GAMBOA vs.

TEVES (2011)
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 Privatiation Council (IPC), to !etro Pacific Assets "ol#ings, Inc$ (!PA"), an
affiliate of %irst Pacific Company &imite# (%irst Pacific), a "ong 'ong-base# investment management
an# hol#ing company an# a sharehol#er of the Philippine &ong (istance Telephone Company
(P&(T)$
The petitioner )uestione# the sale on the groun# that it also involve# an in#irect sale of *+
million shares (or about ,$- percent of the outstan#ing common shares) of P&(T o.ne# by PTIC to
%irst Pacific$ /ith the this sale, %irst Pacific0s common sharehol#ings in P&(T increase# from -1$2
percent to -2 percent, thereby increasing the total common sharehol#ings of foreigners in P&(T to
about 3*$425$ This, accor#ing to the petitioner, violates 6ection **, Article 7II of the *832 Philippine
Constitution .hich limits foreign o.nership of the capital of a public utility to not more than 415$
II. THE ISSUE
(oes the term 9capital: in 6ection **, Article 7II of the Constitution refer to the total common
shares only, or to the total outstan#ing capital stock (combine# total of common an# non-voting
preferre# shares) of P&(T, 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 ote in the election of directors of a pu!lic
utility, or in the instant case, to the total common shares of "#$T%&
6ection **, Article 7II (<ational =conomy an# Patrimony) of the *832 Constitution man#ates
the %ilipiniation of public utilities, to .it>
6ection **$ No fran!"s#$ #r%"f"a%#$ or an& o%!#r for' of a(%!or")a%"on for %!# o*#ra%"on of
a *(+," (%","%& s!a,, +# -ran%#. #/#*% %o "%")#ns of %!# 0!","**"n#s or %o or*ora%"ons or
asso"a%"ons or-an")#. (n.#r %!# ,a1s of %!# 0!","**"n#s$ a% ,#as% s"/%& *#r #n%(' of 1!os#
a*"%a, "s o1n#. +& s(! "%")#ns? nor shall such franchise, certificate, or authoriation be e@clusive in
character or for a longer perio# than fifty years$ <either shall any such franchise or right be grante#
e@cept un#er the con#ition that it shall be subAect to amen#ment, alteration, or repeal by the Congress
.hen the common goo# so re)uires$ The 6tate shall encourage e)uity participation in public utilities by
the general public$ The participation of foreign investors in the governing bo#y of any public utility
enterprise shall be limite# to their proportionate share in its capital, an# all the e@ecutive an# managing
officers of such corporation or association must be citiens of the Philippines$ (=mphasis supplie#)
The term 9capital: in 6ection **, Article 7II of the Constitution refers only to shares of stock
entitle# to vote in the election of #irectors, an# thus in the present case only to common shares, an#
not to the total outstan#ing capital stock comprising both common an# non-voting preferre# shares
Bof P&(TC$
@@@ @@@ @@@
In#isputably, one of the rights of a stockhol#er is the right to participate in the control or
management of the corporation$ This is e@ercise# through his vote in the election of #irectors
because it is the boar# of #irectors that controls or manages the corporation$ In the absence of
provisions in the articles of incorporation #enying voting rights to preferre# shares, preferre# shares
have the same voting rights as common shares$ "o.ever, preferre# sharehol#ers are often
e@clu#e# from any control, that is, #eprive# of the right to vote in the election of #irectors an# on
other matters, on the theory that the preferre# sharehol#ers are merely investors in the corporation
for income in the same manner as bon#hol#ers$ @@@$
Consi#ering that common shares have voting rights .hich translate to control, as oppose# to
preferre# shares .hich usually have no voting rights, the term 9capital: in 6ection **, Article 7II of
the Constitution refers only to common shares$ "o.ever, if the preferre# shares also have the right
to vote in the election of #irectors, then the term 9capital: shall inclu#e such preferre# shares
