NESTOR CHING and ANDREW WELLINGTON, Petitioners,

vs.
SUBIC BAY GOLF AND COUNTRY CLUB, INC., HU HO HSIU LIEN alias SUSAN HU, HU TSUNG
CHIEH alias JACK HU, HU TSUNG HUI, HU TSUNG TZU and REYNALD R. SUAREZ, Respondents.
DECISION
LEONARDO-DE CASTRO, J.:
This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking the review of the
Decision1dated October 27, 2005 of the Court of Appeals in CA-G.R. CV No. 81441, which affirmed the
Order2 dated July 8, 2003 of the Regional Trial Court (RTC), Branch 72 of Olongapo City in Civil Case No. 03-
001 dismissing the Complaint filed by herein petitioners.
On February 26, 2003, petitioners Nestor Ching and Andrew Wellington filed a Complaint3 with the RTC of
Olongapo City on behalf of the members of Subic Bay Golf and Country Club, Inc. (SBGCCI) against the said
country club and its Board of Directors and officers under the provisions of Presidential Decree No. 902-A in
relation to Section 5.2 of the Securities Regulation Code. The Subic Bay Golfers and Shareholders Incorporated
(SBGSI), a corporation composed of shareholders of the defendant corporation, was also named as plaintiff. The
officers impleaded as defendants were the following: (1) itsPresident, Hu Ho Hsiu Lien alias Susan Hu; (2) its
treasurer, Hu Tsung Chieh alias Jack Hu; (3) corporate secretary Reynald Suarez; and (4) directors Hu Tsung Hui
and Hu Tsung Tzu. The case was docketed as Civil Case No. 03-001. The complaint alleged that the defendant
corporation sold shares to plaintiffs at US$22,000.00 per share, presenting to them the Articles of Incorporation
which contained the following provision:
No profit shall inure to the exclusive benefit of any of its shareholders, hence, no dividends shall be declared in
their favor. Shareholders shall be entitled only to a pro-rata share of the assets of the Club at the time of its
dissolution or liquidation.4
However, on June 27, 1996, an amendment to the Articles of Incorporation was approved by the Securities and
Exchange Commission (SEC), wherein the above provision was changed as follows:
No profit shall inure to the exclusive benefit of any of its shareholders, hence, no dividends shall be declared in
their favor. In accordance with the Lease and Development Agreement by and between Subic Bay Metropolitan
Authority and The Universal International Group of Taiwan, where the golf courseand clubhouse component
thereof was assigned to the Club, the shareholders shall not have proprietary rights or interests over the
properties of the Club.5x x x. (Emphasis supplied.)
Petitioners claimed in the Complaint that defendant corporation did not disclose to them the above amendment
which allegedly makes the shares non-proprietary, as it takes away the rightof the shareholders to participate in
the pro-rata distribution of the assets of the corporation after its dissolution. According to petitioners, this is in
fraud of the stockholders who only discovered the amendment when they filed a case for injunction to restrain
the corporation from suspending their rights to use all the facilities of the club. Furthermore, petitioners alleged
that the Board of Directors and officers of the corporation did not call any stockholders’ meeting from the time
of the incorporation, in violation of Section 50 of the Corporation Code and the By-Laws of the corporation.
Neither did the defendant directors and officers furnish the stockholders with the financial statements of the
corporation nor the financial report of the operation of the corporation in violation of Section 75 of the
Corporation Code. Petitioners also claim that on August 15, 1997, SBGCCI presented to the SEC an amendment
to the By-Laws of the corporation suspending the voting rights of the shareholders except for the five founders’
shares. Said amendment was allegedly passed without any stockholders’ meeting or notices to the stockholders
in violation of Section 48 of the Corporation Code.
The Complaint furthermore enumerated several instances of fraud in the management of the corporation
allegedly committed by the Board of Directors and officers of the corporation, particularly:
a. The Board of Directors and the officers of the corporation did not indicate in its financial report for the
year 1999 the amount of ₱235,584,000.00 collected from the subscription of 409 shareholders who paid
 U.S.$22,000.00 for one (1) share of stock at the then prevailing rate of ₱26.18 to a dollar. The
stockholders were not informed how these funds were spent or its whereabouts.
b. The Corporation has been collecting green fees from the patrons of the golf course at an average sum
of ₱1,600.00 per eighteen (18) holes but the income is not reported in their yearly report. The yearly
report for the year 1999 contains the report of the Independent Public Accountant who stated that the
company was incorporated on April 1, 1996 but has not yet started its regular business operation. The
golf course has been in operation since 1997 and as such has collected green fees from non-members and
foreigners who played golf in the club. There is no financial report as to the income derived from these
sources.
c. There is reliable information that the Defendant Corporation has not paid its rentals to the Subic Bay
Metropolitan Authority which up to the present is estimated to be not less than one (1) million U.S.
Dollars. Furthermore, the electric billings of the corporation [have] not been paid which amounts also to
several millions of pesos.
d. That the Supreme Court sustained the pre-termination of its contract with the SBMA and presently the
club is operating without any valid contract with SBMA. The defendant was ordered by the Supreme
Court to yield the possession, the operation and the management of the golf course to SBMA. Up to now
the defendants [have] defied this Order.
e. That the value of the shares of stock of the corporation has drastically declined from its issued value of
U.S.$22,000.00 to only Two Hundred Thousand Pesos, (₱200,000.00) Philippine Currency. The
shareholders [have] lost in terms ofinvestment the sum estimated to be more than two hundred thousand
pesos.This loss is due to the fact that the Club is mismanaged and the golf course is poorly maintained.
