PIERCING VEIL OF CORPORATE FICTION IS NOT WARRANTED BY THE MERE FACT THAT ONE COMPANY OWNS MAJORITY STAKES IN ANOTHER

Piercing the veil of corporate fiction is a legal precept that allows a corporation’s separate personality to be disregarded under certain circumstances, so that a corporation and its stockholders or members, or a corporation and another related corporation could be treated as a single entity.

Thus, the SC held in a November 29, 2017 case, as follows:

Veterans Federation of the Philippines vs. Eduardo L. Montenejo, et al.
G.R. No. 184819, November 29, 2017

Facts:

Veterans Federation of the Philippines (VFP) is a national federation of associations of Filipino war veterans. It was created in 1960 by virtue of Republic Act No. 2640.

In 1967, through the government’s Proclamation No. 192, VFP was able to obtain control and possession of a vast parcel of land located in Taguig. VFP eventually developed said land into an industrial complex, which is now known as the VFP Industrial Area (VFPIA). Respondent VFP Management and Development Corporation (VMDC), on the other hand, is a private management company organized in 1990 pursuant to the general incorporation law.

VFP entered into a management agreement with VMDC. Under the said agreement, VMDC was to assume exclusive management and operation of the VFPIA in exchange for forty percent (40%) of the lease rentals generated from the area.

In managing and operating the VFPIA, VMDC hired its own personnel and employees. Among those hired by VMDC were respondents Eduardo L. Montenejo, Mylene M. Bonifacio, Evangeline E. Valverde and Deana N. Pagal (hereafter collectively referred to as “Montenejo, et al.”).

The management agreement between VFP and VMDC had a term of five (5) years and is renewable for another five (5) years. The agreement was extended until it became only on a month-to-month basis.

Thereafter, VFP board passed a resolution terminating the management agreement effective December 31, 1999. VMDC conceded to the termination and eventually agreed to tum over to VFP the possession of all buildings, equipment and other properties necessary to the operation of the VFPIA.

Thereafter, the President of VMDC issued a memorandum informing the company’s employees of the termination of their services effective at the close of office hours on January 31, 2000 “[i]n view of the termination of the [management agreement].” True to the memorandum’s words, VMDC dismissed all of its employees and paid each his or her separation pay.

Contending in the main that their dismissals had been effected without cause and observance of due process, Montenejo, et al. filed before the Labor Arbiter (LA) a complaint for illegal dismissal, money claims and damages. They impleaded both VMDC and VFP as defendants in the complaint.

VMDC, for its part, denied the contention. It argued that the dismissals of Montenejo, et al. were valid as they were due to an authorized cause-the cessation or closure of its business. VMDC claimed that the cessation of its operations was but the necessary consequence of the termination of such agreement.

VFP, on the other hand, seconded the arguments of VMDC. In addition, however, VFP asserted that it could not, at any rate, be held liable under the complaint because it is not the employer of Montenejo, et al.

LA Ruling:

The LA rendered a decision disposing of the illegal dismissal complaint as lacking in merit but ordering VFP and VMDC to pay, solidarily, each complainant his/her salaries for eleven (11) months. VFP and VMDC were also so ordered to recompute their separation pay with the date January 4, 2001 as their last day of service and accordingly pay them their balance. VFP and VMDC were also ordered to pay, solidarily, Montenejo et al. ‘s proportionate 13th month pay for the year 2000.

The LA ruled that Montenejo, et al. were not illegally dismissed. Their separation was the result of the closure of VMDC, an authorized cause. Hence, Montenejo, et al. were not entitled to reinstatement and backwages.

Montenejo, et al. were contractual employees. They were hired for a definite term that is similar to the maximum term of the management agreement between VFP and VMDC. As the management agreement between VFP and VMDC can have a maximum term of ten (10) years from January 4, 1991, or until January 4, 2001, the employments of Montenejo, et al. also have terms of up to January 4, 2001.

Montenejo, et al. were dismissed on January 3, 2000 which is eleven (11) months short of their January 4, 2001 contract date. Accordingly, Montenejo, et al. are each entitled: (a) to their salary corresponding to the unexpired portion of their contract and a separation pay computed up to the last day of employment.

The LA held further that Montenejo, et al. are not entitled to recover damages. Their dismissals were not shown to be tainted with bad faith. VFP and VMDC are solidarily liable for the monetary awards in favor of Montenejo, et al. The basis of VFP’ s liability is the fact that it is an indirect employer of Montenejo, et al.

Montenejo, et al. and VFP filed separate appeals with the National Labor Relations Commission (NLRC).

NLRC Ruling:

The NLRC reversed and set aside the decision of the LA.

The reversal was premised on the NLRC’s disagreement with the first two findings of the LA. For the NLRC, the dismissals of Montenejo, et al. were illegal and the latter were not merely contractual employees.

According to the NLRC, the dismissals of Montenejo, et al. were not valid because-a. VMDC was not able to establish that the dismissals were based on an authorized cause. VMDC presented no evidence that it had formally closed shop and a closure cannot be inferred from the mere termination of the management agreement between it and VFP.

The claim of VMDC that its very existence hinges on the management agreement is belied by its own Articles of Incorporation. Under VMDC’s Articles of Incorporation, VMDC is authorized, as part of its primary purpose, to “manage, operate, lease, develop, organize, any and all kinds of business enterprises.”

Hence, the existence of VMDC cannot be regarded as exclusively dependent on its management agreement with VFP. Further compromising VMDC’s claim of closure is the fact that it had never filed a notice of closure or cessation of its operations with the Department of Labor and Employment (DOLE).

