Wilson P. Gamboa v. Finance Secretary Margarito Teves, et al.

,
G.R. No. 176579, June 28, 2011
CARPIO, J.:
I.

THE FACTS
This is a petition to nullify the sale of shares of stock of Philippine
Telecommunications Investment Corporation (PTIC) by the government of
the Republic of the Philippines, acting through the Inter-Agency Privatization
Council (IPC), to Metro Pacific Assets Holdings, Inc. (MPAH), an affiliate of
First Pacific Company Limited (First Pacific), a Hong Kong-based investment
management and holding company and a shareholder of the Philippine Long
Distance Telephone Company (PLDT).
The petitioner questioned the sale on the ground that it also involved
an indirect sale of 12 million shares (or about 6.3 percent of the outstanding
common shares) of PLDT owned by PTIC to First Pacific. With the this sale,
First Pacifics common shareholdings in PLDT increased from 30.7 percent
to 37 percent, thereby increasing the total common shareholdings of
foreigners in PLDT to about 81.47%. This, according to the petitioner,
violates Section 11, Article XII of the 1987 Philippine Constitution which limits
foreign ownership of the capital of a public utility to not more than 40%, thus:
Section 11. No franchise, certificate, or any other form of
authorization for the operation of a public utility shall be granted except
to citizens of the Philippines or to corporations or associations
organized under the laws of the Philippines, at least sixty per centum of
whose capital is owned by such citizens; nor shall such franchise,
certificate, or authorization be exclusive in character or for a longer period
than fifty years. Neither shall any such franchise or right be granted except
under the condition that it shall be subject to amendment, alteration, or
repeal by the Congress when the common good so requires. The State shall
encourage equity participation in public utilities by the general public. The
participation of foreign investors in the governing body of any public utility
enterprise shall be limited to their proportionate share in its capital, and all
the executive and managing officers of such corporation or association must
be citizens of the Philippines. (Emphasis supplied)

II.

THE ISSUE
Does the term capital in Section 11, Article XII of the Constitution
refer to the total common shares only, or to the total outstanding capital stock
(combined total of common and non-voting preferred shares) of PLDT, a
public utility?

III. THE RULING

[The Court partly granted the petition and held that the term capital
in Section 11, Article XII of the Constitution refers only to shares of stock
entitled to vote in the election of directors of a public utility, i.e., to the total
common shares in PLDT.]
Considering that common shares have voting rights which translate
to control, as opposed to preferred shares which usually have no voting
rights, the term capital in Section 11, Article XII of the Constitution refers
only to common shares. However, if the preferred shares also have the right
to vote in the election of directors, then the term capital shall include such
preferred shares because the right to participate in the control or
management of the corporation is exercised through the right to vote in the
election of directors. In short, the term capital in Section 11, Article XII
of the Constitution refers only to shares of stock that can vote in the
election of directors.
To construe broadly the term capital as the total outstanding capital
stock, including both common and non-voting preferred shares, grossly
contravenes the intent and letter of the Constitution that the State shall
develop a self-reliant and independent national economy effectively
controlled by Filipinos. A broad definition unjustifiably disregards who owns
the all-important voting stock, which necessarily equates to control of the
public utility.
Holders of PLDT preferred shares are explicitly denied of the right to
vote in the election of directors. PLDTs Articles of Incorporation expressly
state that the holders of Serial Preferred Stock shall not be entitled to
vote at any meeting of the stockholders for the election of directors or
for any other purpose or otherwise participate in any action taken by the
corporation or its stockholders, or to receive notice of any meeting of
stockholders. On the other hand, holders of common shares are granted the
exclusive right to vote in the election of directors. PLDTs Articles of
Incorporation state that each holder of Common Capital Stock shall have
one vote in respect of each share of such stock held by him on all matters
voted upon by the stockholders, and the holders of Common Capital Stock
shall have the exclusive right to vote for the election of directors and
for all other purposes.
It must be stressed, and respondents do not dispute, that foreigners
hold a majority of the common shares of PLDT. In fact, based on PLDTs
2010 General Information Sheet (GIS), which is a document required to be
submitted annually to the Securities and Exchange Commission, foreigners
hold 120,046,690 common shares of PLDT whereas Filipinos hold only

