Gamboa v Teves

June 28, 2011

Carpio, J.
Recit-Ready Version:
Gamboa filed a petition to declare the ownership of most of the common shares of PLDT by Metro Pacific,
a foreign-based corporation. Metro Pacifics defense is that capital doesnt mean common shares, but total
outstanding capital stock.
The SC sort of sided with Gamboa, ruling that capital means shares of stock with voting rights. Thus,
whether common or preferred, if the shareholder has voting rights, its part of capital under the Consti.
Facts:
In 1969, General Telephone and Electronics Corporation sold 26% of PLDTs outstanding common shares
to the Philippine Telecommunications Investment Corporation (PTIC). By virtue of assignment, Prime
Holdings, Inc. became the owner of 111,415 shares of PTIC; these shares were later sequestered by the
PCGG, and later declared to be owned by the Republic.
In 1999, First Pacific, a Bermuda-registered, Hong Kong-based investment firm, acquired the remaining 54%
capital stock of PTIC. In 2006, the Inter-Agency Privatization Council of the Government announced that it
would sell the 111,415 shares through a public bidding. Parallax Venture Fund won the auction.
Later, First Pacific announced that that it would exercise its right of first refusal as a PTIC stockholder and
but those shares by matching the bid price of Parallax. Although it initially failed, First Pacific eventually was
able to buy the said shares. With that sale, First Pacifics ownership of the common stock of PLDT
increased from 30.7 to 37 percent, and the total foreign ownership of common stock rose to 81.47 per cent.
Thus, Wilson P. Gamboa, later joined by Pablito and Arno Sanidad, claimed that PLDTs stock ownership
contravened the foreigners 40% rule laid out in the Constitution.
In response, Finance Sec. Margarito Teves, USec. John Sevilla, and PCGG Commissioner Ricardo Abcede
alleged that the 100% ownership of the PTIC shares by First Pacific did not contravene the Constitution
because this only led to a 13.847% ownership of the outstanding capital stock of PLDT.
This led to the filing of this petition for prohibition, injunction, declaratory relief and declaration of nullity of
sale of shares of stock of PTIC by the Rep. of the Philippines to Metro Pacific Assets Holdings.
Issues:
Preliminary procedural issues to be skipped in discussion:
a. WON the case is within the jurisdiction of the court (Yes. While only prohibition is within the
original jurisdiction of the SC, the latter treated the petition for declaratory relief as one of
mandamus.)
b. WON there was standing (Yes, as a stockholder, and because the issue is one of public interest)
WON the term capital in Section 11, Article XII of the Constitution refers to total common shares only or
and not to the total outstanding capital stock of PLDT, a public utility. (Yes. Uh Oh)
Ratio:
The controversial provision in the Constitution is the ff. (Section 11, Art. XII):
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 percentum of whose capital is owned by such citizens. xxx
This provision is substantially the same as the equivalent provisions in the 1973 and 1935 Constitutions. Fr.
Bernas says that this provision provides for the Filipinization of public utilities. This is a recognition of the
sensitive and vital position of public utilities both in the national economy and for national security.
The problem, however, lies with the definition of the word capital. More specifically, the question is whether
it means common shares or total outstanding capital stock (the total of common and preferred shares).
Constitutionally, the problem is that, undisputedly, most of the common, and thus voting, shares are owned
by foreigners, while such foreigners only own a small part of the total outstanding capital stock. The guiding
state policy is that of an independent national economy effectively controlled by Filipinos.
The SC ruled that capital means only the shares of stock that can vote in the election of directors. The
intent of the framers of the Constitution in imposing the 40% nationality requirement was for Filipino
nationals to always be in control of the corporation undertaking the provision of public utilities. Thus, to
consider capital as total outstanding capital stock would allow foreigners to own all the common shares,
and thereby assume all voting rights by owning all the common shares.
The Corporation Code states that no share may be deprived of voting rights except those classified and
issued as preferred or redeemable shares, unless otherwise provided in the Code. One of the rights of a
stockholder is the right to participate in the control or management of a corporation, exercised through his
vote in the board of directors. While preferred or redeemable shares may be denied this right to vote, under
no circumstance may a common shareholder be deprived of his right to vote.
Generally, preferred shares are not given the right to vote. Thus, it is only the common shares that are given
control of the corporation. However, if the preferred shares also have the right to vote, then capital includes
them too.
Looking at the records of the Constitutional Commission, capital refers to the controlling interest of a
corporation, according to Mssrs. Villegas, Bengzon, and especially Azcuna. Further, under the definition of a
Philippine National in the Foreign Investments act of 1991, only a corporation organized under the laws
of the Philippines of which at least 60% of the capital stock outstanding and entitled to vote is owned and
held by citizens of the Philippines.
Under the IRR of the said law, compliance with the required Filipino ownership of a corporation shall be
determined on the basis of outstanding capital stock whether fully paid or not, but only such stocks which are
generally entitled to vote are considered. Mere legal title is not enough to meet the required Filipino
equity. Full beneficial ownership of the stocks, coupled with appropriate voting rights is essential.
Thus, stocks, the voting rights of which have been assigned or transferred to aliens cannot be considered held
by Philippine citizens or nationals.
Here, the PLDT preferred shares are not entitled to vote, as per the Articles of Incorporation. The right to
vote is given exclusively to holders of common shares.
It is not disputed that foreigners hold a majority of the common shares of PLDT, to the tune of 64.27%. It is
thus clear that foreigners exercise control over PLDT past the 40% limit provided for in the Constitution.
They even get more dividends than common shareholdres,( in a completely irrelevant obiter designed only to
make the shareholders look bad.-ed). Thus, not only do Filipinos hold less than 60% of the voting stock, they
also earn less than 60% of the dividends.
Lastly, the sid provision of the Constitution is self-executing. No legislation is needed to make it effective.
The SEC has been given regulatory and adjudicative functions. Thus, it may disapprove or reject the AOI of
any corporation, where the required percentage of ownership of capital stock by Filipinos has not been
complied with. By this petition for declaratory relief/mandamus, the SC directed the SEC to examine the
ownership of the capital of PLDT.
Petition partly granted. SEC directed to apply above definition of capital to determine extent of
allowable foreign ownership of PLDT.
Epilogue: SEC found that the ownership of PLDT contravened the Consti and directed that the foreign-
owned stocks be sold to Filipinos. No one could afford the stocks. Metro Pacific prevented the
implementation of the decision. Not sure but I think they still own the stocks subject of this case, seeing as
MVP is still a director of PLDT.
Gabe.