G.R. No. 101897. March 5, 1993.

LYCEUM OF THE PHILIPPINES, INC., petitioner, vs. COURT OF

APPEALS, LYCEUM OF APARRI, LYCEUM OF CABAGAN,
LYCEUM OF CAMALANIUGAN, INC., LYCEUM OF LALLO, INC.,
LYCEUM OF TUAO, INC., BUHI LYCEUM, CENTRAL LYCEUM OF
CATANDUANES, LYCEUM OF SOUTHERN PHILIPPINES, LYCEUM
OF EASTERN MINDANAO, INC. and WESTERN PANGASINAN
LYCEUM, INC., respondents.
Quisumbing, Torres & Evangelista Law Offices and Ambrosio Padilla
for petitioner.
Antonio M. Nuyles and Purungan, Chato, Chato, Tarriela & Tan Law
Offices for respondents.
Froilan Siobal for Western Pangasinan Lyceum.
SYLLABUS
1. CORPORATION LAW; CORPORATE NAMES; REGISTRATION
OF PROPOSED NAME WHICH IS IDENTICAL OR CONFUSINGLY
SIMILAR TO THAT OF ANY EXISTING CORPORATION,
PROHIBITED; CONFUSION AND DECEPTION EFFECTIVELY
PRECLUDED BY THE APPENDING OF GEOGRAPHIC NAMES TO
THE WORD "LYCEUM". The Articles of Incorporation of a
corporation must, among other things, set out the name of the
corporation. Section 18 of the Corporation Code establishes a
restrictive rule insofar as corporate names are concerned: "Section
18. Corporate name. No corporate name may be allowed by the
Securities an Exchange Commission if the proposed name is identical
or deceptively or confusingly similar to that of any existing corporation
or to any other name already protected by law or is patently
deceptive, confusing or contrary to existing laws. When a change in
the corporate name is approved, the Commission shall issue an
amended certificate of incorporation under the amended name." The
policy underlying the prohibition in Section 18 against the registration
of a corporate name which is "identical or deceptively or confusingly
similar" to that of any existing corporation or which is "patently
deceptive" or "patently confusing" or "contrary to existing laws," is the
avoidance of fraud upon the public which would have occasion to deal
with the entity concerned, the evasion of legal obligations and duties,

and the reduction of difficulties of administration and supervision over

corporations. We do not consider that the corporate names of private
respondent institutions are "identical with, or deceptively or
confusingly similar" to that of the petitioner institution. True enough,
the corporate names of private respondent entities all carry the word
"Lyceum" but confusion and deception are effectively precluded by
the appending of geographic names to the word "Lyceum." Thus, we
do not believe that the "Lyceum of Aparri" can be mistaken by the
general public for the Lyceum of the Philippines, or that the "Lyceum
of Camalaniugan" would be confused with the Lyceum of the
Philippines.
2. ID.; ID.; DOCTRINE OF SECONDARY MEANING; USE OF WORD
"LYCEUM," NOT ATTENDED WITH EXCLUSIVITY. It is claimed,
however, by petitioner that the word "Lyceum" has acquired a
secondary meaning in relation to petitioner with the result that word,
although originally a generic, has become appropriable by petitioner
to the exclusion of other institutions like private respondents herein.
The doctrine of secondary meaning originated in the field of trademark
law. Its application has, however, been extended to corporate names
sine the right to use a corporate name to the exclusion of others is
based upon the same principle which underlies the right to use a
particular trademark or tradename. In Philippine Nut Industry, Inc. v.
Standard Brands, Inc., the doctrine of secondary meaning was
elaborated in the following terms: " . . . a word or phrase originally
incapable of exclusive appropriation with reference to an article on the
market, because geographically or otherwise descriptive, might
nevertheless have been used so long and so exclusively by one
producer with reference to his article that, in that trade and to that
branch of the purchasing public, the word or phrase has come to
mean that the article was his product." The question which arises,
therefore, is whether or not the use by petitioner of "Lyceum" in its
corporate name has been for such length of time and with such
exclusivity as to have become associated or identified with the
petitioner institution in the mind of the general public (or at least that
portion of the general public which has to do with schools). The Court
of Appeals recognized this issue and answered it in the negative:
"Under the doctrine of secondary meaning, a word or phrase originally
incapable of exclusive appropriation with reference to an article in the
market, because geographical or otherwise descriptive might
nevertheless have been used so long and so exclusively by one
producer with reference to this article that, in that trade and to that

group of the purchasing public, the word or phrase has come to mean
that the article was his produce (Ana Ang vs. Toribio Teodoro, 74 Phil.
56). This circumstance has been referred to as the distinctiveness into
which the name or phrase has evolved through the substantial and
exclusive use of the same for a considerable period of time. . . . No
evidence was ever presented in the hearing before the Commission
which sufficiently proved that the word 'Lyceum' has indeed acquired
secondary meaning in favor of the appellant. If there was any of this
kind, the same tend to prove only that the appellant had been using
the disputed word for a long period of time. . . . In other words, while
the appellant may have proved that it had been using the word
'Lyceum' for a long period of time, this fact alone did not amount to
mean that the said word had acquired secondary meaning in its favor
because the appellant failed to prove that it had been using the same
word all by itself to the exclusion of others. More so, there was no
evidence presented to prove that confusion will surely arise if the
same word were to be used by other educational institutions.
Consequently, the allegations of the appellant in its first two assigned
errors must necessarily fail." We agree with the Court of Appeals. The
number alone of the private respondents in the case at bar suggests
strongly that petitioner's use of the word "Lyceum" has not been
attended with the exclusivity essential for applicability of the doctrine
of secondary meaning. Petitioner's use of the word "Lyceum" was not
exclusive but was in truth shared with the Western Pangasinan
Lyceum and a little later with other private respondent institutions
which registered with the SEC using "Lyceum" as part of their
corporation names. There may well be other schools using Lyceum or
Liceo in their names, but not registered with the SEC because they
have not adopted the corporate form of organization.
3. ID.; ID.; MUST BE EVALUATED IN THEIR ENTIRETY TO
DETERMINE WHETHER THEY ARE CONFUSINGLY OR
DECEPTIVELY SIMILAR TO ANOTHER CORPORATE ENTITY'S
NAME. petitioner institution is not entitled to a legally enforceable
exclusive right to use the word "Lyceum" in its corporate name and
that other institutions may use "Lyceum" as part of their corporate
names. To determine whether a given corporate name is "identical" or
"confusingly or deceptively similar" with another entity's corporate
name, it is not enough to ascertain the presence of "Lyceum" or
"Liceo" in both names. One must evaluate corporate names in their
entirety and when the name of petitioner is juxtaposed with the names

of private respondents, they are not reasonably regarded as

"identical" or "confusingly or deceptively similar" with each other.
DECISION
FELICIANO, J p:
Petitioner is an educational institution duly registered with the
Securities and Exchange Commission ("SEC"). When it first
registered with the SEC on 21 September 1950, it used the corporate
name Lyceum of the Philippines, Inc. and has used that name ever
since.
On 24 February 1984, petitioner instituted proceedings before the
SEC to compel the private respondents, which are also educational
institutions, to delete the word "Lyceum" from their corporate names
and permanently to enjoin them from using "Lyceum" as part of their
respective names.
Some of the private respondents actively participated in the
proceedings before the SEC. These are the following, the dates of
their original SEC registration being set out below opposite their
respective names:
Western Pangasinan Lyceum 27 October 1950
Lyceum of Cabagan 31 October 1962
Lyceum of Lallo, Inc. 26 March 1972
Lyceum of Aparri 28 March 1972
Lyceum of Tuao, Inc. 28 March 1972
Lyceum of Camalaniugan 28 March 1972
The following private respondents were declared in default for failure
to file an answer despite service of summons:
Buhi Lyceum;

Central Lyceum of Catanduanes;

Lyceum of Eastern Mindanao, Inc.; and
Lyceum of Southern Philippines
Petitioner's original complaint before the SEC had included three (3)
other entities:
1. The Lyceum of Malacanay;
2. The Lyceum of Marbel; and
3. The Lyceum of Araullo
The complaint was later withdrawn insofar as concerned the Lyceum
of Malacanay and the Lyceum of Marbel, for failure to serve summons
upon these two (2) entities. The case against the Liceum of Araullo
was dismissed when that school motu proprio change its corporate
name to "Pamantasan ng Araullo."
The background of the case at bar needs some recounting. Petitioner
had sometime before commenced in the SEC a proceeding (SECCase No. 1241) against the Lyceum of Baguio, Inc. to require it to
change its corporate name and to adopt another name not "similar [to]
or identical" with that of petitioner. In an Order dated 20 April 1977,
Associate Commissioner Julio Sulit held that the corporate name of
petitioner and that of the Lyceum of Baguio, Inc. were substantially
identical because of the presence of a "dominant" word, i.e.,
"Lyceum," the name of the geographical location of the campus being
the only word which distinguished one from the other corporate name.
The SEC also noted that petitioner had registered as a corporation
ahead of the Lyceum of Baguio, Inc. in point of time, 1 and ordered
the latter to change its name to another name "not similar or identical
[with]" the names of previously registered entities.
The Lyceum of Baguio, Inc. assailed the Order of the SEC before the
Supreme Court in a case docketed as G.R. No. L-46595. In a Minute
Resolution dated 14 September 1977, the Court denied the Petition
for Review for lack of merit. Entry of judgment in that case was made
on 21 October 1977. 2

Armed with the Resolution of this Court in G.R. No. L-46595,

petitioner then wrote all the educational institutions it could find using
the word "Lyceum" as part of their corporate name, and advised them
to discontinue such use of "Lyceum." When, with the passage of time,
it became clear that this recourse had failed, petitioner instituted
before the SEC SEC-Case No. 2579 to enforce what petitioner claims
as its proprietary right to the word "Lyceum." The SEC hearing officer
rendered a decision sustaining petitioner's claim to an exclusive right
to use the word "Lyceum." The hearing officer relied upon the SEC
ruling in the Lyceum of Baguio, Inc. case (SEC-Case No. 1241) and
held that the word "Lyceum" was capable of appropriation and that
petitioner had acquired an enforceable exclusive right to the use of
that word.
On appeal, however, by private respondents to the SEC En Banc, the
decision of the hearing officer was reversed and set aside. The SEC
En Banc did not consider the word "Lyceum" to have become so
identified with petitioner as to render use thereof by other institutions
as productive of confusion about the identity of the schools concerned
in the mind of the general public. Unlike its hearing officer, the SEC
En Banc held that the attaching of geographical names to the word
"Lyceum" served sufficiently to distinguish the schools from one
another, especially in view of the fact that the campuses of petitioner
and those of the private respondents were physically quite remote
from each other. 3
Petitioner then went on appeal to the Court of Appeals. In its Decision
dated 28 June 1991, however, the Court of Appeals affirmed the
questioned Orders of the SEC En Banc. 4 Petitioner filed a motion for
reconsideration, without success.
Before this Court, petitioner asserts that the Court of Appeals
committed the following errors:
1. The Court of Appeals erred in holding that the Resolution of the
Supreme Court in G.R. No. L-46595 did not constitute stare decisis as
to apply to this case and in not holding that said Resolution bound
subsequent determinations on the right to exclusive use of the word
Lyceum.
2. The Court of Appeals erred in holding that respondent Western
Pangasinan Lyceum, Inc. was incorporated earlier than petitioner.

3. The Court of Appeals erred in holding that the word Lyceum has
not acquired a secondary meaning in favor of petitioner.
4. The Court of Appeals erred in holding that Lyceum as a generic
word cannot be appropriated by the petitioner to the exclusion of
others. 5
We will consider all the foregoing ascribed errors, though not
necessarily seriatim. We begin by noting that the Resolution of the
Court in G.R. No. L-46595 does not, of course, constitute res
adjudicata in respect of the case at bar, since there is no identity of
parties. Neither is stare decisis pertinent, if only because the SEC En
Banc itself has re-examined Associate Commissioner Sulit's ruling in
the Lyceum of Baguio case. The Minute Resolution of the Court in
G.R. No. L-46595 was not a reasoned adoption of the Sulit ruling.
The Articles of Incorporation of a corporation must, among other
things, set out the name of the corporation. 6 Section 18 of the
Corporation Code establishes a restrictive rule insofar as corporate
names are concerned:
"SECTION 18. Corporate name. No corporate name may be
allowed by the Securities an Exchange Commission if the proposed
name is identical or deceptively or confusingly similar to that of any
existing corporation or to any other name already protected by law or
is patently deceptive, confusing or contrary to existing laws. When a
change in the corporate name is approved, the Commission shall
issue an amended certificate of incorporation under the amended
name." (Emphasis supplied)
The policy underlying the prohibition in Section 18 against the
registration of a corporate name which is "identical or deceptively or
confusingly similar" to that of any existing corporation or which is
"patently deceptive" or "patently confusing" or "contrary to existing
laws," is the avoidance of fraud upon the public which would have
occasion to deal with the entity concerned, the evasion of legal
obligations and duties, and the reduction of difficulties of
administration and supervision over corporations. 7
We do not consider that the corporate names of private respondent
institutions are "identical with, or deceptively or confusingly similar" to
that of the petitioner institution. True enough, the corporate names of

private respondent entities all carry the word "Lyceum" but confusion
and deception are effectively precluded by the appending of
geographic names to the word "Lyceum." Thus, we do not believe that
the "Lyceum of Aparri" can be mistaken by the general public for the
Lyceum of the Philippines, or that the "Lyceum of Camalaniugan"
would be confused with the Lyceum of the Philippines.
Etymologically, the word "Lyceum" is the Latin word for the Greek
lykeion which in turn referred to a locality on the river Ilissius in
ancient Athens "comprising an enclosure dedicated to Apollo and
adorned with fountains and buildings erected by Pisistratus, Pericles
and Lycurgus frequented by the youth for exercise and by the
philosopher Aristotle and his followers for teaching." 8 In time, the
word "Lyceum" became associated with schools and other institutions
providing public lectures and concerts and public discussions. Thus
today, the word "Lyceum" generally refers to a school or an institution
of learning. While the Latin word "lyceum" has been incorporated into
the English language, the word is also found in Spanish (liceo) and in
French (lycee). As the Court of Appeals noted in its Decision, Roman
Catholic schools frequently use the term; e.g., "Liceo de Manila,"
"Liceo de Baleno" (in Baleno, Masbate), "Liceo de Masbate," "Liceo
de Albay." 9 "Lyceum" is in fact as generic in character as the word
"university." In the name of the petitioner, "Lyceum" appears to be a
substitute for "university;" in other places, however, "Lyceum," or
"Liceo" or "Lycee" frequently denotes a secondary school or a college.
It may be (though this is a question of fact which we need not resolve)
that the use of the word "Lyceum" may not yet be as widespread as
the use of "university," but it is clear that a not inconsiderable number
of educational institutions have adopted "Lyceum" or "Liceo" as part of
their corporate names. Since "Lyceum" or "Liceo" denotes a school or
institution of learning, it is not unnatural to use this word to designate
an entity which is organized and operating as an educational
institution.
It is claimed, however, by petitioner that the word "Lyceum" has
acquired a secondary meaning in relation to petitioner with the result
that that word, although originally a generic, has become appropriable
by petitioner to the exclusion of other institutions like private
respondents herein.
The doctrine of secondary meaning originated in the field of trademark
law. Its application has, however, been extended to corporate names

sine the right to use a corporate name to the exclusion of others is

based upon the same principle which underlies the right to use a
particular trademark or tradename. 10 In Philippine Nut Industry, Inc.
v. Standard Brands, Inc., 11 the doctrine of secondary meaning was
elaborated in the following terms:
" . . . a word or phrase originally incapable of exclusive appropriation
with reference to an article on the market, because geographically or
otherwise descriptive, might nevertheless have been used so long
and so exclusively by one producer with reference to his article that, in
that trade and to that branch of the purchasing public, the word or
phrase has come to mean that the article was his product." 12
The question which arises, therefore, is whether or not the use by
petitioner of "Lyceum" in its corporate name has been for such length
of time and with such exclusivity as to have become associated or
identified with the petitioner institution in the mind of the general public
(or at least that portion of the general public which has to do with
schools). The Court of Appeals recognized this issue and answered it
in the negative:
"Under the doctrine of secondary meaning, a word or phrase originally
incapable of exclusive appropriation with reference to an article in the
market, because geographical or otherwise descriptive might
nevertheless have been used so long and so exclusively by one
producer with reference to this article that, in that trade and to that
group of the purchasing public, the word or phrase has come to mean
that the article was his produce (Ana Ang vs. Toribio Teodoro, 74 Phil.
56). This circumstance has been referred to as the distinctiveness into
which the name or phrase has evolved through the substantial and
exclusive use of the same for a considerable period of time.
Consequently, the same doctrine or principle cannot be made to apply
where the evidence did not prove that the business (of the plaintiff)
has continued for so long a time that it has become of consequence
and acquired a good will of considerable value such that its articles
and produce have acquired a well-known reputation, and confusion
will result by the use of the disputed name (by the defendant) (Ang Si
Heng vs. Wellington Department Store, Inc., 92 Phil. 448).
With the foregoing as a yardstick, [we] believe the appellant failed to
satisfy the aforementioned requisites. No evidence was ever
presented in the hearing before the Commission which sufficiently

proved that the word 'Lyceum' has indeed acquired secondary

meaning in favor of the appellant. If there was any of this kind, the
same tend to prove only that the appellant had been using the
disputed word for a long period of time. Nevertheless, its (appellant)
exclusive use of the word (Lyceum) was never established or proven
as in fact the evidence tend to convey that the cross-claimant was
already using the word 'Lyceum' seventeen (17) years prior to the
date the appellant started using the same word in its corporate name.
Furthermore, educational institutions of the Roman Catholic Church
had been using the same or similar word like 'Liceo de Manila,' 'Liceo
de Baleno' (in Baleno, Masbate), 'Liceo de Masbate,' 'Liceo de Albay'
long before appellant started using the word 'Lyceum'. The appellant
also failed to prove that the word 'Lyceum' has become so identified
with its educational institution that confusion will surely arise in the
minds of the public if the same word were to be used by other
educational institutions.
In other words, while the appellant may have proved that it had been
using the word 'Lyceum' for a long period of time, this fact alone did
not amount to mean that the said word had acquired secondary
meaning in its favor because the appellant failed to prove that it had
been using the same word all by itself to the exclusion of others. More
so, there was no evidence presented to prove that confusion will
surely arise if the same word were to be used by other educational
institutions. Consequently, the allegations of the appellant in its first
two assigned errors must necessarily fail." 13 (Underscoring partly in
the original and partly supplied)
We agree with the Court of Appeals. The number alone of the private
respondents in the case at bar suggests strongly that petitioner's use
of the word "Lyceum" has not been attended with the exclusivity
essential for applicability of the doctrine of secondary meaning. It may
be noted also that at least one of the private respondents, i.e., the
Western Pangasinan Lyceum, Inc., used the term "Lyceum"
seventeen (17) years before the petitioner registered its own
corporate name with the SEC and began using the word "Lyceum." It
follows that if any institution had acquired an exclusive right to the
word "Lyceum," that institution would have been the Western
Pangasinan Lyceum, Inc. rather than the petitioner institution.
In this connection, petitioner argues that because the Western
Pangasinan Lyceum, Inc. failed to reconstruct its records before the

SEC in accordance with the provisions of R.A. No. 62, which records
had been destroyed during World War II, Western Pangasinan
Lyceum should be deemed to have lost all rights it may have acquired
by virtue of its past registration. It might be noted that the Western
Pangasinan Lyceum, Inc. registered with the SEC soon after
petitioner had filed its own registration on 21 September 1950.
Whether or not Western Pangasinan Lyceum, Inc. must be deemed to
have lost its rights under its original 1933 registration, appears to us to
be quite secondary in importance; we refer to this earlier registration
simply to underscore the fact that petitioner's use of the word
"Lyceum" was neither the first use of that term in the Philippines nor
an exclusive use thereof. Petitioner's use of the word "Lyceum" was
not exclusive but was in truth shared with the Western Pangasinan
Lyceum and a little later with other private respondent institutions
which registered with the SEC using "Lyceum" as part of their
corporation names. There may well be other schools using Lyceum or
Liceo in their names, but not registered with the SEC because they
have not adopted the corporate form of organization.
We conclude and so hold that petitioner institution is not entitled to a
legally enforceable exclusive right to use the word "Lyceum" in its
corporate name and that other institutions may use "Lyceum" as part
of their corporate names. To determine whether a given corporate
name is "identical" or "confusingly or deceptively similar" with another
entity's corporate name, it is not enough to ascertain the presence of
"Lyceum" or "Liceo" in both names. One must evaluate corporate
names in their entirety and when the name of petitioner is juxtaposed
with the names of private respondents, they are not reasonably
regarded as "identical" or "confusingly or deceptively similar" with
each other.
WHEREFORE, the petitioner having failed to show any reversible
error on the part of the public respondent Court of Appeals, the
Petition for Review is DENIED for lack of merit, and the Decision of
the Court of Appeals dated 28 June 1991 is hereby AFFIRMED. No
pronouncement as to costs.
SO ORDERED.

G.R. No. 137592. December 12, 2001]

ANG MGA KAANIB SA IGLESIA NG DIOS KAY KRISTO HESUS,

H.S.K. SA BANSANG PILIPINAS, INC. petitioner, vs. IGLESIA
NG DIOS KAY CRISTO JESUS, HALIGI AT SUHAY NG
KATOTOHANAN, respondent.
DECISION
YNARES-SANTIAGO, J.:
This is a petition for review assailing the Decision dated October 7,
1997[1] and the Resolution dated February 16, 1999[2] of the Court of Appeals
in CA-G.R. SP No. 40933, which affirmed the Decision of the Securities and
Exchange and Commission (SEC) in SEC-AC No. 539.[3]
Respondent Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay ng
Katotohanan (Church of God in Christ Jesus, the Pillar and Ground of
Truth),[4] is a non-stock religious society or corporation registered in
1936. Sometime in 1976, one Eliseo Soriano and several other members of
respondent corporation disassociated themselves from the latter and
succeeded in registering on March 30, 1977 a new non-stock religious
society or corporation, named Iglesia ng Dios Kay Kristo Hesus, Haligi at
Saligan ng Katotohanan.
On July 16, 1979, respondent corporation filed with the SEC a petition
to compel the Iglesia ng Dios Kay Kristo Hesus, Haligi at Saligan ng
Katotohananto change its corporate name, which petition was docketed as
SEC Case No. 1774. On May 4, 1988, the SEC rendered judgment in favor
of respondent, ordering the Iglesia ng Dios Kay Kristo Hesus, Haligi at
Saligan ng Katotohanan to change its corporate name to another name that is
not similar or identical to any name already used by a corporation,
partnership or association registered with the Commission.[5] No appeal was
taken from said decision.
It appears that during the pendency of SEC Case No. 1774, Soriano, et
al., caused the registration on April 25, 1980 of petitioner
corporation, Ang Mga Kaanib sa Iglesia ng Dios Kay Kristo Hesus, H.S.K.,
sa Bansang Pilipinas. The acronym H.S.K. stands for Haligi at Saligan ng
Katotohanan.[6]

On March 2, 1994, respondent corporation filed before the SEC a

petition, docketed as SEC Case No. 03-94-4704, praying that petitioner be
compelled to change its corporate name and be barred from using the same or
similar name on the ground that the same causes confusion among their
members as well as the public.

