G.R. No.

22015

September 1, 1924

MARSHALL-WELLS COMPANY, plaintiff-appellant, vs.HENRY W.

ELSER & CO., INC., defendant-appellee.
Hartigan and Welch for appellant.J. F. Boomer for appellee.
MALCOLM, J.:
Marshall-Wells Company, an Oregon corporation, sued Henry W.
Elser & Co., Inc., a domestic corporation, in the Court of First
Instance of Manila, for the unpaid balance of a bill of goods
amounting to P2,660.74, sold by plaintiff to defendant and for which
plaintiff holds accepted drafts. Defendant demurred to the complaint
on the statutory ground that the plaintiff has not legal capacity to sue.
In the demurrer, counsel stated that "The said complaint does not
show that the plaintiff has complied with the laws of the Philippine
Islands in that which is required of foreign corporations desiring to do
business in the Philippine Islands, neither does it show that it was
authorized to do business in the Philippine Islands." The demurrer
was sustained by the trial judge. Inasmuch as the plaintiff could not
allege compliance with the statute, the order was allowed to become
final and an appeal was perfected.
To begin with the law as a fit setting for the issue. The Corporation
Law (Act No. 1459) contains six sections relating particularly to
foreign corporations. Section 68, as amended by Act No. 2900,
provides that no foreign corporation "shall be permitted to transact
business in the Philippine Islands until after it shall have obtained a
license for that purpose from the Chief of the Mercantile Register of
the Bureau of Commerce and Industry," upon order either of the
Secretary of Finance or the Secretary of Commerce and
Communications. No order for a license shall be issued except upon
a statement under oath of the managing agent of the corporation,
showing to the satisfaction of the proper Secretary that the
corporation is solvent and in sound financial condition, and setting
forth the resources and liabilities of the corporation. Said statement
shall contain the following: (1) The name of the corporation; (2) the
purpose for which it was organized; (3) the location of its principal or
home office; (4) the capital stock of the corporation and the amount

thereof actually subscribed and paid into the treasury; (5) the net
assets of the corporation over and above all debts, liabilities,
obligations, and claims outstanding against it; and (6) the name of an
agent residing in the Philippine Islands authorized by the corporation
to accept evidence of summons and process in all legal proceedings
against the corporation and of all notices affecting the corporation.
Further evidence of the solvency and fair dealing of the corporation
may be required. Upon filing in the Mercantile Register of the Bureau
of Commerce and Industry the said statement, a certified copy of its
charter, and the order of the Secretary for the issuance of a license,
the Chief of the Mercantile Register "shall issue to the foreign
corporation as directed in the order of license to do business in the
Philippine Islands," and for the issuance of the license shall collect a
fee fixed in accordance with the schedule established in section 8 of
the Law.
Passing section 69 of the Corporation Law for the moment, section
70, as amended, covers the cases of foreign corporations
"transacting business in the Islands at the time of the passage" of the
Act. Section 71 authorizes the Secretary of Finance or the Secretary
of Commerce and Communications, as the case may be, by and with
the approval of the Governor-General, "to revoke the license to
transact business in the Philippine Islands" of any foreign corporation.
Section 72 concerns summons and legal process. Section 73 makes
a foreign corporation bound by all the laws, rules, and regulations
applicable to domestic corporations of the same class, with certain
exceptions.
Returning now to section 69 of the Corporation Law, its literal
terminology is as follows:
No foreign corporation or corporation formed, organized, or existing
under any laws other that those of the Philippine Islands shall be
permitted to transact business in the Philippine Islands or maintain by
itself or assignee any suit for the recovery of any debt, claim, or
demand whatever, unless it shall have the license prescribed in the
section immediately preceding. Any officer, director, or agent of the
corporation not having the license prescribed shall be punished by
imprisonment for not less than six months nor more than two years or
by a fine of not less than two hundred pesos nor more than one

thousand pesos, or by both such imprisonment and fine, in the

discretion of the court.
Is the obtaining of the license prescribed in section 68, as amended,
of the Corporation Law a condition precedent to the maintaining of
any kind of action in the courts of the Philippine Islands by a foreign
corporation? The issue is framed to correspond with defendant's
theory of the case on appeal, although possibly somewhat at
variance with its stand in the lower court.
So far as we are informed, this is a question of first impression. The
case of Dampfschieffs Rhederei Union vs. Compaia Trasatlantica
([1907], 8 Phil., 766), relating to the provisions of the Code of
Commerce, only held that a foreign corporation which has not
established itself in the Philippines, nor engaged in business in the
Philippines, could, without filing its articles of incorporation in the
mercantile registry, maintain an action against another for damages.
The case of Spreckles vs. Ward ([1909], 12 Phil., 414), while making
reference to a point similar to the one before us, was merely authority
for the holding, that the provisions of section 69 of the Corporation
Law denying to unregistered foreign corporations the right to maintain
suits for the recovery of any debt, claim, or demand, do not impose
on all plaintiff-litigants the burden of establishing by affirmative proof
that they are not unregistered foreign corporations; that fact will not
be presumed without some evidence tending to establish its
existence. But the question is not alone new, but of prime importance,
to the consideration of which we have given mature thought.
Corporations have no legal status beyond the bounds of the
sovereignty by which they are created. A state may restrict the right of
a foreign corporation to engage in business within its limits, and to
sue in its courts. But by virtue of state comity, a corporation created
by the laws of one state is usually allowed to transact business in
other states and to sue in the courts of the forum. (Paul vs. Virginia
[1869], 8 Wall., 168; Sioux Remedy Co., vs. Cope and Cope [1914],
235 U. S., 197; Cyclone Mining Co. vs. Baker Light & Power Co.,
[1908], 165 Fed., 996.)
But here we have present for resolution no question of constitutional
law. Article 4 of the United States Constitution and the Fourteenth

