Ellice Agro-Industrial Corp., et al. vs. Alicia E. Gala, et al.

[SEC-SICD * CASE NO. 3747. November 3, 1998.] ELLICE AGRO-INDUSTRIAL CORP., MARGO MANAGEMENT AND DEVELOPMENT CORP., PAUL E. GALA, RITA G. BENSON, ADNAN V. ALONTO AND ELIAS N. CRESENCIO , petitioners , vs . ALICIA E. GALA, OFELIA E. GALA AND GUIA G. DOMINGO , respondents . [SEC-SICD * CASE NO. 4027. November 3, 1998.] ALICIA E. GALA, OFELIA E. GALA, GUIA G. DOMINGO AND RITA G. BENSON , petitioners , vs. PAUL E. GALA, MOISES S. MANIEGO, RODOLFO B. REGINO, RENATO S. GONZALES, VICENTE C. NOLAN NESTOR N. BATICULON, ADNAN V. ALONTO, ELIAS N. CRESENCIO, AND VITALIANO N. AGUIRRE respondents . D E C I S I O N These consolidated cases involved; two petitions which are in the. nature of a suit (SEC Case No. 3747, and a counter suit (SEC Case No. 4027). In the first (No. 3747) the individual petitioners Raul E. Gala, Rita G. Benson, Adnan V. Alonto and Elias N. Cresencio claim to be the legitimate directors and officers and controlling stockholders of corporate petitioners Ellice Agro-Industrial Corporation (Ellice) and Margo Management and Development Corporation (Margo). They are demanding that the respondents account for corporate funds and properties unlawfully disposed of or misappropriated or converted for their personal benefit to the damage and prejudice of the individual and corporate petitioners. dctai In the second (Case No. 4027), the petitioners (including Rita G. Benson who seceded from Case No. 3747 to become a petitioner in the second) question the legality of the election of the respondents as directors/officers of Ellice and Margo and the validity of the resolutions and actions of the respondents in such capacities. Inasmuch as the causes of action of the petitioners in Case No. 3747 are essentially their defenses in Case No. 4027 and the defenses of the respondents in Case No. 3747 are basically their causes of action in Case No. 4027 the two cases were consolidated and jointly heard. The individual petitioners in Case No. 3747 namely Raul E. Gala, Adnan V. Alonto and Elias N. Cresencio (Rita G. Benson having withdrawn as such petitioner to become a petitioner in Case No. 4027), are impleaded as respondents in Case No. 4027 together with additional respondents, namely Moises S. Maniego, Rodolfo B. Reyno, Renato S. Gonzales, Vicente C. Nolan, Nestor M. Baticulon and Vitaliano N. Aguirre II who subsequently became stockholders and directors or officers of Ellice and Margo. The petitioners in Case No. 4027 are the respondents in Case No. 3747 with the addition of Rita G. Benson. For convenience, the petitioners in Case No. 3747 and the respondents in Case No. 4027 are denominated as the petitioners/respondents, and the respondents in Case No. 3747 and petitioners in Case No. 4027 are denominated as the respondents/petitioners in this Decision. dctai Statement of Facts 1. Prior to Alicia Gala's marriage to Manuel Gala she already owned parcels of agricultural land in Sariaya, Quezon. During their marriage, they were able to acquire, through conjugal funds, several other properties in Tiaong, Quezon and in San Pablo, Laguna (TSN 12 December 1990 p. 32). 2. From the time the spouses Manuel and Alicia Gala acquired the properties to the present the same were continuously administered and managed them through their appointed overseer and administrator. At present, the appointed overseer is Virgilio Galeon. 3. Sometime in 1976, the spouses Manuel and Alicia Gala decided to convey the aforesaid properties in trust to a corporation, owned and controlled by them, wherein their children Guia, Ofelia and Raul would also be stockholders and officers (Exhibit "4"). It was the intention of the spouses Manuel and Alicia Gala to simulate the said transfers only for Estate Planning purposes and to prevent the properties from being brought under the Land Reform Law (Question and Answer/Direct Testimony of Alicia E. Gala, September 7, 1995 p. 2). 4. On March 28, 1979, Ellice Agro Industrial Corp. (hereinafter referred to as Ellice) was incorporated with the following as incorporators: ibLex a) Manuel Gala 11,700 shares b) Alicia Gala 22,000 shares c) Guia Domingo 16 shares d) Ofelia Gala 40 shares e) Paul Gala 40 shares f) Rita Benson 2 shares g) Virgilio Galeon 1 share h) Julian Gader 1 share Total 35,000 shares The authorized capital stock is Five Million Pesos (P5,000,000.00), divided into Fifty Thousand (50,000) shares. The total Subscribed Capital Stock is Thirty-Five Thousand (35,000) shares or Thirty-Five Million Pesos (P35,000,000.00). 5. Beginning May 1979 and until September 1983, Spouses Manuel and Alicia Gala conveyed the aforesaid properties in trust to Ellice, as their contribution to the capital stock of the corporation. They also paid for the nominal capital stock subscribed in the name of their children who did not pay a single centavo for their stock subscription. Thereafter, the Spouses Manuel and Alicia Gala gratuitously assigned some of their shares to their children Guia, Ofelia and Raul by way of donation inter vivos (Question and Answer Direct Testimony of Alicia Gala, September 7, 1995 pp. 2-4). 6. The agricultural lands were subsequently registered in the name of Ellice and are now covered by Transfer Certificate of Title Nos. 157019 to 186495, not inclusive, of the Register of Deeds of Quezon Province and Transfer Certificate of Title Nos. 17773 and 17776 of the Register of Deeds of San Pablo City. 7. Although these properties were registered in the name of Ellice, the benefits derived therefrom inured to the Gala family alone and the possession, management and administration thereof, remained in the Gala Family. Ellice and Margo had never engaged in any business nor had undertaken any act of development and management geared for industrialization (Question and Answer/Direct Testimony of Alicia E. Gala, September 7, 1995, pp. 4-5). 8. To ensure that the properties would not be dissipated by their heirs in the event of their untimely death, Spouses Manuel and Alicia Gala decided to convey some of the properties by way of lease to another corporation which would also manage the other remaining properties. (Question and Answer/Direct Testimony of Alicia E. Gala, September 7, 1995, p. 2 and Exhibit "6"). 