66,750,622 common shares. In other words, foreigners hold 64.27% of the

total number of PLDTs common shares, while Filipinos hold only 35.73%.
Since holding a majority of the common shares equates to control, it is clear
that foreigners exercise control over PLDT. Such amount of control
unmistakably exceeds the allowable 40 percent limit on foreign ownership of
public utilities expressly mandated in Section 11, Article XII of the
Constitution.
As shown in PLDTs 2010 GIS, as submitted to the SEC, the par
value of PLDT common shares is P5.00 per share, whereas the par value of
preferred shares is P10.00 per share. In other words, preferred shares have
twice the par value of common shares but cannot elect directors and have
only 1/70 of the dividends of common shares. Moreover, 99.44% of the
preferred shares are owned by Filipinos while foreigners own only a
minuscule 0.56% of the preferred shares. Worse, preferred shares constitute
77.85% of the authorized capital stock of PLDT while common shares
constitute only 22.15%. This undeniably shows that beneficial interest in
PLDT is not with the non-voting preferred shares but with the common
shares, blatantly violating the constitutional requirement of 60 percent Filipino
control and Filipino beneficial ownership in a public utility.
In short, Filipinos hold less than 60 percent of the voting stock, and
earn less than 60 percent of the dividends, of PLDT. This directly
contravenes the express command in Section 11, Article XII of the
Constitution that [n]o franchise, certificate, or any other form of authorization
for the operation of a public utility shall be granted except to x x x
corporations x x x organized under the laws of the Philippines, at least sixty
per centum of whose capital is owned by such citizens x x x.
To repeat, (1) foreigners own 64.27% of the common shares of
PLDT, which class of shares exercises the sole right to vote in the election of
directors, and thus exercise control over PLDT; (2) Filipinos own only 35.73%
of PLDTs common shares, constituting a minority of the voting stock, and
thus do not exercise control over PLDT; (3) preferred shares, 99.44% owned
by Filipinos, have no voting rights; (4) preferred shares earn only 1/70 of the
dividends that common shares earn; (5) preferred shares have twice the par
value of common shares; and (6) preferred shares constitute 77.85% of the
authorized capital stock of PLDT and common shares only 22.15%. This kind
of ownership and control of a public utility is a mockery of the Constitution.
[Thus, the Respondent Chairperson of the Securities and Exchange
Commission was DIRECTED by the Court to apply the foregoing definition of
the term capital in determining the extent of allowable foreign ownership in
respondent Philippine Long Distance Telephone Company, and if there is a
violation of Section 11, Article XII of the Constitution, to impose the
appropriate sanctions under the law.]

VELASCO (Separate Dissenting Opinion)

The present petition partakes of a collateral attack on PLDTs franchise as a
public utility with petitioner pleading as ground PLDTs alleged breach of the
40% limit on foreign equity. Such is not allowed. As discussed in PLDT v.
National Telecommunications Commission, a franchise is a property right
that can only be questioned in a direct proceeding.
(1) The intent of the framers of the Constitution was not to limit the
application of the word capital to voting or common shares alone.
Constitutional Commission records show that by using the word capital, the
framers of the Constitution adopted the definition or interpretation that
includes all types of shares, whether voting or non-voting.
(2) Cassus Omissus Pro Omisso Habendus Esta person, object or thing
omitted must have been omitted intentionally. In this case, the intention of the
framers of the Constitution is very clearto omit the phrases voting stock
and controlling interest.
(3) The FIA should also be read in harmony with the Constitution. Since the
Constitution only provides for a single requirement for the operation of a
public utility under Sec. 11, i.e., 60% capital must be Filipino-owned, a mere
statute cannot add another requirement. Otherwise, such statute may be
considered unconstitutional. Accordingly, the phrase entitled to vote should
not be interpreted to be limited to common shares alone or those shares
entitled to vote in the election of members of the Board of Directors.
(4) Further, the FIA did not say entitled to vote in the management affairs of
the corporation or entitled to vote in the election of the members of the
Board of Directors. Verily, where the law does not distinguish, neither should
We. Hence, the proper interpretation of the phrase entitled to vote under
the FIA should be that it applies to all shares, whether classified as voting or
non-voting shares.
(5) Additionally, control is another inherent right of ownership. The
circumstances enumerated in Sec. 6 of the Corporation Code clearly evince
this. It gives voting rights to the stocks deemed as non-voting as to
fundamental and major corporate changes. Thus, the issue should not only
dwell on the daily management affairs of the corporation but also on the
equally important fundamental changes that may need to be voted on.

(6) The SEC rules, opinions and jurisprudence use the control test, which
requires that the nationality of a corporation is determined by the total
outstanding capital stock irrespective of the number of shares, and capital
denotes the total shares subscribed and paid irrespective of their
nomenclature.
(7) Lastly, the last sentence of Sec. 11, Art. XII limits the participation of the
foreign investors in the governing body to their proportionate share in the
capital of the corporation.
ABAD (Dissenting Opinion)
(1)
Authority to define and interpret the meaning of capital in Sec. 11,
Art. XII belongs to Congress as part of its policy making powers, as the
power to authorize and control a public utility is a prerogative of Congress.
Sec. 11, Art. XII is no self-executing and requires Congressional action to
clarify its meaning. FIA is restricted to certain areas of investment and
should not be construed to clarify the meaning of capital under the
constitutional provision as they are rules which apply to future investors.
(2)
Capital refers to the entirety of the corporations outstanding voting
stock as, first, the 40 percent limit (if held only to preferred shareholders)
would render meaningless the fourth sentence which limits foreign
participation in the governing body of public utilities, and, second, amicus
curiae Dr. Villegas, Chairman of the Committee of National Economy, said
that the term capital did not distinguish among the classes of shares. In
both economic and business terms, capital always meant the entire shares of
stock. Further, Philippine policy on foreign ownership already discourages
foreign investments and to impose additional restrictions would aggravate
economic growth.
(3)
Sec. 11, Article XII already provides 3 limitations on foreign
participation in public utilities and the Court need not add more by restricting
the definition of capital.