Amendment to the Constitution are not invoked. The issue is not

complicated with matters affecting interstate commerce under the
American Constitution. Nor are we concerned with a question of
private international law. It all simmers down to an issue of statutory
construction.
Defendant isolates a portion of one sentence of section 69 of the
Corporation Law and asks the court to give it a literal meaning.
Counsel would have the law read thus: "No foreign corporation shall
be permitted to maintain by itself or assignee any suit for the recovery
of any debt, claim, or demand whatever, unless it shall have the
license prescribed in section 68 of the law." Plaintiff, on the contrary,
desires for the court to consider the particular point under discussion
with reference to all the law, and thereafter to give the law a common
sense interpretation.
The object of the statute was to subject the foreign corporation doing
business in the Philippines to the jurisdiction of its courts. The object
of the statute was not to prevent the foreign corporation from
performing single acts, but to prevent it from acquiring a domicile for
the purpose of business without taking the steps necessary to render
it amenable to suit in the local courts. The implication of the law is
that it was never the purpose of the Legislature to exclude a foreign
corporation which happens to obtain an isolated order for business
from the Philippines, from securing redress in the Philippine courts,
and thus, in effect, to permit persons to avoid their contracts made
with such foreign corporations. The effect of the statute preventing
foreign corporations from doing business and from bringing actions in
the local courts, except on compliance with elaborate requirements,
must not be unduly extended or improperly applied. It should not be
construed to extend beyond the plain meaning of its terms,
considered in connection with its object, and in connection with the
spirit of the entire law. (State vs. American Book Co. [1904], 69 Kan.,
1; American De Forest Wireless Telegraph Co. vs. Superior Court of
City & County of San Francisco and Hebbard [1908], 153 Cal., 533; 5
Thompson on Corporations, 2d ed., chap. 184.)
Confronted with the option of giving to the Corporation Law a harsh
interpretation, which would disastrously embarrass trade, or of giving
to the law a reasonable interpretation, which would markedly help in

the development of trade; confronted with the option of barring from

the courts foreign litigants with good causes of action or of assuming
jurisdiction of their cases; confronted with the option of construing the
law to mean that any corporation in the United States, which might
want to sell to a person in the Philippine must send some
representative to the Islands before the sale, and go through the
complicated formulae provided by the Corporation Law with regard to
the obtaining of the license, before the sale was made, in order to
avoid being swindled by Philippine citizens, or of construing the law to
mean that no foreign corporation doing business in the Philippines
can maintain any suit until it shall possess the necessary license,
confronted with these options, can anyone doubt what our decision
will be? The law simply means that no foreign corporation shall be
permitted "to transact business in the Philippine Islands," as this
phrase is known in corporation law, unless it shall have the license
required by law, and, until it complies with the law, shall not be
permitted to maintain any suit in the local courts. A contrary holding
would bring the law to the verge of unconstitutionality, a result which
should be and can be easily avoided. (Sioux Remedy Co. vs. Cope
and Cope, supra; Perkins, Philippine Business Law, p. 264.)
The noncompliance of a foreign corporation with the statute may be
pleaded as an affirmative defense. Thereafter, it must appear from
the evidence, first, that the plaintiff is a foreign corporation, second,
that it is doing business in the Philippines, and third, that it has not
obtained the proper license as provided by the statute. (Standard
Stock Food Co. vs. Jasper [1907], 76 Kan., 926; Spreckles vs. Ward,
supra.)
The order appealed from shall be set aside and the record shall be
returned to the court of origin for further proceedings. Without special
finding as to costs in this instance, it is so ordered.
Johnson, Street, Avancea, Villamor, Ostrand and Romualdez, JJ.,
concur.