9. On September 16, 1982, Margo Management & Development Corporation (hereinafter referred to as Margo) was incorporated with the following incorporators: a) Paul Gala 6,640 b) Ofelia Gala 6,640 c) Guia Domingo 6,640 d) Virgilio Galeon 40 e) Julian Jader 40 The authorized capital stock of Margo is Eight Hundred Thousand Pesos (P800,000.00), Two Hundred Thousand Pesos (P200,000.00) of which have been subscribed. Although it would appear that the above-named stockholders have subscribed to the capital stock of the Corporation, their entire subscription were all paid for by the Spouses Manuel and Alicia Gala. 10. Ellice, through its President Alicia Gala, entered into a Management Contract with Margo through the latter's Vice-President Virgilio Galeon. The contract was for the management of 49 shares parcels of land owned by Ellice (Exhibit "6"). Ellice also entered into a Contract of Lease with Margo over several parcels of land similarly owned by the Spouses Manuel and Alicia Gala but supposedly transferred to Ellice (Exhibits "7" & "8"). The Management Contract and the Lease Contract were, however, not implemented. On October 28, 1989, a Deed Termination of Contract was executed by Ellice and Margo (Exhibit "9"). 11. After the corporations were created, the real properties transferred and a Management Contract executed, Spouses Manuel and Alicia Gala continued to hold control and management of the family assets and treated the same as their own. Corporate acts were based on the sole decision of the spouses in complete disregard of the rules and regulations as provided by the by-laws of the corporations and the Corporation Code (Question and Answer/Direct Testimony of Alicia E. Gala, September 7, 1995 p. 5). 12. While the incorporators assigned themselves as officers, there was no meeting held ever, no books were kept (TSN, February 2, 1995, pp. 41-44) and the corporation had for its official address the Spouses Manuel and Alicia Gala's residence in Urdaneta Village, Makati. The said corporations were run and controlled by the Spouses Manuel and Alicia Gala (Question and Answers/Direct Testimony of Alicia E. Gala, September 7, 1995 p. 5). 13. Raul Gala being the only son of the Spouses Manuel and Alicia Gala was appointed as President, and General Manager of both corporations. He kept all corporate records and files, and was in possession of the stock and transfer book of both corporations. He received no compensation from either corporations and until recently, was dependent on his parents for his income and allowance (TSN, December 12, 1990, p 67). Raul was and continuous to be unemployed. 14. During the lifetime of Manuel Gala, his son Raul Gala was able to obtain documents which purportedly transferred to him and to Margo, Manuel Gala's share in Ellice and Galen. 15. Sometime in July, 1989, Raul Gala fraudulently obtained possession of the transfer certificate of titles covering the properties registered in Ellice's name as well as all papers, records and books of the three (3) above-mentioned corporations (Exhibits "1" & "2"). Despite repeated demands by Alicia Gala, Raul Gala refused and arrogantly refuses to return and deliver the titles to Alicia Gala. Thereafter, he manipulated the books of Ellice to make it appear that he, his nominees and Margo are the majority owners of Ellice in fraud of the real owners of the corporations. 16. On June 23, 1990, a special stockholders meeting of Margo was held under the manipulation of Raul Gala. The following were purportedly elected as Directors: 1. Raul Gala 2. Rodolfo Reyno 3. Renato Gonzales 4. Rita G. Benson In the organizational meeting of the board of directors the following were elected officers: 1. Raul Gala Pres. & General Manager/Chairman of the Board 2. Vicente Nolan Vice Pres. for Operations 3. Vicente Nolan Vice-Pres. for Administration and Finance 4. Rodolfo Reyno Treasurer 5. Renato Gonzales Corporate Secretary The new set of directors also adopted several resolutions, among which is the change of the corporate name of Margo to MRG Management & Development Corp. LibLex 18. On August 24, 1990, Raul Gala called a Special Stockholders Meeting for Ellice. A question on the quorum was brought forward but was eventually settled when he claimed that Fifty-Four percent (54%) of the outstanding Capital Stock were represented in the meeting. The quorum was allegedly based on Paul Gala, representing his shares and that of Margo consisting of twenty-seven thousand and seventeen (27,017) shares; Rita Benson, Two (2) shares, Adnan Alonto, One (1) share and Elias Cresencio, One (1) share :(TSN, 12 December 1990, pp. 70-71 & 74-77). In the said meeting the following were the supposed elected directors: 1. Raul Gala 2. Rita Benson 3. Adnan Alonto 4. Elias Cresencio The new set of directors adopted a resolution for the opening of savings and current accounts in the name of Ellice with the Bank of the Philippine Islands at its head office or any of its branches. Another resolution was adopted changing the principal office of the corporation to suite 401, N. Madrigal Bldg., Ayala Avenue, the same office as the Robles, Ricafrente, Aguirre & Funk Law Offices, Legal counsel of Raul Gala. cdll 18. During the said Special Stockholders' Meeting for Ellice and in the organizational meeting of the Board of Directors the following were the supposed elected officers: 1. Paul Gala Pres. Chairman of the Board & General Manager 2. Rita Benson Vice-Pres. & Treasurer 3. Advan Alonto Vice-Chairman 4. Elias Cresencio Corporate Secretary 19. After the purported reorganization of Ellice and Margo, Raul Gala, filed a case with the Securities & Exchange Commission against Alicia Gala, Ofelia Gala and Guia Domingo for accounting of the properties and funds of Ellice and Margo which, he claims Alicia appropriated for herself. Statement of the Case 1. On March 27, 1990, considering that earnest efforts to exhaust intra-corporate remedies proved to be unavailing, Raul Gala, in his own capacity and on behalf of Ellice Agro-industrial Corporation (ELLICE) and Margo Management and Development Corporation (MARGO) filed a petition against Alicia Gala, Ofelia Gala and Guia Domingo with the Securities and Exchange Commission by reason of the latter's alleged failure and refusal to take the appropriate remedial measures to reform and rectify their wrongful and fraudulent conduct and to redress petitioners' grievances. The petition was docketed as SEC Case No. 3747. The petition prayed that: (1) Respondents be directed to furnish and allow petitioner to inspect and examine all corporate papers and documents; and that a management Committee or a receiver be appointed for the purpose of preserving, administering and disposing of the assets of Ellice and Margo in accordance with law. prcd (2) Respondents be ordered to account for and return to Ellice and Margo all the corporate funds and property unlawfully and fraudulently diverted, disposed of or misappropriated by them and for any profit they have received from the