MARICALUM MINING CORPORATION vs ELY G. FLORENTINO, et al.

,
G.R. No. 221813, July 23, 2018

Piercing the veil of Corporate Fiction

-Holding Company
- Elements of the alter ego theory.
FACTS:

Maricalum Mining's workers, including complainants, and some of Sipalay General Hospital's
employees jointly filed a Complaint with the LA against G Holdings, its president, and officer-
in-charge, and the cooperatives and its officers for illegal dismissal, underpayment and
nonpayment of salaries, underpayment of overtime pay, underpayment of premium pay for
holiday, nonpayment of separation pay, underpayment of holiday pay, nonpayment of service
incentive leave pay, nonpayment of vacation and sick leave, nonpayment of 13th month pay,
moral and exemplary damages, and attorneys fees. On Appeal, the NLRC imposed the liability
of paying the monetary awards imposed by the LA against Maricalum Mining, instead of G
Holdings, based on the following observations that: it was Maricalum Mining-not G Holdings-
who entered into service contracts by way of a Memorandum of Agreement with each of the
manpower cooperatives; complainants continued rendering their services at the insistence of
Maricalum Mining through their cooperatives; Maricalum Mining never relinquished possession
over the Sipalay Mining Complex; Maricalum Mining continuously availed of the services of
complainants through their respective manpower cooperatives. The CA affirmed the decision of
the NLRC.

ISSUE:

Whether or not liability can be imposed against G Holding under the doctrine of piercing the veil
of a corporate entity.

HELD: NO

A parent or holding company is a corporation which owns or is organized to own a substantial

portion of another company's voting shares of stock enough to control or influence the latter's
management, policies or affairs thru election of the latter's board of directors or otherwise. In
other words, a "holding company" is organized and is basically conducting its business by
investing substantially in the equity securities of another company for the purposes of controlling
their policies (as opposed to directly engaging in operating activities) and "holding" them in a
conglomerate or umbrella structure along with other subsidiaries. Significantly, the holding
company itself-being a separate entity does not own the assets of and does not answer for the
liabilities of the subsidiary or affiliate. The management of the subsidiary or affiliate still rests in
the hands of its own board of directors and corporate officers. It is in keeping with the basic rule
a corporation is a juridical entity which is vested with a legal personality separate and distinct
from those acting for and in its behalf and, in general, from the people comprising it. The
corporate form was created to allow shareholders to invest without incurring personal liability
for the acts of the corporation.

While the veil of corporate fiction may be pierced under certain instances, mere ownership of a
subsidiary does not justify the imposition of liability on the parent company. It must further
appear that to recognize a parent and a subsidiary as separate entities would aid in the
consummation of a wrong. Thus, a holding corporation has a separate corporate existence and is
to be treated as a separate entity; unless the facts show that such separate corporate existence is a
mere sham, or has been used as an instrument for concealing the truth.
In the case at bench, complainants mainly harp their cause on the alter ego theory. Under this
theory, piercing the veil of corporate fiction may be allowed only if the following elements
concur:
1)Control-not mere stock control, but complete domination-not only of finances, but of policy
and business practice in respect to the transaction attacked, must have been such that the
corporate entity as to this transaction had at the time no separate mind, will or existence of its
own;
2)Such control must have been used by the defendant to commit a fraud or a wrong, to
perpetuate the violation of a statutory or other positive legal duty, or a dishonest and an unjust
act in contravention of plaintiffs legal right; and
3)The said control and breach of duty must have proximately caused the injury or unjust loss
complained of.

The elements of the alter ego theory.

The first prong is the "instrumentality" or "control" test. This test requires that the subsidiary be
completely under the control and domination of the parent. It examines the parent corporation's
relationship with the subsidiary. It inquires whether a subsidiary corporation is so organized and
controlled and its affairs are so conducted as to make it a mere instrumentality or agent of the
parent corporation such that its separate existence as a distinct corporate entity will be ignored. It
seeks to establish whether the subsidiary corporation has no autonomy and the parent
corporation, though acting through the subsidiary in form and appearance, "is operating the
business directly for itself."