SIGNETICS vs. CA

Facts:
1. The petitioner, Signetics was organized under the laws of the
United States of America. Through Signetics Filipinas
Corporation (SigFil), a wholly-owned subsidiary, Signetics
entered into lease contract over a piece of land with Fruehauf
Electronics Phils., Inc. (Freuhauf).
2. Freuhauf sued Signetics for damages, accounting or return of
certain machinery, equipment and accessories, as well as the
transfer of title and surrender of possession of the buildings,
installations and improvements on the leased land, before the
RTC of Pasig (Civil Case No. 59264). Claiming that Signetics
caused SigFil to insert in the lease contract the words
"machineries, equipment and accessories," the defendants were
able to withdraw these assets from the cost-free transfer
provision of the contract.
3. Service of summons was made on Signetics through TEAM
Pacific Corp. on the basis of the allegation that Signetics is a
"subsidiary of US PHILIPS CORPORATION, and may be served
summons at Philips Electrical Lamps, Inc., Las Pias, Metro
Manila and/or c/o Technology Electronics Assembly &
Management (TEAM) Pacific Corporation, Electronics Avenue,
FTI Complex, Taguig, Metro Manila," service of summons was
made on Signetics through TEAM Pacific Corporation.
4. Petitioner filed a motion to dismiss the complaint on the
ground of lack of jurisdiction over its person. Invoking Section 14,

Rule 14, of the Rules of Court and the rule laid down in Pacific
Micronisian Line, Inc., v. Del Rosario and Pelington to the effect
that the fact of doing business in the Philippines should first be
established in order that summons could be validly made and
jurisdiction acquired by the court over a foreign corporation.
5. The RTC denied the Motion to dismiss. While the CA affirmed
RTC. Hence this petition. The petitioner argues that what was
effectively alleged in the complaint as an activity of doing
business was "the mere equity investment" of petitioner in SigFil,
which the petitioner insists, had theretofore been transferred to
TEAM holdings, Ltd.
Issue: Whether or not the lower court, had correctly
assumed jurisdiction over the petitioner, a foreign
corporation, on its claim in a motion to dismiss, that it had
since ceased to do business in the Philippines.
YES.
1. Signetics cannot, at least in this early stage, assail, on the one
hand, the veracity and correctness of the allegations in the
complaint and proceed, on the other hand, to prove its own, in
order to hasten a peremptory escape. As explained by the Court
in Pacific Micronisian, summons may be served upon an agent
of the defendant who may not necessarily be its "resident agent
designated in accordance with law." The term "agent", in the
context it is used in Section 14, refers to its general meaning,
i.e., one who acts on behalf of a principal.
The allegations in the complaint have thus been able to amply
convey that not only is TEAM Pacific the business conduit of the
petitioner in the Philippines but that, also, by the charge of fraud,
is none other than the petitioner itself.

2. The rule is that, a foreign corporation, although not engaged in

business in the Philippines, may still look up to our courts for
relief; reciprocally, such corporation may likewise be "sued in
Philippine courts for acts done against a person or persons in the
Philippines" (Facilities Management Corporation v. De la
Osa), provided that, in the latter case, it would not be impossible
for court processes to reach the foreign corporation, a matter
that can later be consequential in the proper execution of
judgment. Hence, a State may not exercise jurisdiction in the
absence of some good basis (and not offensive to traditional
notions of fair play and substantial justice) for effectively
exercising it, whether the proceedings are in rem, quasi in
rem or in personam.

AGILENT TECHNOLOGIES vs. INTEGRATED SILICON TECHNOLOGY

FACTS:PetitionerAgilentisaforeigncorporation,which,
byitsownadmission,isnotlicensedtodobusinessinthe
Philippines.RespondentIntegratedSiliconisaprivate
domesticcorporation,100%foreignowned,whichis
engagedinthebusinessofmanufacturingandassembling
electronicscomponents.
Thejuridicalrelationamongthevariouspartiesinthiscase

canbetracedtoa5yearValueAddedAssemblyServices
Agreement(VAASA),betweenIntegratedSiliconandHP
Singapore.UnderthetermsoftheVAASA,Integrated
Siliconwastolocallymanufactureandassemblefiber
opticsforexporttoHPSingapore.HPSingapore,forits
part,wastoconsignrawmaterialstoIntegrated
Silicon.TheVAASAhadafiveyeartermwithaprovision
forannualrenewalbymutualwrittenconsent.Later,with
theconsentofIntegratedSilicon,HPSingaporeassigned
allitsrightsandobligationsintheVAASAtoAgilent.
Later,IntegratedSiliconfiledacomplaintforSpecific
PerformanceandDamagesagainstAgilentanditsofficers.
ItallegedthatAgilentbreachedthepartiesoralagreement
toextendtheVAASA.Agilentfiledaseparatecomplaint
againstIntegratedSiliconforSpecificPerformance,
RecoveryofPossession,andSumofMoneywithReplevin,
PreliminaryMandatoryInjunction,andDamages.
RespondentsfiledaMTDinthe2ndcase,onthegrounds
oflackofAgilentslegalcapacitytosue;litis
pendentia;forumshopping;andfailuretostateacauseof
action.
ThetrialcourtdeniedtheMTDandgrantedpetitioner
Agilentsapplicationforawritofreplevin.Withoutfilinga
MR,respondentsfiledapetitionforcertiorariwiththeCA.
TheCAgrantedrespondentspetitionforcertiorari,set
asidetheassailedOrderofthetrialcourt(denyingthe
MTD)andorderedthedismissalofthe2ndcase.Hence,