use of such funds and property and to pay Ellice and Margo, jointly and severally, all corporate losses as a result of the breach of their fiduciary duties in such amount as will be proven in the course of the trial. (3) The dissolution and liquidation of Ellice and Margo. (4) Respondents to pay petitioner, jointly severally, actual, moral and exemplary damages plus attorney's fees and expenses of litigation in such amounts as shall have been duly proved at the trial or as this Honorable Commission may find just and equitable in the premises; and (5) Respondents to pay the costs of suit. 2. On April 10, 1990, Alicia Gala filed a Motion To Dismiss SEC Case No. 3747 on the following grounds: 1) Insofar as Margo Management and Development Corporation is concerned, this Honorable Commission has no jurisdiction over the subject and nature of the action; 2) The petition states no cause of action; and 3) The suit is between members of the same family and no earnest efforts toward a compromise have been made. A Motion To Suspend Proceedings was likewise filed pending determination of the motion to dismiss. Ofelia Gala and Guia Domingo on their part filed a Motion for Bill of Particulars. 3. On April 17, 1990 petitioners, filed an opposition to the Motion To Dismiss and on April 23, 1990, Alicia Gala filed a Reply to opposition to the Motion To Dismiss. 4. On April 25, 1990, petitioners filed an opposition to Motion For Bill of Particulars to which Ofelia Gala and Guia Domingo filed a Reply to opposition on May 2, 1998. prcd 5. On August 29, 1990, Ellice Agro-Industrial Corporation, Margo Management and Development Corporation, Raul Gala, Rita Benson, Adnan Alonto and Elias Cresencio as petitioners filed an Amended Petition For SEC Case No. 3747. The Amended Petition prayed that: 1) Respondents be directed to furnish and allow petitioners to inspect and examine all corporate papers and documents. 2) Respondents be ordered to account for and return to Ellice and Margo all the corporate funds and property unlawfully and fraudulently diverted, disposed of or misappropriated by them and for any profit they have received from the use of such funds and property and pay Ellice and Margo, jointly and severally, all corporate losses resulting from the breach of their fiduciary duties, in such amount as will be proven in the course of the trial LLjur 3) Respondents be ordered to jointly and severally pay petitioner Raul Gala actual, moral, and exemplary damages plus attorney's fees and expenses of litigation in such amounts as shall have been duly proved at the trial or as this Honorable Commission may find just and equitable in the premises; and (4) Respondents pay the costs. 6. On December 4, 1990 respondents in SEC Case No. 3747 filed their Answer alleging that: "In 1973 to 1983, Alicia Gala with her husband Manuel Gala conveyed properties in trust to Ellice and Margo, contributed to the nominal shares subscribed by Paul Gala and their other children who were constituted as stockholders of Ellice and Margo, which they gratuitously assigned to the latter by way of donation inter vivos. Despite its legal title, Ellice for only a fictitious existence and despite the management and lease contracts executed with Margo, the same were not given force and effect because the management and control of Ellice and Margo remained with the spouses Alicia and Manuel Gala. In July, 1989, Paul Gala fraudulently took possession of the titles to the properties of Ellice, he manipulated Margo to make him its majority owner and manipulated Ellice to make Margo and himself the majority owner of Ellice, making the election of the board of directors and officers of Ellice and Margo, the corresponding resolutions passed by the newly elected board of directors illegal and unlawful" Respondents' counterclaim prayed for the declaration of Paul Gala as trustee of an implied trust, the revocation of the same and the annulment and cancellation of the special stockholders' meeting and all actions taken during the said meeting. It also prayed for the reconveyance of all shares and properties assigned to him. As affirmative defense, respondents claimed that: 1) This Honorable Commission has no jurisdiction over respondent, whom petitioners alleged are not stockholders of Margo, hence, insofar as the corporation is concerned, there is no intra-corporate controversy between the parties; 2) This Honorable commission has no jurisdiction over petitioners' second cause of action for recovery of damages. The regular courts, not this administrative body has exclusive jurisdiction over such a claim; 3) The Amended Petition states no cause of action against respondents; and 4) The suit is between members of the family and no earnest efforts towards a compromise have been made". LexLib 7. Rita Benson who was included by Paul Gala as one of the petitioners in SEC Case no. 3747, filed a separate answer, reiterating the allegations made specifically denied that she is one of the petitioners because she was misled and lured to be one of the petitioners and she now joins the other respondents. 8. On June 25, 1991, Alicia Gala, Ofelia E. Gala, Guia G. Domingo and Rita G. Benson filed a petition with prayer for the issuance of Preliminary Restraining Order against Raul E. Gala, Moises S. Maniego, Rodolfo B. Reyno, Renato S. Gonzales, Vicente C. Nolan, Nestor M. Baticulon, Adnan V. Alonto, Elias N. Cresencio and Vitaliano N. Aguirre II, with this Honorable Commission docketed as SEC Case No. 04027, praying that: 1. An Order be immediately issued restraining herein respondents from performing corporate acts of both Ellice and Margo. 2. The restraining order be made permanent. 3. An order be issued nullifying the election of the new set of Board of Directors and officers of Ellice and Margo from June 2, 1990 to the present, and that of Ellice from August 24, 1990 to the present. (1991) 4. An order be issued for respondents to pay herein petitioners, jointly and severally the amounts mentioned in paragraphs 20 to 22 of the petition. 5. An order be issued for respondents to return all the titles of real properties in the names of Ellice and Margo which were taken and held by respondent Raul Gala. 6. An order for respondents to return to herein petitioners all corporate papers records of both Ellice and Margo which are in their possession and control. 