I
THE HONORABLE COURT OF APPEALS ERRED IN
CONCLUDING THAT PETITIONER HAS NOT BEEN DEPRIVED
OF ITS RIGHT TO PROCEDURAL DUE PROCESS, THE
HONORABLE COURT OF APPEALS DISREGARDED THE
JURISPRUDENCE APPLICABLE TO THE CASE AT BAR AND
INSTEAD
RELIED
ON
TOTALLY
INAPPLICABLE
JURISPRUDENCE.

Petitioner filed a motion to dismiss on the ground of lack of cause of

action. The motion to dismiss was denied. Thereafter, for failure to file an
answer, petitioner was declared in default and respondent was allowed to
present its evidence ex parte.
On November 20, 1995, the SEC rendered a decision ordering petitioner
to change its corporate name. The dispositive portion thereof reads:

II
THE HONORABLE COURT OF APPEALS ERRED IN ITS
INTEPRETATION OF THE CIVIL CODE PROVISIONS ON
EXTINCTIVE PRESCRIPTION, THEREBY RESULTING IN ITS
FAILURE TO FIND THAT THE RESPONDENT'S RIGHT OF
ACTION TO INSTITUTE THE SEC CASE HAS SINCE
PRESCRIBED PRIOR TO ITS INSTITUTION.

PREMISES CONSIDERED, judgment is hereby rendered in favor of the

petitioner (respondent herein).
Respondent Mga Kaanib sa Iglesia ng Dios Kay Kristo Jesus (sic), H.S.K. sa
Bansang Pilipinas (petitioner herein) is hereby MANDATED to change its
corporate name to another not deceptively similar or identical to the same
already used by the Petitioner, any corporation, association, and/or
partnership presently registered with the Commission.

III
THE HONORABLE COURT OF APPEALS FAILED TO CONSIDER
AND PROPERLY APPLY THE EXCEPTIONS ESTABLISHED BY
JURISPRUDENCE IN THE APPLICATION OF SECTION 18 OF
THE CORPORATION CODE TO THE INSTANT CASE.

Let a copy of this Decision be furnished the Records Division and

the Corporate and Legal Department [CLD] of this Commission for their
records, reference and/or for whatever requisite action, if any, to be
undertaken at their end.
SO ORDERED.[7]
Petitioner appealed to the SEC En Banc, where its appeal was docketed
as SEC-AC No. 539. In a decision dated March 4, 1996, the SEC En
Bancaffirmed the above decision, upon a finding that petitioner's corporate
name was identical or confusingly or deceptively similar to that of
respondents corporate name.[8]
Petitioner filed a petition for review with the Court of Appeals. On
October 7, 1997, the Court of Appeals rendered the assailed decision
affirming the decision of the SEC En Banc. Petitioners motion for
reconsideration was denied by the Court of Appeals on February 16, 1992.
Hence, the instant petition for review, raising the following assignment
of errors:

IV
THE HONORABLE COURT OF APPEALS FAILED TO PROPERLY
APPRECIATE THE SCOPE OF THE CONSTITUTIONAL
GUARANTEE ON RELIGIOUS FREEDOM, THEREBY FAILING
TO APPLY THE SAME TO PROTECT PETITIONERS RIGHTS.[9]
Invoking the case of Legarda v. Court of Appeals,[10] petitioner insists
that the decision of the Court of Appeals and the SEC should be set aside
because the negligence of its former counsel of record, Atty. Joaquin
Garaygay, in failing to file an answer after its motion to dismiss was denied
by the SEC, deprived them of their day in court.
The contention is without merit. As a general rule, the negligence of
counsel binds the client. This is based on the rule that any act performed by a
lawyer within the scope of his general or implied authority is regarded as an

act of his client.[11] An exception to the foregoing is where the reckless or

gross negligence of the counsel deprives the client of due process of
law.[12] Said exception, however, does not obtain in the present case.
In Legarda v. Court of Appeals, the effort of the counsel in defending
his clients cause consisted in filing a motion for extension of time to file
answer before the trial court. When his client was declared in default, the
counsel did nothing and allowed the judgment by default to become final and
executory. Upon the insistence of his client, the counsel filed a petition to
annul the judgment with the Court of Appeals, which denied the petition, and
again the counsel allowed the denial to become final and executory. This
Court found the counsel grossly negligent and consequently declared as null
and void the decision adverse to his client.
The factual antecedents of the case at bar are different. Atty. Garaygay
filed before the SEC a motion to dismiss on the ground of lack of cause of
action. When his client was declared in default for failure to file an answer,
Atty. Garaygay moved for reconsideration and lifting of the order of
default.[13] After judgment by default was rendered against petitioner
corporation, Atty. Garaygay filed a motion for extension of time to
appeal/motion for reconsideration, and thereafter a motion to set aside the
decision.[14]
Evidently, Atty. Garaygay was only guilty of simple
negligence. Although he failed to file an answer that led to the rendition of a
judgment by default against petitioner, his efforts were palpably real, albeit
bereft of zeal.[15]
Likewise, the issue of prescription, which petitioner raised for the first
time on appeal to the Court of Appeals, is untenable. Its failure to raise
prescription before the SEC can only be construed as a waiver of that
defense.[16] At any rate, the SEC has the authority to de-register at all times
and under all circumstances corporate names which in its estimation are
likely to spawn confusion. It is the duty of the SEC to prevent confusion in
the use of corporate names not only for the protection of the corporations
involved but more so for the protection of the public.[17]
Section 18 of the Corporation Code provides:
Corporate Name. --- No corporate name may be allowed by the Securities
and Exchange Commission if the proposed name is identical or deceptively
or confusingly similar to that of any existing corporation or to any other
name already protected by law or is patently deceptive, confusing or is
contrary to existing laws. When a change in the corporate name is approved,

the Commission shall issue an amended certificate of incorporation under the

amended name.
Corollary thereto, the pertinent portion of the SEC Guidelines on
Corporate Names states:
(d) If the proposed name contains a word similar to a word already used as
part of the firm name or style of a registered company, the proposed name
must contain two other words different from the name of the company
already registered;
Parties organizing a corporation must choose a name at their peril; and
the use of a name similar to one adopted by another corporation, whether a
business or a nonprofit organization, if misleading or likely to injure in the
exercise of its corporate functions, regardless of intent, may be prevented by
the corporation having a prior right, by a suit for injunction against the new
corporation to prevent the use of the name.[18]
Petitioner claims that it complied with the aforecited SEC guideline by
adding not only two but eight words to their registered name, to wit: Ang
Mga Kaanib"and "Sa Bansang Pilipinas, Inc., which, petitioner argues,
effectively distinguished it from respondent corporation.
The additional words Ang Mga Kaanib and Sa Bansang Pilipinas,
Inc. in petitioners name are, as correctly observed by the SEC, merely
descriptive of and also referring to the members, or kaanib, of respondent
who are likewise residing in the Philippines. These words can hardly serve
as an effective differentiating medium necessary to avoid confusion or
difficulty in distinguishing petitioner from respondent. This is especially so,
since both petitioner and respondent corporations are using the same
acronym --- H.S.K.;[19] not to mention the fact that both are espousing
religious beliefs and operating in the same place. Parenthetically, it is well to
mention that the acronym H.S.K. used by petitioner stands for Haligi at
Saligan ng Katotohanan.[20]
Then, too, the records reveal that in holding out their corporate name to
the public, petitioner highlights the dominant words IGLESIA NG DIOS
KAY KRISTO HESUS, HALIGI AT SALIGAN NG KATOTOHANAN, which
is strikingly similar to respondent's corporate name, thus making it even
more evident that the additional words Ang Mga Kaanib and Sa Bansang
Pilipinas, Inc., are merely descriptive of and pertaining to the members of
respondent corporation.[21]

Significantly, the only difference between the corporate names of

petitioner and respondent are the words SALIGAN and SUHAY. These words
are synonymous --- both mean ground, foundation or support. Hence, this
case is on all fours with Universal Mills Corporation v. Universal Textile
Mills, Inc.,[22]where the Court ruled that the corporate names Universal Mills
Corporation and Universal Textile Mills, Inc., are undisputably so similar
that even under the test of reasonable care and observation confusion may
arise.

Angara, Abello, Concepcion, Regala & Cruz for petitioners.

Furthermore, the wholesale appropriation by petitioner of respondent's

corporate name cannot find justification under the generic word rule. We
agree with the Court of Appeals conclusion that a contrary ruling would
encourage other corporations to adopt verbatim and register an existing and
protected corporate name, to the detriment of the public.

Petitioners seek to set aside the decision of respondent Court of

Appeals in CA-G.R. SP No. 25237, which reversed the Order dated
February 8, 1991 issued by the Regional Trial Court, Branch 11, Cebu
City in Civil Case No. CEB 6967. The order of the trial court denied
the motion to dismiss filed by respondent George C. Roxas of the
complaint for collection filed by petitioners.

The fact that there are other non-stock religious societies or corporations
using the names Church of the Living God, Inc., Church of God Jesus Christ
the Son of God the Head, Church of God in Christ & By the Holy Spirit, and
other similar names, is of no consequence. It does not authorize the use by
petitioner of the essential and distinguishing feature of respondent's
registered and protected corporate name.[23]
We need not belabor the fourth issue raised by petitioner. Certainly,
ordering petitioner to change its corporate name is not a violation of its
constitutionally guaranteed right to religious freedom. In so doing, the SEC
merely compelled petitioner to abide by one of the SEC guidelines in the
approval of partnership and corporate names, namely its undertaking to
manifest its willingness to change its corporate name in the event another
person, firm, or entity has acquired a prior right to the use of the said firm
name or one deceptively or confusingly similar to it.
WHEREFORE, in view of all the foregoing, the instant petition for
review is DENIED. The appealed decision of the Court of Appeals is
AFFIRMED in toto.
SO ORDERED.

Antonio Nuyles for private respondent.

QUIASON, J.:

It appears that sometime on October 28, 1987, Young Auto Supply

Co. Inc. (YASCO) represented by Nemesio Garcia, its president,
Nelson Garcia and Vicente Sy, sold all of their shares of stock in
Consolidated Marketing & Development Corporation (CMDC) to
Roxas. The purchase price was P8,000,000.00 payable as follows: a
downpayment of P4,000,000.00 and the balance of P4,000,000.00 in
four post dated checks of P1,000,000.00 each.
Immediately after the execution of the agreement, Roxas took full
control of the four markets of CMDC. However, the vendors held on to
the stock certificates of CMDC as security pending full payment of the
balance of the purchase price.
The first check of P4,000,000.00, representing the down-payment,
was honored by the drawee bank but the four other checks
representing the balance of P4,000,000.00 were dishonored. In the
meantime, Roxas sold one of the markets to a third party. Out of the
proceeds of the sale, YASCO received P600,000.00, leaving a
balance of P3,400,000.00 (Rollo, p. 176).

G.R. No. 104175 June 25, 1993

YOUNG AUTO SUPPLY CO. AND NEMESIO GARCIA, petitioners,
vs.
THE HONORABLE COURT OF APPEALS (THIRTEENTH
DIVISION) AND GEORGE CHIONG ROXAS,respondents.

Subsequently, Nelson Garcia and Vicente Sy assigned all their rights

and title to the proceeds of the sale of the CMDC shares to Nemesio
Garcia.
On June 10, 1988, petitioners filed a complaint against Roxas in the
Regional Trial Court, Branch 11, Cebu City, praying that Roxas be

ordered to pay petitioners the sum of P3,400,00.00 or that full control

of the three markets be turned over to YASCO and Garcia. The
complaint also prayed for the forfeiture of the partial payment of
P4,600,000.00 and the payment of attorney's fees and costs (Rollo, p.
290).

The Court of Appeals sustained the findings of the trial court with
regard to the first two grounds raised in the motion to dismiss but
ordered the dismissal of the complaint on the ground of improper
venue (Rollo, p. 49).
A subsequent motion for reconsideration by petitioner was to no avail.

Roxas filed two motions for extension of time to submit his answer.
But despite said motion, he failed to do so causing petitioners to file a
motion to have him declared in default. Roxas then filed, through a
new counsel, a third motion for extension of time to submit a
responsive pleading.
On August 19, 1988, the trial court declared Roxas in default. The
order of default was, however, lifted upon motion of Roxas.
On August 22, 1988, Roxas filed a motion to dismiss on the grounds
that:

Petitioners now come before us, alleging that the Court of Appeals
erred in:
1. holding the venue should be in Pasay City, and not
in Cebu City (where both petitioners/plaintiffs are
residents;
2. not finding that Roxas is estopped from questioning
the choice of venue (Rollo, p. 19).
The petition is meritorious.

1. The complaint did not state a cause of action due to

non-joinder of indispensable parties;
2. The claim or demand set forth in the complaint had
been waived, abandoned or otherwise extinguished;
and

In holding that the venue was improperly laid in Cebu City, the Court
of Appeals relied on the address of YASCO, as appearing in the Deed
of Sale dated October 28, 1987, which is "No. 1708 Dominga Street,
Pasay City." This was the same address written in YASCO's letters
and several commercial documents in the possession of Roxas
(Decision, p. 12; Rollo, p. 48).

3. The venue was improperly laid (Rollo, p. 299).

After a hearing, wherein testimonial and documentary evidence were
presented by both parties, the trial court in an Order dated February 8,
1991 denied Roxas' motion to dismiss. After receiving said order,
Roxas filed another motion for extension of time to submit his answer.
He also filed a motion for reconsideration, which the trial court denied
in its Order dated April 10, 1991 for being pro-forma (Rollo, p. 17).
Roxas was again declared in default, on the ground that his motion for
reconsideration did not toll the running of the period to file his answer.
On May 3, 1991, Roxas filed an unverified Motion to Lift the Order of
Default which was not accompanied with the required affidavit or
merit. But without waiting for the resolution of the motion, he filed a
petition for certiorari with the Court of Appeals.

In the case of Garcia, the Court of Appeals said that he gave Pasay
City as his address in three letters which he sent to Roxas' brothers
and sisters (Decision, p. 12; Rollo, p. 47). The appellate court held
that Roxas was led by petitioners to believe that their residence is in
Pasay City and that he had relied upon those representations
(Decision, p. 12, Rollo, p. 47).
The Court of Appeals erred in holding that the venue was improperly
laid in Cebu City.
In the Regional Trial Courts, all personal actions are commenced and
tried in the province or city where the defendant or any of the
defendants resides or may be found, or where the plaintiff or any of
the plaintiffs resides, at the election of the plaintiff [Sec. 2(b) Rule 4,
Revised Rules of Court].

There are two plaintiffs in the case at bench: a natural person and a
domestic corporation. Both plaintiffs aver in their complaint that they
are residents of Cebu City, thus:
1.1. Plaintiff Young Auto Supply Co., Inc., ("YASCO") is
a domestic corporation duly organized and existing
under Philippine laws with principal place of business
at M. J. Cuenco Avenue, Cebu City. It also has a
branch office at 1708 Dominga Street, Pasay City,
Metro Manila.
Plaintiff Nemesio Garcia is of legal age, married,
Filipino citizen and with business address at Young
Auto Supply Co., Inc., M. J. Cuenco Avenue, Cebu
City. . . . (Complaint, p. 1; Rollo, p. 81).

untold inconvenience to said entity. By the same token, a corporation

cannot be allowed to file personal actions in a place other than its
principal place of business unless such a place is also the residence
of a co-plaintiff or a defendant.
If it was Roxas who sued YASCO in Pasay City and the latter
questioned the venue on the ground that its principal place of
business was in Cebu City, Roxas could argue that YASCO was in
estoppel because it misled Roxas to believe that Pasay City was its
principal place of business. But this is not the case before us.
With the finding that the residence of YASCO for purposes of venue is
in Cebu City, where its principal place of business is located, it
becomes unnecessary to decide whether Garcia is also a resident of
Cebu City and whether Roxas was in estoppel from questioning the
choice of Cebu City as the venue.

The Article of Incorporation of YASCO (SEC Reg. No. 22083) states:

THIRD That the place where the principal office of the
corporation is to be established or located is at Cebu
City, Philippines (as amended on December 20, 1980
and further amended on December 20, 1984) (Rollo, p.
273).

WHEREFORE, the petition is GRANTED. The decision of the Court of

Appeals appealed from is SET ASIDE and the Order dated February
8, 1991 of the Regional Trial Court is REINSTATED.
SO ORDERED.
Cruz, Grio-Aquino and Bellosillo, JJ., concur.

A corporation has no residence in the same sense in which this term

is applied to a natural person. But for practical purposes, a
corporation is in a metaphysical sense a resident of the place where
its principal office is located as stated in the articles of incorporation
(Cohen v. Benguet Commercial Co., Ltd., 34 Phil. 256 [1916]
Clavecilla Radio System v. Antillon, 19 SCRA 379 [1967]). The
Corporation Code precisely requires each corporation to specify in its
articles of incorporation the "place where the principal office of the
corporation is to be located which must be within the Philippines"
(Sec. 14 [3]). The purpose of this requirement is to fix the residence of
a corporation in a definite place, instead of allowing it to be
ambulatory.
In Clavencilla Radio System v. Antillon, 19 SCRA 379 ([1967]), this
Court explained why actions cannot be filed against a corporation in
any place where the corporation maintains its branch offices. The
Court ruled that to allow an action to be instituted in any place where
the corporation has branch offices, would create confusion and work

G.R. No. 51765 March 3, 1997

REPUBLIC
PLANTERS
BANK, petitioner,
vs.
HON. ENRIQUE A. AGANA, SR., as Presiding Judge, Court of
First Instance of Rizal, Branch XXVIII, Pasay City, ROBESFRANCISCO REALTY & DEVELOPMENT CORPORATION and
ADALIA F. ROBES, respondents.

HERMOSISIMA, JR., J.:

This is a petition for certiorari seeking the annulment of the
Decision 1 of the then Court of First Instance of Rizal 2 for having been
rendered in grave abuse of discretion. Private respondents Robes-

Francisco Realty and Development Corporation (hereafter, "the

Corporation") and Adalia F. Robes filed in the court a quo, an action
for specific performance to compel petitioner to redeem 800 preferred
shares of stock with a face value of P8,000.00 and to pay 1%
quarterly interest thereon as quarterly dividend owing them under the
terms and conditions of the certificates of stock.
The court a quo rendered judgment in favor of private respondents;
hence, this instant petition.
Herein parties debate only legal issues, no issues of fact having been
raised by them in the court a quo. For ready reference, however, the
following narration of pertinent transactions and events is in order:
On September 18, 1961, private respondent Corporation secured a
loan from petitioner in the amount of P120,000.00. As part of the
proceeds of the loan, preferred shares of stocks were issued to
private respondent Corporation, through its officers then, private
respondent Adalia F. Robes and one Carlos F. Robes. In other words,
instead of giving the legal tender totaling to the full amount of the loan,
which is P120,000.00, petitioner lent such amount partially in the form
of money and partially in the form of stock certificates numbered 3204
and 3205, each for 400 shares with a par value of P10.00 per share,
or for P4,000.00 each, for a total of P8,000.00. Said stock certificates
were in the name of private respondent Adalia F. Robes and Carlos F.
Robes, who subsequently, however, endorsed his shares in favor of
Adalia F. Robes.
Said certificates of stock bear the following terms and conditions:
The Preferred Stock shall have the following rights,
preferences, qualifications and limitations, to wit:
1. Of the right to receive a quarterly dividend of
One Per Centum (1%), cumulative and participating.
xxx xxx xxx
2. That such preferred shares may be redeemed, by
the system of drawing lots, at any time after two (2)

years from the date of issue at the option of the

Corporation. . . .
On January 31, 1979, private respondents proceeded against
petitioner and filed a Complaint anchored on private respondents'
alleged rights to collect dividends under the preferred shares in
question and to have petitioner redeem the same under the terms and
conditions of the stock certificates. Private respondents attached to
their complaint, a letter-demand dated January 5, 1979 which,
significantly, was not formally offered in evidence.
Petitioner filed a Motion to Dismiss 3 private respondents' Complaint
on the following grounds: (1) that the trial court had no jurisdiction
over the subject-matter of the action; (2) that the action was
unenforceable under substantive law; and (3) that the action was
barred by the statute of limitations and/or laches.
Petitioner's Motion to Dismiss was denied by the trial court in an
Order dated March 16, 1979. 4 Petitioner then filed its Answer on May
2, 1979. 5 Thereafter, the trial court gave the parties ten (10) days
from July 30, 1979 to submit their respective memoranda after the
submission of which the case would be deemed submitted for
resolution. 6
On September 7, 1979, the trial court rendered the herein assailed
decision in favor of private respondents. In ordering petitioner to pay
private respondents the face value of the stock certificates as
redemption price, plus 1% quarterly interest thereon until full payment,
the trial court ruled:
There being no issue of fact raised by either of the
parties who filed their respective memoranda
delineating their respective contentions, a judgment on
the pleadings, conformably with an earlier order of the
Court, appears to be in order.
From a further perusal of the pleadings, it appears that
the provision of the stock certificates in question to the
effect that the plaintiffs shall have the right to receive a
quarterly dividend of One Per Centum (1%), cumulative
and participating, clearly and unequivocably [sic]
indicates that the same are "interest bearing stocks"

which are stocks issued by a corporation under an

agreement to pay a certain rate of interest thereon (5
Thompson, Sec. 3439). As such, plaintiffs become
entitled to the payment thereof as a matter of right
without necessity of a prior declaration of dividend.
On the question of the redemption by the defendant of
said preferred shares of stock, the very wordings of the
terms and conditions in said stock certificates clearly
allows the same.
To allow the herein defendant not to redeem said
preferred shares of stock and/or pay the interest due
thereon despite the clear import of said provisions by
the mere invocation of alleged Central Bank Circulars
prohibiting the same is tantamount to an impairment of
the obligation of contracts enshrined in no less than the
fundamental law itself.
Moreover, the herein defendant is considered in
estoppel from taking shelter behind a General Banking
Act provision to the effect that it cannot buy its own
shares of stocks considering that the very terms and
conditions in said stock certificates allowing their
redemption are its own handiwork.
As to the claim by the defendant that plaintiffs' cause of
action is barred by prescription, suffice it to state that
the running of the prescriptive period was considered
interrupted by the written extrajudicial demands made
by the plaintiffs from the defendant. 7
Aggrieved by the decision of the trial court, petitioner elevated the
case before us essentially on pure questions of law. Petitioner's
statement of the issues that it submits for us to adjudicate upon, is as
follows:
A. RESPONDENT JUDGE COMMITTED A GRAVE
ABUSE OF DISCRETION AMOUNTING TO LACK OR
EXCESS OF JURISDICTION IN ORDERING
PETITIONER TO PAY RESPONDENT ADALIA F.
ROBES THE AMOUNT OF P8213.69 AS INTERESTS

FROM 1961 TO 1979 ON HER

SHARES.