Section 10, Article XII of the Philippine Constitution provides that the
Congress must reserve certain areas of investment to Filipinos or to
corporations or associations of which at least 60 percent of capital is owned
by Filipinos. Section 3 of the Foreign Investments Act of 1991 defines a
Philippine national as a citizen of the Philippines or a domestic partnership

or association wholly owned by citizens of the Philippines; or a corporation

organized under the laws of the Philippines of which at least 60 percent of
the capital stock outstanding and entitled to vote is owned and held by
citizens of the Philippines, and where a corporation and its non-Filipino
stockholders own stocks in a SEC registered enterprise, at least 60 percent
of the capital stocks outstanding and entitled to vote of both corporations
must be owned and held by citizens of the Philippines and at least 60 percent
of the members of the Board of Directors of both corporations must be
citizens of the Philippines.
In support of this State policy, the Supreme Court, in the case of Heirs of
Gamboa v. Teves, G.R. No.176579 dated 28 June 2011 and in a resolution
dated Oct. 9, 2012, interpreted the term capital for the first time. In this
case, the Supreme Court ruled that capital under the 1987 Constitution and
the Foreign Investments Act of 1991 refers to shares with voting rights, as
well as full beneficial ownership, and not to the total outstanding capital
stock. Simply put, the 60-40 ownership requirement in favor of the Filipino
citizens must apply separately to each class of shares, whether common,
preferred non-voting, preferred voting or any other class of shares.
In arriving at this judgment, the Supreme Court reasoned that the foreign
ownership limitation also applies to non-voting preferred stocks, that,
although denied the voting rights in the election of directors, are nevertheless
entitled to vote on certain fundamental corporate acts like amendment of the
articles of incorporation; adoption and amendment of by-laws; sale, lease,
exchange, mortgage, pledge or other disposition of all or substantially all of
the corporate property; incurring, creating or increasing bonded
indebtedness; increase or decrease of capital stock; merger or consolidation
of the corporation with another corporation or other corporations; investment
of corporate funds in another corporation or business; and dissolution of the
corporation.
Pursuant to the Heirs of Gamboa case, the Securities and Exchange
Commission issued on May 20, 2013 Memorandum Circular No. 8, which
sets the guidelines for the compliance of businesses engaged in nationalized
and partly nationalized activities. In gist, the said memorandum circular
provides that the required percentage of Filipino ownership shall be applied
to both the total number of outstanding shares of stock entitled to vote in the
election of directors, and the total number of outstanding shares of stock,
whether or not entitled to vote in the election of directors. Consequently, all
existing covered corporations which are not compliant with the guidelines are

given a period of one year from the effectivity of the issuance within which to
comply with the said ownership requirement.
Certainly, the Securities and Exchange Commission issuance upholds the
protection of vital industries and certain investment areas from foreign
control. It is effectively backing Article XII of the Constitution, the Foreign
Investment Act definition of what constitutes a Philippine national, and the
ruling of the Supreme Court in Heirs of Gamboa case to reserve certain
areas of investment to Filipinos. It adheres to the constitutional directive
without compromising the actual and potential foreign investments. While the
Securities and Exchange Commission issuance is providing a guiding
principle in support of the conservative approach of the government with
regard to development of the national economy, it is likewise recognizing the
important role of the foreign investors in the effort to improve the economic
standing of the Philippines.
[Constitutional Law, Corporation]
The term capital does not refer to both preferred and common stocks
treated as the same class of shares regardless of differences in voting rights
and privileges.
Consistent with the constitutional mandate that the State shall develop a
self-reliant and independent national economy effectively controlled by
Filipinos, the term "capital" means the outstanding capital stock entitled to
vote (voting stock), coupled with beneficial ownership, both of which results
to "effective control."
"Mere legal title is insufficient to meet the 60 percent Filipino owned capital
required in the Constitution for certain industries. Full beneficial ownership of
60 percent of the outstanding capital stock, coupled with 60 percent of the
voting rights, is required." In this case, such twin requirements must apply
uniformly and across the board to all classes of shares comprising the
capital. Thus, "the 60-40 ownership requirement in favor of Filipino citizens
must apply separately to each class of shares, whether common, preferred
non-voting, preferred voting or any other class of shares." This guarantees
that the controlling interest in public utilities always lies in the hands of
Filipino citizens.