9. On July 11, 1991, respondents in SEC Case No. 4027 filed their answer with counterclaim. As Affirmative Defense they claimed that the Securities and Exchange Commission has no jurisdiction to entertain this petition insofar as the organization and operation of Margo is concerned because petitioners have no cause of action against respondents because the former are not stockholders, directors or officers of said corporation. Further, SEC Case No. 4027 should be dismissed in view of the pendency of SEC Case No. 3747 which involves the same parties and causes of action. 10 On February 4, 1992, this commission through Hearing Officer Alberto P. Atas, issued an order in SEC Case No. 4027 providing that: LLphil "Insofar as the issue of lack of jurisdiction is concerned, that while admittedly, from the documents presented, there really exists no intra-corporate controversy between petitioners and Margo Management and Development Corporation, this fact alone does not automatically take the petition out of the Commission's jurisdiction. We should not overlook the fact and this is a matter of record, that both petitioners and the respondents are all stockholders of Ellice Agro Industrial Corporation, a factor which provides sufficient basis for the Commission to assume jurisdiction over the instant case. Respondents-movants' claim that the main thrust of the petition that the properties in question are not corporate properties but rather assets of the Gala Family State cannot be given much weight since it is clear from the reading of the petition that what is being sought principally by the petitioners in the instant case is the nullification of certain corporate actions taken by the respondents. Clearly therefore, there are matters or issues falling within the ambit of the Commission's jurisdiction. LLpr Anent the respondents' affirmative defense of pendency of another action between the same parties for the same cause, suffice it to say that for it to be a ground for the dismissal of an action, it is necessary that the identity of the parties and the identity of the rights asserted and relief prayed for be such that any judgment which may be rendered on the other would, regardless of which party is successful, amount to res judicata on the other. In the instant case, the remedy sought by the petition is the nullification of certain corporate acts of respondents. In contrast, petitioners in the other case who are respondents in the instant are seeking the accounting and the return to Ellice and Margo of corporate funds and properties unlawfully and fraudulently diverted, disposed of or misappropriated by the respondents who are petitioners in the instant case. Considering that these two cases involve different remedies, it is not safe to conclude that there is identity of relief in both actions to warrant the dismissal of the case. WHEREFORE, respondents' affirmative defenses which partakes of a motion to dismiss should be as it is hereby DENIED. LexLib SO ORDERED." 11. On February 11, 1991, Honorable Hearing Officer Juanito B. Almosa, Jr. in SEC Case No. 3747, issued an Order declaring the affirmative defenses of respondents to be without merit. 12. On March 9, 1992, petitioner Rita Benson in SEC Case No. 4027, filed a Motion to Suspend Instant Hearing on the ground that the issue in SEC Case No. 3747, is a prejudicial question to which the outcome of the instant case depends. 13. On March 18, 1992, respondents in SEC Case No. 4027 filed a Manifestation joining Rita Benson in her Motion To Suspend Proceedings in the said case. 14. On April 10, 1992, Hearing Officer Alberto P. Atas issued an order suspending the proceedings in SEC Case No. 3747 before Hearing Officer Juanito B. Almosa. Jr. dctai 15. Meanwhile on June 19, 1992, Hearing Officer Alberto P Atas in its Order, held in abeyance the motion to set for hearing the motion for issuance of preliminary restraining Order in SEC Case No. 4027 filed by petitioners therein in view of the fact that the aforementioned motion was considered to be in the nature of a motion for reconsideration of the Order dated April 10, 1992. 16. On August 27, 1992, Hearing Officer Juanito B. Almosa, Jr. in SEC Case No. 3747 issued an Order denying the Motion for the Issuance of the Writ of Preliminary Injunction stating that: "With the legitimacy of the petitioners' management in Ellice being questioned it would appear that petitioner have no clear legal rights to enjoin the respondents from the acts sought to be enjoined in this injunctive incident." 17. On September 4, 1992, Guia G. Domingo in SEC Case No. 4027 filed a Motion to Re-Open Instant Case alleging that Raul Gala is at present about to dispose some of the properties in the name of Ellice, and that the continuous performance of corporate powers and affairs of Ellice as a corporation by the present set of officers and members of the Board of Directors of both Ellice and Margo will further aggravate the damage and prejudice not only to the petitioners, but also to the public; as well as to those who have dealt with or might deal with both Ellice and Margo as a Corporation. cdll 18. On September 14, 1992, respondents in SEC Case No. 4027 filed their opposition to the Motion To Re-Open the case and also filed therewith a Motion To Cite for Contempt petitioner Rita Benson for having filed the Motion to Re-Open the Case. Respondents claimed that the same should be considered as a motion for the reconsideration of the Order dated April 10, 1992. 19. On August 24, 1993, Hearing Officer Alberto P. Atas issued an Order granting the re-opening of SEC Case No. 4027 and denying the Motion To Cite for Contempt. 20. On October 29, 1993, respondents in SEC Case No. 4027, filed a Motion For Joint Trial and/or Consolidation of the case with SEC Case No. 3747 stating that: "3. From a perusal of the basic pleadings in both cases, it is immediately clear that the causes of action of the petitioners in the present case are their defenses (as respondents) in SEC Case No. 3747, while the defenses of respondent. in the present case are their causes of action (as petitioners) in SEC Case No. 3747." The said motion prayed that SEC Case No. 4027 be jointly tried with and/or consolidated in the earlier lower-numbered case, SEC Case No. 3747. 21. On-November 10, 1993, petitioners Guia G. Domingo and Ofelia G. Panes, filed their Opposition to Motion for Joint Trial and/or Consolidation dated October 29, 1993. dctai 22. On November 17, 1993, respondents-movants filed their Reply to Opposition to Motion For Joint Trial and/or consolidation. 23. On November 23, 1993, Hearing Officer Alberto Atas issued an Order consolidating SEC Case No. 4027 with SEC Case No. 3747 under Hearing Officer Juanito B. Almosa. Jr. 24. On April 12, 1995, petitioners in SEC Case No. 3747, (Respondents in SEC Case No. 4027) filed their Formal Offer of Documentary Evidence, and on March 7, 1996, Alicia Gala and Guia G. Domingo likewise, filed their Formal Offer of Evidence. The issues to be resolved in these cases are: 1. Whether or not the spouses Manuel Gala and Alicia Gala are the owners of all the shares of stock. in Ellice Agro-Industrial Corporation and the other stockholders are merely their nominees. 