PREFERRED

B. RESPONDENT JUDGE COMMITTED A GRAVE

ABUSE OF DISCRETION AMOUNTING TO LACK OR
EXCESS OF JURISDICTION IN ORDERING
PETITIONER TO REDEEM RESPONDENT ADALIA F.
ROBES' PREFERRED SHARES FOR P8,000.00.
C. RESPONDENT JUDGE COMMITTED A GRAVE
ABUSE OF DISCRETION AMOUNTING TO LACK OR
EXCESS OF JURISDICTION IN DISREGARDING
THE ORDER OF THE CENTRAL BANK TO
PETITIONER TO DESIST FROM REDEEMING ITS
PREFERRED SHARES AND FROM PAYING
DIVIDENDS THEREON . . . .
D. THE TRIAL COURT ERRED IN NOT HOLDING
THAT THE COMPLAINT DOES NOT STATE A
CAUSE OF ACTION.
E. THE TRIAL COURT ERRED IN NOT HOLDING
THAT THE CLAIM OF RESPONDENT ADALIA F.
ROBES IS BARRED BY PRESCRIPTION OR
LACHES. 8
The petition is meritorious.
Before passing upon the merits of this petition, it may be pertinent to
provide an overview on the nature of preferred shares and the
redemption thereof, considering that these issues lie at the heart of
the dispute.
A preferred share of stock, on one hand, is one which entitles the
holder thereof to certain preferences over the holders of common
stock. The preferences are designed to induce persons to subscribe
for shares of a corporation. 9 Preferred shares take a multiplicity of
forms. The most common forms may be classified into two: (1)
preferred shares as to assets; and (2) preferred shares as to
dividends. The former is a share which gives the holder thereof
preference in the distribution of the assets of the corporation in case

of liquidation; 10 the latter is a share the holder of which is entitled to

receive dividends on said share to the extent agreed upon before any
dividends at all are paid to the holders of common stock. 11 There is
no guaranty, however, that the share will receive any dividends.
Under the old Corporation Law in force at the time the contract
between the petitioner and the private respondents was entered into,
it was provided that "no corporation shall make or declare any
dividend except from the surplus profits arising from its business, or
distribute its capital stock or property other than actual profits among
its members or stockholders until after the payment of its debts and
the termination of its existence by limitation or lawful
dissolution." 12 Similarly, the present Corporation Code 13 provides
that the board of directors of a stock corporation may declare
dividends only out of unrestricted retained earnings. 14 The Code, in
Section 43, adopting the change made in accounting terminology,
substituted the phrase "unrestricted retained earnings," which may be
a more precise term, in place of "surplus profits arising from its
business" in the former law. Thus, the declaration of dividends is
dependent upon the availability of surplus profit or unrestricted
retained earnings, as the case may be. Preferences granted to
preferred stockholders, moreover, do not give them a lien upon the
property of the corporation nor make them creditors of the
corporation, the right of the former being always subordinate to the
latter. Dividends are thus payable only when there are profits earned
by the corporation and as a general rule, even if there are existing
profits, the board of directors has the discretion to determine whether
or not dividends are to be declared. 15Shareholders, both common
and preferred, are considered risk takers who invest capital in the
business and who can look only to what is left after corporate debts
and liabilities are fully paid. 16
Redeemable shares, on the other hand, are shares usually preferred,
which by their terms are redeemable at a fixed date, or at the option of
either issuing corporation, or the stockholder, or both at a certain
redemption price.17 A redemption by the corporation of its stock is, in
a sense, a repurchase of it for cancellation. 18 The present Code
allows redemption of shares even if there are no unrestricted retained
earnings on the books of the corporation. This is a new provision
which in effect qualifies the general rule that the corporation cannot
purchase its own shares except out of current retained
earnings. 19 However, while redeemable shares may be redeemed
regardless of the existence of unrestricted retained earnings, this is

subject to the condition that the corporation has, after such

redemption, assets in its books to cover debts and liabilities inclusive
of capital stock. Redemption, therefore, may not be made where the
corporation is insolvent or if such redemption will cause insolvency or
inability of the corporation to meet its debts as they mature. 20
We come now to the merits of the case. The petitioner argues that it
cannot be compelled to redeem the preferred shares issued to the
private respondent. We agree. Respondent judge, in ruling that
petitioner must redeem the shares in question, stated that:
On the question of the redemption by the defendant of
said preferred shares of stock, the very wordings of the
terms and conditions in said stock certificates clearly
allows the same. 21
What respondent judge failed to recognize was that while the
stock certificate does allow redemption, the option to do so
was clearly vested in the petitioner bank. The redemption
therefore is clearly the type known as "optional". Thus, except
as otherwise provided in the stock certificate, the redemption
rests entirely with the corporation and the stockholder is
without right to either compel or refuse the redemption of its
stock. 22Furthermore, the terms and conditions set forth therein
use the word "may". It is a settled doctrine in statutory
construction that the word "may" denotes discretion, and
cannot be construed as having a mandatory effect. We fail to
see how respondent judge can ignore what, in his words, are
the "very wordings of the terms and conditions in said stock
certificates" and construe what is clearly a mere option to be
his legal basis for compelling the petitioner to redeem the
shares in question.
The redemption of said shares cannot be allowed. As pointed out by
the petitioner, the Central Bank made a finding that said petitioner has
been suffering from chronic reserve deficiency, 23 and that such
finding resulted in a directive, issued on January 31, 1973 by then
Gov. G.S. Licaros of the Central Bank, to the President and Acting
Chairman of the Board of the petitioner bank prohibiting the latter from
redeeming any preferred share, on the ground that said redemption
would reduce the assets of the Bank to the prejudice of its depositors
and creditors. 24 Redemption of preferred shares was prohibited for a

just and valid reason. The directive issued by the Central Bank
Governor was obviously meant to preserve the status quo, and to
prevent the financial ruin of a banking institution that would have
resulted in adverse repercussions, not only to its depositors and
creditors, but also to the banking industry as a whole. The directive, in
limiting the exercise of a right granted by law to a corporate entity,
may thus be considered as an exercise of police power. The
respondent judge insists that the directive constitutes an impairment
of the obligation of contracts. It has, however, been settled that the
Constitutional guaranty of non-impairment of obligations of contract is
limited by the exercise of the police power of the state, the reason
being that public welfare is superior to private rights. 25
The respondent judge also stated that since the stock certificate
granted the private respondents the right to receive a quarterly
dividend of One Per Centum (1%) cumulative and participating, it
"clearly and unequivocably (sic) indicates that the same are "interest
bearing stocks" or stocks issued by a corporation under an agreement
to pay a certain rate of interest thereon. As such, plaintiffs (private
respondents herein) become entitled to the payment thereof as a
matter of right without necessity of a prior declaration of
dividend." 26 There is no legal basis for this observation. Both Sec. 16
of the Corporation Law and Sec. 43 of the present Corporation Code
prohibit the issuance of any stock dividend without the approval of
stockholders, representing not less than two-thirds (2/3) of the
outstanding capital stock at a regular or special meeting duly called
for the purpose. These provisions underscore the fact that payment of
dividends to a stockholder is not a matter of right but a matter of
consensus. Furthermore, "interest bearing stocks", on which the
corporation agrees absolutely to pay interest before dividends are
paid to common stockholders, is legal only when construed as
requiring payment of interest as dividends from net earnings or
surplus only. 27 Clearly, the respondent judge, in compelling the
petitioner to redeem the shares in question and to pay the
corresponding dividends, committed grave abuse of discretion
amounting to lack or excess of jurisdiction in ignoring both the terms
and conditions specified in the stock certificate, as well as the clear
mandate of the law.
Anent the issue of prescription, this Court so holds that the claim of
private respondent is already barred by prescription as well as laches.
Art. 1144 of the New Civil Code provides that a right of action that is

founded upon a written contract prescribes in ten (10) years. The

letter-demand made by the private respondents to the petitioner was
made only on January 5, 1979, or almost eighteen years after receipt
of the written contract in the form of the stock certificate. As noted
earlier, this letter-demand, significantly, was not formally offered in
evidence, nor were any other evidence of demand presented.
Therefore, we conclude that the only time the private respondents
saw it fit to assert their rights, if any, to the preferred shares of stock,
was after the lapse of almost eighteen years. The same clearly
indicates that the right of the private respondents to any relief under
the law has already prescribed. Moreover, the claim of the private
respondents is also barred by laches. Laches has been defined as the
failure or neglect, for an unreasonable length of time, to do that which
by exercising due diligence could or should have been done earlier; it
is negligence or omission to assert a right within a reasonable time,
warranting a presumption that the party entitled to assert it either has
abandoned it or declined to assert it. 28
Considering that the terms and conditions set forth in the stock
certificate clearly indicate that redemption of the preferred shares may
be made at any time after the lapse of two years from the date of
issue, private respondents should have taken it upon themselves,
after the lapse of the said period, to inquire from the petitioner the
reason why the said shares have not been redeemed. As it is, not
only two years had lapsed, as agreed upon, but an additional sixteen
years passed before the private respondents saw it fit to demand their
right. The petitioner, at the time it issued said preferred shares to the
private respondents in 1961, could not have known that it would be
suffering from chronic reserve deficiency twelve years later. Had the
private respondents been vigilant in asserting their rights, the
redemption could have been effected at a time when the petitioner
bank was not suffering from any financial crisis.
WHEREFORE, the instant petition, being impressed with merit, is
hereby GRANTED. The challenged decision of respondent judge is
set aside and the complaint against the petitioner is dismissed.
Costs against the private respondents.
SO ORDERED.
Bellosillo, Vitug and Kapunan, JJ., concur.

Padilla, J., concurs in the result.

G.R. No. 150976

October 18, 2004

CECILIA CASTILLO, OSCAR DEL ROSARIO, ARTURO S.

FLORES, XERXES NAVARRO, MARIA ANTONIA TEMPLO and
MEDICAL
CENTER
PARAAQUE,
INC., petitioners,
vs.
ANGELES BALINGHASAY, RENATO BERNABE, ALODIA DEL
ROSARIO, ROMEO FUNTILA, TERESITA GAYANILO, RUSTICO
JIMENEZ, ARACELI** JO, ESMERALDA MEDINA, CECILIA
MONTALBAN, VIRGILIO OBLEPIAS, CARMENCITA PARRENO,
CESAR REYES, REYNALDO SAVET, SERAPIO TACCAD,
VICENTE VALDEZ, SALVACION VILLAMORA, and HUMBERTO
VILLAREAL, respondents.

SEVENTH. That the authorized capital stock of the corporation

is TWO MILLION (P2,000,000.00) PESOS, Philippine
Currency, divided into TWO THOUSAND (2,000) SHARES at
a par value of P100 each share, whereby the ONE
THOUSAND SHARES issued to, and subscribed by, the
incorporating stockholders shall be classified as Class A
shares while the other ONE THOUSAND unissued shares
shall be considered as Class B shares. Only holders of Class
A shares can have the right to vote and the right to be elected
as directors or as corporate officers.2 (Stress supplied)
On July 31, 1981, Article VII of the Articles of Incorporation of MCPI
was amended, to read thus:
SEVENTH. That the authorized capital stock of the corporation
is FIVE MILLION (P5,000,000.00) PESOS, divided as follows:

DECISION
QUISUMBING, J.:
For review on certiorari is the Partial Judgment1 dated November 26,
2001 in Civil Case No. 01-0140, of the Regional Trial Court (RTC) of
Paraaque City, Branch 258. The trial court declared the February 9,
2001, election of the board of directors of the Medical Center
Paraaque, Inc. (MCPI) valid. The Partial Judgment dismissed
petitioners first cause of action, specifically, to annul said election for
depriving petitioners their voting rights and to be voted on as
members of the board.
The facts, as culled from records, are as follows:
Petitioners and the respondents are stockholders of MCPI,
with the former holding Class "B" shares and the latter owning
Class "A" shares.
MCPI is a domestic corporation with offices at Dr. A. Santos Avenue,
Sucat, Paraaque City. It was organized sometime in September
1977. At the time of its incorporation, Act No. 1459, the old
Corporation Law was still in force and effect. Article VII of MCPIs
original Articles of Incorporation, as approved by the Securities and
Exchange Commission (SEC) on October 26, 1977, reads as follows:

CLASS NO. OF SHARES

"A"
1,000
"B"
4,000

PAR VALUE
P1,000.00
P1,000.00

Only holders of Class A shares have the right to vote and the
right to be elected as directors or as corporate
officers.3 (Emphasis supplied)
The foregoing amendment was approved by the SEC on June 7,
1983. While the amendment granted the right to vote and to be
elected as directors or corporate officers only to holders of Class "A"
shares, holders of Class "B" stocks were granted the same rights and
privileges as holders of Class "A" stocks with respect to the payment
of dividends.
On September 9, 1992, Article VII was again amended to provide as
follows:
SEVENTH: That the authorized capital stock of the corporation
is THIRTY TWO MILLION PESOS (P32,000,000.00) divided
as follows:
CLASS NO. OF SHARES
"A"
1,000

PAR VALUE
P1,000.00

"B"

31,000

1,000.00

Except when otherwise provided by law, only holders of Class

"A" shares have the right to vote and the right to be elected as
directors or as corporate officers4 (Stress and underscoring
supplied).
The SEC approved the foregoing amendment on September 22,
1993.
On February 9, 2001, the shareholders of MCPI held their annual
stockholders meeting and election for directors. During the course of
the proceedings, respondent Rustico Jimenez, citing Article VII, as
amended, and notwithstanding MCPIs history, declared over the
objections of herein petitioners, that no Class "B" shareholder was
qualified to run or be voted upon as a director. In the past, MCPI had
seen holders of Class "B" shares voted for and serve as members of
the corporate board and some Class "B" share owners were in fact
nominated for election as board members. Nonetheless, Jimenez
went on to announce that the candidates holding Class "A" shares
were the winners of all seats in the corporate board. The petitioners
protested, claiming that Article VII was null and void for depriving
them, as Class "B" shareholders, of their right to vote and to be voted
upon, in violation of the Corporation Code (Batas Pambansa Blg. 68),
as amended.
On March 22, 2001, after their protest was given short shrift, herein
petitioners filed a Complaint for Injunction, Accounting and Damages,
docketed as Civil Case No. CV-01-0140 before the RTC of Paraaque
City, Branch 258. Said complaint was founded on two (2) principal
causes of action, namely:
a. Annulment of the declaration of directors of the MCPI made
during the February 9, 2001 Annual Stockholders Meeting,
and for the conduct of an election whereat all stockholders,
irrespective of the classification of the shares they hold, should
be afforded their right to vote and be voted for; and
b. Stockholders derivative suit challenging the validity of a
contract entered into by the Board of Directors of MCPI for the
operation of the ultrasound unit.5

Subsequently, the complaint was amended to implead MCPI as partyplaintiff for purposes only of the second cause of action.
Before the trial court, the herein petitioners alleged that they were
deprived of their right to vote and to be voted on as directors at the
annual stockholders meeting held on February 9, 2001, because
respondents had erroneously relied on Article VII of the Articles of
Incorporation of MCPI, despite Article VII being contrary to the
Corporation Code, thus null and void. Additionally, respondents were
in estoppel, because in the past, petitioners were allowed to vote and
to be elected as members of the board. They further claimed that the
privilege granted to the Class "A" shareholders was more in the
nature of a right granted to founders shares.
In their Answer, the respondents averred that the provisions of Article
VII clearly and categorically state that only holders of Class "A" shares
have the exclusive right to vote and be elected as directors and
officers of the corporation. They denied that the exclusivity was
intended only as a privilege granted to founders shares, as no such
proviso is found in the Articles of Incorporation. The respondents
further claimed that the exclusivity of the right granted to Class "A"
holders cannot be defeated or impaired by any subsequent legislative
enactment, e.g.the New Corporation Code, as the Articles of
Incorporation is an intra-corporate contract between the corporation
and its members; between the corporation and its stockholders; and
among the stockholders. They submit that to allow Class "B"
shareholders to vote and be elected as directors would constitute a
violation of MCPIs franchise or charter as granted by the State.
At the pre-trial, the trial court ruled that a partial judgment could be
rendered on the first cause of action and required the parties to
submit their respective position papers or memoranda.
On November 26, 2001, the RTC rendered the Partial Judgment, the
dispositive portion of which reads:
WHEREFORE, viewed in the light of the foregoing, the
election held on February 9, 2001 is VALID as the holders of
CLASS "B" shares are not entitled to vote and be voted for
and this case based on the First Cause of Action is
DISMISSED.

SO ORDERED.6
In finding for the respondents, the trial court ruled that corporations
had the power to classify their shares of stocks, such as "voting and
non-voting" shares, conformably with Section 67 of the Corporation
Code of the Philippines. It pointed out that Article VII of both the
original and amended Articles of Incorporation clearly provided that
only Class "A" shareholders could vote and be voted for to the
exclusion of Class "B" shareholders, the exception being in instances
provided by law, such as those enumerated in Section 6, paragraph 6
of the Corporation Code. The RTC found merit in the respondents
theory that the Articles of Incorporation, which defines the rights and
limitations of all its shareholders, is a contract between MCPI and its
shareholders. It is thus the law between the parties and should be
strictly enforced as to them. It brushed aside the petitioners claim that
the Class "A" shareholders were in estoppel, as the election of Class
"B" shareholders to the corporate board may be deemed as a mere
act of benevolence on the part of the officers. Finally, the court
brushed aside the "founders shares" theory of the petitioners for lack
of factual basis.
Hence, this petition submitting the sole legal issue of whether or not
the Court a quo, in rendering the Partial Judgment dated November
26, 2001, has decided a question of substance in a way not in accord
with law and jurisprudence considering that:
1. Under the Corporation Code, the exclusive voting right and
right to be voted granted by the Articles of Incorporation of the
MCPI to Class A shareholders is null and void, or already
extinguished;
2. Hence, the declaration of directors made during the
February 9, 2001 Annual Stockholders Meeting on the basis
of the purported exclusive voting rights is null and void for
having been done without the benefit of an election and in
violation of the rights of plaintiffs and Class B shareholders;
and
3. Perforce, another election should be conducted to elect the
directors of the MCPI, this time affording the holders of Class
B shares full voting right and the right to be voted.8

The issue for our resolution is whether or not holders of Class "B"
shares of the MCPI may be deprived of the right to vote and be voted
for as directors in MCPI.
Before us, petitioners assert that Article VII of the Articles of
Incorporation of MCPI, which denied them voting rights, is null and
void for being contrary to Section 6 of the Corporation Code. They
point out that Section 6 prohibits the deprivation of voting rights
except as to preferred and redeemable shares only. Hence, under the
present law on corporations, all shareholders, regardless of
classification, other than holders of preferred or redeemable shares,
are entitled to vote and to be elected as corporate directors or officers.
Since the Class "B" shareholders are not classified as holders of
either preferred or redeemable shares, then it necessarily follows that
they are entitled to vote and to be voted for as directors or officers.
The respondents, in turn, maintain that the grant of exclusive voting
rights to Class "A" shares is clearly provided in the Articles of
Incorporation and is in accord with Section 59 of the Corporation Law
(Act No. 1459), which was the prevailing law when MCPI was
incorporated in 1977. They likewise submit that as the Articles of
Incorporation of MCPI is in the nature of a contract between the
corporation and its shareholders and Section 6 of the Corporation
Code could not retroactively apply to it without violating the nonimpairment clause10 of the Constitution.
We find merit in the petition.
When Article VII of the Articles of Incorporation of MCPI was
amended in 1992, the phrase "except when otherwise provided by
law" was inserted in the provision governing the grant of voting
powers to Class "A" shareholders. This particular amendment is
relevant for it speaks of a law providing for exceptions to the exclusive
grant of voting rights to Class "A" stockholders. Which law was the
amendment referring to? The determination of which law to apply is
necessary. There are two laws being cited and relied upon by the
parties in this case. In this instance, the law in force at the time of the
1992 amendment was the Corporation Code (B.P. Blg. 68), not the
Corporation Law (Act No. 1459), which had been repealed by then.
We find and so hold that the law referred to in the amendment to
Article VII refers to the Corporation Code and no other law. At the time

of the incorporation of MCPI in 1977, the right of a corporation to

classify its shares of stock was sanctioned by Section 5 of Act No.
1459. The law repealing Act No. 1459, B.P. Blg. 68, retained the
same grant of right of classification of stock shares to corporations,
but with a significant change. Under Section 6 of B.P. Blg. 68, the
requirements and restrictions on voting rights were explicitly provided
for, such that "no share may be deprived of voting rights except those
classified and issued as "preferred" or "redeemable" shares, unless
otherwise provided in this Code" and that "there shall always be a
class or series of shares which have complete voting rights." Section
6 of the Corporation Code being deemed written into Article VII of the
Articles of Incorporation of MCPI, it necessarily follows that unless
Class "B" shares of MCPI stocks are clearly categorized to be
"preferred" or "redeemable" shares, the holders of said Class "B"
shares may not be deprived of their voting rights. Note that there is
nothing in the Articles of Incorporation nor an iota of evidence on
record to show that Class "B" shares were categorized as either
"preferred" or "redeemable" shares. The only possible conclusion is
that Class "B" shares fall under neither category and thus, under the
law, are allowed to exercise voting rights.

shares, then Article VII of the Articles of Incorporation cannot be

construed as granting exclusive voting rights to Class "A"
shareholders, to the prejudice of Class "B" shareholders, without
running afoul of the letter and spirit of the Corporation Code.
The respondents then take the tack that the phrase "except when
otherwise provided by law" found in the amended Articles is only a
handwritten insertion and could have been inserted by anybody and
that no board resolution was ever passed authorizing or approving
said amendment.
Said contention is not for this Court to pass upon, involving as it does
a factual question, which is not proper in this petition. In an
appeal via certiorari,
only
questions
of
law
may
be
reviewed.13 Besides, respondents did not adduce persuasive
evidence, but only bare allegations, to support their suspicion. The
presumption that in the amendment process, the ordinary course of
business has been followed14 and that official duty has been regularly
performed15 on the part of the SEC, applies in this case.

WHEREFORE, the petition is GRANTED. The Partial Judgment dated

One of the rights of a stockholder is the right to participate in the
November 26, 2001 of the Regional Trial Court of Paraaque City,
control and management of the corporation that is exercised through
Branch 258, in Civil Case No. 01-0140 is REVERSED AND SET
his vote. The right to vote is a right inherent in and incidental to the
ASIDE. No pronouncement as to costs.
ownership of corporate stock, and as such is a property right. The
stockholder cannot be deprived of the right to vote his stock nor may
SO ORDERED.
the right be essentially impaired, either by the legislature or by the
corporation, without his consent, through amending the charter, or the
WILSON P. GAMBOA,
G.R. No. 176579
by-laws.11
Petitioner,
Neither do we find merit in respondents position that Section 6 of the
Corporation Code cannot apply to MCPI without running afoul of the
non-impairment clause of the Bill of Rights. Section 14812 of the
- versus Corporation Code expressly provides that it shall apply to corporations
in existence at the time of the effectivity of the Code. Hence, the nonimpairment clause is inapplicable in this instance. When Article VII of
the Articles of Incorporation of MCPI were amended in 1992, the
FINANCE SECRETARY MARGARITO B.
board of directors and stockholders must have been aware of Section
TEVES, FINANCE UNDERSECRETARY
6 of the Corporation Code and intended that Article VII be construed
JOHN
P.
SEVILLA,
AND
in harmony with the Code, which was then already in force and effect.
COMMISSIONER RICARDO ABCEDE OF
Since Section 6 of the Corporation Code expressly prohibits the
THE PRESIDENTIAL COMMISSION ON
deprivation of voting rights, except as to "preferred" and "redeemable"

Present:

CORONA, C.J.,
CARPIO,
VELASCO, JR.,

GOOD GOVERNMENT (PCGG) IN THEIR

CAPACITIES AS CHAIR AND MEMBERS,
RESPECTIVELY,
OF
THE
PRIVATIZATION COUNCIL,

CHAIRMAN ANTHONI SALIM OF FIRST

PACIFIC CO., LTD. IN HIS CAPACITY AS
DIRECTOR OF METRO PACIFIC ASSET
HOLDINGS INC., CHAIRMAN MANUEL
V. PANGILINAN OF PHILIPPINE LONG
DISTANCE TELEPHONE COMPANY
PLDT)
IN
HIS
CAPACITY
AS
MANAGING DIRECTOR OF FIRST
PACIFIC
CO.,
LTD.,
PRESIDENT
NAPOLEON
L.
NAZARENO
OF
PHILIPPINE
LONG
DISTANCE
TELEPHONE COMPANY, CHAIR FE
BARIN OF THE SECURITIES EXCHANGE
COMMISSION, and PRESIDENT FRANCIS
LIM OF THE PHILIPPINE STOCK
EXCHANGE,

LEONARDO-DE CASTRO,
BRION,
PERALTA,
BERSAMIN,
DEL CASTILLO,
ABAD,
VILLARAMA, JR.,
PEREZ,
MENDOZA, and
SERENO, JJ.