Other amenities of the Club has (sic) not yet been constructed and are not existing despite the lapse of
morethan five (5) years from the time the stocks were offered for sale to the public. The cause of the
decrease in value of the sharesof stocks is the fraudulent mismanagement of the club.6
Alleging that the stockholders suffered damages as a result of the fraudulent mismanagement of the corporation,
petitioners prayed in their Complaint for the following:
WHEREFORE, it is most respectfully prayed that upon the filing of this case a temporary restraining order be
issued enjoining the defendants from acting as Officers and Board of Directors of the Corporation. After
hearing[,] a writ of preliminary injunction be issued enjoining defendants to act as Board of Directors and
Officers of the Corporation. In the meantime a Receiver be appointed by the Court to act as such until a duly
constituted Board of Directors and Officers of the Corporation be elected and qualified.
That defendants be ordered to pay the stockholders damages in the sum of Two Hundred Thousand Pesos each
representing the decrease in value of their shares of stocks plus the sum of ₱100,000.00 as legal expense and
attorney’s fees, as well as appearance fee of ₱4,000.00 per hearing.7
In their Answer, respondents specifically denied the allegations of the Complaint and essentially averred that:
(a) The subscriptions of the 409 shareholders were paid to Universal International Group Development
Corporation (UIGDC), the majority shareholder of SBGCCI, from whom plaintiffs and other
shareholders bought their shares;8
(b) Contrary to the allegations in the Complaint, said subscriptions were reflected inSBGCCI’s balance
sheets for the fiscal years 1998 and 1999;9
(c) Plaintiffs were never presented the original Articles of Incorporation of SBGCCI since their shares
were purchased after the amendment of the Articles of Incorporation and such amendment was publicly
known to all members prior and subsequent to the said amendment;10
(d) Shareholders’ meetingshad been held and the corporate acts complained of were approved at
shareholders’ meetings;11
(e) Financial statements of SBGCCI had always been presented to shareholders justifiably requesting
copies;12
 (f) Green fees collected were reported in SBGCCI’s audited financial statements;13
(g) Any unpaid rentals are the obligation of UIGDC with SBMA and SBGCCI continued to operate
under a valid contract with the SBMA;14 and
(h) SBGCCI’s Board of Directors was not guilty of any mismanagement and in fact the value of
members’ shares have increased.15
Respondents further claimed by way ofdefense that petitioners failed (a) to show that it was authorized by
SBGSI to file the Complaint on the said corporation’s behalf; (b) to comply with the requisites for filing a
derivative suit and an action for receivership; and (c) to justify their prayer for injunctive relief since the
Complaint may be considered a nuisance or harassment suit under Section 1(b), Rule1 of the Interim Rules of
Procedure for Intra-Corporate Controversies.16 Thus, they prayed for the dismissal of the Complaint.
On July 8, 2003, the RTC issued an Order dismissing the Complaint. The RTC held that the action is a derivative
suit, explaining thus:
The Court finds that this case is intended not only for the benefit of the two petitioners. This is apparentfrom the
caption of the case which reads Nestor Ching, Andrew Wellington and the Subic Bay Golfers and Shareholders,
Inc., for and in behalf of all its members as petitioners. This is also shown in the allegations of the petition[.] x x
x.
On the bases of these allegations of the petition, the Court finds that the case is a derivative suit. Being a
derivative suit in accordance with Rule 8 of the Interim Rules, the stockholders and members may bring an
action in the name of the corporation or association provided that he (the minority stockholder) exerted all
reasonable efforts and allege[d] the same with particularity in the complaint to exhaust of (sic) all remedies
available under the articles of incorporation, by-laws or rules governing the corporation or partnership to obtain
the reliefs he desires. An examination of the petition does not show any allegation that the petitioners applied for
redress to the Board of Directors of respondent corporation there being no demand, oralor written on the
respondents to address their complaints. Neither did the petitioners appl[y] for redress to the stockholders of the
respondent corporation and ma[k]e an effort to obtain action by the stockholders as a whole. Petitioners should
have asked the Board of Directors of the respondent corporation and/or its stockholders to hold a meeting for the
taking up of the petitioners’ rights in this petition.17
The RTC held that petitioners failed to exhaust their remedies within the respondent corporation itself. The RTC
further observed that petitioners Ching and Wellington were not authorized by their co-petitioner Subic Bay
Golfers and Shareholders Inc. to filethe Complaint, and therefore had no personality to file the same on behalf
ofthe said shareholders’ corporation. According to the RTC, the shareholdings of petitioners comprised of two
shares out of the 409 alleged outstanding shares or 0.24% is an indication that the action is a nuisance or
harassment suit which may be dismissed either motu proprio or upon motion in accordance with Section 1(b) of
the Interim Rules of Procedure for Intra-Corporate Controversies.18
Petitioners Ching and Wellington elevated the case to the Court of Appeals, where it was docketed as CA-G.R.
CV No. 81441. On October 27, 2005, the Court of Appeals rendered the assailed Decision affirming that of the
RTC.
Hence, petitioners resort to the present Petition for Review, wherein they argue that the Complaint they filed
with the RTC was not a derivative suit. They claim that they filed the suit in their own right as stockholders
against the officers and Board of Directors of the corporation under Section 5(a) of Presidential DecreeNo. 902-
A, which provides:
Sec. 5. In addition tothe regulatory and adjudicative functions of the Securities and Exchange Commission over
corporations, partnerships and other forms of associations registered with it as expressly granted under existing
laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving:
(a) Devices or schemes employed by or any acts of the board of directors, business associates, its
officers or partners, amounting to fraud and misrepresentation which may be detrimental to the interest
of the public and/or of the stockholders, partners, members of associations or organizations registered
with the Commission.
According to petitioners, the above provision (which should be read in relation to Section 5.2 of the Securities
Regulation Code which transfers jurisdiction over such cases to the RTC) allows any stockholder to file a
complaint against the Board of Directors for employing devices or schemes amounting to fraud and
misrepresentation which is detrimental to the interest of the public and/or the stockholders.
In the alternative, petitioners allege that if this Court rules that the Complaint is a derivative suit, it should
nevertheless reverse the RTC’s dismissal thereof on the ground of failure to exhaust remedies within the
corporation. Petitioners cite Republic Bank v. Cuaderno19 wherein the Court allowed the derivative suit even
without the exhaustion of said remedies as it was futile to do so since the Board ofDirectors were all members of
the same family. Petitioners also point out that in Cuadernothis Court held that the fact that therein petitioners
had only one share of stock does not justify the denial of the relief prayed for.
