A complaint was instituted with the Makati City Regional Trial Court (RTC), Branch 66, against EIB Securities Inc. (E–Securities) for unauthorized sale of 32,180,000 DMCI shares of Pacific Rehouse Corporation, Pacific Concorde Corporation, Mizpah Holdings, Inc., Forum Holdings Corporation, and East Asia Oil Company, Inc. In its October 18, 2005 Resolution, the RTC rendered judgment on the pleadings, directing the E–Securities to return to the petitioners 32,180,000 DMCI shares, as of judicial demand. On the other hand, petitioners are directed to reimburse the defendant the amount of [P]10,942,200.00, representing the buy back price of the 60,790,000 KPP shares of stocks at [P]0.18 per share. The Resolution was ultimately affirmed by the Supreme Court and attained finality.
When the Writ of Execution was returned unsatisfied, petitioners moved for the issuance of an alias writ of execution to hold Export and Industry Bank, Inc. liable for the judgment obligation as E–Securities is “a wholly–owned controlled and dominated subsidiary of Export and Industry Bank, Inc., and is[,] thus[,] a mere alter ego and business conduit of the latter. E–Securities opposed the motion[,] arguing that it has a corporate personality that is separate and distinct from the respondent.
The RTC eventually concluded that E–Securities is a mere business conduit or alter ego of petitioner, the dominant parent corporation, which justifies piercing of the veil of corporate fiction, and issued an alias writ of summons directing defendant EIB Securities, Inc., and/or Export and Industry Bank, Inc., to fully comply therewith. It ratiocinated that being one and the same entity in the eyes of the law, the service of summons upon EIB Securities, Inc. (E–Securities) has bestowed jurisdiction over both the parent and wholly–owned subsidiary.
Export and Industry Bank, Inc. (Export Bank) filed before the Court of Appeals a petition for certiorari with prayer for the issuance of a temporary restraining order (TRO) seeking the nullification of the RTC Order. The Court of Appeals reversed the RTC Order and explained that the alter ego theory cannot be sustained because ownership of a subsidiary by the parent company is not enough justification to pierce the veil of corporate fiction. There must be proof, apart from mere ownership, that Export Bank exploited or misused the corporate fiction of E–Securities. The existence of interlocking incorporators, directors and officers between the two corporations is not a conclusive indication that they are one and the same. The records also do not show that Export Bank has complete control over the business policies, affairs and/or transactions of E–Securities. It was solely E–Securities that contracted the obligation in furtherance of its legitimate corporate purpose; thus, any fall out must be confined within its limited liability.
Whether or not E-Securities is merely an alter ego of Export Bank so that “piercing the veil of corporate fiction” is proper.
NO. An alter ego exists where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere instrumentality or adjunct of the other. The control necessary to invoke the alter ego doctrine is not majority or even complete stock control but such domination of finances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own, and is but a conduit for its principal.
The Court has laid down a three–pronged control test to establish when the alter ego doctrine should be operative:
- Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own;
- Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff’s legal right; and
- The aforesaid control and breach of duty must [have] proximately caused the injury or unjust loss complained of.
The absence of any one of these elements prevents ‘piercing the corporate veil’ in applying the ‘instrumentality’ or ‘alter ego’ doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defendant’s relationship to that operation. Hence, all three elements should concur for the alter ego doctrine to be applicable.
In this case, the alleged control exercised by Export Bank upon its subsidiary E–Securities, by itself, does not mean that the controlled corporation is a mere instrumentality or a business conduit of the mother company. Even control over the financial and operational concerns of a subsidiary company does not by itself call for disregarding its corporate fiction. There must be a perpetuation of fraud behind the control or at least a fraudulent or illegal purpose behind the control in order to justify piercing the veil of corporate fiction. Such fraudulent intent is lacking in this case.
While the courts have been granted the colossal authority to wield the sword which pierces through the veil of corporate fiction, concomitant to the exercise of this power, is the responsibility to uphold the doctrine of separate entity, when rightly so; as it has for so long encouraged businessmen to enter into economic endeavors fraught with risks and where only a few dared to venture.
The decision of the Court of Appeals in favor of Export Bank (reversing the RTC Order) is affirmed.