PABLITO V. SANIDAD and

Promulgated:

ARNO V. SANIDAD,
Petitioners-in-Intervention.

June 28, 2011

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

Respondents.

DECISION

CARPIO, J.:

The Case

This is an original petition for prohibition, injunction, declaratory relief and

declaration of nullity of the sale of shares of stock of Philippine
Telecommunications Investment Corporation (PTIC) by the government of
the Republic of the Philippines to Metro Pacific Assets Holdings, Inc.
(MPAH), an affiliate of First Pacific Company Limited (First Pacific).

The Antecedents

The facts, according to petitioner Wilson P. Gamboa, a stockholder of

Philippine Long Distance Telephone Company (PLDT), are as follows:1

On 28 November 1928, the Philippine Legislature enacted Act No. 3436

which granted PLDT a franchise and the right to engage in
telecommunications business. In 1969, General Telephone and Electronics
Corporation (GTE), an American company and a major PLDT stockholder,
sold 26 percent of the outstanding common shares of PLDT to PTIC. In
1977, Prime Holdings, Inc. (PHI) was incorporated by several persons,
including Roland Gapud and Jose Campos, Jr. Subsequently, PHI became the
owner of 111,415 shares of stock of PTIC by virtue of three Deeds of
Assignment executed by PTIC stockholders Ramon Cojuangco and
Luis Tirso Rivilla. In 1986, the 111,415 shares of stock of PTIC held by PHI
were sequestered by the Presidential Commission on Good Government
(PCGG). The 111,415 PTIC shares, which represent about 46.125 percent of
the outstanding capital stock of PTIC, were later declared by this Court to be
owned by the Republic of the Philippines.2

In 1999, First Pacific, a Bermuda-registered, Hong Kong-based investment

firm, acquired the remaining 54 percent of the outstanding capital stock of
PTIC. On 20 November 2006, the Inter-Agency Privatization Council (IPC)
of the Philippine Government announced that it would sell the 111,415 PTIC
shares, or 46.125 percent of the outstanding capital stock of PTIC, through a

public bidding to be conducted on 4 December 2006. Subsequently, the

public bidding was reset to 8 December 2006, and only two bidders, Parallax
Venture Fund XXVII (Parallax) and Pan-Asia Presidio Capital, submitted
their bids. Parallax won with a bid of P25.6 billion or US$510 million.

Thereafter, First Pacific announced that it would exercise its right of first
refusal as a PTIC stockholder and buy the 111,415 PTIC shares by matching
the bid price of Parallax. However, First Pacific failed to do so by the 1
February 2007 deadline set by IPC and instead, yielded its right to PTIC
itself which was then given by IPC until 2 March 2007 to buy the PTIC
shares. On 14 February 2007, First Pacific, through its subsidiary, MPAH,
entered into a Conditional Sale and Purchase Agreement of the 111,415
PTIC shares, or 46.125 percent of the outstanding capital stock of PTIC, with
the Philippine Government for the price of P25,217,556,000 or
US$510,580,189. The sale was completed on 28 February 2007.

Since PTIC is a stockholder of PLDT, the sale by the Philippine Government

of 46.125 percent of PTIC shares is actually an indirect sale of 12 million
shares or about 6.3 percent of the outstanding common shares of
PLDT. With the sale, First Pacifics common shareholdings in PLDT
increased from 30.7 percent to 37 percent, thereby increasing the
common shareholdings of foreigners in PLDT to about 81.47
percent. This 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 percent.3

On the other hand, public respondents Finance Secretary Margarito B. Teves,

Undersecretary
John
P. Sevilla,
and
PCGG
Commissioner
Ricardo Abcede allege the following relevant facts:

On 9 November 1967, PTIC was incorporated and had since engaged in the
business of investment holdings. PTIC held 26,034,263 PLDT common
shares, or 13.847 percent of the total PLDT outstanding common shares.

PHI, on the other hand, was incorporated in 1977, and became the owner of
111,415 PTIC shares or 46.125 percent of the outstanding capital stock of
PTIC by virtue of three Deeds of Assignment executed by
Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the 111,415 PTIC shares
held by PHI were sequestered by the PCGG, and subsequently declared by
this Court as part of the ill-gotten wealth of former President Ferdinand
Marcos. The sequestered PTIC shares were reconveyed to the Republic of
the Philippines in accordance with this Courts decision4 which became final
and executory on 8 August 2006.
The Philippine Government decided to sell the 111,415 PTIC shares, which
represent 6.4 percent of the outstanding common shares of stock of PLDT,
and designated the Inter-Agency Privatization Council (IPC), composed of
the Department of Finance and the PCGG, as the disposing entity. An
invitation to bid was published in seven different newspapers from 13 to 24
November 2006. On 20 November 2006, a pre-bid conference was held, and
the original deadline for bidding scheduled on 4 December 2006 was reset to
8 December 2006. The extension was published in nine different newspapers.

During the 8 December 2006 bidding, Parallax Capital Management LP

emerged as the highest bidder with a bid of P25,217,556,000. The
government notified First Pacific, the majority owner of PTIC shares, of the
bidding results and gave First Pacific until 1 February 2007 to exercise its
right of first refusal in accordance with PTICs Articles of Incorporation.
First Pacific announced its intention to match Parallaxs bid.

On 31 January 2007, the House of Representatives (HR) Committee on Good

Government conducted a public hearing on the particulars of the then
impending
sale
of
the
111,415
PTIC
shares.
Respondents Teves and Sevilla were among those who attended the public
hearing. The HR Committee Report No. 2270 concluded that: (a) the auction
of the governments 111,415 PTIC shares bore due diligence, transparency
and conformity with existing legal procedures; and (b) First Pacifics
intended acquisition of the governments 111,415 PTIC shares resulting
in First Pacifics 100% ownership of PTIC will not violate the 40 percent
constitutional limit on foreign ownership of a public utility since PTIC
holds only 13.847 percent of the total outstanding common shares of

PLDT.5On 28 February 2007, First Pacific completed the acquisition of the

111,415 shares of stock of PTIC.

Respondent Manuel V. Pangilinan admits the following facts: (a) the IPC
conducted a public bidding for the sale of 111,415 PTIC shares or 46 percent
of the outstanding capital stock of PTIC (the remaining 54 percent of PTIC
shares was already owned by First Pacific and its affiliates); (b) Parallax
offered the highest bid amounting to P25,217,556,000; (c) pursuant to the
right of first refusal in favor of PTIC and its shareholders granted in PTICs
Articles of Incorporation, MPAH, a First Pacific affiliate, exercised its right
of first refusal by matching the highest bid offered for PTIC shares on 13
February 2007; and (d) on 28 February 2007, the sale was consummated
when MPAH paid IPC P25,217,556,000 and the government delivered the
certificates for the 111,415 PTIC shares. Respondent Pangilinandenies the
other allegations of facts of petitioner.

On 28 February 2007, petitioner filed the instant petition for prohibition,

injunction, declaratory relief, and declaration of nullity of sale of the 111,415
PTIC shares. Petitioner claims, among others, that the sale of the 111,415
PTIC shares would result in an increase in First Pacifics common
shareholdings in PLDT from 30.7 percent to 37 percent, and this, combined
with Japanese NTT DoCoMos common shareholdings in PLDT, would
result to a total foreign common shareholdings in PLDT of 51.56 percent
which is over the 40 percent constitutional limit.6 Petitioner asserts:

If and when the sale is completed, First Pacifics equity in PLDT will
go up from 30.7 percent to 37.0 percent of its common or votingstockholdings, x xx. Hence, the consummation of the sale will put
the two largest foreign investors in PLDT First Pacific and Japans
NTT DoCoMo, which is the worlds largest wireless
telecommunications firm, owning 51.56 percent of PLDT common
equity. x x x With the completion of the sale, data culled from the
official website of the New York Stock Exchange (www.nyse.com)
showed that those foreign entities, which own at least five percent of
common equity, will collectively own 81.47 percent of PLDTs
common equity. x x x

x x x as the annual disclosure reports, also referred

to as Form 20-K reports x x x which PLDT
submitted to the New York Stock Exchange for the
period 2003-2005, revealed that First Pacific and
several other foreign entities breached the
constitutional limit of 40 percent ownership as early
as 2003. x x x7

Petitioner raises the following issues: (1) whether the consummation of the
then impending sale of 111,415 PTIC shares to First Pacific violates the
constitutional limit on foreign ownership of a public utility; (2) whether
public respondents committed grave abuse of discretion in allowing the sale
of the 111,415 PTIC shares to First Pacific; and (3) whether the sale of
common shares to foreigners in excess of 40 percent of the entire subscribed
common capital stock violates the constitutional limit on foreign ownership
of a public utility.8

This Court is not a trier of facts. Factual questions such as those raised by
petitioner,9 which indisputably demand a thorough examination of the
evidence of the parties, are generally beyond this Courts jurisdiction.
Adhering to this well-settled principle, the Court shall confine the resolution
of the instant controversy solely on the threshold and purely legal issue of
whether the term capital in Section 11, Article XII of the Constitution
refers 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.

The Ruling of the Court

The petition is partly meritorious.

On 13 August 2007, Pablito V. Sanidad and Arno V. Sanidad filed a Motion
for Leave to Intervene and Admit Attached Petition-in-Intervention. In the
Resolution of 28 August 2007, the Court granted the motion and noted the
Petition-in-Intervention.

Petition for declaratory relief treated as petition for mandamus

Petitioners-in-intervention join petitioner Wilson Gamboa x x x in seeking,

among others, to enjoin and/or nullify the sale by respondents of the 111,415
PTIC shares to First Pacific or assignee. Petitioners-in-intervention claim
that, as PLDT subscribers, they have a stake in the outcome of the
controversy x x x where the Philippine Government is completing the sale of
government owned assets in [PLDT], unquestionably a public utility, in
violation of the nationality restrictions of the Philippine Constitution.

At the outset, petitioner is faced with a procedural barrier. Among the

remedies petitioner seeks, only the petition for prohibition is within the
original jurisdiction of this court, which however is not exclusive but is
concurrent with the Regional Trial Court and the Court of Appeals. The
actions for declaratory relief,10 injunction, and annulment of sale are not
embraced within the original jurisdiction of the Supreme Court. On this
ground alone, the petition could have been dismissed outright.

The Issue

While direct resort to this Court may be justified in a petition for

prohibition,11 the Court shall nevertheless refrain from discussing the
grounds in support of the petition for prohibition since on 28 February 2007,

the questioned sale was consummated when MPAH paid

IPC P25,217,556,000 and the government delivered the certificates for the
111,415 PTIC shares.

However, since the threshold and purely legal issue on the definition of the
term capital in Section 11, Article XII of the Constitution has far-reaching
implications to the national economy, the Court treats the petition for
declaratory relief as one for mandamus.12

In Salvacion v. Central Bank of the Philippines,13 the Court treated the

petition for declaratory relief as one for mandamus considering the grave
injustice that would result in the interpretation of a banking law. In that case,
which involved the crime of rape committed by a foreign tourist against a
Filipino minor and the execution of the final judgment in the civil case for
damages on the tourists dollar deposit with a local bank, the Court declared
Section 113 of Central Bank Circular No. 960, exempting foreign currency
deposits from attachment, garnishment or any other order or process of any
court, inapplicable due to the peculiar circumstances of the case. The Court
held that injustice would result especially to a citizen aggrieved by a foreign
guest like accused x x x that would negate Article 10 of the Civil Code
which provides that in case of doubt in the interpretation or application of
laws, it is presumed that the lawmaking body intended right and justice to
prevail. The Court therefore required respondents Central Bank of the
Philippines, the local bank, and the accused to comply with the writ of
execution issued in the civil case for damages and to release the dollar
deposit of the accused to satisfy the judgment.

In Alliance of Government Workers v. Minister of Labor,14 the Court

similarly brushed aside the procedural infirmity of the petition for
declaratory relief and treated the same as one for mandamus. In Alliance, the
issue was whether the government unlawfully excluded petitioners, who
were government employees, from the enjoyment of rights to which they
were entitled under the law. Specifically, the question was: Are the
branches, agencies, subdivisions, and instrumentalities of the Government,
including government owned or controlled corporations included among the
four employers under Presidential Decree No. 851 which are required to

pay their employees x x x a thirteenth (13th) month pay x x x ? The

Constitutional principle involved therein affected all government employees,
clearly justifying a relaxation of the technical rules of procedure, and
certainly requiring the interpretation of the assailed presidential decree.

In short, it is well-settled that this Court may treat a petition for declaratory
relief as one for mandamus if the issue involved has far-reaching
implications. As this Court held in Salvacion:

The Court has no original and exclusive jurisdiction over a petition

for declaratory relief. However, exceptions to this rule have been
recognized. Thus, where the petition has far-reaching
implications and raises questions that should be resolved, it may
be treated as one for mandamus.15(Emphasis supplied)

In the present case, petitioner seeks primarily the interpretation of the term
capital in Section 11, Article XII of the Constitution. He prays that this
Court declare that the term capital refers to common shares only, and that
such shares constitute the sole basis in determining foreign equity in a
public utility. Petitioner further asks this Court to declare any ruling
inconsistent with such interpretation unconstitutional.

The interpretation of the term capital in Section 11, Article XII of the
Constitution has far-reaching implications to the national economy. In fact, a
resolution of this issue will determine whether Filipinos are masters, or
second class citizens, in their own country. What is at stake here is whether
Filipinos or foreigners will have effective control of the national economy.
Indeed, if ever there is a legal issue that has far-reaching implications to the
entire nation, and to future generations of Filipinos, it is the threshhold legal
issue presented in this case.

The Court first encountered the issue on the definition of the term capital
in Section 11, Article XII of the Constitution in the case ofFernandez
v. Cojuangco, docketed as G.R. No. 157360.16 That case involved the same
public utility (PLDT) and substantially the same private respondents. Despite
the importance and novelty of the constitutional issue raised therein and
despite the fact that the petition involved a purely legal question, the Court
declined to resolve the case on the merits, and instead denied the same for
disregarding the hierarchy of courts.17 There, petitioner Fernandez assailed
on a pure question of law the Regional Trial Courts Decision of 21 February
2003 via a petition for review under Rule 45. The Courts Resolution,
denying the petition, became final on 21 December 2004.
The instant petition therefore presents the Court with another opportunity to
finally settle this purely legal issue which is of transcendental importance to
the national economy and a fundamental requirement to a faithful adherence
to our Constitution. The Court must forthwith seize such opportunity, not
only for the benefit of the litigants, but more significantly for the benefit of
the entire Filipino people, to ensure, in the words of the Constitution, a selfreliant and independent national economy effectively controlled by
Filipinos.18 Besides, in the light of vague and confusing positions taken by
government agencies on this purely legal issue, present and future foreign
investors in this country deserve, as a matter of basic fairness, a categorical
ruling from this Court on the extent of their participation in the capital of
public utilities and other nationalized businesses.

Despite its far-reaching implications to the national economy, this purely

legal issue has remained unresolved for over 75 years since the 1935
Constitution. There is no reason for this Court to evade this ever recurring
fundamental issue and delay again defining the term capital, which appears
not only in Section 11, Article XII of the Constitution, but also in Section 2,
Article XII on co-production and joint venture agreements for the
development of our natural resources,19 in Section 7, Article XII on
ownership of private lands,20 in Section 10, Article XII on the reservation of
certain investments to Filipino citizens,21 in Section 4(2), Article XIV on the
ownership of educational institutions,22 and in Section 11(2), Article XVI on
the ownership of advertising companies.23

Petitioner has locus standi

There is no dispute that petitioner is a stockholder of PLDT. As such, he has

the right to question the subject sale, which he claims to violate the
nationality requirement prescribed in Section 11, Article XII of the
Constitution. If the sale indeed violates the Constitution, then there is a
possibility that PLDTs franchise could be revoked, a dire consequence
directly affecting petitioners interest as a stockholder.

More importantly, there is no question that the instant petition raises matters
of transcendental importance to the public. The fundamental and threshold
legal issue in this case, involving the national economy and the economic
welfare of the Filipino people, far outweighs any perceived impediment in
the legal personality of the petitioner to bring this action.

In Chavez v. PCGG,24 the Court upheld the right of a citizen to bring a suit
on matters of transcendental importance to the public, thus:

In Taada v. Tuvera, the Court asserted that when the issue concerns a
public right and the object of mandamus is to obtain the enforcement of
a public duty, the people are regarded as the real parties in interest; and
because it is sufficient that petitioner is a citizen and as such is interested
in the execution of the laws, he need not show that he has any legal or
special interest in the result of the action. In the aforesaid case, the
petitioners sought to enforce their right to be informed on matters of public
concern, a right then recognized in Section 6, Article IV of the 1973
Constitution, in connection with the rule that laws in order to be valid and
enforceable must be published in the Official Gazette or otherwise
effectively promulgated. In ruling for the petitioners legal standing, the
Court declared that the right they sought to be enforced is a public right
recognized by no less than the fundamental law of the land.

Legaspi v. Civil Service Commission, while reiterating Taada, further

declared that when a mandamus proceeding involves the assertion of a
public right, the requirement of personal interest is satisfied by the mere
fact that petitioner is a citizen and, therefore, part of the general public
which possesses the right.
Further, in Albano v. Reyes, we said that while expenditure of public funds
may not have been involved under the questioned contract for the
development, management and operation of the Manila International
Container Terminal, public interest [was] definitely involved considering
the important role [of the subject contract] . . . in the economic
development of the country and the magnitude of the financial
consideration involved. We concluded that, as a consequence, the
disclosure provision in the Constitution would constitute sufficient authority
for upholding the petitioners standing. (Emphasis supplied)

Clearly, since the instant petition, brought by a citizen, involves matters of

transcendental
public
importance,
the
petitioner
has
the
requisite locus standi.

Definition of the Term Capital in

Section 11, Article XII of the 1987 Constitution

Section 11, Article XII (National Economy and Patrimony) of the 1987
Constitution mandates the Filipinization of public utilities, to wit:

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)

The above provision substantially reiterates Section 5, Article XIV of the

1973 Constitution, thus:

Section 5. 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 the capital of which 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 National Assembly when the public interest 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 the capital thereof. (Emphasis supplied)

The foregoing provision in the 1973 Constitution reproduced Section 8,

Article XIV of the 1935 Constitution, viz:

Section 8. 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
other entities organized under the laws of the Philippines sixty
per centum of the capital of which is owned by citizens of the
Philippines, nor shall such franchise, certificate, or authorization be
exclusive in character or for a longer period than fifty years. No
franchise or right shall be granted to any individual, firm, or
corporation, except under the condition that it shall be subject to
amendment, alteration, or repeal by the Congress when the public
interest so requires. (Emphasis supplied)

Father Joaquin G. Bernas, S.J., a leading member of the 1986 Constitutional

Commission, reminds us that the Filipinization provision in the 1987
Constitution is one of the products of the spirit of nationalism which gripped
the 1935 Constitutional Convention.25 The 1987 Constitution provides for
the Filipinization of public utilities by requiring that any form of
authorization for the operation of public utilities should be granted only 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. The provision is [an express] recognition of the
sensitive and vital position of public utilities both in the national
economy and for national security.26 The evident purpose of the
citizenship requirement is to prevent aliens from assuming control of public
utilities, which may be inimical to the national interest.27 This specific
provision explicitly reserves to Filipino citizens control of public utilities,
pursuant to an overriding economic goal of the 1987 Constitution: to
conserve and develop our patrimony28 and ensure a self-reliant and
independent national economy effectively controlled by Filipinos.29

Any citizen or juridical entity desiring to operate a public utility must

therefore meet the minimum nationality requirement prescribed in Section
11, Article XII of the Constitution. Hence, for a corporation to be granted
authority to operate a public utility, at least 60 percent of its capital must
be owned by Filipino citizens.

The crux of the controversy is the definition of the term capital. Does the
term capital in Section 11, Article XII of the Constitution refer to common
shares or to the total outstanding capital stock (combined total of common
and non-voting preferred shares)?

Petitioner submits that the 40 percent foreign equity limitation in domestic

public utilities refers only to common shares because such shares are entitled
to vote and it is through voting that control over a corporation is exercised.
Petitioner posits that the term capital in Section 11, Article XII of the
Constitution refers to the ownership of common capital stock subscribed
and outstanding, which class of shares alone, under the corporate set-up of
PLDT, can vote and elect members of the board of directors. It is
undisputed that PLDTs non-voting preferred shares are held mostly by
Filipino citizens.30 This arose from Presidential Decree No. 217,31 issued on
16 June 1973 by then President Ferdinand Marcos, requiring every applicant
of a PLDT telephone line to subscribe to non-voting preferred shares to pay
for the investment cost of installing the telephone line.32

Petitioners-in-intervention basically reiterate petitioners arguments and

adopt petitioners definition of the term capital.33 Petitioners-inintervention allege that the approximate foreign ownership of common
capital stock of PLDT x x x already amounts to at least 63.54% of the total
outstanding common stock, which means that foreigners exercise significant
control over PLDT, patently violating the 40 percent foreign equity limitation
in public utilities prescribed by the Constitution.

Respondents, on the other hand, do not offer any definition of the term
capital in Section 11, Article XII of the Constitution. More importantly,
private respondents Nazareno and Pangilinan of PLDT do not dispute that
more than 40 percent of the common shares of PLDT are held by foreigners.

respondentPangilinan alleges that the issue should be whether owners of

shares in PLDT as well as owners of shares in companies holding shares in
PLDT may be required to relinquish their shares in PLDT and in those
companies without any law requiring them to surrender their shares and also
without notice and trial.

In particular, respondent Nazarenos Memorandum, consisting of 73 pages,

harps mainly on the procedural infirmities of the petition and the supposed
violation of the due process rights of the affected foreign common
shareholders. Respondent Nazareno does not deny petitioners allegation of
foreigners
dominating
the
common
shareholdings
of
PLDT. Nazareno stressed mainly that the petition seeks to divest foreign
common shareholders purportedly exceeding 40% of the total common
shareholdings in PLDT of their ownership over their shares. Thus, the
foreign natural and juridical PLDT shareholders must be impleaded in this
suit so that they can be heard.34 Essentially, Nazareno invokes denial of due
process on behalf of the foreign common shareholders.