The second prong is the "fraud" test. This test requires that the parent corporation's conduct in
using the subsidiary corporation be unjust, fraudulent or wrongful. It examines the relationship
of the plaintiff to the corporation. It recognizes that piercing is appropriate only if the parent
corporation uses the subsidiary in a way that harms the plaintiff creditor. As such, it requires a
showing of "an element of injustice or fundamental unfairness."

The third prong is the "harm" test. This test requires the plaintiff to show that the defendant's
control, exerted in a fraudulent, illegal or otherwise unfair manner toward it, caused the harm
suffered. A causal connection between the fraudulent conduct committed through the
instrumentality of the subsidiary and the injury suffered or the damage incurred by the plaintiff
should be established. The plaintiff must prove that, unless the corporate veil is pierced, it will
have been treated unjustly by the defendant's exercise of control and improper use of the
corporate form and, thereby, suffer damages.

To summarize, piercing the corporate veil based on the alter ego theory requires the concurrence
of three elements: control of the corporation by the stockholder or parent corporation, fraud or
fundamental unfairness imposed on the plaintiff, and harm or damage caused to the plaintiff by
the fraudulent or unfair act of the corporation. The absence of any of these elements prevents
piercing the corporate veil.

Again, all these three elements must concur before the corporate veil may be pierced under the
alter ego theory. Keeping in mind the parameters, guidelines and indicators for proper piercing of
the corporate veil, the Court now proceeds to determine whether Maricalum Mining's corporate
veil may be pierced in order to allow complainants to enforce their monetary awards against G
Holdings.

I. Control or Instrumentality Test

the Court first laid down the first set of probative factors of identity that will justify the
application of the doctrine of piercing the corporate veil, viz:
1)Stock ownership by one or common ownership of both corporations.
2)Identity of directors and officers.
3)The manner of keeping corporate books and records.
4)Methods of conducting the business.

Later, the Court expanded the aforementioned probative factors and enumerated a combination
of any of the following common circumstances that may also render a subsidiary an
instrumentality, to wit:
1)The parent corporation owns all or most of the capital stock of the subsidiary;
2)The parent and subsidiary corporations have common directors or officers;
3)The parent corporation finances the subsidiary;
4)The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes
its incorporation;
5)The subsidiary has grossly inadequate capital;
6)The parent corporation pays the salaries and other expenses or losses of the subsidiary;
7)The subsidiary has substantially no business except with the parent corporation or no assets
except those conveyed to or by the parent corporation;
8)In the papers of the parent corporation or in the statements of its officers, the subsidiary is
described as a department or division of the parent corporation, or its business or financial
responsibility is referred to as the parent corporation's own;
9)The parent corporation uses the property of the subsidiary as its own;
10)The directors or executives of the subsidiary do not act independently in the interest of the
subsidiary but take their orders from the parent corporation; and
11)The formal legal requirements of the subsidiary are not observed.

In the instant case, there is no doubt that G Holdings-being the majority and controlling
stockholder-had been exercising significant control over Maricalum Mining. This is because this
Court had already upheld the validity and enforceability of the PSA between the APT and G
Holdings. It was stipulated in the PSA that APT shall transfer 90% of Maricalum Mining's equity
securities to G Holdings and it establishes the presence of absolute control of a subsidiary's
corporate affairs. Moreover, the Court evinces its observation that Maricalum Mining's corporate
name appearing on the heading of the cash vouchers issued in payment of the services rendered
by the manpower cooperatives is being superimposed with G Holding's corporate name. Due to
this observation, it can be reasonably inferred that G Holdings is paying for Maricalum Mining's
salary expenses. Hence, the presence of both circumstances of dominant equity ownership and
provision for salary expenses may adequately establish that Maricalum Mining is an
instrumentality of G Holdings.

However, mere presence of control and full ownership of a parent over a subsidiary is not
enough to pierce the veil of corporate fiction. It has been reiterated by this Court time and again
that mere ownership by a single stockholder or by another corporation of all or nearly all of the
capital stock of a corporation is not of itself sufficient ground for disregarding the separate
corporate personality.

