THIRD DIVISION

G.R. No. L-69259 January 26, 1988

DELPHER TRADES CORPORATION, and DELPHIN PACHECO, petitioners,

vs.
INTERMEDIATE APPELLATE COURT and HYDRO PIPES PHILIPPINES, INC., respondents.

GUTIERREZ, JR., J.:

The petitioners question the decision of the Intermediate Appellate Court which sustained the private respondent's contention that the deed
of exchange whereby Delfin Pacheco and Pelagia Pacheco conveyed a parcel of land to Delpher Trades Corporation in exchange for 2,500
shares of stock was actually a deed of sale which violated a right of first refusal under a lease contract.

Briefly, the facts of the case are summarized as follows:

In 1974, Delfin Pacheco and his sister, Pelagia Pacheco, were the owners of 27,169
square meters of real estate Identified as Lot. No. 1095, Malinta Estate, in the
Municipality of Polo (now Valenzuela), Province of Bulacan (now Metro Manila)
which is covered by Transfer Certificate of Title No. T-4240 of the Bulacan land
registry.

On April 3, 1974, the said co-owners leased to Construction Components

International Inc. the same property and providing that during the existence or after
the term of this lease the lessor should he decide to sell the property leased shall first
offer the same to the lessee and the letter has the priority to buy under similar
conditions (Exhibits A to A-5)

On August 3, 1974, lessee Construction Components International, Inc. assigned its

rights and obligations under the contract of lease in favor of Hydro Pipes Philippines,
Inc. with the signed conformity and consent of lessors Delfin Pacheco and Pelagia
Pacheco (Exhs. B to B-6 inclusive)

The contract of lease, as well as the assignment of lease were annotated at he back
of the title, as per stipulation of the parties (Exhs. A to D-3 inclusive)

On January 3, 1976, a deed of exchange was executed between lessors Delfin and
Pelagia Pacheco and defendant Delpher Trades Corporation whereby the former
conveyed to the latter the leased property (TCT No.T-4240) together with another
parcel of land also located in Malinta Estate, Valenzuela, Metro Manila (TCT No.
4273) for 2,500 shares of stock of defendant corporation with a total value of
P1,500,000.00 (Exhs. C to C-5, inclusive) (pp. 44-45, Rollo)

On the ground that it was not given the first option to buy the leased property pursuant to the proviso
in the lease agreement, respondent Hydro Pipes Philippines, Inc., filed an amended complaint for
reconveyance of Lot. No. 1095 in its favor under conditions similar to those whereby Delpher Trades
Corporation acquired the property from Pelagia Pacheco and Delphin Pacheco.

After trial, the Court of First Instance of Bulacan ruled in favor of the plaintiff. The dispositive portion
of the decision reads:
 ACCORDINGLY, the judgment is hereby rendered declaring the valid existence of
the plaintiffs preferential right to acquire the subject property (right of first refusal) and
ordering the defendants and all persons deriving rights therefrom to convey the said
property to plaintiff who may offer to acquire the same at the rate of P14.00 per
square meter, more or less, for Lot 1095 whose area is 27,169 square meters only.
Without pronouncement as to attorney's fees and costs. (Appendix I; Rec., pp. 246-
247). (Appellant's Brief, pp. 1-2; p. 134, Rollo)

The lower court's decision was affirmed on appeal by the Intermediate Appellate Court.

The defendants-appellants, now the petitioners, filed a petition for certiorari to review the appellate
court's decision.

We initially denied the petition but upon motion for reconsideration, we set aside the resolution
denying the petition and gave it due course.

The petitioners allege that:

The denial of the petition will work great injustice to the petitioners, in that:

1. Respondent Hydro Pipes Philippines, Inc, ("private respondent") will acquire from
petitioners a parcel of industrial land consisting of 27,169 square meters or 2.7
hectares (located right after the Valenzuela, Bulacan exit of the toll expressway) for
only P14/sq. meter, or a total of P380,366, although the prevailing value thereof is
approximately P300/sq. meter or P8.1 Million;

2. Private respondent is allowed to exercise its right of first refusal even if there is no
"sale" or transfer of actual ownership interests by petitioners to third parties; and

3. Assuming arguendo that there has been a transfer of actual ownership interests,
private respondent will acquire the land not under "similar conditions" by which it was
transferred to petitioner Delpher Trades Corporation, as provided in the same
contractual provision invoked by private respondent. (pp. 251-252, Rollo)

The resolution of the case hinges on whether or not the "Deed of Exchange" of the properties
executed by the Pachecos on the one hand and the Delpher Trades Corporation on the other was
meant to be a contract of sale which, in effect, prejudiced the private respondent's right of first
refusal over the leased property included in the "deed of exchange."