Respondent Pangilinan further asserts that Section 11, [Article XII of the
Constitution] imposes no nationality requirement on the shareholders of
the utility company as a condition for keeping their shares in the utility
company. According to him, Section 11 does not authorize taking one
persons property (the shareholders stock in the utility company) on the
basis of another partys alleged failure to satisfy a requirement that is a
condition only for that other partys retention of another piece of property
(the utility company being at least 60% Filipino-owned to keep its
franchise).36

While Nazareno does not introduce any definition of the term capital, he
states that among the factual assertions that need to be established to
counter petitioners allegations is the uniform interpretation by
government agencies (such as the SEC), institutions and corporations
(such as the Philippine National Oil Company-Energy Development
Corporation or PNOC-EDC) of including both preferred shares and
common shares in controlling interest in view of testing compliance
with the 40% constitutional limitation on foreign ownership in public
utilities.35

Similarly, respondent Manuel V. Pangilinan does not define the term

capital in Section 11, Article XII of the Constitution. Neither does he
refute petitioners claim of foreigners holding more than 40 percent of
PLDTs common shares. Instead, respondent Pangilinanfocuses on the
procedural flaws of the petition and the alleged violation of the due process
rights of foreigners. Respondent Pangilinanemphasizes in his Memorandum
(1) the absence of this Courts jurisdiction over the petition; (2) petitioners
lack of standing; (3)mootness of the petition; (4) non-availability of
declaratory relief; and (5) the denial of due process rights. Moreover,

The OSG, representing public respondents Secretary Margarito Teves,

Undersecretary John P. Sevilla, Commissioner Ricardo Abcede, and
Chairman Fe Barin, is likewise silent on the definition of the term capital.
In its Memorandum37 dated 24 September 2007, the OSG also limits its
discussion on the supposed procedural defects of the petition, i.e. lack of
standing, lack of jurisdiction, non-inclusion of interested parties, and lack of
basis for injunction. The OSG does not present any definition or
interpretation of the term capital in Section 11, Article XII of the
Constitution. The OSG contends that the petition actually partakes of a
collateral attack on PLDTs franchise as a public utility, which in effect
requires a full-blown trial where all the parties in interest are given their day
in court.38

Respondent Francisco Ed Lim, impleaded as President and Chief Executive

Officer of the Philippine Stock Exchange (PSE), does not also define the
term capital and seeks the dismissal of the petition on the following
grounds: (1) failure to state a cause of action against Lim; (2) the PSE
allegedly implemented its rules and required all listed companies, including
PLDT, to make proper and timely disclosures; and (3) the reliefs prayed for
in the petition would adversely impact the stock market.

In the earlier case of Fernandez v. Cojuangco, petitioner Fernandez who

claimed to be a stockholder of record of PLDT, contended that the term
capital in the 1987 Constitution refers to shares entitled to vote or the
common shares. Fernandez explained thus:

The forty percent (40%) foreign equity limitation in public utilities

prescribed by the Constitution refers to ownership of shares of stock
entitled to vote, i.e., common shares, considering that it is through
voting that control is being exercised. x x x

Obviously, the intent of the framers of the Constitution in imposing

limitations and restrictions on fully nationalized and partially
nationalized activities is for Filipino nationals to be always in control
of the corporation undertaking said activities. Otherwise, if the Trial
Courts ruling upholding respondents arguments were to be given
credence, it would be possible for the ownership structure of a public
utility corporation to be divided into one percent (1%) common
stocks and ninety-nine percent (99%) preferred stocks. Following the
Trial Courts ruling adopting respondents arguments, the common
shares can be owned entirely by foreigners thus creating an absurd
situation wherein foreigners, who are supposed to be minority
shareholders, control the public utility corporation.

xxxx

Thus, the 40% foreign ownership limitation should be interpreted to

apply to both the beneficial ownership and the controlling interest.

xxxx

Clearly, therefore, the forty percent (40%) foreign equity limitation

in public utilities prescribed by the Constitution refers to ownership
of shares of stock entitled to vote, i.e., common shares. Furthermore,
ownership of record of shares will not suffice but it must be shown
that the legal and beneficial ownership rests in the hands of Filipino
citizens. Consequently, in the case of petitioner PLDT, since it is
already admitted that the voting interests of foreigners which would
gain entry to petitioner PLDT by the acquisition of SMART shares
through the Questioned Transactions is equivalent to 82.99%, and
the nominee arrangements between the foreign principals and the
Filipino owners is likewise admitted, there is, therefore, a violation
of Section 11, Article XII of the Constitution.
Parenthetically, the Opinions dated February 15, 1988 and April 14,
1987 cited by the Trial Court to support the proposition that the
meaning of the word capital as used in Section 11, Article XII of
the Constitution allegedly refers to the sum total of the shares
subscribed and paid-in by the shareholder and it allegedly is
immaterial how the stock is classified, whether as common or
preferred, cannot stand in the face of a clear legislative policy as
stated in the FIA which took effect in 1991 or way after said
opinions were rendered, and as clarified by the above-quoted
Amendments. In this regard, suffice it to state that as between the
law and an opinion rendered by an administrative agency, the law
indubitably prevails. Moreover, said Opinions are merely advisory
and cannot prevail over the clear intent of the framers of the
Constitution.

In the same vein, the SECs construction of Section 11, Article XII
of the Constitution is at best merely advisory for it is the courts that
finally determine what a law means.39

On the other hand, respondents therein, Antonio O. Cojuangco, Manuel

V. Pangilinan, Carlos A. Arellano, Helen Y. Dee, Magdangal B.
Elma, Mariles Cacho-Romulo, Fr. Bienvenido F. Nebres, Ray C. Espinosa,
Napoleon L. Nazareno, Albert F. Del Rosario, and Orlando B. Vea, argued
that the term capital in Section 11, Article XII of the Constitution includes
preferred shares since the Constitution does not distinguish among classes of
stock, thus:

17. But even assuming that resort to the proceedings of the

Constitutional Commission is necessary, there is nothing in the
Record of the Constitutional Commission (Vol. III) which
petitioner misleadingly cited in the Petition x x x which supports
petitioners view that only common shares should form the basis for
computing a public utilitys foreign equity.
xxxx

16. The Constitution applies its foreign ownership limitation on the

corporations capital, without distinction as to classes of shares.
xxx

In this connection, the Corporation Code which was already in

force at the time the present (1987) Constitution was drafted
defined outstanding capital stock as follows:

Section 137. Outstanding capital stock defined. The term

outstanding capital stock, as used in this Code, means the total
shares of stock issued under binding subscription agreements to
subscribers or stockholders, whether or not fully or partially paid,
except treasury shares.

Section 137 of the Corporation Code also does not distinguish

between common and preferred shares, nor exclude either class of
shares, in determining the outstanding capital stock (the capital) of
a corporation. Consequently, petitioners suggestion to reckon
PLDTs foreign equity only on the basis of PLDTs outstanding
common shares is without legal basis. The language of the
Constitution should be understood in the sense it has in common use.
xxxx

18. In addition, the SEC the government agency primarily responsible

for implementing the Corporation Code, and which also has the
responsibility of ensuring compliance with the Constitutions foreign
equity restrictions as regards nationalized activities x x x has
categorically ruled that both common and preferred shares are
properly considered in determining outstanding capital stock and the
nationality composition thereof.40

We agree with petitioner and petitioners-in-intervention. 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, and thus in the present case only
to common shares,41 and not to the total outstanding capital stock comprising
both common and non-voting preferred shares.
The Corporation Code of the Philippines42 classifies shares as common or
preferred, thus:

Sec. 6. Classification of shares. - The shares of stock of stock

corporations may be divided into classes or series of shares, or both,
any of which classes or series of shares may have such rights,
privileges or restrictions as may be stated in the articles of
incorporation: Provided, That no share may be deprived of voting
rights except those classified and issued as preferred or
redeemable shares, unless otherwise provided in this Code:

Provided, further, That there shall always be a class or series of

shares which have complete voting rights. Any or all of the shares or
series of shares may have a par value or have no par value as may be
provided for in the articles of incorporation: Provided,
however, That banks, trust companies, insurance companies, public
utilities, and building and loan associations shall not be permitted to
issue no-par value shares of stock.

2. Adoption and amendment of by-laws;

Preferred shares of stock issued by any corporation may be given

preference in the distribution of the assets of the corporation in case
of liquidation and in the distribution of dividends, or such other
preferences as may be stated in the articles of incorporation which
are not violative of the provisions of this Code: Provided, That
preferred shares of stock may be issued only with a stated par value.
The Board of Directors, where authorized in the articles of
incorporation, may fix the terms and conditions of preferred shares
of stock or any series thereof: Provided, That such terms and
conditions shall be effective upon the filing of a certificate thereof
with the Securities and Exchange Commission.

5. Increase or decrease of capital stock;

Shares of capital stock issued without par value shall be deemed

fully paid and non-assessable and the holder of such shares shall not
be liable to the corporation or to its creditors in respect thereto:
Provided; That shares without par value may not be issued for a
consideration less than the value of five (P5.00) pesos per share:
Provided, further, That the entire consideration received by the
corporation for its no-par value shares shall be treated as capital and
shall not be available for distribution as dividends.
A corporation may, furthermore, classify its shares for the purpose of
insuring compliance with constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and
stated in the certificate of stock, each share shall be equal in all
respects to every other share.
Where the articles of incorporation provide for non-voting shares in
the cases allowed by this Code, the holders of such shares shall
nevertheless be entitled to vote on the following matters:
1. Amendment of the articles of incorporation;

3. Sale, lease, exchange, mortgage, pledge or other

disposition of all or substantially all of the corporate
property;
4. Incurring, creating or increasing bonded indebtedness;

6. Merger or consolidation of the corporation with another

corporation or other corporations;
7. Investment of corporate funds in another corporation or
business in accordance with this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote
necessary to approve a particular corporate act as provided in this
Code shall be deemed to refer only to stocks with voting rights.

Indisputably, one of the rights of a stockholder is the right to participate in

the control or management of the corporation.43 This is exercised through his
vote in the election of directors because it is the board of directors that
controls or manages the corporation.44 In the absence of provisions in the
articles of incorporation denying voting rights to preferred shares, preferred
shares have the same voting rights as common shares. However, preferred
shareholders are often excluded from any control, that is, deprived of the
right to vote in the election of directors and on other matters, on the theory
that the preferred shareholders are merely investors in the corporation for
income in the same manner as bondholders.45 In fact, under the Corporation
Code only preferred or redeemable shares can be deprived of the right to
vote.46 Common shares cannot be deprived of the right to vote in any
corporate meeting, and any provision in the articles of incorporation
restricting the right of common shareholders to vote is invalid.47

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.

MR. VILLEGAS. We have just had a long discussion with the

members of the team from the UP Law Center who provided us a
draft. The phrase that is contained here which we adopted from
the UP draft is 60 percent of voting stock.

MR. NOLLEDO. That must be based on the subscribed capital stock,

because unless declared delinquent, unpaid capital stock shall be
entitled to vote.

MR. VILLEGAS. That is right.

This interpretation is consistent with the intent of the framers of the
Constitution to place in the hands of Filipino citizens the control and
management of public utilities. As revealed in the deliberations of the
Constitutional Commission, capital refers to the voting stock orcontrolling
interest of a corporation, to wit:

MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local

or Filipino equity and foreign equity; namely, 60-40 in Section 3, 6040 in Section 9 and 2/3-1/3 in Section 15.

MR. VILLEGAS. That is right.

MR. NOLLEDO. In teaching law, we are always faced with this

question: Where do we base the equity requirement, is it on the
authorized capital stock, on the subscribed capital stock, or on the
paid-up capital stock of a corporation? Will the Committee please
enlighten me on this?

MR. NOLLEDO. Thank you.

With respect to an investment by one corporation in another

corporation, say, a corporation with 60-40 percent equity invests in
another
corporation
which
is
permitted
by
the
Corporation Code, does the Committee adopt the grandfather rule?

MR. VILLEGAS. Yes, that is the understanding of the Committee.

MR. NOLLEDO. Therefore, we need additional Filipino capital?

MR. VILLEGAS. Yes.48

MR. AZCUNA. May I be clarified as to that portion that was

accepted by the Committee.

MR. BENGZON. No, the reason we eliminated the word stock

as stated in the 1973 and 1935 Constitutions is that according to
Commissioner Rodrigo, there are associations that do not have
stocks. That is why we say CAPITAL.

MR. VILLEGAS. The portion accepted by the Committee is the

deletion of the phrase voting stock or controlling interest.

MR. AZCUNA. We should not eliminate the phrase controlling

interest.

MR. AZCUNA. Hence, without the Davide amendment, the

committee report would read: corporations or associations at least
sixty percent of whose CAPITAL is owned by such citizens.

MR. BENGZON. In the case of stock corporations, it is

assumed.49 (Emphasis supplied)

xxxx

MR. VILLEGAS. Yes.

MR. AZCUNA. So if the Davide amendment is lost, we are stuck

with 60 percent of the capital to be owned by citizens.

Thus, 60 percent of the capital assumes, or should result in, controlling

interest in the corporation. Reinforcing this interpretation of the term
capital, as referring to controlling interest or shares entitled to vote, is the
definition of a Philippine national in the Foreign Investments Act of
1991,50 to wit:

MR. VILLEGAS. That is right.

SEC. 3. Definitions. - As used in this Act:

MR. AZCUNA. But the control can be with the foreigners even if
they are the minority. Let us say 40 percent of the capital is
owned by them, but it is the voting capital, whereas, the Filipinos
own the nonvoting shares. So we can have a situation where the
corporation is controlled by foreigners despite being the
minority because they have the voting capital. That is the
anomaly that would result here.

a. The term Philippine national shall mean 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 sixty percent (60%)
of the capital stock outstandingand entitled to vote is owned and
held by citizens of the Philippines; or a corporation organized
abroad and registered as doing business in the Philippines under the
Corporation Code of which one hundred percent (100%) of the
capital stock outstanding and entitled to vote is wholly owned by
Filipinos or a trustee of funds for pension or other employee

retirement or separation benefits, where the trustee is a Philippine

national and at least sixty percent (60%) of the fund will accrue to
the benefit of Philippine nationals: Provided, That where a
corporation and its non-Filipino stockholders own stocks in a
Securities and Exchange Commission (SEC) registered enterprise, at
least sixty percent (60%) of the capital stock outstanding and entitled
to vote of each of both corporations must be owned and held by
citizens of the Philippines and at least sixty percent (60%) of the
members of the Board of Directors of each of both corporations must
be citizens of the Philippines, in order that the corporation, shall be
considered a Philippine national. (Emphasis supplied)

In explaining the definition of a Philippine national, the Implementing

Rules and Regulations of the Foreign Investments Act of 1991 provide:

b. Philippine national shall mean a citizen of the Philippines or a

domestic partnership or association wholly owned by the citizens of
the Philippines; or a corporation organized under the laws of the
Philippines of which at least sixty percent [60%] of the capital
stock outstanding and entitled to vote is owned and held by
citizens of the Philippines; or a trustee of funds for pension or other
employee retirement or separation benefits, where the trustee is a
Philippine national and at least sixty percent [60%] of the fund will
accrue to the benefit of the Philippine nationals; Provided, that where
a corporation its non-Filipino stockholders own stocks in a Securities
and Exchange Commission [SEC] registered enterprise, at least sixty
percent [60%] of the capital stock outstanding and entitled to vote of
both corporations must be owned and held by citizens of the
Philippines and at least sixty percent [60%] of the members of the
Board of Directors of each of both corporation must be citizens of
the Philippines, in order that the corporation shall be considered a
Philippine national. The control test shall be applied for this purpose.

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.

For stocks to be deemed owned and held by Philippine citizens or

Philippine nationals, 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
Philippine nationals.

Individuals or juridical entities not meeting the aforementioned

qualifications
are
considered
as
non-Philippine
nationals. (Emphasis supplied)

Mere legal title is insufficient to meet the 60 percent Filipino-owned

capital required in the Constitution. Full beneficial ownership of 60 percent
of the outstanding capital stock, coupled with 60 percent of the voting rights,
is required. The legal and beneficial ownership of 60 percent of the
outstanding capital stock must rest in the hands of Filipino nationals in
accordance with the constitutional mandate. Otherwise, the corporation is
considered as non-Philippine national[s].

Under Section 10, Article XII of the Constitution, Congress may reserve to
citizens of the Philippines or to corporations or associations at least sixty per
centum of whose capital is owned by such citizens, or such higher percentage
as Congress may prescribe, certain areas of investments. Thus, in numerous
laws Congress has reserved certain areas of investments to Filipino citizens
or to corporations at least sixty percent of the capital of which is owned by
Filipino citizens. Some of these laws are: (1) Regulation of Award of
Government Contracts or R.A. No. 5183; (2) Philippine Inventors Incentives
Act or R.A. No. 3850; (3) Magna Carta for Micro, Small and Medium
Enterprises or R.A. No. 6977; (4) Philippine Overseas Shipping
Development Act or R.A. No. 7471; (5) Domestic Shipping Development
Act of 2004 or R.A. No. 9295; (6) Philippine Technology Transfer Act of
2009 or R.A. No. 10055; and (7) Ship Mortgage Decree or P.D. No. 1521.
Hence, the term capital in Section 11, Article XII of the Constitution is
also used in the same context in numerous laws reserving certain areas of
investments to Filipino citizens.

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 selfreliant and independent national economyeffectively controlled by
Filipinos. A broad definition unjustifiably disregards who owns the allimportant voting stock, which necessarily equates to control of the public
utility.

We shall illustrate the glaring anomaly in giving a broad definition to the

term capital. Let us assume that a corporation has 100 common shares
owned by foreigners and 1,000,000 non-voting preferred shares owned by
Filipinos, with both classes of share having a par value of one peso (P1.00)
per share. Under the broad definition of the term capital, such corporation
would be considered compliant with the 40 percent constitutional limit on
foreign equity of public utilities since the overwhelming majority, or more
than 99.999 percent, of the total outstanding capital stock is Filipino owned.
This is obviously absurd.

In the example given, only the foreigners holding the common shares have
voting rights in the election of directors, even if they hold only 100 shares.
The foreigners, with a minuscule equity of less than 0.001 percent, exercise
control over the public utility. On the other hand, the Filipinos, holding more
than 99.999 percent of the equity, cannot vote in the election of directors and
hence, have no control over the public utility. This starkly circumvents the
intent of the framers of the Constitution, as well as the clear language of the
Constitution, to place the control of public utilities in the hands of Filipinos.
It also renders illusory the State policy of an independent national
economyeffectively controlled by Filipinos.

The example given is not theoretical but can be found in the real world, and
in fact exists in the present case.

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.51

On the other hand, holders of common shares are granted the exclusive right
to vote in the election of directors. PLDTs Articles of Incorporation52 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.53

In short, only holders of common shares can vote in the election of directors,
meaning only common shareholders exercise control over PLDT.
Conversely, holders of preferred shares, who have no voting rights in the
election of directors, do not have any control over PLDT. In fact, under

PLDTs Articles of Incorporation, holders of common shares have voting

rights for all purposes, while holders of preferred shares have no voting right
for any purpose whatsoever.

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),54 which is a document required to be
submitted annually to the Securities and Exchange Commission,55 foreigners
hold 120,046,690 common shares of PLDT whereas Filipinos hold only
66,750,622 common shares.56 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.

Moreover, the Dividend Declarations of PLDT for 2009,57 as submitted to

the SEC, shows that per share the SIP58 preferred shares earn a pittance in
dividends compared to the common shares. PLDT declared dividends for the
common shares at P70.00 per share, while the declared dividends for the
preferred shares amounted to a measly P1.00 per share.59 So the preferred
shares not only cannot vote in the election of directors, they also have very
little and obviously negligible dividend earning capacity compared to
common shares.

As shown in PLDTs 2010 GIS,60 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.61 Worse, preferred shares constitute 77.85% of the
authorized capital stock of PLDT while common shares constitute only
22.15%.62 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.

The legal and beneficial ownership of 60 percent of the outstanding capital

stock must rest in the hands of Filipinos in accordance with the constitutional
mandate. Full beneficial ownership of 60 percent of the outstanding capital
stock, coupled with 60 percent of the voting rights, is constitutionally
required for the States grant of authority to operate a public utility. The
undisputed fact that the PLDT preferred shares, 99.44% owned by Filipinos,
are non-voting and earn only 1/70 of the dividends that PLDT common
shares earn, grossly violates the constitutional requirement of 60 percent
Filipino control and Filipino beneficial ownership of 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;63 (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.

Incidentally, the fact that PLDT common shares with a par value of P5.00
have a current stock market value of P2,328.00 per share,64while PLDT

preferred shares with a par value of P10.00 per share have a current stock
market value ranging from only P10.92 toP11.06 per share,65 is a glaring
confirmation by the market that control and beneficial ownership of PLDT
rest with the common shares, not with the preferred shares.

Indisputably, construing the term capital in Section 11, Article XII of the
Constitution to include both voting and non-voting shares will result in the
abject surrender of our telecommunications industry to foreigners, amounting
to a clear abdication of the States constitutional duty to limit control of
public utilities to Filipino citizens. Such an interpretation certainly runs
counter to the constitutional provision reserving certain areas of investment
to Filipino citizens, such as the exploitation of natural resources as well as
the ownership of land, educational institutions and advertising businesses.
The Court should never open to foreign control what the Constitution has
expressly reserved to Filipinos for that would be a betrayal of the
Constitution and of the national interest. The Court must perform its solemn
duty to defend and uphold the intent and letter of the Constitution to ensure,
in the words of the Constitution, a self-reliant and independent national
economy effectively controlled by Filipinos.

Section 11, Article XII of the Constitution, like other provisions of the
Constitution expressly reserving to Filipinos specific areas of investment,
such as the development of natural resources and ownership of land,
educational institutions and advertising business, is self-executing. There is
no need for legislation to implement these self-executing provisions of the
Constitution. The rationale why these constitutional provisions are selfexecuting was explained in Manila Prince Hotel v. GSIS,66 thus:
x x x Hence, unless it is expressly provided that a legislative act is
necessary to enforce a constitutional mandate, the presumption now
is that all provisions of the constitution are self-executing. If the
constitutional provisions are treated as requiring legislation instead
of self-executing, the legislature would have the power to ignore and
practically nullify the mandate of the fundamental law. This can be
cataclysmic. That is why the prevailing view is, as it has always
been, that

. . . in case of doubt, the Constitution should be considered selfexecuting rather than non-self-executing. . . . Unless the contrary is
clearly intended, the provisions of the Constitution should be
considered self-executing, as a contrary rule would give the
legislature discretion to determine when, or whether, they shall
be effective. These provisions would be subordinated to the will of
the lawmaking body, which could make them entirely meaningless
by simply refusing to pass the needed implementing statute.
(Emphasis supplied)

In Manila Prince Hotel, even the Dissenting Opinion of then Associate

Justice Reynato S. Puno, later Chief Justice, agreed that constitutional
provisions are presumed to be self-executing. Justice Puno stated:

Courts as a rule consider the provisions of the Constitution as selfexecuting, rather than as requiring future legislation for their
enforcement. The reason is not difficult to discern. For if they are
not treated as self-executing, the mandate of the fundamental
law ratified by the sovereign people can be easily ignored and
nullified by Congress. Suffused with wisdom of the ages is the
unyielding rule that legislative actions may give breath to
constitutional rights but congressional inaction should not
suffocate them.

