Corpolaw - Fulltext.midtermcases - Ntswlclaw 1

G.R. No. 101897. March 5, 1993.
originally incapable of exclusive appropriation with reference

to an article on the market, because geographically or
LYCEUM OF THE PHILIPPINES, INC., petitioner, vs. otherwise descriptive, might nevertheless have been used so
COURT OF APPEALS, LYCEUM OF APARRI, long and so exclusively by one producer with reference to his
LYCEUM OF CABAGAN, LYCEUM OF article that, in that trade and to that branch of the purchasing
CAMALANIUGAN, INC., LYCEUM OF LALLO, INC., public, the word or phrase has come to mean that the article
LYCEUM OF TUAO, INC., BUHI LYCEUM, was his product." The question which arises, therefore, is
CENTRAL LYCEUM OF CATANDUANES, LYCEUM whether or not the use by petitioner of "Lyceum" in its
OF SOUTHERN PHILIPPINES, LYCEUM OF corporate name has been for such length of time and with
EASTERN MINDANAO, INC. and WESTERN such exclusivity as to have become associated or identified
PANGASINAN LYCEUM, INC., respondents. 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
1. CORPORATION LAW; CORPORATE NAMES;
REGISTRATION OF PROPOSED NAME WHICH IS answered it in the negative: "Under the doctrine of secondary
IDENTICAL OR CONFUSINGLY SIMILAR TO THAT OF meaning, a word or phrase originally incapable of exclusive
appropriation with reference to an article in the market,
ANY EXISTING CORPORATION, PROHIBITED;
because geographical or otherwise descriptive might
CONFUSION AND DECEPTION EFFECTIVELY
nevertheless have been used so long and so exclusively by
PRECLUDED BY THE APPENDING OF GEOGRAPHIC
one producer with reference to this article that, in that trade
NAMES TO THE WORD "LYCEUM". — The Articles of
Incorporation of a corporation must, among other things, set and to that group of the purchasing public, the word or phrase
out the name of the corporation. Section 18 of the Corporation has come to mean that the article was his produce (Ana Ang
vs. Toribio Teodoro, 74 Phil. 56). This circumstance has been
Code establishes a restrictive rule insofar as corporate names
referred to as the distinctiveness into which the name or
are concerned: "Section 18. Corporate name. — No corporate
phrase has evolved through the substantial and exclusive use
name may be allowed by the Securities an Exchange
Commission if the proposed name is identical or deceptively of the same for a considerable period of time. . . . No evidence
or confusingly similar to that of any existing corporation or was ever presented in the hearing before the Commission
which sufficiently proved that the word 'Lyceum' has indeed
to any other name already protected by law or is patently
acquired secondary meaning in favor of the appellant. If there
deceptive, confusing or contrary to existing laws. When a
was any of this kind, the same tend to prove only that the
change in the corporate name is approved, the Commission
appellant had been using the disputed word for a long period
shall issue an amended certificate of incorporation under the
amended name." The policy underlying the prohibition in of time. . . . In other words, while the appellant may have
Section 18 against the registration of a corporate name which 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
is "identical or deceptively or confusingly similar" to that of
said word had acquired secondary meaning in its favor
any existing corporation or which is "patently deceptive" or
because the appellant failed to prove that it had been using
"patently confusing" or "contrary to existing laws," is the
the same word all by itself to the exclusion of others. More
avoidance of fraud upon the public which would have
occasion to deal with the entity concerned, the evasion of so, there was no evidence presented to prove that confusion
legal obligations and duties, and the reduction of difficulties will surely arise if the same word were to be used by other
educational institutions. Consequently, the allegations of the
of administration and supervision over corporations. We do
appellant in its first two assigned errors must necessarily fail."
not consider that the corporate names of private respondent
We agree with the Court of Appeals. The number alone of the
institutions are "identical with, or deceptively or confusingly
private respondents in the case at bar suggests strongly that
similar" to that of the petitioner institution. True enough, the
corporate names of private respondent entities all carry the petitioner's use of the word "Lyceum" has not been attended
with the exclusivity essential for applicability of the doctrine
word "Lyceum" but confusion and deception are effectively
of secondary meaning. Petitioner's use of the word "Lyceum"
precluded by the appending of geographic names to the word
was not exclusive but was in truth shared with the Western
"Lyceum." Thus, we do not believe that the "Lyceum of
Pangasinan Lyceum and a little later with other private
Aparri" can be mistaken by the general public for the Lyceum
of the Philippines, or that the "Lyceum of Camalaniugan" respondent institutions which registered with the SEC using
would be confused with the Lyceum of the Philippines. "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
2. ID.; ID.; DOCTRINE OF SECONDARY MEANING; the corporate form of organization.
USE OF WORD "LYCEUM," NOT ATTENDED WITH
EXCLUSIVITY. — It is claimed, however, by petitioner that
the word "Lyceum" has acquired a secondary meaning in 3. ID.; ID.; MUST BE EVALUATED IN THEIR
ENTIRETY TO DETERMINE WHETHER THEY ARE
relation to petitioner with the result that word, although
CONFUSINGLY OR DECEPTIVELY SIMILAR TO
originally a generic, has become appropriable by petitioner to
ANOTHER CORPORATE ENTITY'S NAME. — petitioner
the exclusion of other institutions like private respondents
institution is not entitled to a legally enforceable exclusive
herein. The doctrine of secondary meaning originated in the
field of trademark law. Its application has, however, been right to use the word "Lyceum" in its corporate name and that
extended to corporate names sine the right to use a corporate other institutions may use "Lyceum" as part of their corporate
names. To determine whether a given corporate name is
name to the exclusion of others is based upon the same
"identical" or "confusingly or deceptively similar" with
principle which underlies the right to use a particular
another entity's corporate name, it is not enough to ascertain
trademark or tradename. In Philippine Nut Industry, Inc. v.
the presence of "Lyceum" or "Liceo" in both names. One
Standard Brands, Inc., the doctrine of secondary meaning was
elaborated in the following terms: " . . . a word or phrase must evaluate corporate names in their entirety and when the
Corpolaw.fulltext.midtermcases.ntswlclaw 1
name of petitioner is juxtaposed with the names of private school motu proprio change its corporate name to
respondents, they are not reasonably regarded as "identical" "Pamantasan ng Araullo."
or "confusingly or deceptively similar" with each other.
The background of the case at bar needs some recounting.
DECISION Petitioner had sometime before commenced in the SEC a
proceeding (SEC-Case No. 1241) against the Lyceum of
FELICIANO, J p: 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
Petitioner is an educational institution duly registered with
Commissioner Julio Sulit held that the corporate name of
the Securities and Exchange Commission ("SEC"). When it
petitioner and that of the Lyceum of Baguio, Inc. were
first registered with the SEC on 21 September 1950, it used
substantially identical because of the presence of a
the corporate name Lyceum of the Philippines, Inc. and has
used that name ever since. "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
On 24 February 1984, petitioner instituted proceedings before SEC also noted that petitioner had registered as a corporation
the SEC to compel the private respondents, which are also ahead of the Lyceum of Baguio, Inc. in point of time, 1 and
educational institutions, to delete the word "Lyceum" from ordered the latter to change its name to another name "not
their corporate names and permanently to enjoin them from similar or identical [with]" the names of previously registered
using "Lyceum" as part of their respective names. entities.
Some of the private respondents actively participated in the The Lyceum of Baguio, Inc. assailed the Order of the SEC
proceedings before the SEC. These are the following, the before the Supreme Court in a case docketed as G.R. No. L-
dates of their original SEC registration being set out below 46595. In a Minute Resolution dated 14 September 1977, the
opposite their respective names: Court denied the Petition for Review for lack of merit. Entry
of judgment in that case was made on 21 October 1977. 2
Western Pangasinan Lyceum — 27 October 1950
Armed with the Resolution of this Court in G.R. No. L-
Lyceum of Cabagan — 31 October 1962 46595, petitioner then wrote all the educational institutions it
could find using the word "Lyceum" as part of their corporate
Lyceum of Lallo, Inc. — 26 March 1972 name, and advised them to discontinue such use of "Lyceum."
When, with the passage of time, it became clear that this
Lyceum of Aparri — 28 March 1972 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
Lyceum of Tuao, Inc. — 28 March 1972
officer rendered a decision sustaining petitioner's claim to an
exclusive right to use the word "Lyceum." The hearing officer
Lyceum of Camalaniugan — 28 March 1972 relied upon the SEC ruling in the Lyceum of Baguio, Inc. case
(SEC-Case No. 1241) and held that the word "Lyceum" was
The following private respondents were declared in default capable of appropriation and that petitioner had acquired an
for failure to file an answer despite service of summons: enforceable exclusive right to the use of that word.
Buhi Lyceum; On appeal, however, by private respondents to the SEC En