theinstantpetition.
ISSUE:WONanunlicensedforeigncorporationnotdoing
businessinthePhilippineslacksthelegalcapacitytofile
suit.
HELD:ThepetitionisGRANTED.TheDecisionofthe
CAwhichdismissedthe2ndcaseisREVERSEDandSET
ASIDE.TheOrderdenyingtheMTDisREINSTATED.
AgilentsapplicationforaWritofReplevinisGRANTED.
NO
Aforeigncorporationwithoutalicenseisnotipso
factoincapacitatedfrombringinganactioninPhilippine
courts.Alicenseisnecessaryonlyifaforeigncorporation
istransactingordoingbusinessinthecountry.The
CorporationCodeprovides:Sec.133.Doingbusiness
withoutalicense.Noforeigncorporationtransacting
businessinthePhilippineswithoutalicense,orits
successorsorassigns,shallbepermittedtomaintainor
interveneinanyaction,suitorproceedinginanycourtor
administrativeagencyofthePhilippines;butsuch
corporationmaybesuedorproceededagainstbefore
Philippinecourtsoradministrativetribunalsonanyvalid
causeofactionrecognizedunderPhilippinelaws.
Theaforementionedprovisionpreventsanunlicensed

foreigncorporationdoingbusinessinthePhilippines
fromaccessingourcourts.
[Inanumberofcases,however,wehaveheldthatan
unlicensedforeigncorporationdoingbusinessinthe
PhilippinesmaybringsuitinPhilippinecourtsagainsta
Philippinecitizenorentitywhohadcontractedwithand
benefitedfromsaidcorporation.Suchasuitispremisedon
thedoctrineofestoppel.Apartyisestoppedfrom
challengingthepersonalityofacorporationafterhaving
acknowledgedthesamebyenteringintoacontractwithit.
Thisdoctrineofestoppeltodenycorporateexistenceand
capacityappliestoforeignaswellasdomestic
corporations.Theapplicationofthisprinciplepreventsa
personcontractingwithaforeigncorporationfromlater
takingadvantageofitsnoncompliancewiththestatutes
chieflyincaseswheresuchpersonhasreceivedthebenefits
ofthecontract.]Theprinciplesregardingtherightofa
foreigncorporationtobringsuitinPhilippinecourtsmay
thusbecondensedinfourstatements:
ifaforeigncorporationdoesbusinessinthePhilippines
withoutalicense,itcannotsuebeforethePhilippinecourts;
ifaforeigncorporationisnotdoingbusinessinthe
Philippines,itneedsnolicensetosuebeforePhilippine
courtsonanisolatedtransactionoronacauseofaction
entirelyindependentofanybusinesstransaction;

ifaforeigncorporationdoesbusinessinthePhilippines
withoutalicense,aPhilippinecitizenorentitywhichhas
contractedwithsaidcorporationmaybeestoppedfrom
challengingtheforeigncorporationscorporatepersonality
inasuitbroughtbeforePhilippinecourts;and
ifaforeigncorporationdoesbusinessinthe
Philippineswiththerequiredlicense,itcansuebefore
Philippinecourtsonanytransaction.
**ThechallengetoAgilentslegalcapacitytofilesuit
hingesonwhetherornotitisdoingbusinessinthe
Philippines.However,thereisnodefinitiveruleonwhat
constitutesdoing,engagingin,ortransacting
businessinthePhilippines.TheCorporationCodeitselfis
silentastowhatactsconstitutedoingortransacting
businessinthePhilippines.
[Jurisprudencehasit,however,thatthetermimpliesa
continuityofcommercialdealingsandarrangements,and
contemplates,tothatextent,theperformanceofactsor
worksortheexerciseofsomeofthefunctionsnormally
incidenttoorinprogressiveprosecutionofthepurposeand
subjectofitsorganization.
IntheMentholatumcasethisCourtdiscoursedonthetwo
generalteststodeterminewhetherornotaforeign
corporationcanbeconsideredasdoingbusinessinthe

Philippines.Thefirstoftheseisthesubstancetest,thus:
Thetruetest[fordoingbusiness],however,seemstobe
whethertheforeigncorporationiscontinuingthebodyof
thebusinessorenterpriseforwhichitwasorganizedor
whetherithassubstantiallyretiredfromitandturnedit
overtoanother.
Thesecondtestisthecontinuitytest,expressedthus:
Theterm[doingbusiness]impliesacontinuityof
commercialdealingsandarrangements,andcontemplates,
tothatextent,theperformanceofactsorworksorthe
exerciseofsomeofthefunctionsnormallyincidentto,and
intheprogressiveprosecutionof,thepurposeandobjectof
itsorganization.]
**TheForeignInvestmentsActof1991(theFIA;
RepublicActNo.7042,asamended),definesdoing
businessasfollows:
Sec.3,par.(d).Thephrasedoingbusinessshallinclude
solicitingorders,servicecontracts,openingoffices,
whethercalledliaisonofficesorbranches;appointing
representativesordistributorsdomiciledinthePhilippines
orwhoinanycalendaryearstayinthecountryforaperiod
orperiodstotalingonehundredeighty(180)daysormore;
participatinginthemanagement,supervisionorcontrolof