Thus, we have treated as self-executing the provisions in the Bill of

Rights on arrests, searches and seizures, the rights of a person under
custodial investigation, the rights of an accused, and the privilege
against self-incrimination. It is recognized that legislation is
unnecessary to enable courts to effectuate constitutional provisions
guaranteeing the fundamental rights of life, liberty and the protection
of property. The same treatment is accorded to constitutional
provisions forbidding the taking or damaging of property for public
use without just compensation. (Emphasis supplied)

Thus, in numerous cases,67 this Court, even in the absence of implementing

legislation, applied directly the provisions of the 1935, 1973 and 1987
Constitutions limiting land ownership to Filipinos. In Soriano
v. Ong Hoo,68 this Court ruled:

x x x As the Constitution is silent as to the effects or consequences of

a sale by a citizen of his land to an alien, and as both the citizen and
the alien have violated the law, none of them should have a recourse
against the other, and it should only be the State that should be
allowed to intervene and determine what is to be done with the
property subject of the violation. We have said that what the State
should do or could do in such matters is a matter of public policy,
entirely beyond the scope of judicial authority. (Dinglasan, et al. vs.
Lee Bun Ting, et al., 6 G. R. No. L-5996, June 27, 1956.) While the
legislature has not definitely decided what policy should be
followed in cases of violations against the constitutional
prohibition, courts of justice cannot go beyond by declaring the
disposition to be null and void as violative of the Constitution.
x x x (Emphasis supplied)

To treat Section 11, Article XII of the Constitution as not self-executing

would mean that since the 1935 Constitution, or over the last 75 years, not
one of the constitutional provisions expressly reserving specific areas of
investments to corporations, at least 60 percent of the capital of which is
owned by Filipinos, was enforceable. In short, the framers of the 1935, 1973
and 1987 Constitutions miserably failed to effectively reserve to Filipinos
specific areas of investment, like the operation by corporations of public
utilities, the exploitation by corporations of mineral resources, the ownership
by corporations of real estate, and the ownership of educational institutions.
All the legislatures that convened since 1935 also miserably failed to enact
legislations to implement these vital constitutional provisions that determine
who will effectively control the national economy, Filipinos or foreigners.
This Court cannot allow such an absurd interpretation of the Constitution.

This Court has held that the SEC has both regulatory and adjudicative
functions.69 Under its regulatory functions, the SEC can be compelled by
mandamus to perform its statutory duty when it unlawfully neglects to
perform the same. Under its adjudicative or quasi-judicial functions, the SEC
can be also be compelled by mandamus to hear and decide a possible
violation of any law it administers or enforces when it is mandated by law to
investigate such violation.

Under Section 17(4)70 of the Corporation Code, the SEC has the regulatory
function to reject or disapprove the Articles of Incorporation of any
corporation where the required percentage of ownership of the capital
stock to be owned by citizens of the Philippines has not been complied
with as required by existing laws or the Constitution. Thus, the SEC is
the government agency tasked with the statutory duty to enforce the
nationality requirement prescribed in Section 11, Article XII of the
Constitution on the ownership of public utilities. This Court, in a petition for
declaratory relief that is treated as a petition for mandamus as in the present
case, can direct the SEC to perform its statutory duty under the law, a duty
that the SEC has apparently unlawfully neglected to do based on the 2010
GIS that respondent PLDT submitted to the SEC.
Under Section 5(m) of the Securities Regulation Code,71 the SEC is vested
with the power and function to suspend or revoke, after proper notice
and hearing, the franchise or certificate of registration of corporations,

partnerships or associations, upon any of the grounds provided by law.

The SEC is mandated under Section 5(d) of the same Code with the power
and function to investigate x x x the activities of persons to ensure
compliance with the laws and regulations that SEC administers or enforces.
The GIS that all corporations are required to submit to SEC annually should
put the SEC on guard against violations of the nationality requirement
prescribed in the Constitution and existing laws. This Court can compel the
SEC, in a petition for declaratory relief that is treated as a petition for
mandamus as in the present case, to hear and decide a possible violation of
Section 11, Article XII of the Constitution in view of the ownership structure
of PLDTs voting shares, as admitted by respondents and as stated in PLDTs
2010 GIS that PLDT submitted to SEC.

COUNCIL, CHAIRMAN ANTHONI SALIM OF FIRST PACIFIC CO.,

LTD. IN HIS CAPACITY AS DIRECTOR OF METRO PACIFIC
ASSET HOLDINGS INC., CHAIRMAN MANUEL V. PANGILINAN
OF PHILIPPINE LONG DISTANCE TELEPHONE COMPANY
(PLDT) IN HIS CAPACITY AS MANAGING DIRECTOR OF FIRST
PACIFIC CO., LTD., PRESIDENT NAPOLEON L. NAZARENO OF
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, CHAIR
FE BARIN OF THE SECURITIES AND EXCHANGE COMMISSION,
and PRESIDENT FRANCIS LIM OF THE PHILIPPINE STOCK
EXCHANGE, Respondents.
PABLITO V. SANIDAD and ARNO V. SANIDAD, Petitioner-inIntervention.
RESOLUTION

WHEREFORE, we PARTLY GRANT the petition and rule that the term
capital in Section 11, Article XII of the 1987 Constitution refers only to
shares of stock entitled to vote in the election of directors, and thus in the
present case only to common shares, and not to the total outstanding capital
stock (common and non-voting preferred shares). Respondent Chairperson of
the Securities and Exchange Commission is DIRECTED to apply this
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.

SO ORDERED.

G.R. No. 176579

CARPIO, J.:
This resolves the motions for reconsideration of the 28 June 2011
Decision filed by (1) the Philippine Stock Exchange's (PSE)
President, 1 (2) Manuel V. Pangilinan (Pangilinan),2 (3) Napoleon L.
Nazareno (Nazareno ),3and ( 4) the Securities and Exchange
Commission (SEC)4 (collectively, movants ).
The Office of the Solicitor General (OSG) initially filed a motion for
reconsideration on behalfofthe SEC,5 assailing the 28 June 2011
Decision. However, it subsequently filed a Consolidated Comment on
behalf of the State,6declaring expressly that it agrees with the Court's
definition of the term "capital" in Section 11, Article XII of the
Constitution. During the Oral Arguments on 26 June 2012, the OSG
reiterated its position consistent with the Court's 28 June 2011
Decision.

October 9, 2012
We deny the motions for reconsideration.
*

HEIRS
OF
WILSON
P.
GAMBOA, Petitioners,
vs.
FINANCE SECRETARYMARGARITO B. TEVES, FINANCE
UNDERSECRETARYJOHN P. SEVILLA, AND COMMISSIONER
RICARDO ABCEDE OF THE PRESIDENTIAL COMMISSION ON
GOOD GOVERNMENT(PCGG) IN THEIR CAPACITIES AS CHAIR
AND MEMBERS, RESPECTIVELY, OF THE PRIVATIZATION

I.
Far-reaching implications of the legal issue justify
treatment of petition for declaratory relief as one for mandamus.
As we emphatically stated in the 28 June 2011 Decision, the
interpretation of the term "capital" in Section 11, Article XII of the

Constitution has far-reaching implications to the national economy. In

fact, a resolution of this issue will determine whether Filipinos are
masters, or second-class citizens, in their own country. What is at
stake here is whether Filipinos or foreigners will have effective
control of the Philippine national economy. Indeed, if ever there is a
legal issue that has far-reaching implications to the entire nation, and
to future generations of Filipinos, it is the threshold legal issue
presented in this case.
Contrary to Pangilinans narrow view, the serious economic
consequences resulting in the interpretation of the term "capital" in
Section 11, Article XII of the Constitution undoubtedly demand an
immediate adjudication of this issue. Simply put, the far-reaching
implications of this issue justify the treatment of the petition as
one for mandamus.7
In Luzon Stevedoring Corp. v. Anti-Dummy Board,8 the Court deemed
it wise and expedient to resolve the case although the petition for
declaratory relief could be outrightly dismissed for being procedurally
defective. There, appellant admittedly had already committed a
breach of the Public Service Act in relation to the Anti-Dummy Law
since it had been employing non- American aliens long before the
decision in a prior similar case. However, the main issue in Luzon
Stevedoring was of transcendental importance, involving the exercise
or enjoyment of rights, franchises, privileges, properties and
businesses which only Filipinos and qualified corporations could
exercise or enjoy under the Constitution and the statutes. Moreover,
the same issue could be raised by appellant in an appropriate action.
Thus, in Luzon Stevedoring the Court deemed it necessary to finally
dispose of the case for the guidance of all concerned, despite the
apparent procedural flaw in the petition.
The circumstances surrounding the present case, such as the
supposed procedural defect of the petition and the pivotal legal issue
involved, resemble those in Luzon Stevedoring. Consequently, in the
interest of substantial justice and faithful adherence to the
Constitution, we opted to resolve this case for the guidance of the
public and all concerned parties.
II.
No
change
of
any
long-standing
thus, no redefinition of the term "capital."

rule;

Movants contend that the term "capital" in Section 11, Article XII of the
Constitution has long been settled and defined to refer to the total
outstanding shares of stock, whether voting or non-voting. In fact,
movants claim that the SEC, which is the administrative agency
tasked to enforce the 60-40 ownership requirement in favor of Filipino
citizens in the Constitution and various statutes, has consistently
adopted this particular definition in its numerous opinions. Movants
point out that with the 28 June 2011 Decision, the Court in effect
introduced a "new" definition or "midstream redefinition"9 of the term
"capital" in Section 11, Article XII of the Constitution.
This is egregious error.
For more than 75 years since the 1935 Constitution, the Court
has not interpreted or defined the term "capital" found in various
economic provisions of the 1935, 1973 and 1987 Constitutions. There
has never been a judicial precedent interpreting the term "capital" in
the 1935, 1973 and 1987 Constitutions, until now. Hence, it is patently
wrong and utterly baseless to claim that the Court in defining the term
"capital" in its 28 June 2011 Decision modified, reversed, or set aside
the purported long-standing definition of the term "capital," which
supposedly refers to the total outstanding shares of stock, whether
voting or non-voting. To repeat, until the present case there has never
been a Court ruling categorically defining the term "capital" found in
the various economic provisions of the 1935, 1973 and 1987
Philippine Constitutions.
The opinions of the SEC, as well as of the Department of Justice
(DOJ), on the definition of the term "capital" as referring to both voting
and non-voting shares (combined total of common and preferred
shares) are, in the first place, conflicting and inconsistent. There is no
basis whatsoever to the claim that the SEC and the DOJ have
consistently and uniformly adopted a definition of the term "capital"
contrary to the definition that this Court adopted in its 28 June 2011
Decision.
In DOJ Opinion No. 130, s. 1985,10 dated 7 October 1985, the scope
of the term "capital" in Section 9, Article XIV of the 1973 Constitution
was raised, that is, whether the term "capital" includes "both preferred
and common stocks." The issue was raised in relation to a stock-swap
transaction between a Filipino and a Japanese corporation, both
stockholders of a domestic corporation that owned lands in the

Philippines. Then Minister of Justice Estelito P. Mendoza ruled that

the resulting ownership structure of the corporation would
beunconstitutional because 60% of the voting stock would be owned
by Japanese while Filipinos would own only 40% of the voting stock,
although when the non-voting stock is added, Filipinos would own
60% of the combined voting and non-voting stock. This ownership
structure is remarkably similar to the current ownership
structure of PLDT. Minister Mendoza ruled:

complied with unless the corporation "satisfies the criterion of

beneficial ownership" and that in applying the same "the primordial
consideration is situs of control."
On the other hand, in Opinion No. 23-10 dated 18 August 2010,
addressed to Castillo Laman Tan Pantaleon & San Jose, then SEC
General Counsel Vernette G. Umali-Paco applied the Voting Control
Test, that is, using only the voting stock to determine whether a
corporation is a Philippine national. The Opinion states:

xxxx
Thus, the Filipino group still owns sixty (60%) of the entire subscribed
capital stock (common and preferred) while the Japanese investors
control sixty percent (60%) of the common (voting) shares.
It is your position that x x x since Section 9, Article XIV of the
Constitution uses the word "capital," which is construed "to
include both preferred and common shares" and "that where the
law does not distinguish, the courts shall not distinguish."
xxxx
In light of the foregoing jurisprudence, it is my opinion that the
stock-swap transaction in question may not be constitutionally
upheld. While it may be ordinary corporate practice to classify
corporate shares into common voting shares and preferred non-voting
shares, any arrangement which attempts to defeat the constitutional
purpose should be eschewed. Thus, the resultant equity
arrangement which would place ownership of 60%11 of the
common (voting) shares in the Japanese group, while retaining
60% of the total percentage of common and preferred shares in
Filipino hands would amount to circumvention of the principle of
control by Philippine stockholders that is implicit in the 60%
Philippine nationality requirement in the Constitution. (Emphasis
supplied)
In short, Minister Mendoza categorically rejected the theory that the
term "capital" in Section 9, Article XIV of the 1973 Constitution
includes "both preferred and common stocks" treated as the same
class of shares regardless of differences in voting rights and
privileges. Minister Mendoza stressed that the 60-40 ownership
requirement in favor of Filipino citizens in the Constitution is not

Applying the foregoing, particularly the Control Test, MLRC is

deemed as a Philippine national because: (1) sixty percent (60%) of
its outstanding capital stock entitled to vote is owned by a
Philippine national, the Trustee; and (2) at least sixty percent (60%) of
the ERF will accrue to the benefit of Philippine nationals. Still
pursuant to the Control Test, MLRCs investment in 60% of
BFDCs outstanding capital stock entitled to vote shall be
deemed as of Philippine nationality, thereby qualifying BFDC to
own private land.
Further, under, and for purposes of, the FIA, MLRC and BFDC are
both Philippine nationals, considering that: (1) sixty percent (60%) of
their respective outstanding capital stock entitled to vote is owned
by a Philippine national (i.e., by the Trustee, in the case of MLRC; and
by MLRC, in the case of BFDC); and (2) at least 60% of their
respective board of directors are Filipino citizens. (Boldfacing and
italicization supplied)
Clearly, these DOJ and SEC opinions are compatible with the Courts
interpretation of the 60-40 ownership requirement in favor of Filipino
citizens mandated by the Constitution for certain economic activities.
At the same time, these opinions highlight the conflicting,
contradictory, and inconsistent positions taken by the DOJ and the
SEC on the definition of the term "capital" found in the economic
provisions of the Constitution.
The opinions issued by SEC legal officers do not have the force and
effect of SEC rules and regulations because only the SEC en
banc can adopt rules and regulations. As expressly provided in
Section 4.6 of the Securities Regulation Code,12 the SEC cannot
delegate to any of its individual Commissioner or staff the power to
adopt any rule or regulation. Further, under Section 5.1 of the same

Code, it is the SEC as a collegial body, and not any of its legal
officers, that is empowered to issue opinions and approve rules
and regulations. Thus:
4.6. The Commission may, for purposes of efficiency, delegate any of
its functions to any department or office of the Commission, an
individual
Commissioner
or
staff
member
of
the
Commission exceptits review or appellate authority and its power to
adopt, alter and supplement any rule or regulation.
The Commission may review upon its own initiative or upon the
petition of any interested party any action of any department or office,
individual Commissioner, or staff member of the Commission.
SEC. 5. Powers and Functions of the Commission.- 5.1. The
Commission shall act with transparency and shall have the powers
and functions provided by this Code, Presidential Decree No. 902-A,
the Corporation Code, the Investment Houses Law, the Financing
Company Act and other existing laws. Pursuant thereto the
Commission shall have, among others, the following powers and
functions:
xxxx
(g) Prepare, approve, amend or repeal rules, regulations and
orders, and issue opinionsand provide guidance on and
supervise compliance with such rules, regulations and orders;
x x x x (Emphasis supplied)
Thus, the act of the individual Commissioners or legal officers of the
SEC in issuing opinions that have the effect of SEC rules or
regulations is ultra vires. Under Sections 4.6 and 5.1(g) of the Code,
only the SEC en banc can "issue opinions" that have the force and
effect of rules or regulations. Section 4.6 of the Code bars the SEC en
banc from delegating to any individual Commissioner or staff the
power to adopt rules or regulations. In short, any opinion of
individual Commissioners or SEC legal officers does not
constitute a rule or regulation of the SEC.

The SEC admits during the Oral Arguments that only the SEC en
banc, and not any of its individual commissioners or legal staff, is
empowered to issue opinions which have the same binding effect as
SEC rules and regulations, thus:
JUSTICE CARPIO:
So, under the law, it is the Commission En Banc that
can issue an
SEC Opinion, correct?
COMMISSIONER GAITE:13
Thats correct, Your Honor.
JUSTICE CARPIO:
Can the Commission En Banc delegate this function to
an SEC officer?
COMMISSIONER GAITE:
Yes, Your Honor, we have delegated it to the General
Counsel.
JUSTICE CARPIO:
It can be delegated. What cannot be delegated by the
Commission En Banc to a commissioner or an
individual employee of the Commission?
COMMISSIONER GAITE:
Novel opinions that [have] to be decided by the En
Banc...
JUSTICE CARPIO:
What cannot be delegated, among others, is the power
to adopt or amend rules and regulations, correct?

COMMISSIONER GAITE:

laid down in the 25 March 2010 SEC en banc ruling in Redmont

Consolidated Mines, Corp. v. McArthur Mining, Inc., et al.,15 to wit:

Thats correct, Your Honor.

JUSTICE CARPIO:
So, you combine the two (2), the SEC officer, if
delegated that power, can issue an opinion but that
opinion does not constitute a rule or regulation,
correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
So, all of these opinions that you mentioned they
are not rules and regulations, correct?
COMMISSIONER GAITE:
They are not rules and regulations.
JUSTICE CARPIO:
If they are not rules and regulations, they apply only to
that particular situation and will not constitute a
precedent, correct?
COMMISSIONER GAITE:
Yes, Your Honor.14 (Emphasis supplied)
Significantly, the SEC en banc, which is the collegial body statutorily
empowered to issue rules and opinions on behalf of the SEC, has
adopted even the Grandfather Rule in determining compliance with
the 60-40 ownership requirement in favor of Filipino citizens
mandated by the Constitution for certain economic activities. This
prevailing SEC ruling, which the SEC correctly adopted to thwart any
circumvention of the required Filipino "ownership and control," is

The avowed purpose of the Constitution is to place in the hands of

Filipinos the exploitation of our natural resources. Necessarily,
therefore, the Rule interpreting the constitutional provision
should not diminish that right through the legal fiction of
corporate ownership and control. But the constitutional provision,
as interpreted and practiced via the 1967 SEC Rules, has favored
foreigners contrary to the command of the Constitution. Hence, the
Grandfather Rule must be applied to accurately determine the
actual participation, both direct and indirect, of foreigners in a
corporation engaged in a nationalized activity or business.
Compliance with the constitutional limitation(s) on engaging in
nationalized activities must be determined by ascertaining if 60% of
the investing corporations outstanding capital stock is owned by
"Filipino citizens", or as interpreted, by natural or individual Filipino
citizens. If such investing corporation is in turn owned to some extent
by another investing corporation, the same process must be
observed. One must not stop until the citizenships of the individual or
natural stockholders of layer after layer of investing corporations have
been established, the very essence of the Grandfather Rule.
Lastly, it was the intent of the framers of the 1987 Constitution to
adopt the Grandfather Rule. In one of the discussions on what is
now Article XII of the present Constitution, the framers made the
following exchange:
MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local
or Filipino equity and foreign equity; namely, 60-40 in Section 3, 60-40
in Section 9, and 2/3-1/3 in Section 15.
MR. VILLEGAS. That is right.
MR. NOLLEDO. In teaching law, we are always faced with the
question: Where do we base the equity requirement, is it on the
authorized capital stock, on the subscribed capital stock, or on the
paid-up capital stock of a corporation? Will the Committee please
enlighten me on this?

MR. VILLEGAS. We have just had a long discussion with the

members of the team from the UP Law Center who provided us a
draft. The phrase that is contained here which we adopted from the
UP draft is 60 percent of voting stock.
MR. NOLLEDO. That must be based on the subscribed capital stock,
because unless declared delinquent, unpaid capital stock shall be
entitled to vote.
MR. VILLEGAS. That is right.
MR. NOLLEDO. Thank you. With respect to an investment by one
corporation in another corporation, say, a corporation with 60-40
percent equity invests in another corporation which is permitted by the
Corporation Code, does the Committee adopt the grandfather rule?
MR. VILLEGAS. Yes, that is the understanding of the Committee.
MR. NOLLEDO. Therefore, we need additional Filipino capital?
MR. VILLEGAS. Yes. (Boldfacing and underscoring supplied;
italicization in the original)
This SEC en banc ruling conforms to our 28 June 2011 Decision that
the 60-40 ownership requirement in favor of Filipino citizens in the
Constitution to engage in certain economic activities applies not only
to voting control of the corporation, but also to the beneficial
ownership of the corporation. Thus, in our 28 June 2011 Decision
we stated:
Mere legal title is insufficient to meet the 60 percent Filipinoowned
"capital" required in the Constitution. Full beneficial ownership of 60
percent of the outstanding capital stock, coupled with 60 percent
of the voting rights, is required. The legal and beneficial ownership
of 60 percent of the outstanding capital stock must rest in the hands of
Filipino nationals in accordance with the constitutional mandate.
Otherwise, the corporation is "considered as non-Philippine
national[s]." (Emphasis supplied)

Both the Voting Control Test and the Beneficial Ownership Test must
be applied to determine whether a corporation is a "Philippine
national."
The interpretation by legal officers of the SEC of the term "capital,"
embodied in various opinions which respondents relied upon, is
merely preliminary and an opinion only of such officers. To repeat,
any such opinion does not constitute an SEC rule or regulation. In
fact, many of these opinions contain a disclaimer which expressly
states: "x x x the foregoing opinion is based solely on facts
disclosed in your query and relevant only to the particular issue raised
therein and shall not be used in the nature of a standing rule
binding upon the Commission in other cases whether of similar
or dissimilar circumstances."16 Thus, the opinions clearly make
a caveat that they do not constitute binding precedents on any one,
not even on the SEC itself.
Likewise, the opinions of the SEC en banc, as well as of the DOJ,
interpreting the law are neither conclusive nor controlling and thus, do
not bind the Court. It is hornbook doctrine that any interpretation of the
law that administrative or quasi-judicial agencies make is only
preliminary, never conclusive on the Court. The power to make a final
interpretation of the law, in this case the term "capital" in Section 11,
Article XII of the 1987 Constitution, lies with this Court, not with any
other government entity.
In his motion for reconsideration, the PSE President cites the cases
of National
Telecommunications
Commission
v.
Court
of
17
Appeals and Philippine Long Distance Telephone Company v.
National Telecommunications Commission18 in arguing that the Court
has already defined the term "capital" in Section 11, Article XII of the
1987 Constitution.19
The PSE President is grossly mistaken. In both cases of National
Telecommunications v. Court of Appeals20 andPhilippine Long
Distance Telephone Company v. National Telecommunications
Commission,21 the Court did not define the term "capital" as found in
Section 11, Article XII of the 1987 Constitution. In fact, these two
cases never mentioned, discussed or cited Section 11, Article XII
of the Constitution or any of its economic provisions, and thus
cannot serve as precedent in the interpretation of Section 11,
Article XII of the Constitution. These two cases dealt solely with the

determination of the correct regulatory fees under Section 40(e) and

(f) of the Public Service Act, to wit:
(e) For annual reimbursement of the expenses incurred by the
Commission in the supervision of other public services and/or in the
regulation or fixing of their rates, twenty centavos for each one
hundred pesos or fraction thereof, of the capital stock subscribed or
paid, or if no shares have been issued, of the capital invested, or of
the property and equipment whichever is higher.
(f) For the issue or increase of capital stock, twenty centavos for
each one hundred pesos or fraction thereof, of the increased capital.
(Emphasis supplied)
The Courts interpretation in these two cases of the terms "capital
stock subscribed or paid," "capital stock" and "capital" does not
pertain to, and cannot control, the definition of the term "capital" as
used in Section 11, Article XII of the Constitution, or any of the
economic provisions of the Constitution where the term "capital" is
found. The definition of the term "capital" found in the Constitution
must not be taken out of context. A careful reading of these two cases
reveals that the terms "capital stock subscribed or paid," "capital
stock" and "capital" were defined solely to determine the basis for
computing the supervision and regulation fees under Section 40(e)
and (f) of the Public Service Act.
III.
Filipinization of Public Utilities
The Preamble of the 1987 Constitution, as the prologue of the
supreme law of the land, embodies the ideals that the Constitution
intends to achieve.22 The Preamble reads:
We, the sovereign Filipino people, imploring the aid of Almighty God,
in order to build a just and humane society, and establish a
Government that shall embody our ideals and aspirations, promote
the common good, conserve and develop our patrimony, and
secure to ourselves and our posterity, the blessings of independence
and democracy under the rule of law and a regime of truth, justice,
freedom, love, equality, and peace, do ordain and promulgate this
Constitution. (Emphasis supplied)