Banc, the decision of the hearing officer was reversed and set
Central Lyceum of Catanduanes; aside. The SEC En Banc did not consider the word "Lyceum"
to have become so identified with petitioner as to render use
Lyceum of Eastern Mindanao, Inc.; and 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
Lyceum of Southern Philippines held that the attaching of geographical names to the word
"Lyceum" served sufficiently to distinguish the schools from
Petitioner's original complaint before the SEC had included one another, especially in view of the fact that the campuses
three (3) other entities: of petitioner and those of the private respondents were
physically quite remote from each other. 3
1. The Lyceum of Malacanay;
Petitioner then went on appeal to the Court of Appeals. In its
2. The Lyceum of Marbel; and Decision dated 28 June 1991, however, the Court of Appeals
affirmed the questioned Orders of the SEC En Banc. 4
3. The Lyceum of Araullo Petitioner filed a motion for reconsideration, without success.
The complaint was later withdrawn insofar as concerned the Before this Court, petitioner asserts that the Court of Appeals
Lyceum of Malacanay and the Lyceum of Marbel, for failure committed the following errors:
to serve summons upon these two (2) entities. The case
against the Liceum of Araullo was dismissed when that
1. The Court of Appeals erred in holding that the Resolution Camalaniugan" would be confused with the Lyceum of the
of the Supreme Court in G.R. No. L-46595 did not constitute Philippines.
stare decisis as to apply to this case and in not holding that
said Resolution bound subsequent determinations on the right Etymologically, the word "Lyceum" is the Latin word for the
to exclusive use of the word Lyceum. Greek lykeion which in turn referred to a locality on the river
Ilissius in ancient Athens "comprising an enclosure dedicated
2. The Court of Appeals erred in holding that respondent to Apollo and adorned with fountains and buildings erected
Western Pangasinan Lyceum, Inc. was incorporated earlier by Pisistratus, Pericles and Lycurgus frequented by the youth
than petitioner. for exercise and by the philosopher Aristotle and his
followers for teaching." 8 In time, the word "Lyceum"
3. The Court of Appeals erred in holding that the word became associated with schools and other institutions
Lyceum has not acquired a secondary meaning in favor of providing public lectures and concerts and public discussions.
petitioner. 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
4. The Court of Appeals erred in holding that Lyceum as a
also found in Spanish (liceo) and in French (lycee). As the
generic word cannot be appropriated by the petitioner to the
Court of Appeals noted in its Decision, Roman Catholic
exclusion of others. 5
schools frequently use the term; e.g., "Liceo de Manila,"
"Liceo de Baleno" (in Baleno, Masbate), "Liceo de Masbate,"
We will consider all the foregoing ascribed errors, though not "Liceo de Albay." 9 "Lyceum" is in fact as generic in
necessarily seriatim. We begin by noting that the Resolution character as the word "university." In the name of the
of the Court in G.R. No. L-46595 does not, of course, petitioner, "Lyceum" appears to be a substitute for
constitute res adjudicata in respect of the case at bar, since "university;" in other places, however, "Lyceum," or "Liceo"
there is no identity of parties. Neither is stare decisis or "Lycee" frequently denotes a secondary school or a
pertinent, if only because the SEC En Banc itself has re- college. It may be (though this is a question of fact which we
examined Associate Commissioner Sulit's ruling in the need not resolve) that the use of the word "Lyceum" may not
Lyceum of Baguio case. The Minute Resolution of the Court yet be as widespread as the use of "university," but it is clear
in G.R. No. L-46595 was not a reasoned adoption of the Sulit that a not inconsiderable number of educational institutions
ruling. have adopted "Lyceum" or "Liceo" as part of their corporate
names. Since "Lyceum" or "Liceo" denotes a school or
The Articles of Incorporation of a corporation must, among institution of learning, it is not unnatural to use this word to
other things, set out the name of the corporation. 6 Section 18 designate an entity which is organized and operating as an
of the Corporation Code establishes a restrictive rule insofar educational institution.
as corporate names are concerned:
It is claimed, however, by petitioner that the word "Lyceum"
"SECTION 18. Corporate name. — No corporate name may has acquired a secondary meaning in relation to petitioner
be allowed by the Securities an Exchange Commission if the with the result that that word, although originally a generic,
proposed name is identical or deceptively or confusingly has become appropriable by petitioner to the exclusion of
similar to that of any existing corporation or to any other other institutions like private respondents herein.
name already protected by law or is patently deceptive,
confusing or contrary to existing laws. When a change in the The doctrine of secondary meaning originated in the field of
corporate name is approved, the Commission shall issue an trademark law. Its application has, however, been extended
amended certificate of incorporation under the amended to corporate names sine the right to use a corporate name to
name." (Emphasis supplied) the exclusion of others is based upon the same principle
which underlies the right to use a particular trademark or
The policy underlying the prohibition in Section 18 against tradename. 10 In Philippine Nut Industry, Inc. v. Standard
the registration of a corporate name which is "identical or Brands, Inc., 11 the doctrine of secondary meaning was
deceptively or confusingly similar" to that of any existing elaborated in the following terms:
corporation or which is "patently deceptive" or "patently
confusing" or "contrary to existing laws," is the avoidance of " . . . a word or phrase originally incapable of exclusive
fraud upon the public which would have occasion to deal with appropriation with reference to an article on the market,
the entity concerned, the evasion of legal obligations and because geographically or otherwise descriptive, might
duties, and the reduction of difficulties of administration and nevertheless have been used so long and so exclusively by
supervision over corporations. 7 one producer with reference to his article that, in that trade
and to that branch of the purchasing public, the word or
We do not consider that the corporate names of private phrase has come to mean that the article was his product." 12
respondent institutions are "identical with, or deceptively or
confusingly similar" to that of the petitioner institution. True The question which arises, therefore, is whether or not the use
enough, the corporate names of private respondent entities all by petitioner of "Lyceum" in its corporate name has been for
carry the word "Lyceum" but confusion and deception are such length of time and with such exclusivity as to have
effectively precluded by the appending of geographic names become associated or identified with the petitioner institution
to the word "Lyceum." Thus, we do not believe that the in the mind of the general public (or at least that portion of
"Lyceum of Aparri" can be mistaken by the general public for the general public which has to do with schools). The Court
the Lyceum of the Philippines, or that the "Lyceum of of Appeals recognized this issue and answered it in the
negative:
"Under the doctrine of secondary meaning, a word or phrase "Lyceum," that institution would have been the Western
originally incapable of exclusive appropriation with reference Pangasinan Lyceum, Inc. rather than the petitioner institution.
to an article in the market, because geographical or otherwise
descriptive might nevertheless have been used so long and so In this connection, petitioner argues that because the Western
exclusively by one producer with reference to this article that, Pangasinan Lyceum, Inc. failed to reconstruct its records
in that trade and to that group of the purchasing public, the before the SEC in accordance with the provisions of R.A. No.
word or phrase has come to mean that the article was his 62, which records had been destroyed during World War II,
produce (Ana Ang vs. Toribio Teodoro, 74 Phil. 56). This Western Pangasinan Lyceum should be deemed to have lost
circumstance has been referred to as the distinctiveness into all rights it may have acquired by virtue of its past
which the name or phrase has evolved through the substantial registration. It might be noted that the Western Pangasinan
and exclusive use of the same for a considerable period of Lyceum, Inc. registered with the SEC soon after petitioner
time. Consequently, the same doctrine or principle cannot be had filed its own registration on 21 September 1950. Whether
made to apply where the evidence did not prove that the or not Western Pangasinan Lyceum, Inc. must be deemed to
business (of the plaintiff) has continued for so long a time that have lost its rights under its original 1933 registration,
it has become of consequence and acquired a good will of appears to us to be quite secondary in importance; we refer to
considerable value such that its articles and produce have this earlier registration simply to underscore the fact that
acquired a well-known reputation, and confusion will result petitioner's use of the word "Lyceum" was neither the first
by the use of the disputed name (by the defendant) (Ang Si use of that term in the Philippines nor an exclusive use
Heng vs. Wellington Department Store, Inc., 92 Phil. 448). thereof. Petitioner's use of the word "Lyceum" was not
exclusive but was in truth shared with the Western
With the foregoing as a yardstick, [we] believe the appellant Pangasinan Lyceum and a little later with other private
failed to satisfy the aforementioned requisites. No evidence respondent institutions which registered with the SEC using
was ever presented in the hearing before the Commission "Lyceum" as part of their corporation names. There may well
which sufficiently proved that the word 'Lyceum' has indeed be other schools using Lyceum or Liceo in their names, but
acquired secondary meaning in favor of the appellant. If there not registered with the SEC because they have not adopted
was any of this kind, the same tend to prove only that the the corporate form of organization.
appellant had been using the disputed word for a long period
of time. Nevertheless, its (appellant) exclusive use of the We conclude and so hold that petitioner institution is not
word (Lyceum) was never established or proven as in fact the entitled to a legally enforceable exclusive right to use the
evidence tend to convey that the cross-claimant was already word "Lyceum" in its corporate name and that other
using the word 'Lyceum' seventeen (17) years prior to the date institutions may use "Lyceum" as part of their corporate
the appellant started using the same word in its corporate names. To determine whether a given corporate name is
name. Furthermore, educational institutions of the Roman "identical" or "confusingly or deceptively similar" with
Catholic Church had been using the same or similar word like another entity's corporate name, it is not enough to ascertain
'Liceo de Manila,' 'Liceo de Baleno' (in Baleno, Masbate), the presence of "Lyceum" or "Liceo" in both names. One
'Liceo de Masbate,' 'Liceo de Albay' long before appellant must evaluate corporate names in their entirety and when the
started using the word 'Lyceum'. The appellant also failed to name of petitioner is juxtaposed with the names of private
prove that the word 'Lyceum' has become so identified with respondents, they are not reasonably regarded as "identical"
its educational institution that confusion will surely arise in or "confusingly or deceptively similar" with each other.
the minds of the public if the same word were to be used by
other educational institutions.
WHEREFORE, the petitioner having failed to show any
reversible error on the part of the public respondent Court of
In other words, while the appellant may have proved that it Appeals, the Petition for Review is DENIED for lack of
had been using the word 'Lyceum' for a long period of time, merit, and the Decision of the Court of Appeals dated 28 June
this fact alone did not amount to mean that the said word had 1991 is hereby AFFIRMED. No pronouncement as to costs.
acquired secondary meaning in its favor because the appellant
failed to prove that it had been using the same word all by SO ORDERED.
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 [G.R. No. 137592. December 12, 2001] ANG MGA
institutions. Consequently, the allegations of the appellant in KAANIB SA IGLESIA NG DIOS KAY KRISTO HESUS,
its first two assigned errors must necessarily fail." 13 H.S.K. SA BANSANG PILIPINAS, INC. petitioner,
(Underscoring partly in the original and partly supplied) vs. IGLESIA NG DIOS KAY CRISTO JESUS, HALIGI
AT SUHAY NG KATOTOHANAN, respondent.
We agree with the Court of Appeals. The number alone of the
private respondents in the case at bar suggests strongly that This is a petition for review assailing the Decision dated
petitioner's use of the word "Lyceum" has not been attended October 7, 1997[1] and the Resolution dated February 16,
with the exclusivity essential for applicability of the doctrine 1999[2] of the Court of Appeals in CA-G.R. SP No. 40933,
of secondary meaning. It may be noted also that at least one which affirmed the Decision of the Securities and Exchange
of the private respondents, i.e., the Western Pangasinan and Commission (SEC) in SEC-AC No. 539.[3]
Lyceum, Inc., used the term "Lyceum" seventeen (17) years
before the petitioner registered its own corporate name with Respondent Iglesia ng Dios Kay Cristo Jesus, Haligi at
the SEC and began using the word "Lyceum." It follows that Suhay ng Katotohanan (Church of God in Christ Jesus, the
if any institution had acquired an exclusive right to the word 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 decision, upon a finding that petitioner's corporate name was
corporation disassociated themselves from the latter and identical or confusingly or deceptively similar to that of
succeeded in registering on March 30, 1977 a new non-stock respondents corporate name.[8]
religious society or corporation, named Iglesia ng Dios Kay
Kristo Hesus, Haligi at Saligan ng Katotohanan. Petitioner filed a petition for review with the Court of
Appeals. On October 7, 1997, the Court of Appeals rendered
On July 16, 1979, respondent corporation filed with the the assailed decision affirming the decision of the SEC En
SEC a petition to compel the Iglesia ng Dios Kay Kristo Banc.Petitioners motion for reconsideration was denied by
Hesus, Haligi at Saligan ng Katotohanan to change its the Court of Appeals on February 16, 1992.
corporate name, which petition was docketed as SEC Case
No. 1774. On May 4, 1988, the SEC rendered judgment in Hence, the instant petition for review, raising the
favor of respondent, ordering the Iglesia ng Dios Kay Kristo following assignment of errors:
Hesus, Haligi at Saligan ng Katotohanan to change its
corporate name to another name that is not similar or identical
I
to any name already used by a corporation, partnership or
association registered with the Commission.[5] No appeal was
taken from said decision. THE HONORABLE COURT OF APPEALS ERRED
IN CONCLUDING THAT PETITIONER HAS NOT
BEEN DEPRIVED OF ITS RIGHT TO
It appears that during the pendency of SEC Case No. PROCEDURAL DUE PROCESS, THE
1774, Soriano, et al., caused the registration on April 25, 1980
HONORABLE COURT OF APPEALS
of petitioner corporation, Ang Mga Kaanib sa Iglesia ng Dios
DISREGARDED THE JURISPRUDENCE
Kay Kristo Hesus, H.S.K., sa Bansang Pilipinas. The
APPLICABLE TO THE CASE AT BAR AND
acronym H.S.K. stands for Haligi at Saligan ng
INSTEAD RELIED ON TOTALLY INAPPLICABLE
Katotohanan.[6] JURISPRUDENCE.
On March 2, 1994, respondent corporation filed before

II
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 HONORABLE COURT OF APPEALS ERRED
the ground that the same causes confusion among their IN ITS INTEPRETATION OF THE CIVIL CODE
members as well as the public. PROVISIONS ON EXTINCTIVE PRESCRIPTION,
THEREBY RESULTING IN ITS FAILURE TO FIND
THAT THE RESPONDENT'S RIGHT OF ACTION
Petitioner filed a motion to dismiss on the ground of TO INSTITUTE THE SEC CASE HAS SINCE
lack of cause of action. The motion to dismiss was PRESCRIBED PRIOR TO ITS INSTITUTION.
denied. Thereafter, for failure to file an answer, petitioner
was declared in default and respondent was allowed to
present its evidence ex parte. III
On November 20, 1995, the SEC rendered a decision THE HONORABLE COURT OF APPEALS FAILED
ordering petitioner to change its corporate name. The TO CONSIDER AND PROPERLY APPLY THE
dispositive portion thereof reads: EXCEPTIONS ESTABLISHED BY
JURISPRUDENCE IN THE APPLICATION OF
SECTION 18 OF THE CORPORATION CODE TO
PREMISES CONSIDERED, judgment is hereby rendered THE INSTANT CASE.
in favor of the petitioner (respondent herein).
IV
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 THE HONORABLE COURT OF APPEALS FAILED
another not deceptively similar or identical to the same TO PROPERLY APPRECIATE THE SCOPE OF THE
already used by the Petitioner, any corporation, association, CONSTITUTIONAL GUARANTEE ON RELIGIOUS
and/or partnership presently registered with the Commission. FREEDOM, THEREBY FAILING TO APPLY THE
SAME TO PROTECT PETITIONERS RIGHTS.[9]
Let a copy of this Decision be furnished the Records
Division and the Corporate and Legal Department Invoking the case of Legarda v. Court of
[CLD] of this Commission for their records, reference and/or Appeals,[10] petitioner insists that the decision of the Court of
for whatever requisite action, if any, to be undertaken at their Appeals and the SEC should be set aside because the
end. 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
SO ORDERED.[7]
court.
Petitioner appealed to the SEC En Banc, where its

