The relationship test and the nature of the controversy test in determining intra-corporate disputes

In the landmark case of STRADEC vs. SIDC, et. al. (GR No. 187872), the Supreme Court has modified and modernized the test in determining intra-corporate disputes by applying both the relationship test and the nature of the controversy test.

The ruling states that, “an intra-corporate dispute is understood as a suit arising from intra-corporate relations or between or among stockholders or between any or all of them and the corporation. Applying what has come to be known as the relationship test, it has been held that the types of actions embraced by the foregoing definition include the following suits: (a) between the corporation, partnership or association and the public; (b) between the corporation, partnership or association and its stockholders, partners, members, or officers; (c) between the corporation, partnership or association and the State insofar as its franchise, permit or license to operate is concerned; and, (d) among the stockholders, partners or associates themselves.”

On the other hand, it declares that, “Under the nature of the controversy test, the dispute must not only be rooted in the existence of an intra-corporate relationship, but must also refer to the enforcement of the parties' correlative rights and obligations under the Corporation Code as well as the internal and intra-corporate regulatory rules of the corporation.”

According to the Supreme Court, the combined application of the relationship test and the nature of the controversy test has, consequently, become the norm in determining whether a case is an intra-corporate controversy or is purely civil in character.

By applying the relationship test, the Supreme Court finds in STRADEC case “that the first and second causes of action qualify as intra-corporate disputes since STRADEC and respondent Wong are incorporators and/or stockholders of SIDC.” And “considering that they fundamentally relate to STRADEC’s status as a stockholder and the alleged fraudulent divestment of its stockholding in SIDC, the same causes of action also qualify as intra-corporate disputes under the nature of the controversy test.”

Hence, combining both tests then, the Supreme Court declares that “STRADEC’s causes of action for the nullification of the loan and pledge over its SIDC shareholdings contracted by respondents Yujuico and Sumbilla as well as the avoidance of the notarial sale conducted by respondent Raymond M. Caraos both qualify as intra-corporate disputes.”

The role of the Solicitor General and its relationship with client-agencies

Lately, there have been news about the contradictory positions of the Philippine Securities and Exchange Commission (SEC) and the Office of the Solicitor General concerning the definition of capital for purposes of determining the shares of stocks held by foreigners, leading to testy exchanges between the officials of the two government agencies. Earlier, the Supreme Court declared that the term "capital" under Section 11, Article XII of the 1987 Constitution refers only to shares of stock entitled to vote in the election of directors, i.e., common shares, and not to the total outstanding, capital stock, i.e., both common and non-voting preferred shares, in the case of the ownership of PLDT. (See http://sc.judiciary.gov.ph/jurisprudence/2011/june2011/176579.html)

According to SEC, the SolGen did not adopt its stand that capital must refer to the total outstanding, capital stock. The SolGen agreed with the Supreme Court. Based on the news, SEC would want to remove the SolGen as its counsel and handle the case on its own, or with the help of the Office of the Government Corporate Counsel (OGCC). The question then is, can a government agency like the SEC fire SolGen as its counsel owing to alleged differences with its stand?

The case of Comelec vs. Quijano-Padilla (G. R. No. 151992) comes to mind. There the Supreme Court adroitly explained the relationship between the SolGen and its client agency, thus:

“PHOTOKINA alleges that the OSG has no standing to file the present petition since its legal position is contrary to that espoused by the majority of the COMELEC Commissioners. This is a leap to a non-sequitur conclusion. The OSG is an independent office. Its hands are not shackled to the cause of its client agency. In the discharge of its task, the primordial concern of the OSG is to see to it that the best interest of the government is upheld. This is regardless of the fact that what it perceived as the “best interest of the government” runs counter to its client agency’s position. Endowed with a broad perspective that spans the legal interest of virtually the entire government officialdom, the OSG may transcend the parochial concerns of a particular client agency and instead, promote and protect the public weal. Our ruling in Orbos vs. Civil Service Commission, is relevant, thus:

"x x x It is incumbent upon him (Solicitor General) to present to the court what he considers would legally uphold the best interest of the government although it may run counter to a client’s position. x x x.

"In the present case, it appears that after the Solicitor General studied the issues he found merit in the cause of the petitioner based on the applicable law and jurisprudence. Thus, it is his duty to represent the petitioner as he did by filing this petition. He cannot be disqualified from appearing for the petitioner even if in so doing his representation runs against the interests of the CSC.