Montenejo, et al. are not contractual employees but regular employees of VMDC. The management agreement between VFP and VMDC is not the contract of employment of Montenejo, et al. One cannot be applied to or equated with the other.

Aggrieved, VFP filed a certiorari petition with the CA.

CA Ruling:

The CA rendered a decision dismissing VFP’s certiorari petition.

In doing so, the CA essentially agreed with the ratiocinations of the NLRC. VFP moved for reconsideration, but the CA remained steadfast.

Hence, the Petition before the SC.

Issue/s:

Whether or not one company’s being the majority stockholder of another automatically justifies piercing of veil of corporate fiction or sufficient to disregard the distinct personalities

SC Ruling:

The SC granted the appeal.

The SC held that one of the authorized causes for dismissal recognized under the Labor Code is the bona fide cessation of business or operations by the employer. Article 298 of the Labor Code (Note: formerly Article 283; based on renumbered Labor Code) explicitly sanctions terminations due to the employer’s cessation of business or operations-as long as the cessation is bona fide or is not made ”for the purpose of circumventing the [employees’ right to security of tenure]”.

An employer’s closure or cessation of business or operations is regarded as an invalid ground for the termination of employment only when the closure or cessation is made for the purpose of circumventing the tenurial rights of the employees.

To unmask the true intent of an employer when effecting a closure of business, it is important to consider not only the measures adopted by the employer prior to the purported closure but also the actions taken by the latter after the fact. For, as can be seen from the examples in the cases of Me-Shurn Corporation vs. Me-Shurn Workers Union-FSM, Danzas Intercontinental, Inc. vs. Daguman, St. John Colleges, Inc. vs. St. John Academy Faculty and Employees Union, and Eastridge Golf Club, Inc. vs. East Ridge Golf Club, Inc. Labor Union-Super, the employer’s subsequent acts of suddenly reviving a business it had just closed or surreptititiously continuing with its operation after announcing a shutdown are telltale badges that the employer had no real intent to cease its business or operations and only seeks an excuse to terminate employees capriciously.

The closure of VMDC was still duly proven in this case. The closure can be inferred from other facts that were established by the records and/or were not refuted by the parties.

VMDC had turned over possession of all buildings, equipment and other properties necessary to the operation of the VFPIA to VFP and dismissed all of its officials and employees, which included Montenejo, et al.

For the SC, the confluence of the above facts indicates that VMDC indeed closed shop or ceased operations following the termination of its management agreement with VFP. The acts of VMDC in relinquishing all properties required for its operations and in dismissing its entire workforce would have indubitably compromised its ability to continue on with its operations and are, thus, the practical equivalents of a business closure. Hence, the SC concluded that the closure of VMDC had been established.

VMDC’s cessation of operations is bona fide. None of the telltale badges of bad faith in closures of business, as illustrated in jurisprudence, was shown to be present in this case. Here, there is no evidence on record that shows that VMDC-after dismissing its entire workforce and ceasing to operate-had revived its business or had hired new employees to replace those dismissed. Thus, it cannot be reasonably said that VMDC’s cessation of operations was just a ruse or had been implemented merely as an excuse to terminate its employees.

The mere fact that VMDC could have chosen to continue operating despite the termination of its management agreement with VFP is also of no consequence. The decision of VMDC to cease its operations after the termination of the management agreement is, under the law, a lawful exercise by the company’s leadership of its management prerogative that must perforce be upheld where, as in this case, there is an absence of showing that the cessation was made for prohibited purposes.

The validity of the closure of VMDC necessarily validates the dismissals of Montenejo, et al. that resulted therefrom. The dismissals cannot be regarded as illegal because they were predicated upon an authorized cause recognized by law.

The doctrine of piercing the veil of corporate fiction is a legal precept that allows a corporation’s separate personality to be disregarded under certain circumstances, so that a corporation and its stockholders or members, or a corporation and another related corporation could be treated as a single entity. The doctrine is an equitable principle, it being meant to apply only in situations where the separate corporate personality of a corporation is being abused or being used for wrongful purposes.

In Concept Builders, Inc. vs. NLRC, the SC laid down the following test to determine when it would be proper to apply the doctrine of piercing the veil of corporate fiction:

1. 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;
2. 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 rights; and
3. The aforesaid control and breach of duty must proximately cause 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.

The sole circumstance of VFP being the majority stockholder of the VMDC cannot justify the disregard of the separate personalities of VFP and VMDC. Completely absent, however, both from the decisions of the NLRC and the CA as well as from the records of the instant case itself, is any circumstance which establishes that VFP had complete control or domination over the ”finances[,}. .. policy and business practice” of VMDC. Worse, even assuming that VFP had such kind of control over VMDC, there is likewise no evidence that the former had used the same to “commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention o/[another’s] legal rights.”

Learn more about stockholdings in relation to employee dismissal in Guide to Valid Dismissal of Employees

Relative to the Concept Builders test are the following critical ruminations from Rufina Luy Lim vs. CA:

Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself a sufficient reason for disregarding the fiction of separate corporate personalities.

Moreover, to disregard the separate juridical personality of a corporation, the wrong-doing must be clearly and convincingly established. It cannot be presumed.

Given the absence of any convincing proof of misuse or abuse of the corporate shield, the SC found the application of the doctrine of piercing the veil of corporate fiction to the present case to be unwarranted, if not utterly improper. Consequently, we must also reject, for being erroneous, the pronouncement that VFP may be held solidarily liable with VMDC for any monetary award that may be adjudged in favor of Montenejo, et al. in this case.