To refute the lower courts’ ruling that there had been non-exhaustion of intra-corporate remedies on petitioners’
part, they claim that they filed in Court a case for Injunction docketed as Civil Case No. 103-0-01, to restrain the
corporation from suspending their rights to use all the facilities of the club, on the ground that the club cannot
collect membership fees until they have completed the amenities as advertised when the shares of stock were
sold to them. They allegedly asked the Club to produce the minutes of the meeting of the Board of Directors
allowing the amendments of the Articles of Incorporation and By-Laws. Petitioners likewise assail the dismissal
of the Complaint for being a harassment ornuisance suit before the presentation of evidence. They claim that the
evidence they were supposed to present will show that the members of the Board of Directors are not qualified
managers of a golf course.
We find the petition unmeritorious.
At the outset, it should be noted thatthe Complaint in question appears to have been filed only by the two
petitioners, namely Nestor Ching and Andrew Wellington, who each own one stock in the respondent
corporation SBGCCI. While the caption of the Complaint also names the "Subic Bay Golfers and Shareholders
Inc. for and in behalf of all its members," petitioners did not attach any authorization from said alleged
corporation or its members to file the Complaint. Thus, the Complaint is deemed filed only by petitioners and
not by SBGSI.
On the issue of whether the Complaint is indeed a derivative suit, we are mindful of the doctrine that the nature
of an action, as well as which court or body has jurisdiction over it, isdetermined based on the allegations
contained in the complaint of the plaintiff, irrespective of whether or not the plaintiff is entitled to recover upon
all or some of the claims asserted therein.20
We have also held that the body rather than the title of the complaint determines the nature of an action.21
In Cua, Jr. v. Tan,22 the Court previously elaborated on the distinctions among a derivative suit, anindividual
suit, and a representative or class suit:
A derivative suit must be differentiated from individual and representative or class suits, thus:
"Suits by stockholders or members of a corporation based on wrongful or fraudulent acts of directors or other
persons may be classified intoindividual suits, class suits, and derivative suits. Where a stockholder or member is
denied the right of inspection, his suit would be individual because the wrong is done to him personally and not
to the other stockholders or the corporation. Where the wrong is done to a group of stockholders, as where
preferred stockholders’ rights are violated, a class or representative suitwill be proper for the protection of all
stockholders belonging to the same group. But where the acts complained of constitute a wrong to the
corporation itself, the cause of action belongs to the corporation and not to the individual stockholder or member.
Although in most every case of wrong to the corporation, each stockholder is necessarily affected because the
value of his interest therein would be impaired, this fact of itself is not sufficient to give him an individual cause
of action since the corporation is a person distinct and separate from him, and can and should itself sue the
wrongdoer. Otherwise, not only would the theory of separate entity be violated, but there would be multiplicity
of suits as well as a violation of the priority rights of creditors. Furthermore,there is the difficulty of determining
the amount of damages that should be paid to each individual stockholder.
However, in cases of mismanagement where the wrongful acts are committed by the directors or trustees
themselves, a stockholder or member may find that he has no redress because the former are vested by law with
the right to decide whether or notthe corporation should sue, and they will never be willing to sue themselves.
The corporation would thus be helpless to seek remedy. Because of the frequent occurrence of such a situation,
the common law gradually recognized the right of a stockholder to sue on behalf of a corporation in what
eventually became known as a "derivative suit." It has been proven to be an effective remedy of the minority
against the abuses of management. Thus, an individual stockholder is permitted to institute a derivative suit on
behalf of the corporation wherein he holds stock in order to protect or vindicate corporate rights, whenever
officials of the corporation refuse to sue orare the ones to be sued or hold the control of the corporation. In such
actions, the suing stockholder is regarded as the nominal party, with the corporation as the party in interest."
xxxx
Indeed, the Court notes American jurisprudence to the effect that a derivative suit, on one hand, and individual
and class suits, on the other, are mutually exclusive, viz.:
"As the Supreme Court has explained: "A shareholder’s derivative suit seeks to recover for the benefit of the
corporation and its whole body of shareholders when injury is caused to the corporation that may not otherwise
be redressed because of failureof the corporation to act. Thus, ‘the action is derivative, i.e., in the corporate right,
if the gravamen of the complaint is injury to the corporation, or to the whole body of its stock and property
without any severance or distribution among individual holders, or it seeks to recover assets for the corporation
or to prevent the dissipation of its assets.’ x x x. In contrast, "a directaction [is one] filed by the shareholder
individually (or on behalf of a classof shareholders to which he or she belongs) for injury to his or her interestas
a shareholder. x x x. [T]he two actions are mutually exclusive: i.e., the right of action and recovery belongs to
either the shareholders (direct action) *651 or the corporation(derivative action)." x x x.
Thus, in Nelson v. Anderson(1999), x x x, the **289 minority shareholder alleged that the other shareholder of
the corporation negligently managed the business, resulting in its total failure. x x x. The appellate court
concluded that the plaintiff could not maintain the suit as a direct action: "Because the gravamen of the
complaint is injury to the whole body of its stockholders, it was for the corporation to institute and maintain a
remedial action. x x x. A derivative action would have been appropriate if its responsible officials had refused or
failed to act." x x x. The court wenton to note that the damages shown at trial were the loss of corporate profits. x
x x. Since "[s]hareholders own neither the property nor the earnings of the corporation," any damages that the
plaintiff alleged that resulted from such loss of corporate profits "were incidental to the injury to the
corporation." (Citations omitted.)
The reliefs sought in the Complaint, namely that of enjoining defendants from acting as officers and Board of
Directors of the corporation, the appointment of a receiver, and the prayer for damages in the amount of the
decrease in the value of the sharesof stock, clearly show that the Complaint was filed to curb the alleged
mismanagement of SBGCCI. The causes of action pleaded by petitioners do not accrue to a single shareholder or
a class of shareholders but to the corporation itself.