2. Whether or not the assets of Ellice-Agro-Industrial Corporation-is the estate also of the deceased Manuel Gala and Petitioner Alicia Gala. 3. Whether or not the children of the Spouses Manuel and Alicia Gala can exercise acts of ownership over the shares of stock issued under their name allowing each one of them to transfer the same. On the first issue of whether the Spouses Manuel and Alicia Gala owned all the shares of stock of Ellice Agro- Industrial Corporation and the other stockholders are mere nominees, the answer is in the positive. When the spouses Manuel and Alicia decided to organize Ellice Agro-Industrial Corporation, they intended to establish a family corporation with their children and themselves as incorporators and stockholders. The very purpose of the couple in organizing the corporation was the Estate Planning purposes. Considering that their children do not have income during the time of incorporation, to enable them to pay for their supposed subscriptions, the spouses paid for their stocks and also executed a simulated Deeds of Assignment which were without consideration. This being the case, the transfer of the shares of Ellice to Paul Gala, Ofelia Gala and Guia G. Domingo has no force and effect whatsoever against or in favor of anyone. Article 1409, of the New Civil Code states that: "The following contracts are in existent and void from the beginning: xxx xxx xxx 2. Those which are absolutely simulated or fictitious. xxx xxx xxx These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived" The Supreme Court in Tongoy vs. The Honorable Court of Appeals (G.R. No. L-45645;) June 28, 1983, defined what a simulated contract is, by stating that: "The characteristic of simulation is the fact that the apparent contract is not really intended to produce legal effects nor in anyway alter the juridical situation of the parties. Thus, when a person, in order to place his property beyond the reach of his creditors, simulates a transfer of it to another, he does not really intend to divest himself of his title and control of the property, hence the deed of transfer is but a sham." prcd In accordance with the principle "quod nullum est nullum producit effectum" the transfer of the shares of stock of Ellice Agro-Industrial Corporation by virtue of the Deed of Sale and Deed of Assignment to petitioners/respondents did not create any vested rights in their favor since the same were made merely for Estate Planning Purposes which is premised on the "legal right of a taxpayer to decrease the amount of what otherwise could be his taxes or altogether avoid them, by means of which the law permits" (Liddell & Co. Inc. v. Coll. of Ind. Rev., G.R. No. L-9687, June 30, 1961). Based on the foregoing, the Deeds of Sale and Assignment cannot be considered a contract at all That which is inexistent cannot give life to anything at all. As a general rule, the mere fact that a stockholder owns all or substantially all of the stocks in a corporation, taken alone is not sufficient to justify their being treated as one entity. If used to perform legitimate functions, a corporation's separate existence must be respected. However, there are cases when the veil of corporate entity should be pierced, and the courts have disregarded the separate existence of the stockholders and the corporation where the latter was formed merely for the purpose of avoiding the payment of higher taxes, or where it was so controlled by the stockholders that its separate identity was hardly discernible, thus becoming a mere instrumentality or alter ego of the former. In the case of Delpher Trades Corp. vs. Intermediate Appellate Court, G.R. No. L-69259, January 26, 1988, the Supreme Court in piercing the veil of corporate entity considered the following circumstances: "In the case at bar, in exchange for their properties, the Pachecos acquired 2,500 original unissued no par value shares of stock of the Delpher Trade Corporation . . . Moreover, there was no attempt to state the true or current market value of the real estate. Land value at P300.00 a square meter was turned over to the family corporation for only P14,000.00 a square meter. It is to be stressed that by their ownership of the 2,500 no par shares of stock, the Pachecos have control of the corporation. Their equity capital is 55%, as against 45% of the other stockholders, who also belong to the same family group. In effect, the Delpher Trade Corporation is a business conduit of the Pachecos. What they really did was to invest their properties and change the nature of their membership from unincorporated to incorporated form by organizing Delpher Trades Corporation to take control of the properties and at the same time save on inheritance taxes." LLpr Ellice-Agro Industrial Corporation is a family corporation. The corporation was organized by the spouses Manuel and Alicia Gala together with their children Raul, Ofelia and Guia; the spouses who owns several parcels of land in Quezon Province and Laguna transferred this to the said corporation in order to perpetuate their control over the property through the corporation and to avoid taxes. In order to accomplish this end, the spouses Manuel and Alicia Gala transferred, shares of stocks to their children and executed simulated deeds and contracts for this purpose. In exchange for the properties so transferred the Spouses Manuel and Alicia Gala acquired majority of the shares of stocks of Ellice. Furthermore, there was actually no transfer of ownership of the subject parcel of land since the spouses Gala remained in control of the property, the beneficial ownership and control of petitioner corporation remained in the hands of the Spouses Gala, the original owners. Thus, it was evident that there was no transfer of actual ownership interests over the land when the same was transferred to Ellice Agro-industrial Corporation (petitioner corporation) in exchange for the latter's shares of stock. The transfer of ownership, if anything, was merely in form but not in substance. In reality, the corporation is a mere alter ego or conduit of Spouses Manuel and Alicia Gala; hence the corporation and the Spouses should be deemed to be the same, there being in substance and in effect an identity of interest. A lot of other circumstance attendant to this case would fall within the