anydomesticbusiness,firm,entity,orcorporationinthe
Philippines;andanyotheractoractsthatimplya
continuityofcommercialdealingsorarrangements,and
contemplatetothatextenttheperformanceofactsor
works,ortheexerciseofsomeofthefunctionsnormally
incidentto,andintheprogressiveprosecutionof,
commercialgainorofthepurposeandobjectofthe
businessorganization.
Ananalysisoftherelevantcaselaw,inconjunctionwith
Sec1oftheIRRoftheFIA(asamendedbyRA8179),
woulddemonstratethattheactsenumeratedintheVAASA
donotconstitutedoingbusinessinthePhilippines.The
saidprovisionprovidesthatthefollowingshallnotbe
deemeddoingbusiness:
(1)Mereinvestmentasashareholderbyaforeignentityin
domesticcorporationsdulyregisteredtodobusiness,
and/ortheexerciseofrightsassuchinvestor;
(2)Havinganomineedirectororofficertorepresentits
interestinsuchcorporation;
(3)Appointingarepresentativeordistributordomiciledin
thePhilippineswhichtransactsbusinessinthe
representativesordistributorsownnameandaccount;
(4)Thepublicationofageneraladvertisementthroughany

printorbroadcastmedia;
(5)MaintainingastockofgoodsinthePhilippinessolely
forthepurposeofhavingthesameprocessedbyanother
entityinthePhilippines;
(6)Consignmentbyaforeignentityofequipmentwitha
localcompanytobeusedintheprocessingofproductsfor
export;
(7)CollectinginformationinthePhilippines;and
(8)Performingservicesauxiliarytoanexistingisolated
contractofsalewhicharenotonacontinuingbasis,suchas
installinginthePhilippinesmachineryithasmanufactured
orexportedtothePhilippines,servicingthesame,training
domesticworkerstooperateit,andsimilarincidental
services.
Byandlarge,toconstitutedoingbusiness,theactivityto
beundertakeninthePhilippinesisonethatisforprofit
making.
BythecleartermsoftheVAASA,Agilentsactivitiesin
thePhilippineswereconfinedto(1)maintainingastockof
goodsinthePhilippinessolelyforthepurposeofhaving
thesameprocessedbyIntegratedSilicon;and(2)
consignmentofequipmentwithIntegratedSilicontobe

usedintheprocessingofproductsforexport.Assuch,we
holdthat,basedontheevidencepresentedthusfar,Agilent
cannotbedeemedtobedoingbusinessinthePhilippines.
RespondentscontentionthatAgilentlacksthelegal
capacitytofilesuitisthereforedevoidofmerit.Asa
foreigncorporationnotdoingbusinessinthePhilippines,it
needednolicensebeforeitcansuebeforeourcourts.

THE HOME INSURANCE COMPANY, Petitioner, vs. EASTERN SHIPPING LINES and/or
ANGEL JOSE TRANSPORTATION, INC. Respondent.
G. R. L-34382, July 20, 1983
FACTS:
On or about January 13, 1967, S. Kajikita & Co. on board the SS Eastern Jupiter,
which is owned by the respondent, from Osaka, Japan coils of Black Hot Rolled Copper
Wires Rods. The shipment was covered by Bill of Lading with arrival notice to the Phelps
Dodge Copper Products Corporation, the consignee. It was also insured with the plaintiff
against all risks in the amount of P1,580,105.06.
The coils discharged from the vessel were in bad order, consisting of loose and
partly cut coils which had to be considered scrap. The plaintiff paid the consignee under
insurance the amount of P3,260.44 for the loss/damage suffered by the cargo. Plaintiff, a
foreign insurance company duly authorized to do business in the Philippines, made
demands for payment of the aforesaid amount against the carrier and transportation
company for reimbursement of the aforesaid amount, but each refused to pay the same.
The Eastern Shipping Lines filed its answer and denied the allegations of Paragraph I
which refer to the plaintiffs capacity to sue for lack of knowledge or information sufficient
to form a belief as to the truth thereof. Angel Jose Transportation, on the other hand,
admitted the jurisdictional averments in paragraphs 1, 2 and 3 of the heading parties.
The Court of First Instance dismissed the complaint on the ground that the
appellant had failed to prove its capacity to sue. The petitioner then filed a petition for
review on certiorari.