The contention is without merit. As a general rule, the
appeal was docketed as SEC-AC No. 539. In a decision dated negligence of counsel binds the client. This is based on the
March 4, 1996, the SEC En Banc affirmed the above rule that any act performed by a lawyer within the scope of
his general or implied authority is regarded as an act of his Parties organizing a corporation must choose a name at
client.[11] An exception to the foregoing is where the reckless their peril; and the use of a name similar to one adopted by
or gross negligence of the counsel deprives the client of due another corporation, whether a business or a nonprofit
process of law.[12] Said exception, however, does not obtain organization, if misleading or likely to injure in the exercise
in the present case. of its corporate functions, regardless of intent, may be
prevented by the corporation having a prior right, by a suit for
In Legarda v. Court of Appeals, the effort of the counsel injunction against the new corporation to prevent the use of
in defending his clients cause consisted in filing a motion for the name.[18]
extension of time to file answer before the trial court. When
his client was declared in default, the counsel did nothing and Petitioner claims that it complied with the aforecited
allowed the judgment by default to become final and SEC guideline by adding not only two but eight words to their
executory. Upon the insistence of his client, the counsel filed registered name, to wit: Ang Mga Kaanib" and "Sa Bansang
a petition to annul the judgment with the Court of Appeals, Pilipinas, Inc., which, petitioner argues, effectively
which denied the petition, and again the counsel allowed the distinguished it from respondent corporation.
denial to become final and executory. This Court found the
counsel grossly negligent and consequently declared as null The additional words Ang Mga Kaanib and Sa Bansang
and void the decision adverse to his client. Pilipinas, Inc. in petitioners name are, as correctly observed
by the SEC, merely descriptive of and also referring to the
The factual antecedents of the case at bar are members, or kaanib, of respondent who are likewise residing
different. Atty. Garaygay filed before the SEC a motion to in the Philippines. These words can hardly serve as an
dismiss on the ground of lack of cause of action. When his effective differentiating medium necessary to avoid
client was declared in default for failure to file an answer, confusion or difficulty in distinguishing petitioner from
Atty. Garaygay moved for reconsideration and lifting of the respondent. This is especially so, since both petitioner and
order of default.[13] After judgment by default was rendered respondent corporations are using the same acronym ---
against petitioner corporation, Atty. Garaygay filed a motion H.S.K.;[19] not to mention the fact that both are espousing
for extension of time to appeal/motion for reconsideration, religious beliefs and operating in the same
and thereafter a motion to set aside the decision.[14] place. Parenthetically, it is well to mention that the acronym
H.S.K. used by petitioner stands for Haligi at Saligan ng
Evidently, Atty. Garaygay was only guilty of simple Katotohanan.[20]
negligence. Although he failed to file an answer that led to
the rendition of a judgment by default against petitioner, his Then, too, the records reveal that in holding out their
efforts were palpably real, albeit bereft of zeal.[15] corporate name to the public, petitioner highlights the
dominant words IGLESIA NG DIOS KAY KRISTO HESUS,
Likewise, the issue of prescription, which petitioner HALIGI AT SALIGAN NG KATOTOHANAN, which is
raised for the first time on appeal to the Court of Appeals, is strikingly similar to respondent's corporate name, thus
untenable. Its failure to raise prescription before the SEC can making it even more evident that the additional words Ang
only be construed as a waiver of that defense.[16] At any rate, Mga Kaanib and Sa Bansang Pilipinas, Inc., are merely
the SEC has the authority to de-register at all times and under descriptive of and pertaining to the members of respondent
all circumstances corporate names which in its estimation are corporation.[21]
likely to spawn confusion. It is the duty of the SEC to prevent
confusion in the use of corporate names not only for the Significantly, the only difference between the corporate
protection of the corporations involved but more so for the names of petitioner and respondent are the
protection of the public.[17] words SALIGAN and SUHAY. These words are synonymous
--- both mean ground, foundation or support. Hence, this case
Section 18 of the Corporation Code provides: 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
Corporate Name. --- No corporate name may be allowed by
Mills, Inc., are undisputably so similar that even under the
the Securities and Exchange Commission if the proposed
test of reasonable care and observation confusion may arise.
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 Furthermore, the wholesale appropriation by petitioner
contrary to existing laws. When a change in the corporate of respondent's corporate name cannot find justification
name is approved, the Commission shall issue an amended under the generic word rule. We agree with the Court of
certificate of incorporation under the amended name. Appeals conclusion that a contrary ruling would encourage
other corporations to adopt verbatim and register an existing
Corollary thereto, the pertinent portion of the SEC and protected corporate name, to the detriment of the public.
Guidelines on Corporate Names states:
The fact that there are other non-stock religious
societies or corporations using the names Church of the
(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 Living God, Inc., Church of God Jesus Christ the Son of God
company, the proposed name must contain two other words the Head, Church of God in Christ & By the Holy Spirit, and
other similar names, is of no consequence. It does not
different from the name of the company already registered;
authorize the use by petitioner of the essential and
distinguishing feature of respondent's registered and WHEREFORE, judgment is hereby rendered in favor of the
protected corporate name.[23] petitioner and against the respondent declaring the latters
corporate name Industrial Refractories Corporation of the
We need not belabor the fourth issue raised by Philippines as deceptively and confusingly similar to that of
petitioner. Certainly, ordering petitioner to change its petitioners corporate name Refractories Corporation of the
corporate name is not a violation of its constitutionally Philippines. Accordingly, respondent is hereby directed to
guaranteed right to religious freedom. In so doing, the SEC amend its Articles of Incorporation by deleting the name
merely compelled petitioner to abide by one of the SEC Refractories Corporation of the Philippines in its corporate
guidelines in the approval of partnership and corporate name within thirty (30) days from finality of this
names, namely its undertaking to manifest its willingness to Decision. Likewise, respondent is hereby ordered to pay the
change its corporate name in the event another person, firm, petitioner the sum of P50,000.00 as attorneys fees. [3]
or entity has acquired a prior right to the use of the said firm
name or one deceptively or confusingly similar to it. Petitioner appealed to the SEC En Banc, arguing that it
does not have any jurisdiction over the case, and that
WHEREFORE, in view of all the foregoing, the instant respondent RCP has no right to the exclusive use of its
petition for review is DENIED. The appealed decision of the corporate name as it is composed of generic or common
Court of Appeals is AFFIRMED in toto. words.[4]
SO ORDERED. 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
[G.R. No. 122174. October 3, 2002] INDUSTRIAL
word Refractories.[5]
REFRACTORIES CORPORATION OF THE
PHILIPPINES, petitioner, vs. COURT OF APPEALS,
SECURITIES AND EXCHANGE COMMISSION and Petitioner IRCP elevated the decision of the SEC En
REFRACTORIES CORPORATION OF THE Banc through a petition for review on certiorari to the Court
PHILIPPINES, respondents. of Appeals which then rendered the herein assailed
decision. The appellate court upheld the jurisdiction of the
Filed before us is a petition for review on certiorari under SEC over the case and ruled that the corporate names of
Rule 45 of the Rules of Court assailing the Decision of the petitioner IRCP and respondent RCP are confusingly or
deceptively similar, and that respondent RCP has established
Court of Appeals in CA-G.R. SP No. 35056, denying due
its prior right to use the word Refractories as its corporate
course and dismissing the petition filed by Industrial
name.[6] The appellate court also found that the petition was
Refractories Corp. of the Philippines (IRCP).
filed beyond the reglementary period.[7]
Respondent Refractories Corporation of the Philippines
Hence, herein petition which we must deny.
(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 Petitioner contends that the petition before the Court of
and all refractory bricks, its by-products and derivatives. On Appeals was timely filed. It must be noted that at the time the
June 22, 1977, it registered its corporate and business name SEC En Banc rendered its decision on May 10, 1994, the
with the Bureau of Domestic Trade. 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
Petitioner IRCP on the other hand, was incorporated on
filed before the Court of Appeals within fifteen (15) days
August 23, 1979 originally under the name Synclaire
Manufacturing Corporation. It amended its Articles of from notice, raising questions of fact, of law, or mixed
Incorporation on August 23, 1985 to change its corporate questions of fact and law.[8] A motion for reconsideration
suspends the running of the period.[9]
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. 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]
Both companies are the only local suppliers of
monolithic gunning mix.[1]
June 10, 1994 Receipt of SECs Decision dated May 10, 1994
Discovering that petitioner was using such corporate
name, respondent RCP filed on April 14, 1988 with the June 20, 1994 Filing of Motion for
Securities and Exchange Commission (SEC) a petition to Reconsideration
compel petitioner to change its corporate name on the ground
that its corporate name is confusingly similar with that of September 1, 1994 Receipt of SECs Order
petitioners such that the public may be confused or deceived dated August 3,
into believing that they are one and the same corporation. [2] 1994 denying
petitioners motion
The SEC decided in favor of respondent RCP and for reconsideration
rendered judgment on July 23, 1993 with the following
dispositive portion:
September 2, 1994 Filing of Motion for extension It is the SECs duty to prevent confusion in the use of
of time corporate names not only for the protection of the
corporations involved but more so for the protection of the
September 6, 1994 Filing of Petition 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
Respondent RCP, however, asserts that the foregoing
therefore, the present case falls within the ambit of the SECs
dates are incorrect as the certifications issued by the SEC
show that petitioner received the SECs Decision dated May regulatory powers.[23]
10, 1994 on June 9, 1994, filed the motion for reconsideration
via registered mail on June 25, 1994, and received the Order Likewise untenable is petitioners argument that there is
dated August 3, 1994 on August 15, 1994. [11] Thus, the no confusing or deceptive similarity between petitioner and
petition was filed twenty-one (21) days beyond the respondent RCPs corporate names. Section 18 of the
reglementary period provided in Supreme Court Circular No. Corporation Code expressly prohibits the use of a corporate
1-91.[12] 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
If reckoned from the dates supplied by petitioner, then
or contrary to existing laws. The policy behind the foregoing
the petition was timely filed. On the other hand, if reckoned
prohibition is to avoid fraud upon the public that will have
from the dates provided by respondent RCP, then it was filed
way beyond the reglementary period. On this score, we agree occasion to deal with the entity concerned, the evasion of
with the appellate courts finding that petitioner failed to rebut legal obligations and duties, and the reduction of difficulties
of administration and supervision over corporation. [24]
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 Pursuant thereto, the Revised Guidelines in the
the presumption of regularity.[15] As such, these are prima Approval of Corporate and Partnership Names[25] specifically
facie evidence of the facts stated therein.[16] And based on requires that: (1) a corporate name shall not be identical,
such dates, there is no question that the petition was filed with misleading or confusingly similar to one already registered
the Court of Appeals beyond the fifteen (15) day period. On by another corporation with the Commission;[26] and (2) if the
this ground alone, the instant petition should be denied as the proposed name is similar to the name of a registered firm, the
SEC En Bancs decision had already attained finality and the proposed name must contain at least one distinctive word
SECs findings of fact, when supported by substantial different from the name of the company already registered.[27]
evidence, is final.[17]
As held in Philips Export B.V. vs. Court of
Nevertheless, to set the matters at rest, we shall delve Appeals,[28] to fall within the prohibition of the law, two
into the other issues posed by petitioner. requisites must be proven, to wit:
Petitioners arguments, substantially, are as follows: (1) (1) that the complainant corporation acquired a
jurisdiction is vested with the regular courts as the present prior right over the use of such corporate name;
case is not one of the instances provided in P.D. 902-A; (2)
respondent RCP is not entitled to use the generic name and
refractories; (3) there is no confusing similarity between their
corporate names; and (4) there is no basis for the award of (2) the proposed name is either: (a) identical, or (b)
attorneys fees.[18] deceptively or confusingly similar to that of
any existing corporation or to any other name
Petitioners argument on the SECs jurisdiction over the already protected by law; or (c) patently
case is utterly myopic. The jurisdiction of the SEC is not deceptive, confusing or contrary to existing
merely confined to the adjudicative functions provided in law.
Section 5 of P.D. 902-A, as amended.[19] By express mandate,
it has absolute jurisdiction, supervision and control over all As regards the first requisite, it has been held that the