"This is not the first time that the Office of the Solicitor General has taken a position adverse to his clients like the CSC, the National Labor Relations Commission, among others, and even the People of the Philippines. x x x”

Hence, while petitioners’ stand is contrary to that of the majority of the Commissioners, still, the OSG may represent the COMELEC as long as in its assessment, such would be for the best interest of the government. For, indeed, in the final analysis, the client of the OSG is not the agency but no less than the Republic of the Philippines in whom the plenum of sovereignty resides.”

Basic queries of foreigners desiring to do business in the Philippines

Our company is an LLC (limited liability company). It provides an umbrella under which individuals may operate and receive individual immunity similar to those enjoyed by shareholders in a corporation.  It has the advantage that income flows through to the members of the LLC and is taxed at their individual rates.  There is no “corporate” tax.  My questions are as follows:

a.  Is there a similar entity in the Philippines? There is none.

b.  Would the Philippines give full faith and credit to this American entity under the rules of comity? Recognition as such legal entity in America, yes. But to actually conduct business in the Philippines pursuant to its purpose/s, an entity must be duly registered as a Philippine corporation.

c.   Would the American LLC be recognized in the Philippines as a legitimate owner of the entity which we form there? Yes.

d.   Are shareholders or the individual owners and officers shielded from individual legal liability for the acts of the corporation?  If not, what is their exposure? As a general rule, shareholders and officers of the corporation are not liable for such acts. However, directors and other officers who willfully and knowingly vote for or assent to patently unlawful acts of the corporation, or who are guilty of gross negligence or bad faith in directing the affairs of the corporation, or acquire any personal or pecuniary interest in conflict with their duty as such directors, trustees or officers, shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons.

With respect to debts or monetary obligations of the corporation, shareholders are liable only to the extent of their subscriptions.

e.   In some civil law countries, officers and owners of corporations can face criminal penalties for what we consider civil matters in this country.  What is the law in the Philippines and what risks must we consider? Please elaborate on the acts or omissions considered civil matters in America. At any rate, the Philippine Corporation Code (“Code”) provides that, violations of any of the provisions of the Code or its amendments shall be punished by a fine of not less than one thousand (P1,000.00) pesos but not more than ten thousand (P10,000.00) pesos, or by imprisonment for not less than thirty (30) days but not more than five (5) years, or both, in the discretion of the court.

f.   Likewise, can the officers and shareholders of a company be held liable for the acts of the corporation in the Philippines? In the absence of malice, bad faith, or specific provision of law, a director or an officer of a corporation cannot be made personally liable for corporate liabilities.

g.   How difficult or easy is for someone to pierce the corporate veil in the Philippines? This one really depends on the lawyer and the surrounding circumstances.The doctrine of piercing the corporate veil applies only in three (3) basic instances, namely: a) when the separate and distinct corporate personality defeats public convenience, as when the corporate fiction is used as a vehicle for the evasion of an existing obligation; b) in fraud cases, or when the corporate entity is used to justify a wrong, protect a fraud, or defend a crime; or c) is used in alter ego cases, i.e., where a corporation is essentially a farce, since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.

h.   Are employees permitted to sue their employers for personal injury? In cases of work-connected disability, sickness or death, the Philippines has a law entitled  Employees’ Compensation and State Insurance Fund (“Fund”). The liability of the Fund is exclusive and in place of all other liabilities of the employer to the employee or his dependents or anyone otherwise entitled to receive damages on behalf of the employee or his dependents.However, under our law on quasi-delicts (in the New Civil Code), employees may still sue the corporation and its officers for civil damages if malice or bad faith on the part of the latter contributed to such injuries.     For injuries caused by fellow employees? Again, under our law on quasi-delicts, the owners and managers of an establishment or enterprise are responsible for damages caused by their employees in the service of the branches in which the latter are employed or on the occasion of their functions.

Such responsibility ceases when the owners and managers prove that they observed all the diligence of a good father of a family to prevent damage.

i.    Are there any special labor laws we should be aware of, i.e. labor relations, pension and health benefits, are employees, employees at will, etc.?

Yes. The Labor Code, the Social Security Law, the Employees’ Compensation and State Insurance Fund, and the National Health Insurance Act are the most important laws.