ISSUE: Whether or not that the trial court erred in dismissing the finding that plaintiffappellant has no capacity to sue.
RULING:
The court held that the objective of the law is to subject the foreign corporation to
the jurisdiction of our court. The Corporation Law must be given reasonable, not an
unduly harsh interpretation which does not hamper the development of trade relations and
which fosters friendly commercial intercourse among countries.
Counsel for appellant contends that at the time of the service of summons, the appellant
had not yet been authorized to do business. But, the lack of capacity at the time of the
execution of the contracts was cured by the subsequent registration is also strengthened
by the procedural aspects of the case.
The court find the general denials inadequate to attack the foreign corporations lack of
capacity to sue in the light of its positive averment that it is authorized to do so. Section 4, Rule 8
requires that "a party desiring to raise an issue as to the legal existence of any party or the
capacity of any party to sue or be sued in a representative capacity shall do so by specific denial,
which shall include such supporting particulars as are particularly within the pleader's knowledge.
At the very least, the private respondents should have stated particulars in their answers upon
which a specific denial of the petitioner's capacity to sue could have been based or which could
have supported its denial for lack of knowledge. And yet, even if the plaintiff's lack of capacity to
sue was not properly raised as an issue by the answers, the petitioner introduced documentary
evidence that it had the authority to engage in the insurance business at the time it filed the
complaints.

CEMCO HOLDINGS, INC. vs. NATIONAL LIFE INSURANCE

COMPANY OF THE PHILIPPINES, INC.
GR No. 171815, August 7, 2007
Chico-Nazario, J.
FACTS:
Union Cement Corporation (UCC), a publicly-listed company, has
two principal stockholders UCHC, a non-listed company, with shares
amounting to 60.51%, and petitioner Cemco with 17.03%. Majority
of UCHCs stocks were owned by BCI with 21.31% and ACC with
29.69%. Cemco, on the other hand, owned 9% of UCHC stocks. In a
disclosure letter, BCI informed the Philippine Stock Exchange (PSE) that
it and its subsidiary ACC had passed resolutions to sell
to Cemco BCIsstocks in UCHC equivalent to 21.31% and ACCs stocks
in UCHC equivalent to 29.69%.

As a consequence of this disclosure, the PSE inquired as to

whether the Tender Offer Rule under Rule 19 of the Implementing Rules
of the Securities Regulation Code is not applicable to the purchase by
petitioner of the majority of shares of UCC. The SEC en banc had
resolved that the Cemco transaction was not covered by the tender
offer rule. Feeling aggrieved by the transaction, respondent National
Life Insurance Company of the Philippines, Inc., a minority stockholder
of UCC, sent a letter toCemco demanding the latter to comply with the
rule on mandatory tender offer. Cemco, however, refused.
Respondent National Life Insurance Company of the Philippines,
Inc. filed a complaint with the SEC asking it to reverse its 27 July
2004 Resolution and to declare the purchase agreement of Cemco void
and praying that the mandatory tender offer rule be applied to its UCC
shares.
The SEC ruled in favor of the respondent by reversing and setting
aside its 27 July 2004 Resolution and directed petitioner Cemco to
make a tender offer for UCC shares to respondent and other holders of
UCC shares similar to the class held by UCHC in accordance with
Section 9(E), Rule 19 of the Securities Regulation Code.
On petition to the Court of Appeals, the CA rendered a decision
affirming the ruling of the SEC. It ruled that the SEC has jurisdiction to
render the questioned decision and, in any event, Cemcowas barred
by estoppel from questioning the SECs jurisdiction. It, likewise, held
that the tender offer requirement under the Securities Regulation Code
and its Implementing Rules applies to Cemcos purchase of UCHC
stocks. Cemcos motion for reconsideration was likewise denied.
ISSUES:
1. Whether or not the SEC has jurisdiction over respondents

complaint and to require Cemco to make a tender offer for

respondents UCC shares.

2. Whether or not the rule on mandatory tender offer applies to the

indirect acquisition of shares in a listed company, in this case,

the indirect acquisition by Cemco of 36% of UCC, a publiclylisted company, through its purchase of the shares in UCHC, a
non-listed company.

HELD:
1. YES. In taking cognizance of respondents complaint against petitioner
and eventually rendering a judgment which ordered the latter to make

a tender offer, the SEC was acting pursuant to Rule 19(13) of the
Amended Implementing Rules and Regulations of the Securities
Regulation Code, to wit:

13. Violation
If there shall be violation of this Rule by pursuing a
purchase of equity shares of a public company at threshold
amounts without the required tender offer, the
Commission, upon complaint, may nullify the said
acquisition and direct the holding of a tender offer. This
shall be without prejudice to the imposition of other
sanctions under the Code.
The foregoing rule emanates from the SECs power and
authority to regulate, investigate or supervise the activities of
persons to ensure compliance with the Securities Regulation
Code, more specifically the provision on mandatory tender offer
under Section 19 thereof. Moreover, petitioner is barred from
questioning the jurisdiction of the SEC. It must be pointed out
that petitioner had participated in all the proceedings before the
SEC and had prayed for affirmative relief.
2. YES. Tender offer is a publicly announced intention by a person
acting alone or in concert with other persons to acquire equity
securities of a public company. [12] A public company is defined
as a corporation which is listed on an exchange, or a corporation
with assets exceeding P50,000,000.00 and with 200 or more
stockholders, at least 200 of them holding not less than 100
shares of such company. [13] Stated differently, a tender offer is
an offer by the acquiring person to stockholders of a public
company for them to tender their shares therein on the terms
specified in the offer. [14] Tender offer is in place to protect
minority shareholders against any scheme that dilutes the share
value of their investments. It gives the minority shareholders
the chance to exit the company under reasonable terms, giving
them the opportunity to sell their shares at the same price as
those of the majority shareholders.