corporations.[20] It also exercises regulatory and right to the exclusive use of a corporate name with freedom
administrative powers to implement and enforce the from infringement by similarity is determined by priority of
Corporation Code,[21] one of which is Section 18, which adoption.[29] In this case, respondent RCP was incorporated
provides: on October 13, 1976 and since then has been using the
corporate name Refractories Corp. of the
SEC. 18. Corporate name. -- No corporate name may be Philippines. Meanwhile, petitioner was incorporated on
allowed by the Securities and Exchange Commission if the August 23, 1979 originally under the name Synclaire
proposed name is identical or deceptively or confusingly Manufacturing Corporation. It only started using the name
similar to that of any existing corporation or to any other Industrial Refractories Corp. of the Philippines when it
name already protected by law or is patently deceptive, amended its Articles of Incorporation on August 23, 1985, or
confusing or contrary to existing laws. When a change in the nine (9) years after respondent RCP started using its
corporate name is approved, the Commission shall issue an name. Thus, being the prior registrant, respondent RCP has
amended certificate of incorporation under the amended acquired the right to use the word Refractories as part of its
name. corporate name.
Anent the second requisite, in determining the existence Costs against petitioner.
of confusing similarity in corporate names, the test is whether
the similarity is such as to mislead a person using ordinary SO ORDERED
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, [G.R. No. 124293. September 24, 2003]
Corporation and Philippines.The only word that distinguishes
petitioner from respondent RCP is the word Industrial which JG SUMMIT HOLDINGS, INC., petitioner, vs. COURT
merely identifies a corporations general field of activities or OF APPEALS, COMMITTEE ON
operations.We need not linger on these two corporate names PRIVATIZATION, its Chairman and Members;
to conclude that they are patently similar that even with ASSET PRIVATIZATION TRUST and
reasonable care and observation, confusion might arise. [31] It PHILYARDS HOLDINGS, INC., respondents.
must be noted that both cater to the same clientele, i.e. the
steel industry. In fact, the SEC found that there were The core issue posed by the Motions for
instances when different steel companies were actually Reconsideration is whether a shipyard is a public utility
confused between the two, especially since they also have whose capitalization must be sixty percent (60%) owned by
similar product packaging.[32] Such findings are accorded not Filipinos. Our resolution of this issue will determine the fate
only great respect but even finality, and are binding upon this of the shipbuilding and ship repair industry. It can either spell
Court, unless it is shown that it had arbitrarily disregarded or the industrys demise or breathe new life to the struggling but
misapprehended evidence before it to such an extent as to potentially healthy partner in the countrys bid for economic
compel a contrary conclusion had such evidence been growth. It can either kill an initiative yet in its infancy, or
properly appreciated. [33] And even without such proof of harness creativity in the productive disposition of
actual confusion between the two corporate names, it suffices government assets.
that confusion is probable or likely to occur. [34]
The facts are undisputed and can be summarized briefly
Refractory materials are described as follows: as follows:
Refractories are structural materials used at high temperatures On January 27, 1977, the National Investment and
to [sic] industrial furnaces. They are supplied mainly in the Development Corporation (NIDC), a government
form of brick of standard sizes and of special shapes. corporation, entered into a Joint Venture Agreement (JVA)
Refractories also include refractory cements, bonding with Kawasaki Heavy Industries, Ltd. of Kobe, Japan
mortars, plastic firebrick, castables, ramming mixtures, and (KAWASAKI) for the construction, operation and
other bulk materials such as dead-burned grain magneside, management of the Subic National Shipyard, Inc. (SNS)
chrome or ground ganister and special clay.[35] which subsequently became the Philippine Shipyard and
Engineering Corporation (PHILSECO). Under the JVA, the
While the word refractories is a generic term, its usage is not NIDC and KAWASAKI will contribute P330 million for the
widespread and is limited merely to the industry/trade in capitalization of PHILSECO in the proportion of 60%-40%
which it is used, and its continuous use by respondent RCP respectively.[1] One of its salient features is the grant to the
for a considerable period has made the term so closely parties of the right of first refusal should either of them
identified with it. [36] Moreover, as held in the case of Ang decide to sell, assign or transfer its interest in the joint
Kaanib sa Iglesia ng Dios kay Kristo Hesus, H.S.K. sa venture, viz:
Bansang Pilipinas, Inc. vs. Iglesia ng Dios kay Cristo Jesus,
Haligi at Suhay ng Katotohanan, petitioners appropriation 1.4 Neither party shall sell, transfer or assign all or any part
of respondent's corporate name cannot find justification of its interest in SNS [PHILSECO] to any third party without
under the generic word rule. [37] A contrary ruling would giving the other under the same terms the right of first refusal.
encourage other corporations to adopt verbatim and register This provision shall not apply if the transferee is a corporation
an existing and protected corporate name, to the detriment of owned or controlled by the GOVERNMENT or by a
the public.[38] KAWASAKI affiliate.[2]
Finally, we find the award of P50,000.00 as attorney's On November 25, 1986, NIDC transferred all its rights,
fees to be fair and reasonable. Article 2208 of the Civil title and interest in PHILSECO to the Philippine National
Code allows the award of such fees when its claimant is Bank (PNB). Such interests were subsequently transferred to
compelled to litigate with third persons or to incur expenses the National Government pursuant to Administrative Order
to protect its just and valid claim. In this case, despite its No. 14. On December 8, 1986, President Corazon C. Aquino
undertaking to change its corporate name in case another firm issued Proclamation No. 50 establishing the Committee on
has acquired a prior right to use such name,[39] it refused to do Privatization (COP) and the Asset Privatization Trust (APT)
so, thus compelling respondent to undergo litigation and incur to take title to, and possession of, conserve, manage and
expenses to protect its corporate name. dispose of non-performing assets of the National
Government. Thereafter, on February 27, 1987, a trust
WHEREFORE, the instant petition for review agreement was entered into between the National
on certiorari is hereby DENIED for lack of merit. 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 6.1 Should Kawasaki Heavy Industries, Inc. and/or Philyards
shareholdings in PHILSECO increased to 97.41% thereby Holdings, Inc. exercise their Option to Top the Highest Bid,
reducing KAWASAKIs shareholdings to 2.59%.[3] they shall so notify the APT about such exercise of their
option and deposit with APT the amount equivalent to ten
In the interest of the national economy and the percent (10%) of the highest bid plus five percent (5%)
government, the COP and the APT deemed it best to sell the thereof within the thirty (30)-day period mentioned in
National Governments share in PHILSECO to private paragraph 6.0 above. APT will then serve notice upon
entities. After a series of negotiations between the APT and Kawasaki Heavy Industries, Inc. and/or Philyards Holdings,
KAWASAKI, they agreed that the latters right of first refusal Inc. declaring them as the preferred bidder and they shall have
under the JVA be exchanged for the right to top by five a period of ninety (90) days from the receipt of the APTs
percent (5%) the highest bid for the said shares. They further notice within which to pay the balance of their bid price.
agreed that KAWASAKI would be entitled to name a
company in which it was a stockholder, which could exercise 6.2 Should Kawasaki Heavy Industries, Inc. and/or Philyards
the right to top. On September 7, 1990, KAWASAKI Holdings, Inc. fail to exercise their Option to Top the Highest
informed APT that Philyards Holdings, Inc. (PHI) would Bid within the thirty (30)-day period, APT will declare the
exercise its right to top.[4] highest bidder as the winning bidder.
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 12.0 The bidder shall be solely responsible for examining
Bidding Rules (ASBR) drafted for the National Governments with appropriate care these rules, the official bid forms,
87.6% equity share in PHILSECO.[5] The provisions of the including any addenda or amendments thereto issued during
ASBR were explained to the interested bidders who were the bidding period. The bidder shall likewise be responsible
notified that the bidding would be held on December 2, 1993. for informing itself with respect to any and all conditions
A portion of the ASBR reads: concerning the PHILSECO Shares which may, in any
manner, affect the bidders proposal. Failure on the part of the
1.0 The subject of this Asset Privatization Trust (APT) sale bidder to so examine and inform itself shall be its sole risk
through public bidding is the National Governments equity in and no relief for error or omission will be given by APT or
PHILSECO consisting of 896,869,942 shares of stock COP. . ..[6]
(representing 87.67% of PHILSECOs outstanding capital
stock), which will be sold as a whole block in accordance At the public bidding on the said date, petitioner J.G.
with the rules herein enumerated. 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:
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 4. I/We understand that the Committee on Privatization
Committee on Privatization (COP). (COP) has up to thirty (30) days to act on APTs
recommendation based on the result of this bidding. Should
2.1 APT reserves the right in its sole discretion, to reject any the COP approve the highest bid, APT shall advise Kawasaki
or all bids. Heavy Industries, Inc. and/or its nominee, Philyards
Holdings, Inc. that the highest bid is acceptable to the
National Government. Kawasaki Heavy Industries, Inc.
3.0 This public bidding shall be on an Indicative Price
Bidding basis. The Indicative price set for the National and/or Philyards Holdings, Inc. shall then have a period of
Governments 87.67% equity in PHILSECO is PESOS: ONE thirty (30) calendar days from the date of receipt of such
advice from APT within which to exercise their Option to
BILLION THREE HUNDRED MILLION
Top the Highest Bid by offering a bid equivalent to the
(P1,300,000,000.00).
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
6.0 The highest qualified bid will be submitted to the APT Kawasaki Heavy Industries, Inc./Philyards Holdings, Inc. to
Board of Trustees at its regular meeting following the top JGSMIs bid by 5% as specified in the bidding rules. [8]
bidding, for the purpose of determining whether or not it
should be endorsed by the APT Board of Trustees to the COP,
On December 29, 1993, petitioner informed APT that it
and the latter approves the same. The APT shall advise
was protesting the offer of PHI to top its bid on the grounds
Kawasaki Heavy Industries, Inc. and/or its nominee,
that: (a) the KAWASAKI/PHI consortium composed of
Philyards Holdings, Inc., that the highest bid is acceptable to
Kawasaki, Philyards, Mitsui, Keppel, SM Group, ICTSI and
the National Government. Kawasaki Heavy Industries, Inc.
and/or Philyards Holdings, Inc. shall then have a period of Insular Life violated the ASBR because the last four (4)
thirty (30) calendar days from the date of receipt of such companies were the losing bidders thereby circumventing the
law and prejudicing the weak winning bidder; (b) only
advice from APT within which to exercise their Option to
KAWASAKI could exercise the right to top; (c) giving the
Top the Highest Bid by offering a bid equivalent to the
same option to top to PHI constituted unwarranted benefit to
highest bid plus five (5%) percent thereof.
a third party; (d) no right of first refusal can be exercised in a
public bidding or auction sale; and (e) the JG Summit (a) accept the said amount
consortium was not estopped from questioning the of P2,030,000,000.00 less bid
proceedings.[9] deposit and interests from
petitioner;
On February 2, 1994, petitioner was notified that PHI
had fully paid the balance of the purchase price of the subject (b) execute a Stock Purchase Agreement
bidding. On February 7, 1994, the APT notified petitioner with 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 (c) cause the issuance in favor of petitioner
February 24, 1994, the APT and PHI executed a Stock of the certificates of stocks
Purchase Agreement.[10] Consequently, petitioner filed with representing 87.6% of
this Court a Petition for Mandamus under G.R. No. 114057. PHILSECOs total capitalization;
On May 11, 1994, said petition was referred to the Court of
Appeals. On July 18, 1995, the Court of Appeals denied the (d) return to private respondent PHGI the
same for lack of merit. It ruled that the petition for mandamus
amount of Two Billion One
was not the proper remedy to question the constitutionality or
Hundred Thirty-One Million Five
legality of the right of first refusal and the right to top that
Hundred Thousand Pesos
was exercised by KAWASAKI/PHI, and that the matter must
(P2,131,500,000.00); and
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 (e) cause the cancellation of the stock
right to top are prima facie legal and that the petitioner, by certificates issued to PHI.
participating in the public bidding, with full knowledge of the
right to top granted to KASAWASAKI/Philyards is . . SO ORDERED.[16]
.estopped from questioning the validity of the award given to
Philyards after the latter exercised the right to top and had In separate Motions for
paid in full the purchase price of the subject shares, pursuant Reconsideration,[17] respondents submit three basic issues for
to the ASBR. Petitioner filed a Motion for Reconsideration of our resolution: (1) Whether PHILSECO is a public utility; (2)
said Decision which was denied on March 15, 1996. Whether under the 1977 JVA, KAWASAKI can exercise its
Petitioner thus filed a Petition for Certiorari with this right of first refusal only up to 40% of the total capitalization
Court alleging grave abuse of discretion on the part of the of PHILSECO; and (3) Whether the right to top granted to
appellate court.[11] KAWASAKI violates the principles of competitive bidding.
On November 20, 2000, this Court rendered the now I.