However, as minority stockholders, petitioners do not have any statutory right to override the business judgments
of SBGCCI’s officers and Board of Directors on the ground of the latter’s alleged lackof qualification to manage
a golf course. Contraryto the arguments of petitioners, Presidential Decree No. 902-A, which is entitled
REORGANIZATION OF THE SECURITIES AND EXCHANGE COMMISSION WITH ADDITIONAL
POWERS AND PLACING THE SAID AGENCY UNDER THE ADMINISTRATIVE SUPERVISION OF THE
OFFICE OF THE PRESIDENT, does not grant minority stockholders a cause of action against waste and
diversion by the Board of Directors, but merely identifies the jurisdiction of the SEC over actionsalready
authorized by law or jurisprudence. It is settled that a stockholder’s right to institute a derivative suit is not based
on any express provisionof the Corporation Code, or even the Securities Regulation Code, but is impliedly
recognized when the said laws make corporate directors or officers liable for damages suffered by the
corporation and its stockholders for violation of their fiduciary duties.23
At this point, we should take note that while there were allegations in the Complaint of fraud in their
subscription agreements, such as the misrepresentation of the Articles of Incorporation, petitioners do not pray
for the rescission of their subscription or seekto avail of their appraisal rights. Instead, they ask that defendants
be enjoined from managing the corporation and to pay damages for their mismanagement. Petitioners’ only
possible cause of action as minority stockholders against the actions of the Board of Directors is the common
law right to file a derivative suit. The legal standing of minority stockholders to bring derivative suits is not a
statutory right, there being no provision in the Corporation Code or related statutes authorizing the same, but is
instead a product of jurisprudence based on equity. However, a derivative suit cannot prosper without first
complying with the legal requisites for its institution.24
Section 1, Rule 8 of the Interim Rules of Procedure Governing IntraCorporate Controversies imposes the
following requirements for derivative suits:
(1) He was a stockholder or member at the time the acts or transactions subject of the action occurred
and at the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust
all remedies available under the articles of incorporation, by-laws, laws or rules governing the
corporation or partnership to obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.
The RTC dismissed the Complaint for failure to comply with the second and fourth requisites above.
Upon a careful examination of the Complaint, this Court finds that the same should not have been dismissed on
the ground that it is a nuisance or harassment suit. Although the shareholdings of petitioners are indeed only two
out of the 409 alleged outstanding shares or 0.24%, the Court has held that it is enough that a member or a
minority of stockholders file a derivative suit for and in behalf of a corporation.25
With regard, however, to the second requisite, we find that petitioners failed to state with particularity in the
Complaint that they had exerted all reasonable efforts to exhaust all remedies available under the articles of
incorporation, by-laws, and laws or rules governing the corporation to obtain the relief they desire. The
Complaint contained no allegation whatsoever of any effort to avail of intra-corporate remedies. Indeed, even if
petitioners thought it was futile to exhaust intra-corporate remedies, they should have stated the same in the
Complaint and specified the reasons for such opinion. Failure to do so allows the RTC to dismiss the Complaint,
even motu proprio, in accordance with the Interim Rules. The requirement of this allegation in the Complaint is
not a useless formality which may be disregarded at will.1âwphi1 We ruled in Yu v. Yukayguan26:
The wordings of Section 1, Rule8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies
are simple and do not leave room for statutory construction. The second paragraph thereof requires that the
stockholder filing a derivative suit should have exerted all reasonable efforts to exhaust all remedies
availableunder the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to
obtain the relief he desires; and to allege such fact with particularityin the complaint. The obvious intent behind
the rule is to make the derivative suit the final recourse of the stockholder, after all other remedies to obtain the
relief sought had failed.
WHEREFORE, the Petition for Review is hereby DENIED. The Decision of the Court of Appeals in CA-G.R.
CV No. 81441 which affirmed the Order of the Regional Trial Court (RTC) of Olongapo City dismissing the
Complaint filed thereon by herein petitioners is AFFIRMED.
SO ORDERED.
CESAR REYES, ET ALS., plaintiffs-appellants,
vs.
MAX BLOUSE, ET ALS., defendants-appellees.
Reyes, Albert and Agcaoili for appellants.
Gibbs, Gibbs, Chuidian and Quasha for appellees.
BAUTISTA ANGELO, J.:
This is an action instituted by the plaintiffs as minority stockholders of the Laguna Tayabas Bus Co. to restrain
its Board of Directors composed of the defendants from carrying out a resolution approved by approximately
92½ per cent of the stockholders in a meeting held on July 30, 1947, authorizing said Board of Directors to take
the necessary steps to consolidate the properties and franchises of the Laguna Tayabas Bus Co. with those of the
Batangas Transportation Co. The grounds on which plaintiffs predicate their action are:
1. That the proposed consolidation or merger of the two companies would be prejudicial to the L.T.B.
Co. and to the appellants in particular who do not own shares of stock of B.T. Co. in that:
a. During the last ten years prior to the last war, the dividends declared by L.T.B. Co. were increasing,
whereas the dividends declared by B.T. Co. were decreasing in amount.
b. In 1941, the shares of L.T.B. Co. cost P250 each in the market, whereas the shares of B.T. Co. cost
only P150 each.
c. A comparative study of the net gains of each company for the first six months of 1947 showed that the
profits of the L.T.B. Co. exceeded B.T. Co. by approximately P67,000. As a consequence, the shares of
L.T.B. Co. were costing P360 a share, while the shares of the B.T. Co. were quoted at only P200.
2. That the proposed consolidation or merger was illegal because the unanimous vote of the stockholders
was not secured and that the same was contrary to the spirit of our laws. (Rec. on Appeal, pp. 19-20)
After the filing of the complaint, the court granted the writ of preliminary injunction prayed for therein upon a
nominal bond of P5,000, which later was increased to P10,000.