Consistent with these ideals, Section 19, Article II of the 1987

Constitution declares as State policy the development of a national
economy "effectively controlled" by Filipinos:
Section 19. The State shall develop a self-reliant and independent
national economy effectively controlled by Filipinos.
Fortifying the State policy of a Filipino-controlled economy, the
Constitution decrees:
Section 10. The Congress shall, upon recommendation of the
economic and planning agency, when the national interest dictates,
reserve to citizens of the Philippines or to corporations or associations
at least sixty per centum of whose capital is owned by such citizens,
or such higher percentage as Congress may prescribe, certain areas
of investments. The Congress shall enact measures that will
encourage the formation and operation of enterprises whose capital is
wholly owned by Filipinos.
In the grant of rights, privileges, and concessions covering the
national economy and patrimony, the State shall give preference to
qualified Filipinos.
The State shall regulate and exercise authority over foreign
investments within its national jurisdiction and in accordance with its
national goals and priorities.23
Under Section 10, Article XII of the 1987 Constitution, Congress may
"reserve to citizens of the Philippines or to corporations or
associations at least sixty per centum of whose capital is owned by
such citizens, or such higher percentage as Congress may prescribe,
certain areas of investments." Thus, in numerous laws Congress has
reserved certain areas of investments to Filipino citizens or to
corporations at least sixty percent of the "capital" of which is owned
by Filipino citizens. Some of these laws are: (1) Regulation of Award
of Government Contracts or R.A. No. 5183; (2) Philippine Inventors
Incentives Act or R.A. No. 3850; (3) Magna Carta for Micro, Small and
Medium Enterprises or R.A. No. 6977; (4) Philippine Overseas
Shipping Development Act or R.A. No. 7471; (5) Domestic Shipping
Development Act of 2004 or R.A. No. 9295; (6) Philippine Technology
Transfer Act of 2009 or R.A. No. 10055; and (7) Ship Mortgage
Decree or P.D. No. 1521.

With respect to public utilities, the 1987 Constitution specifically

ordains:
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)
This provision, which mandates the Filipinization of public utilities,
requires that any form of authorization for the operation of public
utilities shall be granted only 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." "The provision is [an express] recognition of the
sensitive and vital position of public utilities both in the national
economy and for national security."24
The 1987 Constitution reserves the ownership and operation of public
utilities exclusively to (1) Filipino citizens, or (2) corporations or
associations at least 60 percent of whose "capital" is owned by
Filipino citizens. Hence, in the case of individuals, only Filipino
citizens can validly own and operate a public utility. In the case of
corporations or associations, at least 60 percent of their "capital" must
be owned by Filipino citizens. In other words, under Section 11,
Article XII of the 1987 Constitution, to own and operate a public
utility a corporations capital must at least be 60 percent owned
by Philippine nationals.
IV.
Definition of "Philippine National"

Pursuant to the express mandate of Section 11, Article XII of the 1987
Constitution, Congress enacted Republic Act No. 7042 or the Foreign
Investments Act of 1991 (FIA), as amended, which defined a
"Philippine national" as follows:
SEC. 3. Definitions. - As used in this Act:
a. The term "Philippine national" shall mean 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 sixty percent (60%) of
the capital stock outstanding and entitled to vote is owned and
held by citizens of the Philippines; or a corporation organized
abroad and registered as doing business in the Philippines under the
Corporation Code of which one hundred percent (100%) of the capital
stock outstanding and entitled to vote is wholly owned by Filipinos or a
trustee of funds for pension or other employee retirement or
separation benefits, where the trustee is a Philippine national and at
least sixty percent (60%) of the fund will accrue to the benefit of
Philippine nationals: Provided, That where a corporation and its nonFilipino stockholders own stocks in a Securities and Exchange
Commission (SEC) registered enterprise, at least sixty percent (60%)
of the capital stock outstanding and entitled to vote of each of both
corporations must be owned and held by citizens of the Philippines
and at least sixty percent (60%) of the members of the Board of
Directors of each of both corporations must be citizens of the
Philippines, in order that the corporation, shall be considered a
"Philippine national." (Boldfacing, italicization and underscoring
supplied)
Thus, the FIA clearly and unequivocally defines a "Philippine
national" as a Philippine citizen, or a domestic corporation at least
"60% of the capital stock outstanding and entitled to vote" is
owned by Philippine citizens.
The definition of a "Philippine national" in the FIA reiterated the
meaning of such term as provided in its predecessor statute,
Executive Order No. 226 or the Omnibus Investments Code of
1987,25 which was issued by then President Corazon C. Aquino.
Article 15 of this Code states:

Article 15. "Philippine national" shall mean a citizen of the Philippines

or a diplomatic partnership or association wholly-owned by citizens of
the Philippines; or a corporation organized under the laws of the
Philippines of which at least sixty per cent (60%) of the capital
stock outstandingand entitled to vote is owned and held by
citizens of the Philippines; or a trustee of funds for pension or other
employee retirement or separation benefits, where the trustee is a
Philippine national and at least sixty per cent (60%) of the fund will
accrue to the benefit of Philippine nationals: Provided, That where a
corporation and its non-Filipino stockholders own stock in a registered
enterprise, at least sixty per cent (60%) of the capital stock
outstanding and entitled to vote of both corporations must be owned
and held by the citizens of the Philippines and at least sixty per cent
(60%) of the members of the Board of Directors of both corporations
must be citizens of the Philippines in order that the corporation shall
be considered a Philippine national. (Boldfacing, italicization and
underscoring supplied)
Under Article 48(3)26 of the Omnibus Investments Code of 1987, "no
corporation x x x which is not a Philippine national x x x shall do
business
x x x in the Philippines x x x without first securing from the Board of
Investments a written certificate to the effect that such business or
economic activity x x x would not conflict with the Constitution or laws
of the Philippines."27Thus, a "non-Philippine national" cannot own and
operate a reserved economic activity like a public utility. This means,
of course, that only a "Philippine national" can own and operate a
public utility.
In turn, the definition of a "Philippine national" under Article 15 of the
Omnibus Investments Code of 1987 was a reiteration of the meaning
of such term as provided in Article 14 of the Omnibus Investments
Code of 1981,28 to wit:
Article 14. "Philippine national" shall mean 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 sixty per cent (60%) of the capital
stock outstanding and entitled to vote is owned and held by
citizens of the Philippines; or a trustee of funds for pension or other
employee retirement or separation benefits, where the trustee is a

Philippine national and at least sixty per cent (60%) of the fund will
accrue to the benefit of Philippine nationals: Provided, That where a
corporation and its non-Filipino stockholders own stock in a registered
enterprise, at least sixty per cent (60%) of the capital stock
outstanding and entitled to vote of both corporations must be owned
and held by the citizens of the Philippines and at least sixty per cent
(60%) of the members of the Board of Directors of both corporations
must be citizens of the Philippines in order that the corporation shall
be considered a Philippine national. (Boldfacing, italicization and
underscoring supplied)
Under Article 69(3) of the Omnibus Investments Code of 1981, "no
corporation x x x which is not a Philippine national x x x shall do
business x x x in the Philippines x x x without first securing a written
certificate from the Board of Investments to the effect that such
business or economic activity x x x would not conflict with the
Constitution or laws of the Philippines."29 Thus, a "non-Philippine
national" cannot own and operate a reserved economic activity like a
public utility. Again, this means that only a "Philippine national" can
own and operate a public utility.
Prior to the Omnibus Investments Code of 1981, Republic Act No.
518630 or the Investment Incentives Act, which took effect on 16
September 1967, contained a similar definition of a "Philippine
national," to wit:
(f) "Philippine National" shall mean a citizen of the Philippines; or a
partnership or association wholly owned by citizens of the Philippines;
or a corporation organized under the laws of the Philippines of
which at least sixty per cent of the capital stock outstanding and
entitled to vote is owned and held by citizens of the Philippines;
or a trustee of funds for pension or other employee retirement or
separation benefits, where the trustee is a Philippine National and at
least sixty per cent of the fund will accrue to the benefit of Philippine
Nationals: Provided, That where a corporation and its non-Filipino
stockholders own stock in a registered enterprise, at least sixty per
cent of the capital stock outstanding and entitled to vote of both
corporations must be owned and held by the citizens of the
Philippines and at least sixty per cent of the members of the Board of
Directors of both corporations must be citizens of the Philippines in
order that the corporation shall be considered a Philippine National.
(Boldfacing, italicization and underscoring supplied)

Under Section 3 of Republic Act No. 5455 or the Foreign Business

Regulations Act, which took effect on 30 September 1968, if the
investment in a domestic enterprise by non-Philippine nationals
exceeds 30% of its outstanding capital stock, such enterprise must
obtain prior approval from the Board of Investments before accepting
such investment. Such approval shall not be granted if the investment
"would conflict with existing constitutional provisions and laws
regulating the degree of required ownership by Philippine nationals in
the enterprise."31 A "non-Philippine national" cannot own and operate
a reserved economic activity like a public utility. Again, this means
that only a "Philippine national" can own and operate a public utility.
The FIA, like all its predecessor statutes, clearly defines a
"Philippine national" as a Filipino citizen, or adomestic corporation
"at least sixty percent (60%) of the capital stock outstanding and
entitled to vote"is owned by Filipino citizens. A domestic corporation
is a "Philippine national" only if at least 60% of its voting stock is
owned by Filipino citizens. This definition of a "Philippine national" is
crucial in the present case because the FIA reiterates and clarifies
Section 11, Article XII of the 1987 Constitution, which limits the
ownership and operation of public utilities to Filipino citizens or to
corporations or associations at least 60% Filipino-owned.
The FIA is the basic law governing foreign investments in the
Philippines, irrespective of the nature of business and area of
investment. The FIA spells out the procedures by which nonPhilippine nationals can invest in the Philippines. Among the key
features of this law is the concept of a negative list or the Foreign
Investments Negative List.32 Section 8 of the law states:
SEC. 8. List of Investment Areas Reserved to Philippine
Nationals [Foreign Investment Negative List]. - The Foreign
Investment Negative List shall have two 2 component lists: A and B:
a. List A shall enumerate the areas of activities reserved to
Philippine nationals by mandate of the Constitution and specific
laws.
b. List B shall contain the areas of activities and enterprises regulated
pursuant to law:

1. which are defense-related activities, requiring prior clearance and

authorization from the Department of National Defense [DND] to
engage in such activity, such as the manufacture, repair, storage
and/or distribution of firearms, ammunition, lethal weapons, military
ordinance, explosives, pyrotechnics and similar materials; unless such
manufacturing or repair activity is specifically authorized, with a
substantial export component, to a non-Philippine national by the
Secretary of National Defense; or
2. which have implications on public health and morals, such as the
manufacture and distribution of dangerous drugs; all forms of
gambling; nightclubs, bars, beer houses, dance halls, sauna and
steam bathhouses and massage clinics. (Boldfacing, underscoring
and italicization supplied)
Section 8 of the FIA enumerates the investment areas "reserved to
Philippine nationals." Foreign Investment Negative List A consists
of "areas of activities reserved to Philippine nationals by
mandate of the Constitution and specific laws," where foreign
equity participation in any enterprise shall be limited to the
maximum percentage expressly prescribed by the Constitution
and other specific laws. In short, to own and operate a public
utility in the Philippines one must be a "Philippine national" as
defined in the FIA. The FIA is abundant notice to foreign
investors to what extent they can invest in public utilities in the
Philippines.
To repeat, among the areas of investment covered by the Foreign
Investment Negative List A is the ownership and operation of public
utilities, which the Constitution expressly reserves to Filipino citizens
and to corporations at least 60% owned by Filipino citizens. In other
words, Negative List A of the FIA reserves the ownership and
operation of public utilities only to "Philippine nationals,"
defined in Section 3(a) of the FIA as "(1) a citizen of the Philippines;
x x x or (3) a corporation organized under the laws of the
Philippines of which at least sixty percent (60%) of the capital
stock outstanding and entitled to vote is owned and held by
citizens of the Philippines; or (4) a corporation organized abroad
and registered as doing business in the Philippines under the
Corporation Code of which one hundred percent (100%) of the capital
stock outstanding and entitled to vote is wholly owned by Filipinos or a
trustee of funds for pension or other employee retirement or

separation benefits, where the trustee is a Philippine national and at

least sixty percent (60%) of the fund will accrue to the benefit of
Philippine nationals."
Clearly, from the effectivity of the Investment Incentives Act of 1967 to
the adoption of the Omnibus Investments Code of 1981, to the
enactment of the Omnibus Investments Code of 1987, and to the
passage of the present Foreign Investments Act of 1991, or for more
than four decades, the statutory definition of the term "Philippine
national" has been uniform and consistent: it means a Filipino
citizen, or a domestic corporation at least 60% of the voting
stock is owned by Filipinos. Likewise, these same statutes have
uniformly and consistently required that only "Philippine
nationals" could own and operate public utilities in the
Philippines. The following exchange during the Oral Arguments is
revealing:
JUSTICE CARPIO:
Counsel, I have some questions. You are aware of the
Foreign Investments Act of 1991, x x x? And the FIA of
1991 took effect in 1991, correct? Thats over twenty
(20) years ago, correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
And Section 8 of the Foreign Investments Act of 1991
states that []only Philippine nationals can own and
operate public utilities[], correct?

And the same Foreign Investments Act of 1991 defines

a "Philippine national" either as a citizen of the
Philippines, or if it is a corporation at least sixty percent
(60%) of the voting stock is owned by citizens of the
Philippines, correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
And, you are also aware that under the predecessor
law of the Foreign Investments Act of 1991, the
Omnibus Investments Act of 1987, the same provisions
apply: x x x only Philippine nationals can own and
operate a public utility and the Philippine national, if it is
a corporation, x x x sixty percent (60%) of the capital
stock of that corporation must be owned by citizens of
the Philippines, correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
And even prior to the Omnibus Investments Act of
1987, under the Omnibus Investments Act of 1981, the
same rules apply: x x x only a Philippine national can
own and operate a public utility and a Philippine
national, if it is a corporation, sixty percent (60%) of its
x x x voting stock, must be owned by citizens of the
Philippines, correct?

COMMISSIONER GAITE:
COMMISSIONER GAITE:
Yes, Your Honor.
Correct, Your Honor.
JUSTICE CARPIO:
JUSTICE CARPIO:

And even prior to that, under [the]1967 Investments

Incentives Act and the Foreign Company Act of 1968,
the same rules applied, correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
So, for the last four (4) decades, x x x, the law has
been very consistent only a Philippine national
can own and operate a public utility, and a
Philippine national, if it is a corporation, x x x at
least sixty percent (60%) of the voting stock must
be owned by citizens of the Philippines, correct?
COMMISSIONER GAITE:

national" in Section 3(a) of the FIA in determining whether a particular

corporation is qualified to own and operate a nationalized or partially
nationalized business in the Philippines. This shows that SEC legal
officers are not only aware of, but also rely on and invoke, the
provisions of the FIA in ascertaining the eligibility of a corporation to
engage in partially nationalized industries. The following are some of
such opinions:
1. Opinion of 23 March 1993, addressed to Mr. Francis F.
How;
2. Opinion of 14 April 1993, addressed to Director Angeles T.
Wong of the Philippine Overseas Employment Administration;
3. Opinion of 23 November 1993, addressed to Messrs.
Dominador Almeda and Renato S. Calma;
4. Opinion of 7 December 1993, addressed to Roco Bunag
Kapunan Migallos & Jardeleza;

Correct, Your Honor.33 (Emphasis supplied)

Government agencies like the SEC cannot simply ignore Sections
3(a) and 8 of the FIA which categorically prescribe that certain
economic activities, like the ownership and operation of public utilities,
are reserved to corporations "at least sixty percent (60%) of the
capital stock outstanding and entitled to vote is owned and held by
citizens of the Philippines." Foreign Investment Negative List A refers
to "activities reserved to Philippine nationals by mandate of the
Constitution and specific laws." The FIA is the basic statute
regulating foreign investments in the Philippines. Government
agencies tasked with regulating or monitoring foreign investments, as
well as counsels of foreign investors, should start with the FIA in
determining to what extent a particular foreign investment is allowed
in the Philippines. Foreign investors and their counsels who ignore the
FIA do so at their own peril. Foreign investors and their counsels who
rely on opinions of SEC legal officers that obviously contradict the FIA
do so also at their own peril.
Occasional opinions of SEC legal officers that obviously contradict the
FIA should immediately raise a red flag. There are already numerous
opinions of SEC legal officers that cite the definition of a "Philippine

5. SEC Opinion No. 49-04, addressed to Romulo Mabanta

Buenaventura Sayoc & De Los Angeles;
6. SEC-OGC Opinion No. 17-07, addressed to Mr. Reynaldo
G. David; and
7. SEC-OGC Opinion No. 03-08, addressed to Attys. Ruby
Rose J. Yusi and Rudyard S. Arbolado.
The SEC legal officers occasional but blatant disregard of the
definition of the term "Philippine national" in the FIA signifies their lack
of integrity and competence in resolving issues on the 60-40
ownership requirement in favor of Filipino citizens in Section 11,
Article XII of the Constitution.
The PSE President argues that the term "Philippine national" defined
in the FIA should be limited and interpreted to refer to corporations
seeking to avail of tax and fiscal incentives under investment
incentives laws and cannot be equated with the term "capital" in
Section 11, Article XII of the 1987 Constitution. Pangilinan similarly
contends that the FIA and its predecessor statutes do not apply to

"companies which have not registered and obtained special incentives

under the schemes established by those laws."
Both are desperately grasping at straws. The FIA does not grant tax
or fiscal incentives to any enterprise. Tax and fiscal incentives to
investments are granted separately under the Omnibus Investments
Code of 1987, not under the FIA. In fact, the FIA expressly repealed
Articles 44 to 56 of Book II of the Omnibus Investments Code of 1987,
which articles previously regulated foreign investments in nationalized
or partially nationalized industries.
The FIA is the applicable law regulating foreign investments in
nationalized or partially nationalized industries. There is nothing in the
FIA, or even in the Omnibus Investments Code of 1987 or its
predecessor statutes, that states, expressly or impliedly, that the FIA
or its predecessor statutes do not apply to enterprises not availing of
tax and fiscal incentives under the Code. The FIA and its predecessor
statutes apply to investments in all domestic enterprises, whether or
not such enterprises enjoy tax and fiscal incentives under the
Omnibus Investments Code of 1987 or its predecessor statutes. The
reason is quite obvious mere non-availment of tax and fiscal
incentives by a non-Philippine national cannot exempt it from
Section 11, Article XII of the Constitution regulating foreign
investments in public utilities. In fact, the Board of
Investments Primer
on
Investment
Policies
in
the
Philippines,34 which is given out to foreign investors, provides:
PART III. FOREIGN INVESTMENTS WITHOUT INCENTIVES
Investors who do not seek incentives and/or whose chosen activities
do not qualify for incentives, (i.e., the activity is not listed in the IPP,
and they are not exporting at least 70% of their production) may go
ahead and make the investments without seeking incentives. They
only have to be guided by the Foreign Investments Negative List
(FINL).
The FINL clearly defines investment areas requiring at least 60%
Filipino ownership. All other areas outside of this list are fully open to
foreign investors. (Emphasis supplied)

V.
Right to elect directors, coupled with beneficial ownership,
translates to effective control.
The 28 June 2011 Decision declares that the 60 percent Filipino
ownership required by the Constitution to engage in certain economic
activities applies not only to voting control of the corporation, but also
to the beneficial ownership of the corporation. To repeat, we held:
Mere legal title is insufficient to meet the 60 percent Filipino-owned
"capital" required in the Constitution. Full beneficial ownership of 60
percent of the outstanding capital stock, coupled with 60 percent
of the voting rights, is required. The legal and beneficial ownership
of 60 percent of the outstanding capital stock must rest in the hands of
Filipino nationals in accordance with the constitutional mandate.
Otherwise, the corporation is "considered as non-Philippine
national[s]." (Emphasis supplied)
This is consistent with Section 3 of the FIA which provides that where
100% of the capital stock is held by "a trustee of funds for pension or
other employee retirement or separation benefits," the trustee is a
Philippine national if "at least sixty percent (60%) of the fund will
accrue to the benefit of Philippine nationals." Likewise, Section 1(b) of
the Implementing Rules of the FIA provides that "for stocks to be
deemed owned and held by Philippine citizens or Philippine nationals,
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."
Since the constitutional requirement of at least 60 percent Filipino
ownership applies not only to voting control of the corporation but also
to the beneficial ownership of the corporation, it is therefore
imperative that such requirement apply uniformly and across the
board to all classes of shares, regardless of nomenclature and
category, comprising the capital of a corporation. Under the
Corporation Code, capital stock35 consists of all classes of shares
issued to stockholders, that is, common shares as well as preferred
shares, which may have different rights, privileges or restrictions as
stated in the articles of incorporation.36
The Corporation Code allows denial of the right to vote to preferred
and redeemable shares, but disallows denial of the right to vote in

specific corporate matters. Thus, common shares have the right to

vote in the election of directors, while preferred shares may be denied
such right. Nonetheless, preferred shares, even if denied the right to
vote in the election of directors, are entitled to vote on the following
corporate matters: (1) amendment of articles of incorporation; (2)
increase and decrease of capital stock; (3) incurring, creating or
increasing bonded indebtedness; (4) sale, lease, mortgage or other
disposition of substantially all corporate assets; (5) investment of
funds in another business or corporation or for a purpose other than
the primary purpose for which the corporation was organized; (6)
adoption, amendment and repeal of by-laws; (7) merger and
consolidation; and (8) dissolution of corporation.37
Since a specific class of shares may have rights and privileges or
restrictions different from the rest of the shares in a corporation, the
60-40 ownership requirement in favor of Filipino citizens in Section 11,
Article XII of the Constitution must apply not only to shares with voting
rights but also to shares without voting rights. Preferred shares,
denied the right to vote in the election of directors, are anyway still
entitled to vote on the eight specific corporate matters mentioned
above. Thus, if a corporation, engaged in a partially nationalized
industry, issues a mixture of common and preferred non-voting
shares, at least 60 percent of the common shares and at least 60
percent of the preferred non-voting shares must be owned by
Filipinos. Of course, if a corporation issues only a single class of
shares, at least 60 percent of such shares must necessarily be owned
by Filipinos. In short, 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 uniform application of the 60-40
ownership requirement in favor of Filipino citizens clearly breathes life
to the constitutional command that the ownership and operation of
public utilities shall be reserved exclusively to corporations at least 60
percent of whose capital is Filipino-owned. Applying uniformly the 6040 ownership requirement in favor of Filipino citizens to each class of
shares, regardless of differences in voting rights, privileges and
restrictions, guarantees effective Filipino control of public utilities, as
mandated by the Constitution.
Moreover, such uniform application to each class of shares insures
that the "controlling interest" in public utilities always lies in the hands
of Filipino citizens. This addresses and extinguishes Pangilinans

worry that foreigners, owning most of the non-voting shares, will

exercise greater control over fundamental corporate matters requiring
two-thirds or majority vote of all shareholders.
VI.
Intent of the framers of the Constitution
While Justice Velasco quoted in his Dissenting Opinion38 a portion of
the deliberations of the Constitutional Commission to support his
claim that the term "capital" refers to the total outstanding shares of
stock, whether voting or non-voting, the following excerpts of the
deliberations reveal otherwise. It is clear from the following exchange
that the term "capital" refers to controlling interest of a corporation,
thus:
MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local
or Filipino equity and foreign equity; namely, 60-40 in Section 3, 60-40
in Section 9 and 2/3-1/3 in Section 15.
MR. VILLEGAS. That is right.
MR. NOLLEDO. In teaching law, we are always faced with this
question: "Where do we base the equity requirement, is it on the
authorized capital stock, on the subscribed capital stock, or on the
paid-up capital stock of a corporation"? Will the Committee please
enlighten me on this?
MR. VILLEGAS. We have just had a long discussion with the
members of the team from the UP Law Center who provided us a
draft. The phrase that is contained here which we adopted from
the UP draft is "60 percent of voting stock."
MR. NOLLEDO. That must be based on the subscribed capital stock,
because unless declared delinquent, unpaid capital stock shall be
entitled to vote.
MR. VILLEGAS. That is right.
MR. NOLLEDO. Thank you.