Eduardo Neria, a certified public accountant and son-in-law of the late Pelagia Pacheco testified that
Delpher Trades Corporation is a family corporation; that the corporation was organized by the
children of the two spouses (spouses Pelagia Pacheco and Benjamin Hernandez and spouses
Delfin Pacheco and Pilar Angeles) who owned in common the parcel of land leased to Hydro Pipes
Philippines in order to perpetuate their control over the property through the corporation and to avoid
taxes; that in order to accomplish this end, two pieces of real estate, including Lot No. 1095 which
had been leased to Hydro Pipes Philippines, were transferred to the corporation; that the leased
property was transferred to the corporation by virtue of a deed of exchange of property; that in
exchange for these properties, Pelagia and Delfin acquired 2,500 unissued no par value shares of
stock which are equivalent to a 55% majority in the corporation because the other owners only
owned 2,000 shares; and that at the time of incorporation, he knew all about the contract of lease of
Lot. No. 1095 to Hydro Pipes Philippines. In the petitioners' motion for reconsideration, they refer to
this scheme as "estate planning." (p. 252, Rollo)
Under this factual backdrop, the petitioners contend that there was actually no transfer of ownership
of the subject parcel of land since the Pachecos remained in control of the property. Thus, the
petitioners allege: "Considering that the beneficial ownership and control of petitioner corporation
remained in the hands of the original co-owners, there was no transfer of actual ownership interests
over the land when the same was transferred to 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, petitioner corporation is a mere alter ego or conduit of the Pacheco co-owners; hence the
corporation and the co-owners should be deemed to be the same, there being in substance and in
effect an Identity of interest." (p. 254, Rollo)

The petitioners maintain that the Pachecos did not sell the property. They argue that there was no
sale and that they exchanged the land for shares of stocks in their own corporation. "Hence, such
transfer is not within the letter, or even spirit of the contract. There is a sale when ownership is
transferred for a price certain in money or its equivalent (Art. 1468, Civil Code) while there is a barter
or exchange when one thing is given in consideration of another thing (Art. 1638, Civil Code)." (pp.
254-255, Rollo)

On the other hand, the private respondent argues that Delpher Trades Corporation is a corporate
entity separate and distinct from the Pachecos. Thus, it contends that it cannot be said that Delpher
Trades Corporation is the Pacheco's same alter ego or conduit; that petitioner Delfin Pacheco,
having treated Delpher Trades Corporation as such a separate and distinct corporate entity, is not a
party who may allege that this separate corporate existence should be disregarded. It maintains that
there was actual transfer of ownership interests over the leased property when the same was
transferred to Delpher Trades Corporation in exchange for the latter's shares of stock.

We rule for the petitioners.

After incorporation, one becomes a stockholder of a corporation by subscription or by purchasing

stock directly from the corporation or from individual owners thereof (Salmon, Dexter & Co. v.
Unson, 47 Phil, 649, citing Bole v. Fulton [1912], 233 Pa., 609). In the case at bar, in exchange for
their properties, the Pachecos acquired 2,500 original unissued no par value shares of stocks of the
Delpher Trades Corporation. Consequently, the Pachecos became stockholders of the corporation
by subscription "The essence of the stock subscription is an agreement to take and pay for original
unissued shares of a corporation, formed or to be formed." (Rohrlich 243, cited in Agbayani,
Commentaries and Jurisprudence on the Commercial Laws of the Philippines, Vol. III, 1980 Edition,
p. 430) It is significant that the Pachecos took no par value shares in exchange for their properties.

A no-par value share does not purport to represent any stated proportionate interest
in the capital stock measured by value, but only an aliquot part of the whole number
of such shares of the issuing corporation. The holder of no-par shares may see from
the certificate itself that he is only an aliquot sharer in the assets of the corporation.
But this character of proportionate interest is not hidden beneath a false appearance
of a given sum in money, as in the case of par value shares. The capital stock of a
corporation issuing only no-par value shares is not set forth by a stated amount of
money, but instead is expressed to be divided into a stated number of shares, such
as, 1,000 shares. This indicates that a shareholder of 100 such shares is an aliquot
sharer in the assets of the corporation, no matter what value they may have, to the
extent of 100/1,000 or 1/10. Thus, by removing the par value of shares, the attention
of persons interested in the financial condition of a corporation is focused upon the
value of assets and the amount of its debts. (Agbayani, Commentaries and
Jurisprudence on the Commercial Laws of the Philippines, Vol. III, 1980 Edition, p.
107).
Moreover, there was no attempt to state the true or current market value of the real estate. Land
valued at P300.00 a square meter was turned over to the family's corporation for only P14.00 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 Trades Corporation is a business conduit of the Pachecos. What they really did
was to invest their properties and change the nature of their ownership from unincorporated to
incorporated form by organizing Delpher Trades Corporation to take control of their properties and at
the same time save on inheritance taxes.