II. Fraud Test

The corporate veil may be lifted only if it has been used to shield fraud, defend crime, justify a
wrong, defeat public convenience, insulate bad faith or perpetuate injustice.[75] To aid in the
determination of the presence or absence of fraud, the following factors in the "Totality of
Circumstances Test" may be considered, viz:
1)Commingling of funds and other assets of the corporation with those of the individual
shareholders;
2)Diversion of the corporation's funds or assets to non-corporate uses (to the personal uses of the
corporation's shareholders);
3)Failure to maintain the corporate formalities necessary for the issuance of or subscription to the
corporation's stock, such as formal approval of the stock issue by the board of directors;
4)An individual shareholder representing to persons outside the corporation that he or she is
personally liable for the debts or other obligations of the corporation;
5)Failure to maintain corporate minutes or adequate corporate records;
6)Identical equitable ownership in two entities;
7)Identity of the directors and officers of two entities who are responsible for supervision and
management (a partnership or sole proprietorship and a corporation owned and managed by the
same parties);
8)Failure to adequately capitalize a corporation for the reasonable risks of the corporate
undertaking;
9)Absence of separately held corporate assets;
10)Use of a corporation as a mere shell or conduit to operate a single venture or some particular
aspect of the business of an individual or another corporation;
11)Sole ownership of all the stock by one individual or members of a single family;
12)Use of the same office or business location by the corporation and its individual
shareholder(s);
13)Employment of the same employees or attorney by the corporation and its shareholder(s);
14)Concealment or misrepresentation of the identity of the ownership, management or financial
interests in the corporation, and concealment of personal business activities of the shareholders
(sole shareholders do not reveal the association with a corporation, which makes loans to them
without adequate security);
15)Disregard of legal formalities and failure to maintain proper arm's length relationships among
related entities;
16)Use of a corporate entity as a conduit to procure labor, services or merchandise for another
person or entity;
17)Diversion of corporate assets from the corporation by or to a stockholder or other person or
entity to the detriment of creditors, or the manipulation of assets and liabilities between entities
to concentrate the assets in one and the liabilities in another;
18)Contracting by the corporation with another person with the intent to avoid the risk of
nonperformance by use of the corporate entity; or the use of a corporation as a subterfuge for
illegal transactions; and
19)The formation and use of the corporation to assume the existing liabilities of another person
or entity.

Aside from the aforementioned circumstances, it must be determined whether the transfer of
assets from Maricalum Mining to G Holdings is enough to invoke the equitable remedy of
piercing the corporate veil. The same issue was resolved in Y-I Leisure Phils., Inc., et al. v.
Yuwhere this Court applied the "Nell Doctrine"regarding the transfer of all the assets of one
corporation to another. It was discussed in that case that as a general rule that where one
corporation sells or otherwise transfers all of its assets to another corporation, the latter is not
liable for the debts and liabilities of the transferor, except:
1)Where the purchaser expressly or impliedly agrees to assume such debts;
2)Where the transaction amounts to a consolidation or merger of the corporations;
3)Where the purchasing corporation is merely a continuation of the selling corporation; and
4)Where the transaction is entered into fraudulently in order to escape liability for such debts.
If any of the above-cited exceptions are present, then the transferee corporation shall assume the
liabilities of the transferor.

In this case, G Holdings cannot be held liable for the satisfaction of labor-related claims against
Maricalum Mining under the fraud test for the following reasons:

First, the transfer of some Maricalum Mining's assets in favor G Holdings was by virtue of the
PSA as part of an official measure to dispose of the government's non-performing assets-not to
evade its monetary obligations to the complainants. Even before complainants' monetary claims
supposedly existed in 2007, some of Maricalum Mining's assets had already been validly
extrajudicially foreclosed and eventually sold to G Holdings in 2001. Thus, G Holdings could
not have devised a scheme to avoid a non-existent obligation. No fraud could be attributed to G
Holdings because the transfer of assets was pursuant to a previously perfected valid contract.