Defendants twice moved to dissolve the writ of preliminary injunction, but both motions were denied by the
lower court.
The defendants also asked for the dismissal of the complaint on the ground that the facts, therein alleged do not
constitute sufficient cost of action. In connection with the determination of this incident, defendants submitted an
affidavit of Max Blouse, President of the Laguna Tayabas Bus Co., outlining the steps to be taken by the Board
of Directors in carrying out the merger or consolidation authorized in the disputed resolution. the court however,
deferred its resolution on the motion until after trial on the merits. After due trial, at which both parties presented
their respective evidence, the lower court rendered its decision, the dispositive portion of which reads:
For all the foregoing considerations, the court is of the opinion and so holds that the contoversial
proposed acts to be performed by the defendants, directors of the Laguna Tayabas Bus Co., are with in
the authority granted under Section 28½ of the Corporation Law. The complaint, therefore, is dismissed
and the preliminary injunction is hereby lifted without pronouncement as to costs. (Record on Appeal, p.
182)
On the motion of the plaintiffs, the court a quo revived the writ of preliminary injunction which was dissolved in
its decision above mentioned and maintained the status quo of the case pending appeal upon a new indemnity
bond of P30,000, which was subsequently increased to P50,000.
The case is now before this Court on appeal interposed by the plaintiffs who impute six errors to the lower court.
The principal issue involved in this appeal is whether the real purpose of the disputed resolution is the merger or
consolidation of the properties and franchises of the Laguna Tayabas Bus Co. with those of the Batangas
Transportation Co. within the meaning of the law, and in the affirmative case, whether said merger or
consolidation can be carried out under the law now existing and in force in the Philippines. On one hand counsel
for plaintiffs contends that its real purpose is to effect a merger or consolidation, and as such there is no law in
the Philippines under which it may properly be carried out; on the other hand, counsel for the defendants
maintains the negative view, holding that it is merely an exchange of properties sanctioned by our corporation
law, as amended, and that even if it be considered as a consolidation, the same can still be carried out under
Commonwealth Act No. 146, section 20, otherwise known as the Public Service Law.
The disputed resolution, which was approved on July 20, 1947, at a special meeting held by the stock holders of
the Laguna Tayabas Bus Co. reads as follows:
Resolved that the Board of Directors of the Laguna Tayabas Bus Company, be as it hereby is, authorized
to take the necessary steps to consolidate the properties and franchises of the corporation with those of
the Batangas Transportation Company under a single corporation by the organization of a new
corporation and to dispose to such new corporation all the properties and franchises of the corporation in
return for stock of the new corporation, or by the exchange of stock, and/or through such other means as
may be deemed most advisable by the Board of Directors.
It should be noted that under the above resolution, the Board of Directors is charged with the authority to take
the necessary steps to consolidate the properties and franchises of the Laguna Tayabas Bus Co. with those of the
Batangas Transportation Co. under a new corporation in return for stock of the new corporation, or by exchange
of stock, and/or through such other means as may be deemed most advisable by the Board of Directors. The way
and manner the consolidation shall be effected is, therefore, left to the discretion of the Board of Directors. In
pursuance of this broad authority, the Board of Directors acted and the steps it has taken having in view the
interest of both corporations are outlined in the affidavit attached to the memorandum submitted to the court by
Max Blouse, president of the two corporations above mentioned. The substance of this affidavit is; that both
corporations have passed similar resolutions authorizing the Board of Directors to take such steps as may be
necessary to effect the consolidation; that the Board of Directors of the Laguna Tayabas Bus Co. has decided to
transfer its assets, franchises and other properties to the new corporation, from which shall be excluded the
claims that it has against the United States Army and the cash it has received from it for the use and
commandering of its busses and other stock and equipment during the war; that the Laguna Tayabas Bus Co.,
will not transfer any liabilities to the new corporation; and that said company will not be dissolved but will
continue existing, although not operating, until the stockholders decide to dissolve the same.
It is apparent that the purpose of the resolution is not to dissolve the Laguna Tayabas Bus Co. but merely to
transfer its assets to a new corporation in exchange for its corporation stock. This intent is clearly deducible from
the provision that the Laguna Tayabas Bus Co. will not be dissolved but will continue existing until its
stockholders decide to dissolve the same. This comes squarely within the purview of section 28½ of the
corporation may sell, exchange, lease or otherwise dispose of all its property and assets, including its good will,
upon such terms and conditions as its Board of Directors may deem expedient when authorized by the
affirmative vote of the shareholders holding at least 2/3 of the voting power. The words "or other wise disposed
of" is very broad and in a sense covers a merger or consolidation. The action of the corporation was taken having
in view this provision of our corporation law and in our opinion the corporation has acted correctly.
But appellants contend that the disputed resolution calls for a real merger or consolidation in the sense and in the
manner said terms are intended and understood under the law and authorities of the United States, citing in
support of their contention a long line of American authorities, and that view the resolution in that light, the same
cannot come within the purview of section 28_«_ of our corporation law, as claimed by appellees. But even if we
view the resolution in the light of the American authorities, we are of the opinion that the transaction called for
therein cannot be considered, strickly speaking, as a merger or consolidation of the two corporations because,
under said authorities, a merger implies necessarily the termination or cessation of the merged corporations and
not merely a merger of their properties and assets. This situation does not here obtain. The two corporations will
not lose their corporate existence or personality, or at least the Laguna Tayabas Bus Co., but will continue to
exist even after the consolidation. In other words, what is intended by the resolution is merely a consolidation of
properties and assets, to be managed and operated by a new corporation, and not a merger of the corporations
themselves.