factual backdrop of the case of Marvel Building Corporation, et al. vs. David, G.R. No. L-5081, February 24, 1954, 94 Phil. 376, which would necessitate the piercing of the veil of Ellice Agro-Industrial Corporation. The Supreme Court in the said case declared that: "The fact that the other subscribers had no incentives of sufficient magnitude to justify their big subscriptions, that fact that the subscriptions were not receipted for and deposited by the treasurer in the name of the corporation but were kept by Maria B. Castro herself, the fact that the stockholders or directors never appeared to have ever met to discuss the business of the corporation, the fact that advanced big sum of money to the corporation without any previous arrangement or accounting, and the fact that the books of accounts were kept as they belong to Maria B. Castro alone - these facts are of potent and patent significance. What are the necessary implication? Maria B. Castro would not have asked them to endorse their stock certificates, or be keeping these in her possession, if they were really the owners. They never would have consented that Maria B. Castro kept the funds without receipts or accounting nor that she Manages the business without the knowledge or concurrence, were they owners of the stock in their own rights. Each and everyone of the facts all set forth above, in the same manner, is inconsistent with the claim that the stockholders, other than Maria B. Castro, owned their shares in their own rights. On the other hand, each and everyone of them, and all of them, can point to no other conclusion than that Maria B. Castro was the sole and exclusive owner of the shares and that they were only her dummies" LLpr On the second issue of whether the assets of Ellice-Agro Industrial Corporation, is the estate also of the deceased Manuel Gala and of petitioner Alicia Gala, the answer is likewise in the positive. The case in point on the matter is the case of Cease vs. Honorable Court of Appeals G.R. No. L-33172, October 18, 1979, which is applicable. The Supreme Court in piercing the veil of corporate entity found that: "While the records showed that originally its incorporators were aliens, friends or third parties in relation of one to another, in the course of its existence, it developed into a close family corporation. The Board of Directors and stockholders belong to one family the head of which Forrest L. Cease always retained the majority stocks and hence the control and management of its affairs. In fact, during the reconstruction of its records in 1947 before the Securities and Exchange Commission only nine (9) nominal shares out of 300 appears in the name of his 3 eldest children then and another shares out of 300 appears in the name or the Securities & Exchange Commission, only 9 nominal shares out of 300 appears in the name of his 3 eldest children then and another person close to them., It is likewise noteworthy to observe that as his children increase or perhaps become of age, he continued distributing his shares among them adding Florence, Teresa and Marlon until at the time of his death only 190 were left to his name. Definitely, only the members of his family benefited from the corporation. The accounts of the corporation and therefore its operation as well as that of the family appear to be indistinguishable and apparently formed together. As admitted by the defendants (Manifestation of Compliance with Order of 07 March 1963 (Exhibit "21") the corporation "never" had any account with any banking institution or if any account was carried in a bank on its behalf, it was in the name of Mr. Forest L. Cease. In brief, the operation of the corporation is merged with those of the majority stockholders, the latter using the former as his instrumentality and for the exclusive benefits of all his family. From the foregoing indication, therefore, there, is truth in plaintiff's allegation that the corporation is only a business conduit of his father and an extension of his personality, they are one and the same thing. thus, the assets of the corporation are also the estate of Forrest L. Cease the father of the parties herein who are all legitimate children of full blood. xxx xxx xxx In any of these cases, the notion of corporate entity will be pierced or disregarded, and the corporation will be treated merely as an association of person or, where there are two corporations, they will be merged as one the one being merely regarded as part or the instrumentality of the other. (Koppel (Phil.), Inc. vs. Yatco, G.R. No. L-47673, October 10, 1946, 77 Phil. 496, Yutivo Sons Hardware Company Vs. Court of Tax Appeals, G.R. No. L-13203, January 28, 1961, supra). So must the case at bar, add to this jurisprudence. An indubitable deduction from the findings of the trial court cannot but lead to the conclusion that the business of the corporation is largely, if not wholly, the personal venture of Forrest L. Cease. There is not even a shadow of a showing that his children were subscribers or purchasers of the stocks they own. Their participation as nominal shareholders emanated solely from Forest L. Cease's gratuitous sale out of his own shares to the benefit of his children and ultimately his family. In the course of the trial, the testimony of both Alicia Gala and Raul Gala contained statements that would show that Ellice-Industrial Corporation is merely the alter ego of the Spouses Manuel and Alicia Gala. Alicia Gala in her direct testimony testified that: Q. What was the reason why you organized the family corporation Ellice Agro-Industrial Corporation? A.. Ellice was created to ensure the smooth transfer of all our real properties to our children just in case of our untimely demise. They were created for estate tax planning. It was also organized to prevent the properties being brought under the Land Reform program because we were then apprehensive that the Agrarian Reform Law would later include coconut lands. Q. Who were then the incorporators of Ellice? A. My husband and I, my four children and my two overseers of my coconut land Mssrs. Virgilio Galeon and Julian Jader. prLL Q. Who were the subscribers of Ellice? A. My husband and I were the major stockholders with the bulk of the shares being placed under our names. We however, put nominal shares under the names of our four children and two overseers. Q. How were the shares of stock paid? A. The real properties separately owned by my husband and I, as well as our conjugal properties, were transferred to the corporation in exchange for properties than my husband, more shares of stock were placed under my name. xxx xxx xxx