Settled is the rule that where one corporation sells or otherwise transfers all its assets to another
corporation for value, the latter is not, by that fact alone, liable for the debts and liabilities of the
transferor.In other words, control or ownership of substantially all of a subsidiary's assets is not
by itself an indication of a holding company's fraudulent intent to alienate these assets in evading
labor-related claims or liabilities. The PSA was not designed to evade the monetary claims of the
complainants. Although there was proof that G Holdings has an office in Maricalum Mining's
premises and that that some of their assets have been commingled due to the PSA's unavoidable
consequences, there was no fraudulent diversion of corporate assets to another corporation for
the sole purpose of evading complainants' claim.

Besides, it is evident that the alleged continuing depletion of Maricalum Mining's assets is due to
its disgruntled employees' own acts of pilferage, which was beyond the control of G Holdings.
More so, complainants also failed to present any clear and convincing evidence that G Holdings
was grossly negligent and failed to exercise the required degree of diligence in ensuring that
Maricalum Mining's assets would be protected from pilferage. Hence, no fraud can be imputed
against G Holdings considering that there is no evidence in the records that establishes it
systematically tried to alienate Maricalum Mining's assets to escape the liabilities to
complainants.

Second, it was not proven that all of Maricalum Mining's assets were transferred to G Holdings
or were totally depleted. Complainants never offered any evidence to establish that Maricalum
Mining had absolutely no substantial assets to cover for their monetary claims. Their allegation
that their claims will be reduced to a mere "paper victory" has not confirmed with concrete proof.
At the very least, substantial evidence should be adduced that the subsidiary company's "net
realizable value"of "current assets" and "fair value" of "non-current assets"[are collectively
insufficient to cover the whole amount of its liability subject in the instant litigation.

Third, G Holdings purchased Maricalum Mining's shares from the APT not for the purpose of
continuing the latter's existence and operations but for the purpose of investing in the mining
industry without having to directly engage in the management and operation of mining. As
discussed earlier, a holding company's primary business is merely to invest in the equity of
another corporation for the purpose of earning from the latter's endeavors. It generally does not
undertake to engage in the daily operating activities of its subsidiaries that, in turn, have their
own separate sets of directors and officers. Thus, there should be proof that a holding company
had indeed fraudulently used the separate corporate personality of its subsidiary to evade an
obligation before it can be held liable. Since G Holdings is a holding company, the corporate veil
of its subsidiaries may only be pierced based on fraud or gross negligence amounting to bad
faith.

Lastly, no clear and convincing evidence was presented by the complainants to conclusively
prove the presence of fraud on the part of G Holdings. Thus, to disregard the separate juridical
personality of a corporation, the wrongdoing must be established clearly and convincingly-it
cannot be presumed. There must be proof that fraud-not the inevitable effects of a previously
executed and valid contract such as the PSA-was the cause of the latter's total asset depletion. To
be clear, the presence of control per se is not enough to justify the piercing of the corporate veil.

III. Harm or Casual Connection Test

The control necessary to invoke the instrumentality or alter ego rule is not majority or even
complete stock control but such domination of finances, policies and practices that the controlled
corporation has, so to speak, no separate mind, will or existence of its own, and is but a conduit
for its principal. The control must be shown to have been exercised at the time the acts
complained of took place. Moreover, the control and breach of duty must proximately cause the
injury or unjust loss for which the complaint is made.

In the case at bench, complainants have not yet even suffered any monetary injury. They have
yet to enforce their claims against Maricalum Mining. It is apparent that complainants are merely
anxious that their monetary awards will not be satisfied because the assets of Maricalum Mining
were allegedly transferred surreptitiously to G Holdings. However, as discussed earlier, since
complainants failed to show that G Holdings's mere exercise of control had a clear hand in the
depletion of Maricalum Mining's assets, no proximate cause was successfully established. The
transfer of assets was pursuant to a valid and legal PSA between G Holdings and APT.

Accordingly, complainants failed to satisfy the second and third tests to justify the application of
the alter ego theory. This inevitably shows that the CA committed no reversible error in
upholding the NLRC's Decision declaring Maricalum Mining as the proper party liable to pay
the monetary awards in favor of complainants.