The SEC and the Court of Appeals ruled that the indirect
acquisition by petitioner of 36% of UCC shares through the
acquisition of the non-listed UCHC shares is covered by the
mandatory tender offer rule.
The legislative intent of Section 19 of the Code is to regulate
activities relating to acquisition of control of the listed company
and for the purpose of protecting the minority stockholders of a

listed corporation. Whatever may be the method by which

control of a public company is obtained, either through the direct
purchase of its stocks or through an indirect means, mandatory
tender offer applies. As appropriately held by the Court of
Appeals:
What is decisive is the determination of the power
of control. The legislative intent behind the tender
offer rule makes clear that the type of activity
intended to be regulated is the acquisition of control
of the listed company through the purchase of
shares. Control may [be] effected through a direct
and indirect acquisition of stock, and when this takes
place, irrespective of the means, a tender offer must
occur. The bottomline of the law is to give the
shareholder of the listed company the opportunity to
decide whether or not to sell in connection with a
transfer of control.xxx

Securities and Exchange Commission v. Interport Resources Corporation

NATURE: Petition for Review on Certiorari under Rule 45 of the Rules of Court, assailing the
Decision,1 dated 20 August 1998, rendered by the Court of Appeals in C.A.-G.R. SP No. 37036,
enjoining petitioner Securities and Exchange Commission (SEC) from taking cognizance of or
initiating any action against the respondent corporation Interport Resources Corporation (IRC)
and members of its board of directors, respondents Manuel S. Recto, Rene S. Villarica, Pelagio
Ricalde, Antonio Reina, Francisco Anonuevo, Joseph Sy and Santiago Tanchan, Jr., with respect
to Sections 8, 30 and 36 of the Revised Securities Act.
Doctrine: The mere absence of implementing rules cannot effectively invalidate provisions of law
where a reasonable construction that will support the law may be given. It is well established that
administrative authorities have the power to promulgate rules and regulations to confirm to the
terms and standards prescribed by the statute as well as purport to carry into effect its general
policies.
The insider's misuse of nonpublic and undisclosed information is the gravamen of illegal conduct.
The intent of the law is the protection of investors against fraud, committed when an insider,
using secret information, takes advantage of an uninformed investor. Insiders are obligated to
disclose material information to the other party or abstain from trading the shares of his
corporation. This duty to disclose or abstain is based n 2 factors: 1) the existence of a
relationship giving access, directly or indirectly to information intended to be available only for a
corporate purpose and not for the personal benefit of anyone and 2) the inherent unfairness

involved when a party takes advantage of such information knowing it is unavailable to those with
whom he is dealing.
Facts:
- The Board of Directors of IRC approved a Memorandum of Agreement with GHB (Ganda
Holdings Berhad). Under said memorandum of agreement, IRC acquired 100% of the entire
capital stock of GEHI (Ganda Energy Holdings Inc.) which would own and operate a 102
megawatt gas turbine power generating barge. In exchange, IRC will issue to GHB 55% of the
expanded capital stock of IRC. On the side, IRC would acquire 67% of the entire capital of
PRCI (Philippine Racing Club).
- It is alleged herein that a press release announcing the approval of the agreement was sent to
the Philippine Stock Exchange through facsimile and the SEC, but the facsimile machine of the
SEC could not receive it. However, the SEC received reports that the IRC failed to make
timely public disclosures of its negotiations with GHB and that some of its directors,
heavily traded IRC shares utilizing this material insider information. For this reason, the
SEC required the directors to appear before the SEC to explain the alleged failure to disclose
material information as required by the Rules on Disclosure of Material Facts. Unsatisfied with the
explanation, the SEC issued an order finding that the IRC violated the Rules in connection
with the then Old Securities Act when it failed to make timely disclosures of its
negotiations with GHB. In addition, the SEC found that the directors of IRC entered into
transactions involving IRC shares in violation of the Revised Securities Act.
- Respondents, however, questioned the authority of the SEC to investigate on said matter since
according to PD 902-A, jurisdiction upon the matter was conferred upon the PED (Prosecution
and Enforcement Department) of the SEC however, this issue is already moot since pending
the disposition of the case, the Securities Regulation Code was passed thereby effectively
repealing PD 902-A and abolishing the PED. They also contended that their right to due process
was violated when the SEC required them to appear before the SEC to show cause why
sanctions should not be imposed upon them since such requirement shifted the burden of proof
to respondents.
The case reached the CA and said court ruled in favor of the respondents and effectively enjoined
the SEC from filing any criminal, civil or administrative cases against respondents. In its
resolution, the CA stated that since there are no rules and regulations implementing the
rules regarding DISCLOSURE, INSIDER TRADING OR ANY OF THE PROVISIONS OF THE
REVISED SECURITIES ACT, the SEC has no statutory authority to file any suit against
respondents. The CA, therefore, prohibited the SEC from taking cognizance or initiating any
action against the respondents for the alleged violations of the Revised Securities Act.
Issue:
1.) Whether or not the SEC has authority to file suit against respondents for violations of the RSA.
2.) Whether or not their right to due process was violated when the SEC denied the parties of
their right to cross examination.
Ratio:
- The Revised Securities Act does not require the enactment of implementing rules to
make it binding and effective. The provisions of the RSA are sufficiently clear and
complete by themselves. The requirements are specifically set out and the acts which are
enjoined are determinable. To tule that absence of implementing rules can render ineffective an
act of Congress would empower administrative bodies to defeat the legislative will by delaying the
implementing rules. Where the statute contains sufficient standards and an unmistakable intent
(as in this case, the RSA) there should be no impediment as to its implementation.
- The court does not discern any vagueness or ambiguity in the RSA such that the acts
proscribed and/or required would not be understood by a person of ordinary intelligence. The

