Republic V Sandiganbayan

FACTS
ETPI was one of the corporations sequestered by the Presidential Commission on Good
Government (PCGG). Among its stockholders were Roberto S. Benedicto and
UNIMOLCO.
Sometime in 1990, PCGG and Benedicto entered into a compromise agreement

whereby Benedicto ceded to the government 204,000 shares of stock in ETPI,
representing his fifty-one percent (51%) equity therein. The other forty-nine percent
(49%), consisting of 196,000 shares of stock, were released from sequestration and
adjudicated by final judgment to Benedicto and UNIMOLCO. Furthermore, the
government agreed to withdraw the cases filed against Benedicto and free him from
further criminal prosecution.
In a written notice received on April 24, 1996 by Melquiades Gutierrez, the President
and Chairman of the Board of ETPI, UNIMOLCO offered to sell to ETPI its 196,000
shares of stock therein.
On June 4, 1996 the PCGG received copy of a letter of 29 May 1996 from Atty. Juan
de Ocampo, alleging that he is the Corporate Secretary of ETPI, and all stockholders of
record have the right of first refusal to purchase pro rata to their holdings in ETPI.
On June 21, 1996, PCGG issued Resolution No. 96-142 enjoining all stockholders of
ETPI from selling shares of stock therein without the written conformity of the PCGG.
Subsequently, on July 24, 1996, UNIMOLCO and Smart Communications executed a

Deed of Absolute Sale whereby UNIMOLCO sold its 196,000 shares of stock in ETPI to
Smart. Prior to the sale, Smart was not a stockholder of ETPI.
Thus, on August 8, 1996, petitioner filed with the Sandiganbayan a "Motion to Cite
Defendant Benedicto and the Parties to the Sale of UNIMOLCO Shares in ETPI in
Contempt of Court and to Rescind and/or Annul Said Sale."
On September 24, 1996, petitioner sent a letter to the Corporate Secretary stating
that the government is exercising its right of first refusal and offering payment thereof
in the form of compensation or set-off against the assets of respondent Benedicto still
due to the Philippine government under the Compromise Agreement. (PCGG argues
that it only received notice of UNIMOLCO’s offer to sell its shares of stock only on
August 30, 1996 which gave the stockholders, including the Republic, until September
26, 1996 within which to exercise their preemptive right.)
Arguments of the PCGG

1. The sale of the 196,000 shares of stock of UNIMOLCO to Smart was in defiance of
the May 7, 1996 Resolution of the Sandiganbayan, which provided that the 204,000
shares of the government shall come from the shareholdings of UNIMOLCO, and
Resolution No. 96-142 enjoining all stockholders of ETPI from selling shares of stock
therein without the written conformity of the PCGG.
2. PCGG argued that the sale of the shares of stock of UNIMOLCO to SMART violated its
right of first refusal to purchase shares of stock in ETPI.
3. The doctrine of piercing the veil of corporate fiction
ISSUES
1. Did the Republic seasonable exercised its right of first refusal?
2. Is the set-off or compensation proposed by the Republic an acceptable mode of
payment under the AOI?
Rulings:
1. No. The First Period of thirty days contemplated in the Articles of Incorporation
commenced to run on April 24, 1996, giving the corporation until May 24, 1996
within which to exercise its right of first refusal. ETPI’s inaction simply means
that it did not desire to purchase the shares of stock. The stockholders’ right of first
refusal, thus, accrued upon the expiration of the First Period and within the succeeding
thirty days, known as the Second Period. The Sandiganbayan held that the First Period
and the Second Period are "continuous in character because the Second Period ends, in
the very words of Article 10 of the ETPI Articles, ‘thirty (30) days after the First Period’,
and the ‘expiry date being thirty (30) days after the end of the First Period.’" The
Second Period, therefore, covered the period from May 24, 1996 to June 23, 1996.
The purpose of the notice requirement in Article 10 of the ETPI Articles of Incorporation
is to give the stockholders knowledge of the intended sale of shares of stock of the
corporation, in order that they may exercise their preemptive right. Where it is shown
that a stockholder had actual knowledge of the intended sale within the period
prescribed to exercise the right, the notice requirement had been sufficiently
met. In the case at bar, PCGG had actual knowledge of UNIMOLCO’s offer to sell its
shares of stock.
2. No. The Republic failed to follow the requirement in the Articles of Incorporation that
payment must be tendered in "cash or certified checks or checks drawn on a
Philippine bank or banks." The set-off or compensation it proposed does not fall
under any of the recognized modes of payment in the Articles.
The Republic sought the offsetting of the price of the shares of stock with assets of
respondent Benedicto, whom it claimed was indebted to it for certain lands and
dividends due to it under their Compromise Agreement. Benedicto was only a
stockholder of UNIMOLCO, the Offeror. While he may be the majority
stockholder, UNIMOLCO cannot be said to be liable for Benedicto’s supposed
obligations to petitioner. To be sure, Benedicto and UNIMOLCO are separate and
distinct persons. On the basis of this alone, there can be no valid set-off. Petitioner and
UNIMOLCO are not principal debtors and creditors of each other.
The Republic counters that UNIMOLCO’s corporate fiction should be pierced since it is
also owned by Benedicto. However, mere majority ownership of the stocks of a
corporation is not per se a cause for piercing the corporate veil. There was no
evidence that UNIMOLCO’s corporate entity was used by respondent Benedicto to
commit fraud or to do wrong on petitioner; neither was it shown that the corporate
entity was merely a farce and that it was used as an alter ego, business conduit or
instrumentality of a person or another entity or that piercing the corporation fiction is
necessary to achieve justice or equity. Only in these instances may the fiction be
pierced and disregarded. Being the part that invoked it, petitioner has the burden of
substantiating by clear and convincing evidence that UNIMOLCO’s corporate veil must
be pierced.
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Besides, petitioner’s claims on the lands and dividends allegedly due it from respondent
Benedicto’s other business holdings are not enforceable in court. Only liquidated debts
are enforceable in court, there being no apparent defenses inherent in them. "For
compensation to take place, a distinction must be made between a debt and a mere
claim. A debt is a claim which has been formally passed upon by the highest authority
to which it call in law be submitted and has been declared to be a debt. A claim, on the
other hand, is a debt in embryo. It is mere evidence of a debt and must pass through
the process prescribed by law before it develops

Republic V Sandiganbayan

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FACTS

Sometime in 1990, PCGG and Benedicto entered into a compromise agreement

Subsequently, on July 24, 1996, UNIMOLCO and Smart Communications executed a

Arguments of the PCGG

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