Q. Since the Management Agreement was not implemented and the Contract of Lease, and the amendments thereto, were terminated, how was the family corporations and their assets managed? A. The real properties we transferred to the corporations continued to be managed, operated and controlled by my husband and I. We treated the real properties as our own personal properties just like before we transferred the same to the family corporations. Q. Who decided and executed any acts of ownership over the family assets go? A.. The proceeds of the harvests and the sale of family assets went to the family. My husband and I used the proceeds to answer for family expenses, wants and needs. (Question and Answer/Direct Testimony of Alicia E. Gala, 7 September 1995, PP. 2 & 5). Raul E. Gala on his part testified that: Q. And all the payments for the capital stock of the stockholders in this corporation were made by your parents? A. Yes, Sir. Q. This could include the payment for the shares of stocks in your name and that of/your sisters. Guia, Ofelia and Rita? A. Yes, Sir. Q. How about the shares of stocks appearing in the name of Virgilio Galeon and Julian Jader who paid for their shares? LexLib A. My parents, Sir. Q. Could you inform us who are these persons. Virgilio Galeon and Julian Jader? A. Virgilio Galeon is the long time overseer of my father and mother. Q. How about Julian Jader? A. He is also a long time overseer of my grandparents and then of my parents also. Q. So, you would affirm the fact that all the payments for the subscriptions to the capital stock of Ellice were solely and exclusively by your parents? A. Yes, Sir. Q. And the other stockholders did not pay a single centavo for their shares in their names? LLpr A. Correct, Sir. Q. How about the corporation, Margo Management and Development Corporation, who paid for the shares of stocks appearing in the name of the 5 incorporators and original stockholders? A. My father, Sir. Q. So, you and the other stockholders in this corporation did not pay a single centavo for your share, is this correct? A. Are you referring to Margo? Q. Yes, Margo. A. Yes, Sir. Q. It is not a fact that the income to all these properties went to both your mother and father even after the execution of the Management Agreement? A. When my father was exercising at that time the principle of corporation, because I told him it's very hard when he would not forbid. Then, I was telling him that if he would die, then this would be a trouble to the family because anybody would be. So I told him, in other words, to clean corporation and not the other way around. Q. Yes, but your parents continued to spend the income from these agricultural lands for the support of your family, is it, not? A. Yes, but . . . Atty. Santiago: Q. In fact the income from those agricultural land continue to be given to your parents even after the execution of the Contract of Lease between Ellice and Margo, is it not? A. Yes, Sir. Q. After your father died on February 12, 1988, to whom did the income from these agricultural land go to? A. To my mother. Q. And your mother, spent and maintain this income for the support of your family? A. I disagree because my other sisters and myself are members of the family but we were not given anything. Q. Do you mean to say that after your father died, your mother spent the income from this agricultural land only in accordance with her own personal wishes? A. Yes, Sir. Q. At present, to whom does the income from these agricultural land go to? A. Of course, to my mother and to the two sisters, namely, Guia and Ofelia. I know the other one Rita, because I don't talk to her now but for myself, definitely, zero. I cannot speak for my sister Rita. I don't know. Q. So, while all of the five children were benefited from the income of the agricultural land during the lifetime of your father, the situation changed after the death of your father, is that what you're trying to say? A. Definitely. Q. So, would you agree with me that the income from these agricultural lands transferred in the name of Ellice never went to either Ellice or Margo? A. I would say, yes, it has been to my parents. (TSN, 2 February 1995, pp. 14-15 & 35-38) Respondents/petitioners in this case did not perceive Ellice Agro-Industrial Corporation as a legal or artificial entity, it was merely a shell, serving no legitimate business purpose. Thus, all assets and properties of the corporation shall still be deemed owned by the Spouses Manuel and Alicia Gala. Fletcher Cyclopedia Corporations, permanent Edition, Vol.. I, Chap. 2, Sec. 43, p. 230, states that: "Where decedent owned all stock of corporation which in turn owned all capital stock of the second corporation, any and all claims against either corporation was in essence a claim against decedent estate, and hence the Surrogate court would disregard corporate entity and exercise jurisdiction of proceeding involving claimed stock option and stock interest in second corporation" As to whether or not the children of the Spouses Manuel and Alicia Gala can exercise acts of ownership over the shares of stocks issued under their name allowing each one of them to transfer the same, it would appear that they cannot. They are nominees and they are not the beneficial owners of the shares of stocks. Prior to incorporation of a corporation, a person can become a stockholder only by subscription to shares of stocks. Subscription to stock is ordinarily found in the articles of incorporation or in the pre-incorporation agreements among its promoters. However, after incorporation, a person can become a stockholder in several ways: a) By subscription direct from a corporation b) By purchase from a stockholder The children of the Spouses Manuel and Alicia Gala are only nominees by their parents, they are not the stockholders of the corporations because it was Spouses Manuel and Alicia Gala who paid for their subscription. The latter has to nominate their children as incorporators/stockholders to be able to comply with the requirements for incorporation and organize or form a corporation. The claim by petitioner/respondent Raul Gala that he has claim of ownership over the shares of stocks by virtue of a donation made by the Spouses Manuel and Alicia Gala in their favor is without legal basis. The requirements for a valid donation of personal or movable properties is laid down in Article 748 of the New Civil Code which states that: "The donation of a movable may be made orally or in writing. An oral donation requires the simultaneous delivery of the thing or of the document representing the right donated. If the value of the personal