Granting arguendo that the disputed resolution has really the intention and the purpose of carrying out the
merger or consolidation both of the assets and properties of the two corporations as well as of the two
corporations themselves in the true sense of the word, or in the light of the American authorities, still we believe
that this can be carried out in this jurisdiction in the light of our Public Service Law. Thus, section 20(g) of
Commonwealth Act No. 146, as amended, prohibits any public service operators, unless with the approval of the
Public Service Commission, "to sell, alienate, mortgage, encumber or lease its property, franchises, certificates,
privileges, or rights, or any part thereof, or merge or consolidate its property, franchises, privileges or rights or
any part thereof, with those of any other public service". This law speaks of merger or consolidation of public
service engaged in land transportation. It does not impose any qualification except that it shall be done with the
approval of the Public Service Commission. There is no doubt that the intended merger or consolidation comes
within the purview of this legal provision.
The claim that the merger or consolidation of two land transportation companies cannot be carried out in this
jurisdiction because it is prohibited by Act No. 2772, is untenable in the light of the very provisions of said Act.
A careful analysis of said act will show that it only regulates the merger or consolidation of railroad companies,
or of a railroad company with any other carrier by land or water. Said Act does not apply to the merger or
consolidation of two corporations exclusively engaged in land transportation. To extend the meaning and scope
of said Act 2772 to the merger or consolidation of land carries would be to render nugatory the provisions of the
Public Service Law, which effect cannot be implied because the latter law (1936) is of more recent enactment
than the former (1918). As to how the merger or consolidation shall be carried out, our corporation law contains
ample provisions to this effect (sections 17½, 18 and 25½). This law does not require that there be an express
legislative authority, or a unanimous consent of all stockholders, to effect a merger or consolidation of two
corporations.
Plaintiffs object to the use made by the lower court of the affidavit submitted by Max Blouse, president of the
merging corporations, in connection with the incident relative to the motion to dismiss filed by the defendants to
which affidavit no objection has been interposed by the plaintiffs and for that reason that affidavit became part or
the record. As said Affidavit was submitted with the motion to dismiss and other exhibits presented by both
parties for the consideration of the court, we find no reason why the lower court should err in considering it in its
decision and why it cannot now be considered in this appeal. This action of the court was merely in line with the
move of the parties when they submitted for consideration the motion to dismiss filed by the defendants.
The remaining question to be determined refers to the claim that the proposed consolidation or merger of the two
corporations would be prejudicial to the Laguna Tayabas Bus Co. and to the appellants in particular who do not
own shares of stock of the Batangas Transportation Co. This is a question of fact which much depends upon the
evidence submitted by the parties. After weighing the evidence, the lower court reached the conclusion that the
merger would not be prejudicial or disadvantageous to the appellants or to the stockholders of the Laguna
Tayabas Bus Co. On this point the court said: "The testimony of Max Blouse, who had founded both the Laguna
Tayabas Bus Co. and the Batangas Transportation Co., should be given consideration weight and credence not
only because of the position which he enjoys in both companies, but also because of his long experience in the
transportation business in this country. His opinion, therefore, insofar as he states that the earnings of both
companies should be about equal, in normal circumstances, is entitled to more weight and credit than that of the
plaintiffs".
To the foregoing we may add the following: the Laguna Tayabas Bus Co. and the Batangas Transportation Co.
are pre-war corporations organized in 1928 and 1918, respectively. They ceased operating during the war. In
April, 1945, they resumed operations, and pursuant to the authority granted by the respective Board of Directors,
the two companies were jointly operated under a single management. In view of the success of this joint
operation, it was strongly recommended that it be continued and made permanent. For this purpose a meeting of
the stockholders was called, and the disputed resolution was approved. And this resolution was approved
because the stockholders found that with the consolidation, the two companies would enjoy the services of the
same technical men, would invest much less in the purchase of spare parts, would effect savings in running one
machine shop, instead of two, would employ less personel, and in general, both companies would effect a
substantial economy in men, materials and operation expenses. The merger or the consolidation has been voted
upon by two-thirds vote of the stockholders. Their action is decisive. They have acted having in view only the
best interests of both companies. It is not fair to allow a small minority to undo or set at naught what they have
done. The remedy of the appellants is to register their objection in writing and demand payment of their shares
from the corporation as provided for in section 28½ of the corporation law.
Wherefore, the decision is hereby affirmed, with cost against appellants.
THE EDWARD J. NELL COMPANY, petitioner,
vs.
PACIFIC FARMS, INC., respondent.
Agrava & Agrava for petitioner.
Araneta, Mendoza & Papa for respondent.
CONCEPCION, J.:
Appeal by certiorari, taken by Edward J. Nell Co. — hereinafter referred to as appellant — from a decision of
the Court of Appeals.
On October 9, 1958, appellant secured in Civil Case No. 58579 of the Municipal Court of Manila against Insular
Farms, Inc. — hereinafter referred to as Insular Farms a judgment for the sum of P1,853.80 — representing the
unpaid balance of the price of a pump sold by appellant to Insular Farms — with interest on said sum, plus
P125.00 as attorney's fees and P84.00 as costs. A writ of execution, issued after the judgment had become final,
was, on August 14, 1959, returned unsatisfied, stating that Insular Farms had no leviable property. Soon
thereafter, or on November 13, 1959, appellant filed with said court the present action against Pacific Farms, Inc.
— hereinafter referred to as appellee — for the collection of the judgment aforementioned, upon the theory that
appellee is the alter ego of Insular Farms, which appellee has denied. In due course, the municipal court
rendered judgment dismissing appellant's complaint. Appellant appealed, with the same result, to the court of
first instance and, subsequently, to the Court of Appeals. Hence this appeal by certiorari, upon the ground that
the Court of Appeals had erred: (1) in not holding the appellee liable for said unpaid obligation of the Insular
Farms; and (2) in not granting attorney's fees to appellant.