assailed Decision ruling among others that the Court of
Appeals erred when it dismissed the petition on the sole Whether PHILSECO is a Public Utility.
ground of the impropriety of the special civil action
of mandamus because the petition was also one
After carefully reviewing the applicable laws and
of certiorari.[12] It further ruled that a shipyard like
jurisprudence, we hold that PHILSECO is not a public utility
PHILSECO is a public utility whose capitalization must be
for the following reasons:
sixty percent (60%) Filipino-owned.[13] Consequently, the
right to top granted to KAWASAKI under the Asset Specific
Bidding Rules (ASBR) drafted for the sale of the 87.67% First. By nature, a shipyard is not a public utility.
equity of the National Government in PHILSECO is illegal--
-not only because it violates the rules on competitive bidding- A public utility is a business or service engaged in
-- but more so, because it allows foreign corporations to own regularly supplying the public with some commodity or
more than 40% equity in the shipyard.[14] It also held that service of public consequence such as electricity, gas, water,
although the petitioner had the opportunity to examine the transportation, telephone or telegraph service.[18] To
ASBR before it participated in the bidding, it cannot be constitute a public utility, the facility must be necessary for
estopped from questioning the unconstitutional, illegal and the maintenance of life and occupation of the residents.
inequitable provisions thereof.[15] Thus, this Court voided the However, the fact that a business offers services or goods that
transfer of the national governments 87.67% share in promote public good and serve the interest of the public does
PHILSECO to Philyard Holdings, Inc., and upheld the right not automatically make it a public utility. Public use is not
of JG Summit, as the highest bidder, to take title to the said synonymous with public interest. As its name indicates, the
shares, viz: term public utility implies public use and service to the
public. The principal determinative characteristic of a
WHEREFORE, the instant petition for review on certiorari public utility is that of service to, or readiness to serve, an
is GRANTED. The assailed Decision and Resolution of the indefinite public or portion of the public as such which has a
Court of Appeals are REVERSED and SET ASIDE. legal right to demand and receive its services or commodities.
Petitioner is ordered to pay to APT its bid price of Two Stated otherwise, the owner or person in control of a public
Billion Thirty Million Pesos (P2,030,000,000.00 ), less its bid utility must have devoted it to such use that the public
deposit plus interests upon the finality of this Decision. In generally or that part of the public which has been served and
turn, APT is ordered to: 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 and aircraft manufacturing---and for that matter ship building
utility holds out generally and may not refuse legitimate and ship repair--- serve the public only incidentally.
demand for service.[20] Thus, in Iloilo Ice and Cold Storage
Co. vs. Public Utility Board,[21] this Court defined public Second. There is no law declaring a shipyard as a
use, viz: public utility.
Public use means the same as use by the public. The essential History provides us hindsight and hindsight ought to
feature of the public use is that it is not confined to privileged give us a better view of the intent of any law. The succession
individuals, but is open to the indefinite public. It is this of laws affecting the status of shipyards ought not to
indefinite or unrestricted quality that gives it its public obliterate, but rather, give us full picture of the intent of the
character. In determining whether a use is public, we must legislature. The totality of the circumstances, including the
look not only to the character of the business to be done, but contemporaneous interpretation accorded by the
also to the proposed mode of doing it. If the use is merely administrative bodies tasked with the enforcement of the law
optional with the owners, or the public benefit is merely all lead to a singular conclusion: that shipyards are not public
incidental, it is not a public use, authorizing the exercise of utilities.
jurisdiction of the public utility commission. There must be,
in general, a right which the law compels the owner to give
Since the enactment of Act No. 2307 which created the
to the general public. It is not enough that the general
Public Utility Commission (PUC) until its repeal by
prosperity of the public is promoted. Public use is not Commonwealth Act No. 146, establishing the Public Service
synonymous with public interest. The true criterion by Commission (PSC), a shipyard, by legislative declaration, has
which to judge the character of the use is whether the been considered a public utility.[25] A Certificate of Public
public may enjoy it by right or only by Convenience (CPC) from the PSC to the effect that the
permission.[22] (emphasis supplied)
operation of the said service and the authorization to do
business will promote the public interests in a proper and
Applying the criterion laid down in Iloilo to the case at suitable manner is required before any person or corporation
bar, it is crystal clear that a shipyard cannot be considered may operate a shipyard.[26] In addition, such persons or
a public utility. corporations should abide by the citizenship requirement
provided in Article XIII, section 8 of the 1935
A shipyard is a place or enclosure where ships are built Constitution,[27] viz:
or repaired.[23] Its nature dictates that it serves but a limited
clientele whom it may choose to serve at its discretion. While Sec. 8. No franchise, certificate, or any other form or
it offers its facilities to whoever may wish to avail of its authorization for the operation of a public utility shall be
services, a shipyard is not legally obliged to render its granted except to citizens of the Philippines or to corporations
services indiscriminately to the public. It has no legal or other entities organized under the laws of the
obligation to render the services sought by each and every Philippines, sixty per centum of the capital of which is
client. The fact that it publicly offers its services does not give owned by citizens of the Philippines, nor shall such
the public a legal right to demand that such services be franchise, certificate or authorization be exclusive in
rendered. character or for a longer period than fifty years. No franchise
or right shall be granted to any individual, firm or
There can be no disagreement that the shipbuilding and corporation, except under the condition that it shall be subject
ship repair industry is imbued with public interest as it to amendment, alteration, or repeal by the National Assembly
involves the maintenance of the seaworthiness of vessels when the public interest so requires. (emphasis supplied)
dedicated to the transportation of either persons or goods.
Nevertheless, the fact that a business is affected with public To accelerate the development of shipbuilding and ship
interest does not imply that it is under a duty to serve the repair industry, former President Ferdinand E. Marcos issued
public. While the business may be regulated for public good, P.D. No. 666 granting the following incentives:
the regulation cannot justify the classification of a purely
private enterprise as a public utility. The legislature cannot,
SECTION 1. Shipbuilding and ship repair yards duly
by its mere declaration, make something a public utility
registered with the Maritime Industry Authority shall be
which is not in fact such; and a private business operated entitled to the following incentive benefits:
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 (a) Exemption from import duties and taxes.- The importation
utility, since that would be taking private property for public of machinery, equipment and materials for shipbuilding, ship
use without just compensation, which cannot be done repair and/or alteration, including indirect import, as well as
consistently with the due process clause.[24] 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
It is worthy to note that automobile and aircraft
duty and compensating tax: Provided, however, That the
manufacturers, which are of similar nature to shipyards, are
Maritime Industry Authority certifies that the item or items
not considered public utilities despite the fact that their
imported are not produced locally in sufficient quantity and
operations greatly impact on land and air transportation. The acceptable quality at reasonable prices, and that the
reason is simple. Unlike commodities or services traditionally importation is directly and actually needed and will be used
regarded as public utilities such as electricity, gas, water,
exclusively for the construction, repair, alteration, or
transportation, telephone or telegraph service, automobile
overhaul of merchant vessels, and other
watercrafts; Provided, further, That if the above machinery, On April 28, 1983, Batas Pambansa Blg. 391, also
equipment, materials and spare parts are sold to non-tax known as the Investment Incentive Policy Act of 1983, was
exempt persons or entities, the corresponding duties and taxes enacted. It laid down the general policy of the government to
shall be paid by the original importer; Provided, finally, That encourage private domestic and foreign investments in the
local dealers and/or agents who sell machinery, equipment, various sectors of the economy, to wit:
materials and accessories to shipyards for shipbuilding and
ship repair are entitled to tax credits, subject to approval by Sec. 2. Declaration of Investment Policy.- It is the policy of
the total tariff duties and compensating tax paid for said the State to encourage private domestic and foreign
machinery, equipment, materials and accessories. investments in industry, agriculture, mining and other sectors
of the economy which shall: provide significant employment
(b) Accelerated depreciation.- Industrial plant and equipment opportunities relative to the amount of the capital being
may, at the option of the shipbuilder and ship repairer, be invested; increase productivity of the land, minerals, forestry,
depreciated for any number of years between five years and aquatic and other resources of the country, and improve
expected economic life. utilization of the products thereof; improve technical skills of
the people employed in the enterprise; provide a foundation
(c) Exemption from contractors percentage tax.- The gross for the future development of the economy; accelerate
receipts derived by shipbuilders and ship repairers from development of less developed regions of the country; and
shipbuilding and ship repairing activities shall be exempt result in increased volume and value of exports for the
from the Contractors Tax provided in Section 91 of the economy.
National Internal Revenue Code during the first ten years
from registration with the Maritime Industry Authority, It is the policy of the State to extend to projects which will
provided that such registration is effected not later than the significantly contribute to the attainment of these
year 1990; Provided, That any and all amounts which would objectives, fiscal incentives without which said projects may
otherwise have been paid as contractors tax shall be set aside not be established in the locales, number and/or pace required
as a separate fund, to be known as Shipyard Development for optimum national economic development. Fiscal
Fund, by the contractor for the purpose of expansion, incentive systems shall be devised to compensate for
modernization and/or improvement of the contractors own market imperfections, reward performance of making
shipbuilding or ship repairing facilities; Provided, That, for contributions to economic development, cost-efficient and
this purpose, the contractor shall submit an annual statement be simple to administer.
of its receipts to the Maritime Industry Authority; and
Provided, further, That any disbursement from such fund for The fiscal incentives shall be extended to stimulate
any of the purposes hereinabove stated shall be subject to establishment and assist initial operations of the enterprise,
approval by the Maritime Industry Authority. and shall terminate after a period of not more than 10 years
from registration or start-up of operation unless a special
In addition, P.D. No. 666 removed the shipbuilding and period is otherwise stated.
ship repair industry from the list of public utilities, thereby
freeing the industry from the 60% citizenship requirement The foregoing declaration shall apply to all investment
under the Constitution and from the need to obtain Certificate incentive schemes and in particular will supersede article 2
of Public Convenience pursuant to section 15 of C.A No. of Presidential Decree No. 1789. (emphases supplied)
146. Section 1 (d) of P.D. 666 reads:
With the new investment incentive regime, Batas
(d) Registration required but not as a Public Utility.- The Pambansa Blg. 391 repealed the following laws, viz:
business of constructing and repairing vessels or parts
thereof shall not be considered a public utility and no Sec. 20. The following provisions are hereby repealed:
Certificate of Public Convenience shall be required
therefor. However, no shipyard, graving dock, marine
railway or marine repair shop and no person or enterprise 1) Section 53, P.D. 463 (Mineral Resources Development
shall engage in construction and/or repair of any vessel, or Decree);
any phase or part thereof, without a valid Certificate of
Registration and license for this purpose from the Maritime 2.) Section 1, P.D. 666 (Shipbuilding and Ship Repair
Industry Authority, except those owned or operated by the Industry);
Armed Forces of the Philippines or by foreign governments
pursuant to a treaty or agreement. (emphasis supplied) 3) Section 6, P.D. 1101 (Radioactive Minerals);
Any law, decree, executive order, or rules and 4) LOI 508 extending P.D. 791 and P.D. 924
regulations inconsistent with P.D. No. 666 were repealed or (Sugar); and
modified accordingly.[28] Consequently, sections 13 (b) and
15 of C.A. No. 146 were repealed in so far as the former law 5) The following articles of Presidential Decree
included shipyards in the list of public utilities and required 1789: 2, 18, 19, 22, 28, 30, 39, 49 (d), 62,
the certificate of public convenience for their operation. and 77. Articles 45, 46 and 48 are hereby
Simply stated, the repeal was due to irreconcilable amended only with respect to domestic and
inconsistency, and by definition, this kind of repeal falls export producers.
under the category of an implied repeal.[29]
All other laws, decrees, executive orders, administrative Furthermore, of the 441 Ship Building and Ship Repair
orders, rules and regulations or parts thereof which are (SBSR) entities registered with the MARINA,[33] none
inconsistent with the provisions of this Act are hereby appears to have an existing franchise. If we continue to hold
repealed, amended or modified accordingly. that a shipyard is a pubic utility, it is a necessary consequence
that all these entities should have obtained a franchise as was
All other incentive systems which are not in any way affected the rule prior to the enactment of P.D. No. 666. But MARINA
by the provisions of this Act may be restructured by the remains without authority, pursuant to P.D. No. 474 [34] to
President so as to render them cost-efficient and to make them issue franchises for the operation of shipyards. Surely,
conform with the other policy guidelines in the declaration of
policy provided in Section 2 of this Act. (emphasis supplied) the legislature did not intend to create a vacuum by
continuously treating a shipyard as a public utility without
From the language of the afore-quoted provision, the giving MARINA the power to issue a Certificate of Public
whole of P.D. No. 666, section 1 was expressly and Convenience (CPC) or a Certificate of Public Convenience
categorically repealed. As a consequence, the provisions of and Necessity (CPCN) as required by section 15 of C.A. No.
C.A. No. 146, which were impliedly repealed by P.D. No. 146.
666, section 1 were revived.[30] In other words, with the
enactment of Batas Pambansa Blg. 391, a shipyard reverted II.
back to its status as a public utility and as such, requires a
CPC for its operation. Whether under the 1977 Joint Venture Agreement,
The crux of the present controversy is the effect of the KAWASAKI can purchase only a maximum of 40%
express repeal of Batas Pambansa Blg. 391 by Executive
Order No. 226 issued by former President Corazon C. Aquino
of PHILSECOs total capitalization.
under her emergency powers.
A careful reading of the 1977 Joint Venture Agreement
We rule that the express repeal of Batas Pambansa Blg.
reveals that there is nothing that prevents KAWASAKI from
391 by E.O. No. 226 did not revive Section 1 of P.D. No. 666.
acquiring more than 40% of PHILSECOs total capitalization.
But more importantly, it also put a period to the existence of Section 1 of the 1977 JVA states:
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. 1.3 The authorized capital stock of Philseco shall be P330
Had the latter not repealed P.D. No. 666, the former should million. The parties shall thereafter increase their
have been modified accordingly and shipyards effectively subscription in Philseco as may be necessary and as called by
removed from the list of public utilities. Ergo, with the the Board of Directors, maintaining a proportion of 60%-40%
express repeal of Batas Pambansa Blg. 391 by E.O. No. 226, for NIDC and KAWASAKI respectively, up to a total
the revival of sections 13 (b) and 15 of C.A. No. 146 had no subscribed and paid-up capital stock of P312 million.
more leg to stand on. A law that has been expressly repealed
ceases to exist and becomes inoperative from the moment the 1.4 Neither party shall sell, transfer or assign all or any part
repealing law becomes effective.[31]Hence, there is simply no of its interest in SNS [renamed PHILSECO] to any third party
basis in the conclusion that shipyards remain to be a public without giving the other under the same terms the right of first