As explained by Eduardo Neria:

xxx xxx xxx

ATTY. LINSANGAN:

Q Mr. Neria, from the point of view of taxation, is there any benefit to
the spouses Hernandez and Pacheco in connection with their
execution of a deed of exchange on the properties for no par value
shares of the defendant corporation?

A Yes, sir.

COURT:

Q What do you mean by "point of view"?

A To take advantage for both spouses and corporation in entering in

the deed of exchange.

ATTY. LINSANGAN:

Q (What do you mean by "point of view"?) What are these benefits to

the spouses of this deed of exchange?

A Continuous control of the property, tax exemption benefits, and

other inherent benefits in a corporation.

Q What are these advantages to the said spouses from the point of
view of taxation in entering in the deed of exchange?

A Having fulfilled the conditions in the income tax law, providing for
tax free exchange of property, they were able to execute the deed of
exchange free from income tax and acquire a corporation.

Q What provision in the income tax law are you referring to?
 A I refer to Section 35 of the National Internal Revenue Code under
par. C-sub-par. (2) Exceptions regarding the provision which I quote:
"No gain or loss shall also be recognized if a person exchanges his
property for stock in a corporation of which as a result of such
exchange said person alone or together with others not exceeding
four persons gains control of said corporation."

Q Did you explain to the spouses this benefit at the time you
executed the deed of exchange?

A Yes, sir

Q You also, testified during the last hearing that the decision to have
no par value share in the defendant corporation was for the purpose
of flexibility. Can you explain flexibility in connection with the
ownership of the property in question?

A There is flexibility in using no par value shares as the value is

determined by the board of directors in increasing capitalization. The
board can fix the value of the shares equivalent to the capital
requirements of the corporation.

Q Now also from the point of taxation, is there any flexibility in the
holding by the corporation of the property in question?

A Yes, since a corporation does not die it can continue to hold on to

the property indefinitely for a period of at least 50 years. On the other
hand, if the property is held by the spouse the property will be tied up
in succession proceedings and the consequential payments of estate
and inheritance taxes when an owner dies.

Q Now what advantage is this continuity in relation to ownership by a

particular person of certain properties in respect to taxation?

A The property is not subjected to taxes on succession as the

corporation does not die.

Q So the benefit you are talking about are inheritance taxes?

A Yes, sir. (pp. 3-5, tsn., December 15, 1981)

The records do not point to anything wrong or objectionable about this "estate planning" scheme
resorted to by the Pachecos. "The legal right of a taxpayer to decrease the amount of what
otherwise could be his taxes or altogether avoid them, by means which the law permits, cannot be
doubted." (Liddell & Co., Inc. v. The collector of Internal Revenue, 2 SCRA 632 citing Gregory v.
Helvering, 293 U.S. 465, 7 L. ed. 596).

The "Deed of Exchange" of property between the Pachecos and Delpher Trades Corporation cannot
be considered a contract of sale. There was no transfer of actual ownership interests by the
Pachecos to a third party. The Pacheco family merely changed their ownership from one form to
another. The ownership remained in the same hands. Hence, the private respondent has no basis
for its claim of a light of first refusal under the lease contract.

WHEREFORE, the instant petition is hereby GRANTED, The questioned decision and resolution of
the then Intermediate Appellate Court are REVERSED and SET ASIDE. The amended complaint in
Civil Case No. 885-V-79 of the then Court of First Instance of Bulacan is DISMISSED. No costs.

SO ORDERED.

DELPHER TRADES CORPORATION, and DELPHIN PACHECO vs.

INTERMEDIATE APPELLATE COURT and HYDRO PIPES PHILIPPINES, INC.,

G.R. No. L-69259, January 26, 1988

FACTS:

In 1974, Delfin Pacheco and his sister, Pelagia Pacheco, were the owners of 27,169
square meters of real estate Identified as Lot. No. 1095, Malinta Estate, in the
Municipality of Polo (now Valenzuela), Province of Bulacan (now Metro Manila) which
is covered by Transfer Certificate of Title No. T-4240 of the Bulacan land registry.