property donated exceeds five thousand pesos, the donation and acceptance shall be made in writing. Otherwise, the donation shall be void." Petitioner/respondent Raul Gala testified that: ATTY. SANTIAGO: Q. Mr. Gala do you maintain that all the shares of stocks in your name in the corporations Ellice, Margo and Galen belong to you personally? A. As you can see, Sir, in the Brief, I only own a certain portion of the outstanding capital stocks of Ellice. I don't get something that is not mine. ATTY. SANTIAGO: No. The question refers to the shares of stocks, appearing in your name at the time of incorporation of this corporation. A. At the time, Okay, I think, it was only 40 shares under my name. ATTY. SANTIAGO: Q. And you maintain that you own this in your personal capacity? A.. Yes because, I think, my father gave it to me. Q. When you said that your father gave it to me, do you mean to say that these shares were donated to you? A. I believe so because, probably, I was the assistant of all of his works, I gave opinion, I gave feasibility study and investments that give proposals, I also give recommendations. I think, I am entitled especially it comes to Ellice-Agro, once upon a time I dealt with Enrile Company like Jaka that they have a designated factory, I was the one who was negotiating for the company to have more money or income. My Daddy was sick at that time, 1971. He had a heart attack. He relied on my recommendations than anybody else. Q. Do you have any document to show that the shares of stocks appearing in your name had, in fact, been donated to you? A. Well, I considered as what I've told you that in spite that. he paid it but still he gave it to me. ATTY. SANTIAGO: No. The question is whether you have any document to show that the shares were donated to you? H.O. ALMOSA: What is only being asked is whether you have the document? ATTY. SANTIAGO: Whether you have the document to show that this alleged... A. As far as the document is concerned, I don't have it but as far as my relationship with my father, yes. (TSN, 2 February 1995, pp. 22-25) The afore-quoted testimony does not in any manner show that the spouses Manuel and Alicia Gala intended a donation of the shares of stocks to Raul or any of their children. Raul merely presumed that the shares were purportedly donated to him by his father because of the supposed assistance he rendered to the corporation and to his father. No evidence whatsoever were presented by the petitioners/respondents to prove that there was an oral or written donation of any of the spouses Manuel or Alicia Gala in favor of any or all of their children. Moreover, the children cannot either claim ownership of the shares of stocks by virtue of the Deeds of Assignment because the same were all simulated or fictitious. Spouses Manuel and Alicia Gala never intended to transfer the shares and this was clearly explained by Alicia Gala in her testimony before this Honorable Commission, when she said that: Q. How about the Deed of Assignment that you executed on August 29, 1993 transferring certain shares of stocks of Ellice in favor of Ofelia, Raul and Guia which has been marked as Exh. "AA" for the petitioners in SEC Case No. 3747 and Exh. "4" for the respondents in that case. Were you forced or intimidated to execute this Deed of Assignment? A. I was not forced but it was simulated for lack of consideration. Q. How about the Deed of Assignment executed by you on July 20, 1988 transferring 10,000 shares of stocks of Ellice in favor of Margo Development and Management Corporation which has been marked as Exh. "CC" for the petitioners in 3747 and Exh. "5" for respondents in said case. Were you forced or intimidated, in any way, to execute his document? A. No, Sir but it was also simulated for lack of consideration. Q. When you say simulated for lack of consideration, Mrs. Gala, you mean that you were not paid any money for the transfer of these Ellice's shares. is that correct? A. Yes, Sir, No money. (TSN, 25 September 1995, pp. 11-12" Moreover, petitioner/respondent Raul Gala recognizes the right of control by his parents over the corporations and their corresponding ownership of the properties supposedly owned by the corporations. In his letter to Alicia Gala dated 29 July 1989, he stated that: "Mommy, I just came from Sariaya and persuaded Vio into giving me our titles to our coconut properties . . . Mommy, I promise you I will hold on to the titles only to safeguard our remaining properties so that my sisters will no longer pressure or entice you, into disposing them . . . . Mommy, I promise you that when things get normal again at home, I will account to you the titles piece by piece and turn them over to you intact." After subscription or purchase of stock, one becomes an owner of the shares of stocks, making him a stockholder of the corporation. It is well settled that the owner, as in the case of other personal property, has an absolute and inherent right as an incident of his ownership, to sell and transfer the same at will, except insofar as the right may be restricted by the charter of the corporation, or the general law or by valid by-laws, or by a valid agreement between him and the corporation, provided the transfer is in good faith, and to a person capable of assuming the obligations of a stockholder (12 Fletcher Cyc. Corp., Sec. 5452). Thus, only an owner has an absolute and inherent right as an incident of his ownership, to sell and transfer the same at will. The children of the Spouses Manuel and Alicia Gala not being the owners of the shares of stocks because they do not have any claim of ownership over the same have no right to exercise any acts of ownership making any transfer, sale, assignment or alienation of the shares of stocks by them void. WHEREFORE, premises considered, judgment is hereby rendered. as follows: 1. Dismissing the petition in SEC Case No. 3747; 2. Issuing the following orders in SEC Case No. 4027; (a) Enjoining herein respondents to perform Corporate acts of both Ellice and Margo, as directors and officers thereof. (b) Nullifying the election of the new sets of Board of Directors and Officers of Ellice and Margo from June 23, 1990 to the present, and that of Ellice from August 24, 1990 to the present; (c) Ordering the respondent Raul Gala to return all the titles of real properties in the names of Ellice and Margo which were unlawfully taken and held by him. (d) Directing the respondents to return to herein petitioners all corporate papers, records of both Ellice and Margo which are in their possession and control. LexLib SO ORDERED. (SGD.) JUANITO B. ALMOSA JR. Hearing Officer