With respect to the first ground, it should be noted that appellant's complaint in the municipal court was
anchored upon the theory that appellee is an alter ego of Insular Farms, because the former had purchased all or
substantially all of the shares of stock, as well as the real and personal properties of the latter, including the
pumping equipment sold by appellant to Insular Farms. The record shows that, on March 21, 1958, appellee
purchased 1,000 shares of stock of Insular Farms for P285,126.99; that, thereupon, appellee sold said shares of
stock to certain individuals, who forthwith reorganized said corporation; and that the board of directors thereof,
as reorganized, then caused its assets, including its leasehold rights over a public land in Bolinao, Pangasinan, to
be sold to herein appellee for P10,000.00. We agree with the Court of Appeals that these facts do not prove that
the appellee is an alter ego of Insular Farms, or is liable for its debts. The rule is set forth in Fletcher Cyclopedia
Corporations, Vol. 15, Sec. 7122, pp. 160-161, as follows:
Generally 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.
In the case at bar, there is neither proof nor allegation that appellee had expressly or impliedly agreed to assume
the debt of Insular Farms in favor of appellant herein, or that the appellee is a continuation of Insular Farms, or
that the sale of either the shares of stock or the assets of Insular Farms to the appellee has been entered into
fraudulently, in order to escape liability for the debt of the Insular Farms in favor of appellant herein. In fact,
these sales took place (March, 1958) not only over six (6) months before the rendition of the judgment (October
9, 1958) sought to be collected in the present action, but, also, over a month before the filing of the case (May
29, 1958) in which said judgment was rendered. Moreover, appellee purchased the shares of stock of Insular
Farms as the highest bidder at an auction sale held at the instance of a bank to which said shares had been
pledged as security for an obligation of Insular Farms in favor of said bank. It has, also, been established that the
appellee had paid P285,126.99 for said shares of stock, apart from the sum of P10,000.00 it, likewise, paid for
the other assets of Insular Farms.
Neither is it claimed that these transactions have resulted in the consolidation or merger of the Insular Farms and
appellee herein. On the contrary, appellant's theory to the effect that appellee is an alter ego of the Insular Farms
negates such consolidation or merger, for a corporation cannot be its own alter ego.
It is urged, however, that said P10,000.00 paid by appellee for other assets of Insular Farms is a grossly
inadequate price, because, appellant now claims, said assets were worth around P285,126.99, and that,
consequently, the sale must be considered fraudulent. However, the sale was submitted to and approved by the
Securities and Exchange Commission. It must be presumed, therefore, that the price paid was fair and
reasonable. Moreover, the only issue raised in the court of origin was whether or not appellee is an alter ego of
Insular Farms. The question of whether the aforementioned sale of assets for P10,000.00 was fraudulent or not,
had not been put in issue in said court. Hence, it may, not be raised on appeal.
Being a mere consequence of the first assignment of error, which is thus clearly untenable, appellant's second
assignment of error needs no discussion.
WHEREFORE, the decision appealed from is hereby affirmed, with costs against the appellant. It is so ordered.
LAGUNA TRANSPORTATION CO., INC., petitioner-appellant,
vs.
SOCIAL SECURITY SYSTEM, respondent-appellee.
Yatco & Yatco for appellant.
Solicitor General Edilberto Barot, Solicitor Camilo Quiason and Crispin Baizas for appellee.
BARRERA, J.:
On January 24, 1958, petitioner Laguna Transportation Co., Inc. filed with the Court of First Instance of Laguna
petition praying that an order be issued by the court declaring that it is not bound to register as a member of
respondent Social Security System and, therefore, not obliged to pay to the latter the contributions required
under the Social Security Act.1 To this petition, respondent filed its answer on February 11, 1958 praying for its
dismissal due to petitioner's failure to exhaust administrative remedies, and for a declaration that petitioner is
covered by said Act, since the latter's business has been in operation for at least 2 years prior to September 1,
1957.
On February 11, 1958, respondent filed a motion for preliminary hearing on its defense that petitioner failed to
exhaust administrative remedies. When the case was called for preliminary hearing, it was postponed by
agreement of the parties. Subsequently, it was set for trial. On the date of the trial, the parties agreed to present,
in lieu of any other evidence, a stipulation of facts, which they did on May 27, 1958, as follows:
1. That petitioner is a domestic corporation duly organized and existing under the laws of the
Philippines, with principal place of business at Biñan, Laguna;
2. That respondent is an agency created under Republic Act No. 1161, as amended by Republic Act No.
1792, with the principal place of business at the new GSIS Bldg., corner Arroceros and Concepcion
Streets, Manila, where it may be served with summons;
3. That respondent has served notice upon the petitioner requiring it to register as member of the System
and to remit the premiums due from all the employees of the petitioner and the contribution of the latter
to the System beginning the month of September, 1957;
4. That sometime in 1949, the Biñan Transportation Co., a corporation duly registered with the Securities
and Exchange Commission, sold part of the lines and equipment it operates to Gonzalo Mercado,
Artemio Mercado, Florentino Mata and Dominador Vera Cruz;
5. That after the sale, the said vendees formed an unregistered partnership under the name of Laguna
Transportation Company which continued to operate the lines and equipment bought from the Biñan
Transportation Company, in addition to new lines which it was able to secure from the Public Service
Commission;
6. That the original partners forming the Laguna Transportation Company, with the addition of two new
members, organized a corporation known as the Laguna Transportation Company, Inc., which was
registered with the Securities and Exchange Commission on June 20, 1956, and which corporation is the
plaintiff now in this case;
7. That the incorporators of the Laguna Transportation Company, Inc., and their corresponding shares are
as follows:

Name No. of Shares Amount Amount Paid

Dominador Cruz 333 shares P33,300.00 P9,160.81

Maura Mendoza 333 shares 33,300.00 9,160.81

Artemio Mercado 94 shares 9,400.00 2,565.90

Florentino Mata 110 shares 11,000.00 3,021.54

Sabina Borja 64 shares 6,400.00 1,750.00

1,000 shares P100,000.00 P27,481.55

8. That the corporation continued the same transportation business of the unregistered partnership;
9. That the plaintiff filed on August 30, 1957 an Employee's Data Record . . . and a supplemental
Information Sheet . . .;
10. That prior to November 11, 1957, plaintiff requested for exemption from coverage by the System on
the ground that it started operation only on June 20, 1956, when it was registered with the Securities and
Exchange Commission but on November 11, 1957, the Social Security System notified plaintiff that it
was covered;
11. On November 14, 1957, plaintiff through counsel sent a letter to the Social Security System
contesting the claim of the System that plaintiff was covered, . . .