On April 3, 1974, the said co-owners leased to Construction Components

International Inc. the same property and providing that during the existence or after the
term of this lease the lessor should he decide to sell the property leased shall first offer
the same to the lessee and the letter has the priority to buy under similar conditions.

4 months later, lessee Construction Components International, Inc. assigned its

rights and obligations under the contract of lease in favor of Hydro Pipes Philippines,
Inc. with the signed conformity and consent of lessors Delfin Pacheco and Pelagia
Pacheco.

The contract of lease, as well as the assignment of lease were annotated at the
back of the title, as per stipulation of the parties.

On January 3, 1976, a deed of exchange was executed between lessors Delfin and
Pelagia Pacheco and defendant Delpher Trades Corporation whereby the former
conveyed to the latter the leased property together with another parcel of land for 2,500
shares of stock of defendant corporation with a total value of P1,500,000.00
 On the ground that it was not given the first option to buy the leased property
pursuant to the proviso in the lease agreement, respondent Hydro Pipes Philippines,
Inc., filed an amended complaint for reconveyance of Lot. No. 1095 in its favor under
conditions similar to those whereby Delpher Trades Corporation acquired the property
from Pelagia Pacheco and Delphin Pacheco.

The CFI of Bulacan ruled in favor of the plaintiff.

The IAC affirmed the decision of the CFI.

ISSUE:

Whether or not the "Deed of Exchange" of the properties executed by the

Pachecos on the one hand and the Delpher Trades Corporation on the other was meant
to be a contract of sale which, in effect, prejudiced the private respondent's right of first
refusal over the leased property included in the "deed of exchange."

ARGUMENTS:

Eduardo Neria, a CPA and son-in-law of the late Pelagia Pacheco testified that
Delpher Trades Corporation is a family corporation and that the corporation was
organized by the children of the two spouses (spouses Pelagia Pacheco and Benjamin
Hernandez and spouses Delfin Pacheco and Pilar Angeles in order to perpetuate their
control over the property through the corporation and as a means to avoid taxes.

Under this factual backdrop, the petitioners contend that there was actually no
transfer of ownership of the subject parcel of land since the Pachecos remained in
control of the property. Thus, the petitioners allege: "Considering that the beneficial
ownership and control of Petitioner Corporation remained in the hands of the original
co-owners, there was no transfer of actual ownership interests over the land when the
same was transferred to 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, Petitioner Corporation is a mere alter ego or conduit of the Pacheco co-
owners

On the other hand, the private respondent argues that Delpher Trades
Corporation is a corporate entity separate and distinct from the Pachecosn and that
there was actual transfer of ownership interests over the leased property when the same
was transferred to Delpher Trades Corporation in exchange for the latter's shares of
stock.

RULING:

No, it was not meant to be a contract of sale.

After incorporation, one becomes a stockholder of a corporation by subscription

or by purchasing stock directly from the corporation or from individual owners thereof
(Salmon, Dexter & Co. v. Unson, 47 Phil, 649, citing Bole v. Fulton [1912], 233 Pa., 609).
In the case at bar, in exchange for their properties, the Pachecos acquired 2,500 original
unissued no par value shares of stocks of the Delpher Trades Corporation.
Consequently, the Pachecos became stockholders of the corporation by subscription
"The essence of the stock subscription is an agreement to take and pay for original
unissued shares of a corporation, formed or to be formed.

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 Trades Corporation is a business conduit of the Pachecos.

What they really did was to invest their properties and change the nature of their
ownership from unincorporated to incorporated form by organizing Delpher Trades
Corporation to take control of their properties and at the same time save on inheritance
taxes.

The records do not point to anything wrong or objectionable about this "estate
planning" scheme resorted to by the Pachecos. "The legal right of a taxpayer to decrease
the amount of what otherwise could be his taxes or altogether avoid them, by means
which the law permits, cannot be doubted.

The "Deed of Exchange" of property between the Pachecos and Delpher Trades
Corporation cannot be considered a contract of sale. There was no transfer of actual
ownership interests by the Pachecos to a third party. The Pacheco family merely
changed their ownership from one form to another. The ownership remained in the
same hands. Hence, the private respondent has no basis for its claim of a light of first
refusal under the lease contract.
DISPOSITIVE PORTION

WHEREFORE, the instant petition is hereby GRANTED, The questioned decision

and resolution of the then Intermediate Appellate Court are REVERSED and SET
ASIDE. The amended complaint in Civil Case No. 885-V-79 of the then Court of First
Instance of Bulacan is DISMISSED. No costs.