because the right to participate in the control or management of the corporation is e@ercise# through
the right to vote in the election of #irectors$ In short, the term 9capital: in 6ection **, Article 7II of the
Constitution refers only to shares of stock that can vote in the election of #irectors$
@@@ @@@ @@@
!ere legal title is insufficient to meet the ,1 percent %ilipino-o.ne# 9capital: re)uire# in the
Constitution$ %ull beneficial o.nership of ,1 percent of the outstan#ing capital stock, couple# .ith ,1
percent of the voting rights, is re)uire#$ The legal an# beneficial o.nership of ,1 percent of the
outstan#ing capital stock must rest in the han#s of %ilipino nationals in accor#ance .ith the
constitutional man#ate$ Dther.ise, the corporation is 9consi#ere# as non-Philippine nationalBsC$:
@@@ @@@ @@@
To construe broa#ly the term 9capital: as the total outstan#ing capital stock, inclu#ing both
common an# non'oting preferre# shares, grossly contravenes the intent an# letter of the
Constitution that the 96tate shall #evelop a self-reliant an# in#epen#ent national economy effectiely
controlled by %ilipinos$: A broa# #efinition unAustifiably #isregar#s .ho o.ns the all-important voting
stock, .hich necessarily e)uates to control of the public utility$
/e shall illustrate the glaring anomaly in giving a broa# #efinition to the term 9capital$: &et us
assume that a corporation has *11 common shares o.ne# by foreigners an# *,111,111 non-voting
preferre# shares o.ne# by %ilipinos, .ith both classes of share having a par value of one peso
(P*$11) per share$ En#er the broa# #efinition of the term 9capital,: such corporation .oul# be
consi#ere# compliant .ith the 41 percent constitutional limit on foreign e)uity of public utilities since
the over.helming maAority, or more than 88$888 percent, of the total outstan#ing capital stock is
%ilipino o.ne#$ This is obviously absur#$
In the e@ample given, only the foreigners hol#ing the common shares have voting rights in
the election of #irectors, even if they hol# only *11 shares$ The foreigners, .ith a minuscule e)uity of
less than 1$11* percent, e@ercise control over the public utility$ Dn the other han#, the %ilipinos,
hol#ing more than 88$888 percent of the e)uity, cannot vote in the election of #irectors an# hence,
have no control over the public utility$ This starkly circumvents the intent of the framers of the
Constitution, as .ell as the clear language of the Constitution, to place the control of public utilities in
the han#s of %ilipinos$ It also ren#ers illusory the 6tate policy of an in#epen#ent national
economy effectiely controlled by %ilipinos$
The e@ample given is not theoretical but can be foun# in the real .orl#, and in fact e(ists in
the present case%
@@@ @@@ @@@
BDCnly hol#ers of common shares can vote in the election of #irectors Bof P&(TC, meaning
only common sharehol#ers e@ercise control over P&(T$ Conversely, hol#ers of preferre# shares,
.ho have no voting rights in the election of #irectors, #o not have any control over P&(T$ In fact,
un#er P&(T0s Articles of Incorporation, hol#ers of common shares have voting rights for all
purposes, .hile hol#ers of preferre# shares have no voting right for any purpose .hatsoever$
It must be stresse#, an# respon#ents #o not #ispute, that foreigners hol# a maAority of the
common shares of P&(T$ In fact, base# on P&(T0s +1*1 Feneral Information 6heet (FI6), .hich is a
#ocument re)uire# to be submitte# annually to the 6ecurities an# =@change Commission, foreigners
hol# *+1,14,,,81 common shares of P&(T .hereas %ilipinos hol# only ,,,2G1,,++ common
shares$ In other .or#s, foreigners hol# ,4$+25 of the total number of P&(T0s common shares, .hile
%ilipinos hol# only -G$2-5$ 6ince hol#ing a maAority of the common shares e)uates to control, it is
clear that foreigners e@ercise control over P&(T$ 6uch amount of control unmistakably e@cee#s the
allo.able 41 percent limit on foreign o.nership of public utilities e@pressly man#ate# in 6ection **,