utility. A repealed statute cannot be the basis for classifying refusal. This provision shall not apply if the transferee is a
shipyards as public utilities. corporation owned and controlled by the GOVERMENT [of
the Philippines] or by a Kawasaki affiliate.
In view of the foregoing, there can be no other
conclusion than to hold that a shipyard is not a pubic utility. 1.5 The By-Laws of SNS [PHILSECO] shall grant the parties
A shipyard has been considered a public utility merely by preemptive rights to unissued shares of SNS [PHILSECO].[35]
legislative declaration. Absent this declaration, there is no
more reason why it should continuously be regarded as such. Under section 1.3, the parties agreed to the amount
The fact that the legislature did not clearly and of P330 million as the total capitalization of their joint
unambiguously express its intention to include shipyards in venture. There was no mention of the amount of their initial
the list of public utilities indicates that that it did not intend to subscription. What is clear is that they are to infuse the needed
do so. Thus, a shipyard reverts back to its status as non-public capital from time to time until the total subscribed and paid-
utility prior to the enactment of the Public Service Law. up capital reaches P312 million. The phrase maintaining a
proportion of 60%-40% refers to their respective share of the
This interpretation is in accord with the uniform burden each time the Board of Directors decides to increase
interpretation placed upon it by the Board of Investments the subscription to reach the target paid-up capital of P312
(BOI), which was entrusted by the legislature with the million. It does not bind the parties to maintain the sharing
preparation of annual Investment Priorities Plan (IPPs). The scheme all throughout the existence of their partnership.
BOI has consistently classified shipyards as part of the
manufacturing sector and not of the public utilities sector. The parties likewise agreed to arm themselves with
The enactment of Batas Pambansa Blg. 391 did not alter the protective mechanisms to preserve their respective interests
treatment of the BOI on shipyards. It has been, as at present, in the partnership in the event that (a) one party decides to sell
classified as part of the manufacturing and not of the public its shares to third parties; and (b) new Philseco shares are
utilities sector.[32] issued. Anent the first situation, the non-selling party is given
the right of first refusal under section 1.4 to have a Verily, the operative protective mechanism is the right of first
preferential right to buy or to refuse the selling partys shares. refusal which does not impose any limitation in the maximum
The right of first refusal is meant to protect the original or shares that the non-selling partner may acquire.
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
III.
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 Whether the right to top granted to KAWASAKI
other associates. The right of first refusal thus ensures that the
parties are given control over who may become a new partner in exchange for its right of first refusal violates
in substitution of or in addition to the original partners.
Should the selling partner decide to dispose all its shares, the the principles of competitive bidding.
non-selling partner may acquire all these shares and terminate
the partnership. No person or corporation can be compelled We also hold that the right to top granted to
to remain or to continue the partnership. Of course, this KAWASAKI and exercised by private respondent did not
presupposes that there are no other restrictions in the violate the rules of competitive bidding.
maximum allowable share that the non-selling partner may
acquire such as the constitutional restriction on foreign
The word bidding in its comprehensive sense means
ownership in public utility. The theory that KAWASAKI can
making an offer or an invitation to prospective contractors
acquire, as a maximum, only 40% of PHILSECOs shares is
whereby the government manifests its intention to make
correct only if a shipyard is a public utility.In such instance,
proposals for the purpose of supplies, materials and
the non-selling partner who is an alien can acquire only a
equipment for official business or public use, or for public
maximum of 40% of the total capitalization of a public utility
works or repair.[38] The three principles of public bidding are:
despite the grant of first refusal.The partners cannot, by mere
(1) the offer to the public; (2) an opportunity for competition;
agreement, avoid the constitutional proscription. But as
and (3) a basis for comparison of bids. [39] As long as these
afore-discussed, PHILSECO is not a public utility and no
three principles are complied with, the public bidding can be
other restriction is present that would limit the right of
considered valid and legal. It is not necessary that the highest
KAWASAKI to purchase the Governments share to 40% of
bid be automatically accepted. The bidding rules may specify
Philsecos total capitalization.
other conditions or the bidding process be subjected to certain
reservation or qualification such as when the owner reserves
Furthermore, the phrase under the same terms in section to himself openly at the time of the sale the right to bid upon
1.4 cannot be given an interpretation that would limit the right the property, or openly announces a price below which the
of KAWASAKI to purchase PHILSECO shares only to the property will not be sold. Hence, where the seller reserves the
extent of its original proportionate contribution of 40% to the right to refuse to accept any bid made, a binding sale is not
total capitalization of the PHILSECO. Taken together with consummated between the seller and the bidder until the
the whole of section 1.4, the phrase under the same terms seller accepts the bid. Furthermore, where a right is reserved
means that a partner to the joint venture that decides to in the seller to reject any and all bids received, the owner may
sell its shares to a third party shall make a similar offer to exercise the right even after the auctioneer has accepted a bid,
the non-selling partner. The selling partner cannot make a and this applies to the auction of public as well as private
different or a more onerous offer to the non-selling partner. property. [40]Thus:
The exercise of first refusal presupposes that the non- It is a settled rule that where the invitation to bid contains a
selling partner is aware of the terms of the conditions reservation for the Government to reject any or all bids, the
attendant to the sale for it to have a guided choice. While the lowest or the highest bidder, as the case may be, is not entitled
right of first refusal protects the non-selling partner from the to an award as a matter of right for it does not become a
entry of third persons, it cannot also deprive the other partner ministerial duty of the Government to make such an award.
the right to sell its shares to third persons if, under the same Thus, it has been held that where the right to reject is so
offer, it does not buy the shares. reserved, the lowest bid or any bid for that matter may be
rejected on a mere technicality, that all bids may be rejected,
Apart from the right of first refusal, the parties also even if arbitrarily and unwisely, or under a mistake, and that
have preemptive rights under section 1.5 in the unissued in the exercise of a sound discretion, the award may be made
shares of Philseco. Unlike the former, this situation does not to another than the lowest bidder. And so, where the
contemplate transfer of a partners shares to third parties but Government as advertiser, availing itself of that right, makes
the issuance of new Philseco shares. The grant of preemptive its choice in rejecting any or all bids, the losing bidder has no
rights preserves the proportionate shares of the original cause to complain nor right to dispute that choice, unless an
partners so as not to dilute their respective interests with the unfairness or injustice is shown. Accordingly, he has no
issuance of the new shares. Unlike the right of first refusal, a ground of action to compel the Government to award the
preemptive right gives a partner a preferential right over the contract in his favor, nor compel it to accept his bid. [41]
newly issued shares only to the extent that it retains its
original proportionate share in the joint venture. In the instant case, the sale of the Government shares in
PHILSECO was publicly known. All interested bidders were
The case at bar does not concern the issuance of new welcomed. The basis for comparing the bids were laid down.
shares but the transfer of a partners share in the joint venture. All bids were accepted sealed and were opened and read in
the presence of the COAs official representative and before bidding is the accepted method in arriving at a fair and
all interested bidders. The only question that remains is reasonable price and ensures that overpricing, favoritism and
whether or not the existence of KAWASAKIs right to top other anomalous practices are eliminated or
destroys the essence of competitive bidding so as to say that minimized.[42] But the requirement for public bidding does
the bidders did not have an opportunity for competition. We not negate the exercise of the right of first refusal. In fact,
hold that it does not. public bidding is an essential first step in the exercise of the
right of first refusal because it is only after the public bidding
The essence of competition in public bidding is that the that the terms upon which the Government may be said to be
bidders are placed on equal footing. This means that all willing to sell its shares to third parties may be known. It is
qualified bidders have an equal chance of winning the auction only after the public bidding that the Government will have a
through their bids. In the case at bar, all of the bidders were basis with which to offer KAWASAKI the option to buy or
exposed to the same risk and were subjected to the same forego the shares.
condition, i.e., the existence of KAWASAKIs right to top.
Under the ASBR, the Government expressly reserved the Assuming that the parties did not swap KAWASAKIs
right to reject any or all bids, and manifested its intention not right of first refusal with the right to top, KAWASAKI would
to accept the highest bid should KAWASAKI decide to have been able to buy the National Governments shares in
exercise its right to top under the ABSR. This reservation or PHILSECO under the same terms as offered by the highest
qualification was made known to the bidders in a pre-bidding bidder. Stated otherwise, by exercising its right of first
conference held on September 28, 1993. They all expressly refusal, KAWASAKI could have bought the shares for
accepted this condition in writing without any qualification. only P2.03 billion and not the higher amount of P2.1315
Furthermore, when the Committee on Privatization notified billion. There is, thus, no basis in the submission that the right
petitioner of the approval of the sale of the National to top unfairly favored KAWASAKI. In fact, with the right to
Government shares of stock in PHILSECO, it specifically top, KAWASAKI stands to pay higher than it should had it
stated that such approval was subject to the right of settled with its right of first refusal. The obvious beneficiary
KAWASAKI Heavy Industries, Inc./Philyards Holdings, Inc. of the scheme is the National Government.
to top JGSMIs bid by 5% as specified in the bidding rules.
Clearly, the approval of the sale was a conditional one. Since If at all, the obvious consideration for the exchange of
Philyards eventually exercised its right to top petitioners bid the right of first refusal with the right to top is that
by 5%, the sale was not consummated. Parenthetically, it KAWASAKI can name a nominee, which it is a shareholder,
cannot be argued that the existence of the right to top set for to exercise the right to top. This is a valid contractual
naught the entire public bidding. Had Philyards Holdings, stipulation; the right to top is an assignable right and both
Inc. failed or refused to exercise its right to top, the sale parties are aware of the full legal consequences of its exercise.
between the petitioner and the National Government would As aforesaid, all bidders were aware of the existence of the
have been consummated. In like manner, the existence of the right to top, and its possible effects on the result of the public
right to top cannot be likened to a second bidding, which is bidding was fully disclosed to them. The petitioner, thus,
countenanced, except when there is failure to bid as when cannot feign ignorance nor can it be allowed to repudiate its
there is only one bidder or none at all. A prohibited second acts and question the proceedings it had fully adhered to. [43]
bidding presupposes that based on the terms and conditions
of the sale, there is already a highest bidder with the right to
The fact that the losing bidder, Keppel Consortium
demand that the seller accept its bid. In the instant case, the
(composed of Keppel, SM Group, Insular Life Assurance,
highest bidder was well aware that the acceptance of its bid
Mitsui and ICTSI), has joined Philyards in the latters effort to
was conditioned upon the non-exercise of the right to top. raise P2.131 billion necessary in exercising the right to top is
not contrary to law, public policy or public morals. There is
To be sure, respondents did not circumvent the nothing in the ASBR that bars the losing bidders from joining
requirements for bidding by granting KAWASAKI, a non- either the winning bidder (should the right to top is not
bidder, the right to top the highest bidder. The fact that exercised) or KAWASAKI/PHI (should it exercise its right to
KAWASAKIs nominee to exercise the right to top has among top as it did), to raise the purchase price. The petitioner did
its stockholders some losing bidders cannot also be deemed not allege, nor was it shown by competent evidence, that the
unfair. participation of the losing bidders in the public bidding was
done with fraudulent intent. Absent any proof of fraud, the
It must be emphasized that none of the parties questions formation by Philyards of a consortium is legitimate in a free
the existence of KAWASAKIs right of first refusal, which is enterprise system. The appellate court is thus correct in
concededly the basis for the grant of the right to top. Under holding the petitioner estopped from questioning the validity
KAWASAKIs right of first refusal, the National Government of the transfer of the National Governments shares in
is under the obligation to give preferential right to PHILSECO to respondent.
KAWASAKI in the event it decides to sell its shares in
PHILSECO. It has to offer to KAWASAKI the shares and Finally, no factual basis exists to support the view that
give it the option to buy or refuse under the same terms for the drafting of the ASBR was illegal because no prior
which it is willing to sell the said shares to third approval was given by the COA for it, specifically the
parties. KAWASAKI is not a mere non-bidder. It is a partner provision on the right to top the highest bidder and that the
in the joint venture; the incidents of which are governed by public auction on December 2, 1993 was not witnessed by a
the law on contracts and on partnership. COA representative. No evidence was proffered to prove
these allegations and the Court cannot make legal conclusions
It is true that properties of the National Government, as out of mere allegations. Regularity in the performance of
a rule, may be sold only after a public bidding is held. Public official duties is presumed[44]and in the absence of competent
evidence to rebut this presumption, this Court is duty bound Roxas filed two motions for extension of time to submit his
to uphold this presumption. answer. But despite said motion, he failed to do so causing
petitioners to file a motion to have him declared in default.
IN VIEW OF THE FOREGOING, the Motion for Roxas then filed, through a new counsel, a third motion for
Reconsideration is hereby GRANTED. The impugned extension of time to submit a responsive pleading.
Decision and Resolution of the Court of Appeals are
AFFIRMED. On August 19, 1988, the trial court declared Roxas in default.
The order of default was, however, lifted upon motion of
SO ORDERED. Roxas.
G.R. No. 104175 June 25, 1993 On August 22, 1988, Roxas filed a motion to dismiss on the
grounds that:
YOUNG AUTO SUPPLY CO. AND NEMESIO
GARCIA, petitioners, 1. The complaint did not state a cause of
vs. action due to non-joinder of indispensable
THE HONORABLE COURT OF APPEALS parties;
(THIRTEENTH DIVISION) AND GEORGE CHIONG
ROXAS, respondents. 2. The claim or demand set forth in the
complaint had been waived, abandoned or
Petitioners seek to set aside the decision of respondent Court otherwise extinguished; and
of Appeals in CA-G.R. SP No. 25237, which reversed the
Order dated February 8, 1991 issued by the Regional Trial 3. The venue was improperly laid (Rollo, p.
Court, Branch 11, Cebu City in Civil Case No. CEB 6967. 299).
The order of the trial court denied the motion to dismiss filed
by respondent George C. Roxas of the complaint for After a hearing, wherein testimonial and documentary
collection filed by petitioners. evidence were presented by both parties, the trial court in an
Order dated February 8, 1991 denied Roxas' motion to
It appears that sometime on October 28, 1987, Young Auto dismiss. After receiving said order, Roxas filed another
Supply Co. Inc. (YASCO) represented by Nemesio Garcia, motion for extension of time to submit his answer. He also
its president, Nelson Garcia and Vicente Sy, sold all of their filed a motion for reconsideration, which the trial court
shares of stock in Consolidated Marketing & Development denied in its Order dated April 10, 1991 for being pro-
Corporation (CMDC) to Roxas. The purchase price was forma (Rollo, p. 17). Roxas was again declared in default, on
P8,000,000.00 payable as follows: a downpayment of the ground that his motion for reconsideration did not toll the