12. On November 27, 1957, Carlos Sanchez, Manager of the Production Department of the respondent
System for and in behalf of the Acting Administrator, informed plaintiff that plaintiff's business has been
in actual operation for at least two years, . . .
On the basis of the foregoing stipulation of facts, the court, on August 15, 1958, rendered a decision the
dispositive part of which reads:
Wherefore, the Court is of the opinion and so declares that the petitioner was an employer engaged in
business as common carrier which had been in operation for at least two years prior to the enactment of
Republic Act No. 1161, as amended by Republic Act 1792 and by virtue thereof, it was subject to
compulsory coverage under said law. . . .
From this decision, petitioner appealed directly to us, raising purely questions of law.
Petitioner claims that the lower court erred in holding that it is an employer engaged in business as a common
carrier which had been in operation for at least 2 years prior to the enactment of the Social Security Act and,
therefore, subject to compulsory coverage thereunder.
Section 9 of the Social Security Act, in part, provides:
SEC. 9 Compulsory Coverage. — Coverage in the System shall be compulsory upon all employees
between the ages of sixteen and sixty years, inclusive, if they have been for at least six months in the
service of an employer who is a member of the System. Provided, That the Commission may not compel
any employer to become a member of the System unless he shall have been in operation for at least two
years . . . . (Italics supplied.).
It is not disputed that the Laguna Transportation Company, an unregistered partnership composed of Gonzalo
Mercado, Artemio Mercado, Florentina Mata, and Dominador Vera Cruz, commenced the operation of its
business as a common carrier on April 1, 1949. These 4 original partners, with 2 others (Maura Mendoza and
Sabina Borja) later converted the partnership into a corporate entity, by registering its articles of incorporation
with the Securities and Exchange Commission on June 20, 1956. The firm name "Laguna Transportation
Company" was not altered, except with the addition of the word "Inc." to indicate that petitioner was duly
incorporated under existing laws. The corporation continued the same transportation business of the unregistered
partnership, using the same lines and equipment. There was, in effect, only a change in the form of the
organization of the entity engaged in the business of transportation of passengers. Hence, said entity as an
employer engaged in business, was already in operation for at least 3 years prior to the enactment of the Social
Security Act on June 18, 1954 and for at least two years prior to the passage of the amendatory act on June 21,
1957. Petitioner argues that, since it was registered as a corporation with the Securities and Exchange
Commission only on June 20, 1956, it must be considered to have been in operation only on said date. While it is
true that a corporation once formed is conferred a juridical personality separate and district from the persons
composing it, it is but a legal fiction introduced for purposes of convenience and to subserve the ends of justice.
The concept cannot be extended to a point beyond its reasons and policy, and when invoked in support of an end
subversive of this policy, will be disregarded by the courts. (13 Am. Jur. 160.)
If any general rule can be laid down, in the present state of authority, it is that a corporation will be
looked upon as a legal entity as a general rule, and until sufficient reason to the contrary appears; but,
when the motion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or
defend crime, the law will regard the corporation as an association of persons. (1 Fletcher Cyclopedia
Corporations [Perm. Ed.] 135-136; U.S. Milwaukee Refrigeration Transit Co., 142 Fed. 247, cited in
Koppel Philippines, Inc. vs. Yatco, 43 Off. Gaz., 4604.)
To adopt petitioner's argument would defeat, rather than promote, the ends for which the Social Security Act was
enacted. An employer could easily circumvent the statute by simply changing his form of organization every
other year, and then claim exemption from contribution to the System as required, on the theory that, as a new
entity, it has not been in operation for a period of at least 2 years. the door to fraudulent circumvention of the
statute would, thereby, be opened.
Moreover, petitioner admitted that as an employer engaged in the business of a common carrier, its operation
commenced on April 1, 1949 while it was a partnership and continued by the corporation upon its formation on
June 20, 1956. Unlike in the conveyance made by the Biñan Transportation Company to the partners Gonzalo
Mercado, Artemio Mercado, Florentino Mata, and Dominador Vera Cruz, no mention whatsoever is made either
in the pleadings or in the stipulation of facts that the lines and equipment of the unregistered partnership had
been sold and transferred to the corporation, petitioner herein. This omission, to our mind, clearly indicates that
there was, in fact, no transfer of interest, but a mere change in the form of the organization of the employer
engaged in the transportation business, i.e., from an unregistered partnership to that of a corporation. As a rule,
courts will look to the substance and not to the form.(Colonial Trust Co. vs. Montolo Eric Works, 172 Fed. 310;
Metropolitan Holding Co. vs. Snyder, 79 F. 2d 263, 103 A.L.R. 612; Arnold vs. Willits, et al., 44 Phil., 634; 1
Fletcher Cyclopedia Corporations [Perm. Ed.] 139-140.)
Finally, the weight of authority supports the view that where a corporation was formed by, and consisted of
members of a partnership whose business and property was conveyed and transferred to the corporation for the
purpose of continuing its business, in payment for which corporate capital stock was issued, such corporation is
presumed to have assumed partnership debts, and is prima facie liable therefor. (Stowell vs. Garden City News
Corps., 57 P. 2d 12; Chicago Smelting & Refining Corp. vs. Sullivan, 246 IU, App. 538; Ball vs. Bross., 83 June
19, N.Y. Supp. 692.) The reason for the rule is that the members of the partnership may be said to have simply
put on a new coat, or taken on a corporate cloak, and the corporation is a mere continuation of the partnership. (8
Fletcher Cyclopedia Corporations [Perm. Ed.] 402-411.)
Wherefore, finding no error in the judgment of the court a quo, the same is hereby affirmed, with costs against
petitioner-appellant. So ordered.