CORPO CASES III. Formation and Organization of a Private Corp