P4,000,000.00 and the balance of P4,000,000.00 in four post running of the period to file his answer.
dated checks of P1,000,000.00 each.
On May 3, 1991, Roxas filed an unverified Motion to Lift the
Immediately after the execution of the agreement, Roxas took Order of Default which was not accompanied with the
full control of the four markets of CMDC. However, the required affidavit or merit. But without waiting for the
vendors held on to the stock certificates of CMDC as security resolution of the motion, he filed a petition for certiorari with
pending full payment of the balance of the purchase price. the Court of Appeals.
The first check of P4,000,000.00, representing the down- The Court of Appeals sustained the findings of the trial court
payment, was honored by the drawee bank but the four other with regard to the first two grounds raised in the motion to
checks representing the balance of P4,000,000.00 were dismiss but ordered the dismissal of the complaint on the
dishonored. In the meantime, Roxas sold one of the markets ground of improper venue (Rollo, p. 49).
to a third party. Out of the proceeds of the sale, YASCO
received P600,000.00, leaving a balance of P3,400,000.00 A subsequent motion for reconsideration by petitioner was to
(Rollo, p. 176). no avail.
Subsequently, Nelson Garcia and Vicente Sy assigned all Petitioners now come before us, alleging that the Court of
their rights and title to the proceeds of the sale of the CMDC Appeals
shares to Nemesio Garcia. erred in:
On June 10, 1988, petitioners filed a complaint against Roxas 1. holding the venue should be in Pasay
in the Regional Trial Court, Branch 11, Cebu City, praying City, and not in Cebu City (where both
that Roxas be ordered to pay petitioners the sum of petitioners/plaintiffs are residents;
P3,400,00.00 or that full control of the three markets be
turned over to YASCO and Garcia. The complaint also
2. not finding that Roxas is estopped from
prayed for the forfeiture of the partial payment of
questioning the choice of venue (Rollo, p.
P4,600,000.00 and the payment of attorney's fees and costs
19).
(Rollo, p. 290).
The petition is meritorious.
In holding that the venue was improperly laid in Cebu City, Philippines" (Sec. 14 [3]). The purpose of this requirement is
the Court of Appeals relied on the address of YASCO, as to fix the residence of a corporation in a definite place, instead
appearing in the Deed of Sale dated October 28, 1987, which of allowing it to be ambulatory.
is "No. 1708 Dominga Street, Pasay City." This was the same
address written in YASCO's letters and several commercial In Clavencilla Radio System v. Antillon, 19 SCRA 379
documents in the possession of Roxas (Decision, p. 12; Rollo, ([1967]), this Court explained why actions cannot be filed
p. 48). against a corporation in any place where the corporation
maintains its branch offices. The Court ruled that to allow an
In the case of Garcia, the Court of Appeals said that he gave action to be instituted in any place where the corporation has
Pasay City as his address in three letters which he sent to branch offices, would create confusion and work untold
Roxas' brothers and sisters (Decision, p. 12; Rollo, p. 47). The inconvenience to said entity. By the same token, a corporation
appellate court held that Roxas was led by petitioners to cannot be allowed to file personal actions in a place other than
believe that their residence is in Pasay City and that he had its principal place of business unless such a place is also the
relied upon those representations (Decision, p. 12, Rollo, p. residence of a co-plaintiff or a defendant.
47).
If it was Roxas who sued YAS CO in Pasay City and the latter
The Court of Appeals erred in holding that the venue was questioned the venue on the ground that its principal place of
improperly laid in Cebu City. business was in Cebu City, Roxas could argue that YASCO
was in estoppel because it misled Roxas to believe that Pasay
In the Regional Trial Courts, all personal actions are City was its principal place of business. But this is not the
commenced and tried in the province or city where the case before us.
defendant or any of the defendants resides or may be found,
or where the plaintiff or any of the plaintiffs resides, at the With the finding that the residence of YASCO for purposes
election of the plaintiff [Sec. 2(b) Rule 4, Revised Rules of of venue is in Cebu City, where its principal place of business
Court]. is located, it becomes unnecessary to decide whether Garcia
is also a resident of Cebu City and whether Roxas was in
There are two plaintiffs in the case at bench: a natural person estoppel from questioning the choice of Cebu City as the
and a domestic corporation. Both plaintiffs aver in their venue.
complaint that they are residents of Cebu City, thus:
WHEREFORE, the petition is GRANTED. The decision of
1.1. Plaintiff Young Auto Supply Co., Inc., the Court of Appeals appealed from is SET ASIDE and the
("YASCO") is a domestic corporation duly Order dated February 8, 1991 of the Regional Trial Court is
organized and existing under Philippine REINSTATED.
laws with principal place of business at M.
J. Cuenco Avenue, Cebu City. It also has a SO ORDERED.
branch office at 1708 Dominga Street,
Pasay City, Metro Manila. [G.R. No. 51765. March 3, 1997]
Plaintiff Nemesio Garcia is of legal age, REPUBLIC PLANTERS BANK, petitioner, vs. HON.
married, Filipino citizen and with business ENRIQUE A. AGANA, SR., as Presiding Judge,
address at Young Auto Supply Co., Inc., Court of First Instance of Rizal, Branch XXVIII,
M. J. Cuenco Avenue, Cebu City. . . . Pasay City, ROBES-FRANCISCO REALTY &
(Complaint, p. 1; Rollo, p. 81). DEVELOPMENT CORPORATION and
ADALIA F. ROBES, respondents.
The Article of Incorporation of YASCO (SEC Reg. No.
22083) states: This is a petition for certiorari seeking the annulment of the
Decision[1] of the then Court of First Instance of Rizal[2] for
THIRD That the place where the principal having been rendered in grave abuse of discretion. Private
office of the corporation is to be established respondents Robes-Francisco Realty and Development
or located is at Cebu City, Philippines (as Corporation (hereafter, "the Corporation") and Adalia F.
amended on December 20, 1980 and Robes filed in the court a quo, an action for specific
further amended on December 20, 1984) performance to compel petitioner to redeem 800 preferred
(Rollo, p. 273). shares of stock with a face value of P8,000.00 and to pay 1%
quarterly interest thereon as quarterly dividend owing them
A corporation has no residence in the same sense in which under the terms and conditions of the certificates of stock.
this term is applied to a natural person. But for practical
purposes, a corporation is in a metaphysical sense a resident The court a quo rendered judgment in favor of private
of the place where its principal office is located as stated in respondents; hence, this instant petition.
the articles of incorporation (Cohen v. Benguet Commercial
Co., Ltd., 34 Phil. 256 [1916] Clavecilla Radio System v. Herein parties debate only legal issues, no issues of fact
Antillon, 19 SCRA 379 [1967]). The Corporation Code having been raised by them in the court a quo. For ready
precisely requires each corporation to specify in its articles of reference, however, the following narration of pertinent
incorporation the "place where the principal office of the transactions and events is in order:
corporation is to be located which must be within the
On September 18, 1961, private respondent Corporation ordering petitioner to pay private respondents the face value
secured a loan from petitioner in the amount of P120,000.00. of the stock certificates as redemption price, plus 1%
As part of the proceeds of the loan, preferred shares of stocks quarterly interest thereon until full payment, the trial court
were issued to private respondent Corporation, through its ruled:
officers then, private respondent Adalia F. Robes and one
Carlos F. Robes. In other words, instead of giving the legal "There being no issue of fact raised by either of the parties
tender totaling to the full amount of the loan, which who filed their respective memoranda delineating their
is P120,000.00, petitioner lent such amount partially in the respective contentions, a judgment on the pleadings,
form of money and partially in the form of stock certificates conformably with an earlier order of the Court, appears to be
numbered 3204 and 3205, each for 400 shares with a par in order.
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
From a further perusal of the pleadings, it appears that the
private respondent Adalia F. Robes and Carlos F. Robes, who
provision of the stock certificates in question to the effect that
subsequently, however, endorsed his shares in favor of Adalia the plaintiffs shall have the right to receive a quarterly
F. Robes. dividend of One Per Centum (1%), cumulative and
participating, clearly and unequivocably [sic] indicates that
Said certificates of stock bear the following terms and the same are 'interest bearing stocks' which are stocks issued
conditions: by a corporation under an agreement to pay a certain rate of
interest thereon (5 Thompson, Sec. 3439). As such, plaintiffs
"The Preferred Stock shall have the following rights, become entitled to the payment thereof as a matter of right
preferences, qualifications and limitations, to wit: without necessity of a prior declaration of dividend.
1. Of the right to receive a On the question of the redemption by the defendant of said
quarterly dividend of preferred shares of stock, the very wordings of the terms and
One Per Centum (1%), conditions in said stock certificates clearly allows the same.
cumulative and
participating. To allow the herein defendant not to redeem said preferred
shares of stock and/or pay the interest due thereon despite the
xxx clear import of said provisions by the mere invocation of
alleged Central Bank Circulars prohibiting the same is
2. That such preferred tantamount to an impairment of the obligation of contracts
shares may be enshrined in no less than the fundamental law itself.
redeemed, by the
system of drawing lots, Moreover, the herein defendant is considered in estoppel
at any time after two from taking shelter behind a General Banking Act provision
(2) years from the date to the effect that it cannot buy its own shares of stocks
of issue at the option of considering that the very terms and conditions in said stock
the Corporation. x x x." certificates allowing their redemption are its own handiwork.
On January 31, 1979, private respondents proceeded against As to the claim by the defendant that plaintiffs' cause of action
petitioner and filed a Complaint anchored on private is barred by prescription, suffice it to state that the running of
respondents' alleged rights to collect dividends under the the prescriptive period was considered interrupted by the
preferred shares in question and to have petitioner redeem the written extrajudicial demands made by the plaintiffs from the
same under the terms and conditions of the stock certificates. defendant."[7]
Private respondents attached to their complaint, a letter-
demand dated January 5, 1979 which, significantly, was not Aggrieved by the decision of the trial court, petitioner
formally offered in evidence. elevated the case before us essentially on pure questions of
law. Petitioner's statement of the issues that it submits for us
Petitioner filed a Motion to Dismiss[3] private to adjudicate upon, is as follows:
respondents' Complaint on the following grounds: (1) that the
trial court had no jurisdiction over the subject-matter of the "A. RESPONDENT JUDGE COMMITTED A
action; (2) that the action was unenforceable under GRAVE ABUSE OF DISCRETION
substantive law; and (3) that the action was barred by the AMOUNTING TO LACK OR EXCESS
statute of limitations and/or laches. OF JURISDICTION IN ORDERING
PETITIONER TO PAY RESPONDENT
Petitioner's Motion to Dismiss was denied by the trial ADALIA F. ROBES THE AMOUNT
court in an Order dated March 16, 1979.[4] Petitioner then OF P8,213.69 AS INTERESTS FROM
filed its Answer on May 2, 1979.[5] Thereafter, the trial court 1961 To 1979 ON HER PREFERRED
gave the parties ten (10) days from July 30, 1979 to submit SHARES.
their respective memoranda after the submission of which the
case would be deemed submitted for resolution.[6] B. RESPONDENT JUDGE COMMITTED A
GRAVE ABUSE OF DISCRETION
On September 7, 1979, the trial court rendered the AMOUNTING TO LACK OR EXCESS
herein assailed decision in favor of private respondents. In OF JURISDICTION IN ORDERING
PETITIONER TO REDEEM moreover, do not give them a lien upon the property of the
RESPONDENT ADALIA F. ROBES' corporation nor make them creditors of the corporation, the
PREFERRED SHARES FOR P8,000.00 right of the former being always subordinate to the latter.
Dividends are thus payable only when there are profits earned
C. RESPONDENT JUDGE by the corporation and as a general rule, even if there are
COMMITTED A GRAVE ABUSE OF existing profits, the board of directors has the discretion to
DISCRETION AMOUNTING TO LACK determine whether or not dividends are to be
OR EXCESS OF JURISDICTION IN declared.[15] Shareholders, both common and preferred, are
DISREGARDING THE ORDER OF THE considered risk takers who invest capital in the business and
CENTRAL BANK TO PETITIONER TO who can look only to what is left after corporate debts and
DESIST FROM REDEEMING ITS liabilities are fully paid.[16]
PREFERRED SHARES AND FROM
PAYING DIVIDENDS THEREON x x x. Redeemable shares, on the other hand, are shares
usually preferred, which by their terms are redeemable at a
D. THE TRIAL COURT ERRED IN fixed date, or at the option of either issuing corporation, or
NOT HOLDING THAT THE the stockholder, or both at a certain redemption price. [17] A
COMPLAINT DOES NOT STATE A redemption by the corporation of its stock is, in a sense, a
CAUSE OF ACTION. repurchase of it for cancellation.[18]The present Code allows
redemption of shares even if there are no unrestricted retained
E. THE TRIAL COURT ERRED IN earnings on the books of the corporation. This is a new
provision which in effect qualifies the general rule that the
NOT HOLDING THAT THE CLAIM OF
corporation cannot purchase its own shares except out of
RESPONDENT ADALIA F. ROBES IS
current retained earnings.[19] However, while redeemable
BARRED BY PRESCRIPTION OR
shares may be redeemed regardless of the existence of
LACHES."[8]
unrestricted retained earnings, this is subject to the condition
that the corporation has, after such redemption, assets in its
The petition is meritorious. books to cover debts and liabilities inclusive of capital stock.
Redemption, therefore, may not be made where the
Before passing upon the merits of this petition, it may corporation is insolvent or if such redemption will cause
be pertinent to provide an overview on the nature of preferred insolvency or inability of the corporation to meet its debts as
shares and the redemption thereof, considering that these they mature.[20]
issues lie at the heart of the dispute.
We come now to the merits of the case. The petitioner
A preferred share of stock, on one hand, is one which argues that it cannot be compelled to redeem the preferred
entitles the holder thereof to certain preferences over the shares issued to the private respondent. We agree.
holders of common stock. The preferences are designed to Respondent judge, in ruling that petitioner must redeem the
induce persons to subscribe for shares of a shares in question, stated that:
corporation.[9] Preferred shares take a multiplicity of forms.
The most common forms may be classified into two: (1) "On the question of the redemption by the defendant of said
preferred shares as to assets; and (2) preferred shares as to preferred shares of stock, the very wordings of the terms and
dividends. The former is a share which gives the holder conditions in said stock certificates clearly allows the
thereof preference in the distribution of the assets of the same."[21]
corporation in case of liquidation;[10] the latter is a share the
holder of which is entitled to receive dividends on said share
What respondent Judge failed to recognize was that while the
to the extent agreed upon before any dividends at all are paid
to the holders of common stock.[11] There is no guaranty, stock certificate does allow redemption, the option to do so
was clearly vested in the petitioner bank. The redemption
however, that the share will receive any dividends. Under the
therefore is clearly the type known as "optional". Thus,
old Corporation Law in force at the time the contract between
except as otherwise provided in the stock certificate, the
the petitioner and the private respondents was entered into, it
redemption rests entirely with the corporation and the
was provided that "no corporation shall make or declare any
dividend except from the surplus profits arising from its stockholder is without right to either compel or refuse the
business, or distribute its capital stock or property other than redemption of its stock.[22] Furthermore, the terms and
conditions set forth therein use the word "may". It is a settled
actual profits among its members or stockholders until after
doctrine in statutory construction that the word "may"
the payment of its debts and the termination of its existence
denotes discretion, and cannot be construed as having a
by limitation or lawful dissolution." [12] Similarly, the present
mandatory effect. We fail to see how respondent judge can
Corporation Code[13] provides that the board of directors of a
stock corporation may declare dividends only out of ignore what, in his words, are the "very wordings of the terms
unrestricted retained earnings.[14] The Code, in Section 43, and conditions in said stock certificates" and construe what is
clearly a mere option to be his legal basis for compelling the
adopting the change made in accounting terminology,
petitioner to redeem the shares in question.
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 The redemption of said shares cannot be allowed. As
declaration of dividends is dependent upon the availability of pointed out by the petitioner, the Central Bank made a finding