provision explains in simple terms that the insider's misuse of nonpublic and undisclosed
information is the gravamen of illegal conduct and that the intent of the law is the
protection of investors against fraud committed when an insider, using secret information,
takes advantage of an uninformed investor. Insiders are obligatd to disclose material
information to the other party or abstain from trading the shares of his corporation. This duty to
disclose or abstain is based n 2 factors: 1) the existence of a relationship giving access, directly
or indirectly to information intended to be available only for a corporate purpose and not for the
personal benefit of anyone and 2) the inherent unfairness involved when a party takes advantage
of such information knowing it is unavailable to those with whom he is dealing.
- This obligation to disclose is imposed upon "insiders" which are particularly officers, directors or
controlling stockholders but that definition has already been expanded and not includes those
persons whose relationship of former relationship to the issuer or the security that is not generally
available and the one who learns such a fact from an insider knowing that the person from whom
he learns such fact is an insider. In some case, however, there may be valid corporate reasons
for the nondisclosure of material information but it should not be used for non-corporate
purposes.
- Respondent contends that the terms "material fact", "reasonable person", "nature and
reliability" and "generally available" are vaguely used in the RSA because under the provision
of the said law what is required to be disclosed is a fact of special significance, meaning:
1. a material fact which would be likely to affect the market price of a security or;
2. one which a reasonable person would consider especially important in determining
his course of action with regard to the shares of stock.
- But the court dismissed said contention and stated that material fact is already defined and
explained as one which induces or tends to induce or otherwise affect the sale or purchase
of securities. On the other hand, "reasonable person" has already been used many times in
jurisprudence and in law since it is a standard on which most of legal doctrines stand (even the
doctrine on negligence uses such standard) and it has been held to mean "a man who relies on
the calculus of common sense of which all reasonable men have in abundance"
- As to "nature and reliability" the proper adjudicative body would be able to determine if facts
of a certain nature and reliability can influence a reasonable person's decision to retain, buy or
sell securities and thereafter explain and justify its factual findings in its decision since the same
must be viewed in connection with the particular circumstances of a case.
As to "generally available", the court held also that such is a matter which may be adjudged
given the particular circumstances of the case. The standards of which cannot remain at a
standstill.
- There is no violation of due process in this case since the proceedings before the PED
are summary in nature. The hearing officer may require the parties to submit their respective
verified position papers together will all supporting documents and affidavits of witnesses. A
formal hearing is not mandatory and it is within the discretion of the hearing officer to
determine whether or not there is a need for a formal hearing.
- Moreover, the law creating the PED empowers it to investigate violations of the rules and
regulations and to file and prosecute such cases. It does not have an adjudicatory powers.
Thus, the PED need not comply with the provisions of the Administrative Code on adjudication.
- The SEC retained jurisdiction to investigate violations of the RSA, reenacted in the
Securities Regulations Code despite the abolition of the PED. In this case, the SEC already
commenced investigating the respondents for violations of the RSA but during the pendency of
the case the Securities and Regulations Code was passed thereby repealing the RSA. However,
the repeal cannot deprive the SEC of its jurisdiction to continue investigating the case.

- Investigations by the SEC is a requisite before a criminal case may be referred to the DOJ since
the SEC is an administrative agency with the special competence to do so. According to the
doctrine of primary jurisdiction, the courts will not determine a controversy involving a question
within the jurisdiction of an administrative tribunal where the question demands the exercise of
sound administrative discretion requiring the specialized knowledge and expertise of said
administrative tribunal to determine technical and intricate matters of fact.