Article 7II of the Constitution$
As sho.n in P&(T0s +1*1 FI6, as submitte# to the 6=C, the par value of P&(T common
shares is PG$11 per share, .hereas the par value of preferre# shares is P*1$11 per share$ In other
.or#s, preferre# shares have t.ice the par value of common shares but cannot elect #irectors an#
have only *H21 of the #ivi#en#s of common shares$ !oreover, 88$445 of the preferre# shares are
o.ne# by %ilipinos .hile foreigners o.n only a minuscule 1$G,5 of the preferre# shares$ /orse,
preferre# shares constitute 22$3G5 of the authorie# capital stock of P&(T .hile common shares
constitute only ++$*G5$ This un#eniably sho.s that beneficial interest in P&(T is not .ith the non-
voting preferre# shares but .ith the common shares, blatantly violating the constitutional
re)uirement of ,1 percent %ilipino control an# %ilipino beneficial o.nership in a public utility$
The legal an# beneficial o.nership of ,1 percent of the outstan#ing capital stock must rest in
the han#s of %ilipinos in accor#ance .ith the constitutional man#ate$ %ull beneficial o.nership of ,1
percent of the outstan#ing capital stock, couple# .ith ,1 percent of the voting rights, is
constitutionally re)uire# for the 6tate0s grant of authority to operate a public utility$ The un#ispute#
fact that the P&(T preferre# shares, 88$445 o.ne# by %ilipinos, are non-voting an# earn only *H21
of the #ivi#en#s that P&(T common shares earn, grossly violates the constitutional re)uirement of
,1 percent %ilipino control an# %ilipino beneficial o.nership of a public utility$
In short, %ilipinos hol# less than ,1 percent of the voting stock, an# earn less than ,1
percent of the #ivi#en#s, of P&(T$ This #irectly contravenes the e@press comman# in 6ection **,
Article 7II of the Constitution that 9BnCo franchise, certificate, or any other form of authoriation for the
operation of a public utility shall be grante# e@cept to @ @ @ corporations @ @ @ organie# un#er the
la.s of the Philippines, at least si@ty per centum of .hose capital is o.ne# by such citiens @ @ @$:
To repeat, (*) foreigners o.n ,4$+25 of the common shares of P&(T, .hich class of shares
e@ercises the sole right to vote in the election of #irectors, an# thus e@ercise control over P&(T? (+)
%ilipinos o.n only -G$2-5 of P&(T0s common shares, constituting a minority of the voting stock, an#
thus #o not e@ercise control over P&(T? (-) preferre# shares, 88$445 o.ne# by %ilipinos, have no
voting rights? (4) preferre# shares earn only *H21 of the #ivi#en#s that common shares earn? (G)
preferre# shares have t.ice the par value of common shares? an# (,) preferre# shares constitute
22$3G5 of the authorie# capital stock of P&(T an# common shares only ++$*G5$ This kin# of
o.nership an# control of a public utility is a mockery of the Constitution$
Inci#entally, the fact that P&(T common shares .ith a par value of PG$11 have a current
stock market value of P+,-+3$11 per share, .hile P&(T preferre# shares .ith a par value of P*1$11
per share have a current stock market value ranging from only P*1$8+ to P**$1, per share, is a
glaring confirmation by the market that control an# beneficial o.nership of P&(T rest .ith the
common shares, not .ith the preferre# shares$
@@@ @@@ @@@
2HEREFORE, .e 0ARTL3 GRANT the petition an# rule that the term 9capital: in 6ection
**, Article 7II of the *832 Constitution refers only to shares of stock entitle# to vote in the election of
#irectors, an# thus in the present case only to common shares, an# not to the total outstan#ing
capital stock (common an# non-voting preferre# shares)$ Respon#ent Chairperson of the 6ecurities
an# =@change Commission is 4IRECTE4 to apply this #efinition of the term 9capital: in #etermining
the e@tent of allo.able foreign o.nership in respon#ent Philippine &ong (istance Telephone
Company, an# if there is a violation of 6ection **, Article 7II of the Constitution, to impose the
appropriate sanctions un#er the la.$