surplus profit or unrestricted retained earnings, as the case that said petitioner has been suffering from chronic reserve
may be. Preferences granted to preferred stockholders, 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 respondents is also barred by laches. Laches has been defined
Board of the petitioner bank prohibiting the latter from as the failure or neglect, for an unreasonable length of time,
redeeming any preferred share, on the ground that said to do that which by exercising due diligence could or should
redemption would reduce the assets of the Bank to the have been done earlier; it is negligence or omission to assert
prejudice of its depositors and creditors.[24] Redemption of a right within a reasonable time, warranting a presumption
preferred shares was prohibited for a just and valid reason. that the party entitled to assert it either has abandoned it or
The directive issued by the Central Bank Governor was declined to assert it.[28]
obviously meant to preserve the status quo, and to prevent the
financial ruin of a banking institution that would have Considering that the terms and conditions set forth in
resulted in adverse repercussions, not only to its depositors the stock certificate clearly indicate that redemption of the
and creditors, but also to the banking industry as a whole. The preferred shares may be made at any time after the lapse of
directive, in limiting the exercise of a right granted by law to two years from the date of issue, private respondents should
a corporate entity, may thus be considered as an exercise of have taken it upon themselves, after the lapse of the said
police power. The respondent judge insists that the directive period, to inquire from the petitioner the reason why the said
constitutes an impairment of the obligation of contracts. It shares have not been redeemed. As it is, not only two years
has, however, been settled that the Constitutional guaranty of had lapsed, as agreed upon, but an additional sixteen years
non-impairment of obligations of contract is limited by the passed before the private respondents saw it fit to demand
exercise of the police power of the state, the reason being that their right. The petitioner, at the time it issued said preferred
public welfare is superior to private rights.[25] shares to the private respondents in 1961, could not have
known that it would be suffering from chronic reserve
The respondent judge also stated that since the stock deficiency twelve years later. Had the private respondents
certificate granted the private respondents the right to receive been vigilant in asserting their rights, the redemption could
a quarterly dividend of one Per Centum (1%), cumulative and have been effected at a time when the petitioner bank was not
participating, it "clearly and unequivocably (sic) indicates suffering from any financial crisis.
that the same are 'interest bearing stocks' or stocks issued by
a corporation under an agreement to pay a certain rate of WHEREFORE, the instant petition, being impressed
interest thereon. As such, plaintiffs (private respondents with merit, is hereby GRANTED. The challenged decision of
herein) become entitled to the payment thereof as a matter of respondent judge is set aside and the complaint against the
right without necessity of a prior declaration of petitioner is dismissed.
dividend."[26] There is no legal basis for this observation.
Both Sec. 16 of the Corporation Law and Sec. 43 of the Costs against the private respondents.
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 SO ORDERED.
at a regular or special meeting duly called for the purpose.
These provisions underscore the fact that payment of [G.R. No. 150976. October 18, 2004]
dividends to a stockholder is not a matter of right but a matter
of consensus. Furthermore, "interest bearing stocks", on CECILIA CASTILLO, OSCAR DEL ROSARIO,
which the corporation agrees absolutely to pay interest before ARTURO S. FLORES, XERXES NAVARRO,
dividends are paid to common stockholders, is legal only MARIA ANTONIA TEMPLO and MEDICAL
when construed as requiring payment of interest as dividends CENTER PARAAQUE, INC., petitioners,
from net earnings or surplus only.[27] Clearly, the respondent vs. ANGELES BALINGHASAY,
judge, in compelling the petitioner to redeem the shares in RENATO BERNABE, ALODIA DEL
question and to pay the corresponding dividends, committed ROSARIO, ROMEO FUNTILA, TERESITA
grave abuse of discretion amounting to lack or excess of GAYANILO, RUSTICO JIMENEZ, ARACELI** JO,
jurisdiction in ignoring both the terms and conditions ESMERALDA MEDINA, CECILIA
specified in the stock certificate, as well as the clear mandate MONTALBAN, VIRGILIO OBLEPIAS,
of the law. CARMENCITA PARRENO, CESAR REYES,
REYNALDO SAVET, SERAPIO TACCAD,
Anent the issue of prescription, this Court so holds that VICENTE VALDEZ, SALVACION VILLAMORA,
the claim of private respondent is already barred by and HUMBERTO VILLAREAL, respondents.
prescription as well as laches. Art. 1144 of the New Civil
Code provides that a right of action that is founded upon a For review on certiorari is the Partial
written contract prescribes in ten (10) years. The letter- Judgment[1] dated November 26, 2001 in Civil Case No. 01-
demand made by the private respondents to the petitioner was 0140, of the Regional Trial Court (RTC) of Paraaque City,
made only on January 5, 1979, or almost eighteen years after Branch 258. The trial court declared the February 9, 2001,
receipt of the written contract in the form of the stock election of the board of directors of the Medical Center
certificate. As noted earlier, this letter-demand, significantly, Paraaque, Inc. (MCPI) valid. The Partial Judgment dismissed
was not formally offered in evidence, nor were any other petitioners first cause of action, specifically, to annul said
evidence of demand presented. Therefore, we conclude that election for depriving petitioners their voting rights and to be
the only time the private respondents saw it fit to assert their voted on as members of the board.
rights, if any, to the preferred shares of stock, was after the
lapse of almost eighteen years. The same clearly indicates The facts, as culled from records, are as follows:
that the right of the private respondents to any relief under the
law has already prescribed. Moreover, the claim of the private
Petitioners and the respondents are stockholders of elected as directors or as corporate officers[4] (Stress and
MCPI, with the former holding Class B shares and the latter underscoring supplied).
owning Class A shares.
The SEC approved the foregoing amendment on
MCPI is a domestic corporation with offices at Dr. A. September 22, 1993.
Santos Avenue, Sucat, Paraaque City. It was organized
sometime in September 1977. At the time of its incorporation, On February 9, 2001, the shareholders of MCPI held
Act No. 1459, the old Corporation Law was still in force and their annual stockholders meeting and election for directors.
effect. Article VII of MCPIs original Articles of During the course of the proceedings, respondent Rustico
Incorporation, as approved by the Securities and Exchange Jimenez, citing Article VII, as amended, and notwithstanding
Commission (SEC) on October 26, 1977, reads as follows: MCPIs history, declared over the objections of herein
petitioners, that no Class B shareholder was qualified to run
SEVENTH. That the authorized capital stock of the or be voted upon as a director. In the past, MCPI had seen
corporation is TWO MILLION (P2,000,000.00) PESOS, holders of Class B shares voted for and serve as members of
Philippine Currency, divided into TWO THOUSAND the corporate board and some Class B share owners were in
(2,000) SHARES at a par value of P100 each share, whereby fact nominated for election as board members. Nonetheless,
the ONE THOUSAND SHARES issued to, and subscribed Jimenez went on to announce that the candidates holding
by, the incorporating stockholders shall be classified as Class Class A shares were the winners of all seats in the corporate
A shares while the other ONE THOUSAND unissued shares board. The petitioners protested, claiming that Article VII
shall be considered as Class B shares. Only holders of Class was null and void for depriving them, as Class B
A shares can have the right to vote and the right to be elected shareholders, of their right to vote and to be voted upon, in
as directors or as corporate officers.[2] (Stress supplied) violation of the Corporation Code (Batas Pambansa Blg. 68),
as amended.
On July 31, 1981, Article VII of the Articles of
Incorporation of MCPI was amended, to read thus: On March 22, 2001, after their protest was given short
shrift, herein petitioners filed a Complaint for Injunction,
SEVENTH. That the authorized capital stock of the Accounting and Damages, docketed as Civil Case No. CV-
corporation is FIVE MILLION (P5,000,000.00) PESOS, 01-0140 before the RTC of Paraaque City, Branch 258. Said
divided as follows: complaint was founded on two (2) principal causes of action,
namely:
CLASS NO. OF SHARES PAR VALUE
a. Annulment of the declaration of directors of the MCPI
A 1,000 P1,000.00 made during the February 9, 2001 Annual Stockholders
Meeting, and for the conduct of an election whereat all
stockholders, irrespective of the classification of the shares
B 4,000 P1,000.00 they hold, should be afforded their right to vote and be voted
for; and
Only holders of Class A shares have the right to vote and
the right to be elected as directors or as corporate b. Stockholders derivative suit challenging the validity of a
officers.[3] (Emphasis supplied) contract entered into by the Board of Directors of MCPI for
the operation of the ultrasound unit.[5]
The foregoing amendment was approved by the SEC on
June 7, 1983. While the amendment granted the right to vote Subsequently, the complaint was amended to implead
and to be elected as directors or corporate officers only to MCPI as party-plaintiff for purposes only of the second cause
holders of Class A shares, holders of Class B stocks were of action.
granted the same rights and privileges as holders of Class A
stocks with respect to the payment of dividends.
Before the trial court, the herein petitioners alleged that
they were deprived of their right to vote and to be voted on as
On September 9, 1992, Article VII was again amended directors at the annual stockholders meeting held on February
to provide as follows: 9, 2001, because respondents had erroneously relied on
Article VII of the Articles of Incorporation of MCPI, despite
SEVENTH: That the authorized capital stock of the Article VII being contrary to the Corporation Code, thus null
corporation is THIRTY TWO MILLION PESOS and void. Additionally, respondents were in estoppel, because
(P32,000,000.00) divided as follows: in the past, petitioners were allowed to vote and to be elected
as members of the board. They further claimed that the
CLASS NO. OF SHARES PAR VALUE privilege granted to the Class A shareholders was more in the
nature of a right granted to founders shares.
A 1,000 P1,000.00
In their Answer, the respondents averred that the
B 31,000 1,000.00 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.
Except when otherwise provided by law, only holders of
They denied that the exclusivity was intended only as a
Class A shares have the right to vote and the right to be
privilege granted to founders shares, as no such proviso is
found in the Articles of Incorporation. The respondents 3. Perforce, another election should be conducted to elect the
further claimed that the exclusivity of the right granted to directors of the MCPI, this time affording the holders of Class
Class A holders cannot be defeated or impaired by any B shares full voting right and the right to be voted.[8]
subsequent legislative enactment, e.g. the New Corporation
Code, as the Articles of Incorporation is an intra-corporate The issue for our resolution is whether or not holders of
contract between the corporation and its members; between Class B shares of the MCPI may be deprived of the right to
the corporation and its stockholders; and among the vote and be voted for as directors in MCPI.
stockholders. They submit that to allow Class B shareholders
to vote and be elected as directors would constitute a violation Before us, petitioners assert that Article VII of the
of MCPIs franchise or charter as granted by the State.
Articles of Incorporation of MCPI, which denied them voting
rights, is null and void for being contrary to Section 6 of the
At the pre-trial, the trial court ruled that a partial Corporation Code. They point out that Section 6 prohibits the
judgment could be rendered on the first cause of action and deprivation of voting rights except as to preferred and
required the parties to submit their respective position papers redeemable shares only. Hence, under the present law on
or memoranda. corporations, all shareholders, regardless of classification,
other than holders of preferred or redeemable shares, are
On November 26, 2001, the RTC rendered the Partial entitled to vote and to be elected as corporate directors or
Judgment, the dispositive portion of which reads: officers. Since the Class B shareholders are not classified as
holders of either preferred or redeemable shares, then it
WHEREFORE, viewed in the light of the foregoing, the necessarily follows that they are entitled to vote and to be
election held on February 9, 2001 is VALID as the holders of voted for as directors or officers.
CLASS B shares are not entitled to vote and be voted for and
this case based on the First Cause of Action is DISMISSED. The respondents, in turn, maintain that the grant of
exclusive voting rights to Class A shares is clearly provided
SO ORDERED.[6] 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 in 1977. They
In finding for the respondents, the trial court ruled that
corporations had the power to classify their shares of stocks, likewise submit that as the Articles of Incorporation of MCPI
such as voting and non-voting shares, conformably with is in the nature of a contract between the corporation and its
shareholders and Section 6 of the Corporation Code could not
Section 6[7] of the Corporation Code of the Philippines. It
retroactively apply to it without violating the non-impairment
pointed out that Article VII of both the original and amended
clause[10] of the Constitution.
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 We find merit in the petition.
provided by law, such as those enumerated in Section 6,
paragraph 6 of the Corporation Code. The RTC found merit When Article VII of the Articles of Incorporation of
in the respondents theory that the Articles of Incorporation, MCPI was amended in 1992, the phrase except when
which defines the rights and limitations of all its shareholders, otherwise provided by law was inserted in the provision
is a contract between MCPI and its shareholders. It is thus the governing the grant of voting powers to Class A shareholders.
law between the parties and should be strictly enforced as to This particular amendment is relevant for it speaks of a law
them. It brushed aside the petitioners claim that the Class A providing for exceptions to the exclusive grant of voting
shareholders were in estoppel, as the election of Class B rights to Class A stockholders. Which law was the
shareholders to the corporate board may be deemed as a mere amendment referring to? The determination of which law to
act of benevolence on the part of the officers. Finally, the apply is necessary. There are two laws being cited and relied
court brushed aside the founders shares theory of the upon by the parties in this case. In this instance, the law in
petitioners for lack of factual basis. force at the time of the 1992 amendment was the Corporation
Code (B.P. Blg. 68), not the Corporation Law (Act No. 1459),
Hence, this petition submitting the sole legal issue of which had been repealed by then.
whether or not the Court a quo, in rendering the Partial
Judgment dated November 26, 2001, has decided a question We find and so hold that the law referred to in the
of substance in a way not in accord with law and amendment to Article VII refers to the Corporation Code and
jurisprudence considering that: no other law. At the time of the incorporation of MCPI in
1977, the right of a corporation to classify its shares of stock
1. Under the Corporation Code, the exclusive voting right and was sanctioned by Section 5 of Act No. 1459. The law
right to be voted granted by the Articles of Incorporation of repealing Act No. 1459, B.P. Blg. 68, retained the same
the MCPI to Class A shareholders is null and void, or already grant of right of classification of stock shares to
extinguished; 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
2. Hence, the declaration of directors made during the
February 9, 2001 Annual Stockholders Meeting on the basis deprived of voting rights except those classified and issued as
of the purported exclusive voting rights is null and void for preferred or redeemable shares, unless otherwise provided in
this Code and that there shall always be a class or series of
having been done without the benefit of an election and in
shares which have complete voting rights. Section 6 of the
violation of the rights of plaintiffs and Class B shareholders;
Corporation Code being deemed written into Article VII of
and
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 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.
SO ORDERED.

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G.R. No. 101897. March 5, 1993.

originally incapable of exclusive appropriation with reference

Buhi Lyceum; On appeal, however, by private respondents to the SEC En

On March 2, 1994, respondent corporation filed before

Petitioner appealed to the SEC En Banc, where its

SO ORDERED. In its Decision dated July 23, 1993, the SEC En

At the pre-bidding conference held on September 18, ...

On November 20, 2000, this Court rendered the now I.

One of the rights of a stockholder is the right to

Neither do we find merit in respondents position that

The respondents then take the tack that the

Said contention is not for this Court to pass upon,

WHEREFORE, the petition is GRANTED. The Partial

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