With respect to an investment by one corporation in another

corporation, say, a corporation with 60-40 percent equity invests in
another corporation which is permitted by the Corporation Code, does
the Committee adopt the grandfather rule?

Commissioner Rodrigo, there are associations that do not have

stocks. That is why we say "CAPITAL."
MR. AZCUNA. We should not eliminate the phrase "controlling
interest."

MR. VILLEGAS. Yes, that is the understanding of the Committee.

MR. NOLLEDO. Therefore, we need additional Filipino capital?
MR. VILLEGAS. Yes.39

MR. BENGZON. In the case of stock corporations, it is

assumed.40 (Boldfacing and underscoring supplied)
Thus, 60 percent of the "capital" assumes, or should result in, a
"controlling interest" in the corporation.

xxxx
MR. AZCUNA. May I be clarified as to that portion that was accepted
by the Committee.
MR. VILLEGAS. The portion accepted by the Committee is the
deletion of the phrase "voting stock or controlling interest."
MR. AZCUNA. Hence, without the Davide amendment, the committee
report would read: "corporations or associations at least sixty percent
of whose CAPITAL is owned by such citizens."
MR. VILLEGAS. Yes.
MR. AZCUNA. So if the Davide amendment is lost, we are stuck with
60 percent of the capital to be owned by citizens.
MR. VILLEGAS. That is right.
MR. AZCUNA. But the control can be with the foreigners even if
they are the minority. Let us say 40 percent of the capital is
owned by them, but it is the voting capital, whereas, the Filipinos
own the nonvoting shares. So we can have a situation where the
corporation is controlled by foreigners despite being the
minority because they have the voting capital. That is the
anomaly that would result here.
MR. BENGZON. No, the reason we eliminated the word "stock"
as stated in the 1973 and 1935 Constitutions is that according to

The use of the term "capital" was intended to replace the word "stock"
because associations without stocks can operate public utilities as
long as they meet the 60-40 ownership requirement in favor of Filipino
citizens prescribed in Section 11, Article XII of the Constitution.
However, this did not change the intent of the framers of the
Constitution to reserve exclusively to Philippine nationals the
"controlling interest" in public utilities.
During the drafting of the 1935 Constitution, economic protectionism
was "the battle-cry of the nationalists in the Convention."41 The same
battle-cry resulted in the nationalization of the public utilities.42 This is
also the same intent of the framers of the 1987 Constitution who
adopted the exact formulation embodied in the 1935 and 1973
Constitutions on foreign equity limitations in partially nationalized
industries.
The OSG, in its own behalf and as counsel for the State,43 agrees fully
with the Courts interpretation of the term "capital." In its Consolidated
Comment, the OSG explains that the deletion of the phrase
"controlling interest" and replacement of the word "stock" with the
term "capital" were intended specifically to extend the scope of the
entities qualified to operate public utilities to include associations
without stocks. The framers omission of the phrase "controlling
interest" did not mean the inclusion of all shares of stock, whether
voting or non-voting. The OSG reiterated essentially the Courts
declaration that the Constitution reserved exclusively to Philippine
nationals the ownership and operation of public utilities consistent with
the States policy to "develop a self-reliant and independent national
economy effectively controlled by Filipinos."

As we held in our 28 June 2011 Decision, to construe broadly the

term "capital" as the total outstanding capital stock, treated as
a single class regardless of the actual classification of shares, grossly
contravenes the intent and letter of the Constitution that the "State
shall
develop
a
self-reliant
and
independent
national
economyeffectively controlled by Filipinos." We illustrated the
glaring anomaly which would result in defining the term "capital" as
the total outstanding capital stock of a corporation, treated as
a single class of shares regardless of the actual classification of
shares, to wit:
Let us assume that a corporation has 100 common shares owned by
foreigners and 1,000,000 non-voting preferred shares owned by
Filipinos, with both classes of share having a par value of one peso
(P 1.00) per share. Under the broad definition of the term "capital,"
such corporation would be considered compliant with the 40 percent
constitutional limit on foreign equity of public utilities since the
overwhelming majority, or more than 99.999 percent, of the total
outstanding capital stock is Filipino owned. This is obviously absurd.
In the example given, only the foreigners holding the common shares
have voting rights in the election of directors, even if they hold only
100 shares. The foreigners, with a minuscule equity of less than 0.001
percent, exercise control over the public utility. On the other hand, the
Filipinos, holding more than 99.999 percent of the equity, cannot vote
in the election of directors and hence, have no control over the public
utility. This starkly circumvents the intent of the framers of the
Constitution, as well as the clear language of the Constitution, to
place the control of public utilities in the hands of Filipinos. x x x
Further, even if foreigners who own more than forty percent of the
voting shares elect an all-Filipino board of directors, this situation
does not guarantee Filipino control and does not in any way cure the
violation of the Constitution. The independence of the Filipino board
members so elected by such foreign shareholders is highly doubtful.
As the OSG pointed out, quoting Justice George Sutherlands words
in Humphreys Executor v. US,44 "x x x it is quite evident that one who
holds his office only during the pleasure of another cannot be
depended upon to maintain an attitude of independence against the
latters will." Allowing foreign shareholders to elect a controlling
majority of the board, even if all the directors are Filipinos, grossly

circumvents the letter and intent of the Constitution and defeats the
very purpose of our nationalization laws.
VII.
Last sentence of Section 11, Article XII of the Constitution
The last sentence of Section 11, Article XII of the 1987 Constitution
reads:
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.
During the Oral Arguments, the OSG emphasized that there was
never a question on the intent of the framers of the Constitution to
limit foreign ownership, and assure majority Filipino ownership and
control of public utilities. The OSG argued, "while the delegates
disagreed as to the percentage threshold to adopt, x x x the records
show they clearly understood that Filipino control of the public utility
corporation can only be and is obtained only through the election of a
majority of the members of the board."
Indeed, the only point of contention during the deliberations of the
Constitutional Commission on 23 August 1986 was the extent of
majority Filipino control of public utilities. This is evident from the
following exchange:
THE PRESIDENT. Commissioner Jamir is recognized.
MR. JAMIR. Madam President, my proposed amendment on lines 20
and 21 is to delete the phrase "two thirds of whose voting stock or
controlling interest," and instead substitute the words "SIXTY
PERCENT OF WHOSE CAPITAL" so that the sentence will read: "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 PERCENT OF WHOSE
CAPITAL is owned by such citizens."
xxxx

THE PRESIDENT: Will Commissioner Jamir first explain?

MR. JAMIR. Yes, in this Article on National Economy and Patrimony,
there were two previous sections in which we fixed the Filipino equity
to 60 percent as against 40 percent for foreigners. It is only in this
Section 15 with respect to public utilities that the committee proposal
was increased to two-thirds. I think it would be better to harmonize
this provision by providing that even in the case of public utilities, the
minimum equity for Filipino citizens should be 60 percent.
MR. ROMULO. Madam President.
THE PRESIDENT. Commissioner Romulo is recognized.
MR. ROMULO. My reason for supporting the amendment is based on
the discussions I have had with representatives of the Filipino majority
owners of the international record carriers, and the subsequent
memoranda they submitted to me. x x x
Their second point is that under the Corporation Code, the
management and control of a corporation is vested in the board of
directors, not in the officers but in the board of directors. The officers
are only agents of the board. And they believe that with 60 percent of
the equity, the Filipino majority stockholders undeniably control the
board. Only on important corporate acts can the 40-percent foreign
equity exercise a veto, x x x.
x x x x45
MS. ROSARIO BRAID. Madam President.
THE PRESIDENT. Commissioner Rosario Braid is recognized.
MS. ROSARIO BRAID. Yes, in the interest of equal time, may I also
read from a memorandum by the spokesman of the Philippine
Chamber of Communications on why they would like to maintain the
present equity, I am referring to the 66 2/3. They would prefer to have
a 75-25 ratio but would settle for 66 2/3. x x x
xxxx

THE PRESIDENT. Just to clarify, would Commissioner Rosario Braid

support the proposal of two-thirds rather than the 60 percent?
MS. ROSARIO BRAID. I have added a clause that will put
management in the hands of Filipino citizens.
x x x x46
While they had differing views on the percentage of Filipino ownership
of capital, it is clear that the framers of the Constitution intended
public utilities to be majority Filipino-owned and controlled. To ensure
that Filipinos control public utilities, the framers of the Constitution
approved, as additional safeguard, the inclusion of the last sentence
of Section 11, Article XII of the Constitution commanding that "[t]he
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." In
other words, the last sentence of Section 11, Article XII of the
Constitution mandates that (1) the participation of foreign investors in
the governing body of the corporation or association shall be limited to
their proportionate share in the capital of such entity; and (2) all
officers of the corporation or association must be Filipino citizens.
Commissioner Rosario Braid proposed the inclusion of the phrase
requiring the managing officers of the corporation or association to be
Filipino citizens specifically to prevent management contracts, which
were designed primarily to circumvent the Filipinization of public
utilities, and to assure Filipino control of public utilities, thus:
MS. ROSARIO BRAID. x x x They also like to suggest that we amend
this provision by adding a phrase which states: "THE MANAGEMENT
BODY OF EVERY CORPORATION OR ASSOCIATION SHALL IN
ALL CASES BE CONTROLLED BY CITIZENS OF THE
PHILIPPINES." I have with me their position paper.
THE PRESIDENT. The Commissioner may proceed.
MS. ROSARIO BRAID. The three major international record carriers
in the Philippines, which Commissioner Romulo mentioned
Philippine Global Communications, Eastern Telecommunications,

Globe Mackay Cable are 40-percent owned by foreign multinational

companies and 60-percent owned by their respective Filipino
partners. All three, however, also have management contracts with
these foreign companies Philcom with RCA, ETPI with Cable and
Wireless PLC, and GMCR with ITT. Up to the present time, the
general managers of these carriers are foreigners. While the
foreigners in these common carriers are only minority owners, the
foreign multinationals are the ones managing and controlling their
operations by virtue of their management contracts and by virtue of
their strength in the governing bodies of these carriers.47

xxxx

xxxx

FR. BERNAS. The reformulation will be essentially the formula of the

1973 Constitution which reads: "THE PARTICIPATION OF FOREIGN
INVESTORS IN THE GOVERNING BODY OF ANY PUBLIC UTILITY
ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE
SHARE IN THE CAPITAL THEREOF AND..."

MR. OPLE. I think a number of us have agreed to ask Commissioner

Rosario Braid to propose an amendment with respect to the operating
management of public utilities, and in this amendment, we are
associated with Fr. Bernas, Commissioners Nieva and Rodrigo.
Commissioner Rosario Braid will state this amendment now.
Thank you.
MS. ROSARIO BRAID. Madam President.
THE PRESIDENT. This is still on Section 15.
MS. ROSARIO BRAID. Yes.
MR. VILLEGAS. Yes, Madam President.
xxxx
MS. ROSARIO BRAID. Madam President, I propose a new section to
read: THE MANAGEMENT BODY OF EVERY CORPORATION OR
ASSOCIATION SHALL IN ALL CASES BE CONTROLLED BY
CITIZENS OF THE PHILIPPINES."
This will prevent management contracts and assure control by
Filipino citizens. Will the committee assure us that this amendment
will insure that past activities such as management contracts will no
longer be possible under this amendment?

FR. BERNAS. Madam President.

THE PRESIDENT. Commissioner Bernas is recognized.
FR. BERNAS. Will the committee accept a reformulation of the first
part?
MR. BENGZON. Let us hear it.

MR. VILLEGAS. "ALL THE EXECUTIVE AND MANAGING

OFFICERS OF SUCH CORPORATIONS AND ASSOCIATIONS
MUST BE CITIZENS OF THE PHILIPPINES."
MR. BENGZON. Will Commissioner Bernas read the whole thing
again?
FR. BERNAS. "THE PARTICIPATION OF FOREIGN INVESTORS IN
THE GOVERNING BODY OF ANY PUBLIC UTILITY ENTERPRISE
SHALL BE LIMITED TO THEIR PROPORTIONATE SHARE IN THE
CAPITAL THEREOF..." I do not have the rest of the copy.
MR. BENGZON. "AND ALL THE EXECUTIVE AND MANAGING
OFFICERS OF SUCH CORPORATIONS OR ASSOCIATIONS MUST
BE CITIZENS OF THE PHILIPPINES." Is that correct?
MR. VILLEGAS. Yes.
MR. BENGZON. Madam President, I think that was said in a more
elegant language. We accept the amendment. Is that all right with
Commissioner Rosario Braid?
MS. ROSARIO BRAID. Yes.

xxxx
MR. DE LOS REYES. The governing body refers to the board of
directors and trustees.

ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE

SHARE IN THE CAPITAL THEREOF AND ALL THE EXECUTIVE
AND MANAGING OFFICERS OF SUCH CORPORATIONS OR
ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES."

MR. RAMA. The body is now ready to vote, Madam President.

MR. VILLEGAS. "NOR SHALL SUCH FRANCHISE, CERTIFICATE

OR AUTHORIZATION BE EXCLUSIVE IN CHARACTER OR FOR A
PERIOD LONGER THAN TWENTY-FIVE YEARS RENEWABLE FOR
NOT MORE THAN TWENTY-FIVE 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 Congress when the
common good so requires. The State shall encourage equity
participation in public utilities by the general public."

VOTING

VOTING

xxxx

xxxx

The results show 29 votes in favor and none against; so the proposed
amendment is approved.

The results show 29 votes in favor and 4 against; Section 15, as

amended, is approved.48 (Emphasis supplied)

xxxx

The last sentence of Section 11, Article XII of the 1987 Constitution,
particularly the provision on the limited participation of foreign
investors in the governing body of public utilities, is a reiteration of the
last sentence of Section 5, Article XIV of the 1973
Constitution,49 signifying its importance in reserving ownership and
control of public utilities to Filipino citizens.

MR. VILLEGAS. That is right.

MR. BENGZON. Yes, the governing body refers to the board of
directors.
MR. REGALADO. It is accepted.

THE PRESIDENT. All right. Can we proceed now to vote on Section

15?
MR. RAMA. Yes, Madam President.
THE PRESIDENT. Will the chairman of the committee please read
Section 15?
MR. VILLEGAS. The entire Section 15, as amended, reads: "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 60 PERCENT OF WHOSE CAPITAL is
owned by such citizens." May I request Commissioner Bengzon to
please continue reading.
MR. BENGZON. "THE PARTICIPATION OF FOREIGN INVESTORS
IN THE GOVERNING BODY OF ANY PUBLIC UTILITY

VIII.
The undisputed facts
There is no dispute, and respondents do not claim the contrary, that
(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 foreigners control PLDT; (2) Filipinos own only
35.73% of PLDTs common shares, constituting a minority of the
voting stock, and thus Filipinos do not control 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;50 (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%.
Despite the foregoing facts, the Court did not decide, and in fact
refrained from ruling on the question of whether PLDT violated the 6040 ownership requirement in favor of Filipino citizens in Section 11,
Article XII of the 1987 Constitution. Such question indisputably calls
for a presentation and determination of evidence through a hearing,
which is generally outside the province of the Courts jurisdiction, but
well within the SECs statutory powers. Thus, for obvious reasons, the
Court limited its decision on the purely legal and threshold issue on
the definition of the term "capital" in Section 11, Article XII of the
Constitution and directed the SEC to apply such definition in
determining the exact percentage of foreign ownership in PLDT.
IX.
PLDT
is
not
an
SEC is impleaded in this case.

indispensable

party;

In his petition, Gamboa prays, among others:

xxxx
5. For the Honorable Court to issue a declaratory relief that ownership
of common or voting shares is the sole basis in determining foreign
equity in a public utility and that any other government rulings,
opinions, and regulations inconsistent with this declaratory relief be
declared unconstitutional and a violation of the intent and spirit of the
1987 Constitution;
6. For the Honorable Court to declare null and void all sales of
common stocks to foreigners in excess of 40 percent of the total
subscribed common shareholdings; and
7. For the Honorable Court to direct the Securities and Exchange
Commission and Philippine Stock Exchange to require PLDT to
make a public disclosure of all of its foreign shareholdings and
their actual and real beneficial owners.
Other relief(s) just and equitable are likewise prayed for. (Emphasis
supplied)

As can be gleaned from his prayer, Gamboa clearly asks this Court to
compel the SEC to perform its statutory duty to investigate whether
"the required percentage of ownership of the capital stock to be
owned by citizens of the Philippines has been complied with [by
PLDT] as required by x x x the Constitution."51 Such plea clearly
negates SECs argument that it was not impleaded.
Granting that only the SEC Chairman was impleaded in this case, the
Court has ample powers to order the SECs compliance with its
directive contained in the 28 June 2011 Decision in view of the farreaching implications of this case. In Domingo v. Scheer,52 the Court
dispensed with the amendment of the pleadings to implead the
Bureau of Customs considering (1) the unique backdrop of the case;
(2) the utmost need to avoid further delays; and (3) the issue of public
interest involved. The Court held:
The Court may be curing the defect in this case by adding the BOC as
party-petitioner. The petition should not be dismissed because the
second action would only be a repetition of the first. In Salvador, et al.,
v. Court of Appeals, et al., we held that this Court has full powers,
apart from that power and authority which is inherent, to amend the
processes, pleadings, proceedings and decisions by substituting as
party-plaintiff the real party-in-interest. The Court has the power to
avoid delay in the disposition of this case, to order its
amendment as to implead the BOC as party-respondent. Indeed,
it may no longer be necessary to do so taking into account the
unique backdrop in this case, involving as it does an issue of
public interest. After all, the Office of the Solicitor General has
represented the petitioner in the instant proceedings, as well as in the
appellate court, and maintained the validity of the deportation order
and of the BOCs Omnibus Resolution. It cannot, thus, be claimed by
the State that the BOC was not afforded its day in court, simply
because only the petitioner, the Chairperson of the BOC, was the
respondent in the CA, and the petitioner in the instant recourse.
In Alonso v. Villamor, we had the occasion to state:
There is nothing sacred about processes or pleadings, their
forms or contents. Their sole purpose is to facilitate the
application of justice to the rival claims of contending
parties. They were created, not to hinder and delay, but to facilitate
and promote, the administration of justice. They do not constitute the
thing itself, which courts are always striving to secure to litigants. They

are designed as the means best adapted to obtain that thing. In other
words, they are a means to an end. When they lose the character of
the one and become the other, the administration of justice is at fault
and courts are correspondingly remiss in the performance of their
obvious duty.53 (Emphasis supplied)
In any event, the SEC has expressly manifested54 that it will
abide by the Courts decision and defer to the Courts definition
of the term "capital" in Section 11, Article XII of the Constitution.
Further, the SEC entered its special appearance in this case and
argued during the Oral Arguments, indicating its submission to
the Courts jurisdiction. It is clear, therefore, that there exists no
legal impediment against the proper and immediate
implementation of the Courts directive to the SEC.
PLDT is an indispensable party only insofar as the other issues,
particularly the factual questions, are concerned. In other words,
PLDT must be impleaded in order to fully resolve the issues on (1)
whether the sale of 111,415 PTIC shares to First Pacific violates the
constitutional limit on foreign ownership of PLDT; (2) whether the sale
of common shares to foreigners exceeded the 40 percent limit on
foreign equity in PLDT; and (3) whether the total percentage of the
PLDT common shares with voting rights complies with the 60-40
ownership requirement in favor of Filipino citizens under the
Constitution for the ownership and operation of PLDT. These issues
indisputably call for an examination of the parties respective
evidence, and thus are clearly within the jurisdiction of the SEC. In
short, PLDT must be impleaded, and must necessarily be heard, in
the proceedings before the SEC where the factual issues will be
thoroughly threshed out and resolved.
Notably, the foregoing issues were left untouched by the Court.
The Court did not rule on the factual issues raised by Gamboa, except
the single and purely legal issue on the definition of the term "capital"
in Section 11, Article XII of the Constitution. The Court confined the
resolution of the instant case to this threshold legal issue in deference
to the fact-finding power of the SEC.
Needless to state, the Court can validly, properly, and fully dispose of
the fundamental legal issue in this case even without the participation
of PLDT since defining the term "capital" in Section 11, Article XII of
the Constitution does not, in any way, depend on whether PLDT was

impleaded. Simply put, PLDT is not indispensable for a complete

resolution of the purely legal question in this case.55 In fact, the Court,
by treating the petition as one for mandamus,56 merely directed the
SEC to apply the Courts definition of the term "capital" in Section 11,
Article XII of the Constitution in determining whether PLDT committed
any violation of the said constitutional provision. The dispositive
portion of the Courts ruling is addressed not to PLDT but solely
to the SEC, which is the administrative agency tasked to enforce
the 60-40 ownership requirement in favor of Filipino citizens in
Section 11, Article XII of the Constitution.
Since the Court limited its resolution on the purely legal issue on the
definition of the term "capital" in Section 11, Article XII of the 1987
Constitution, and directed the SEC to investigate any violation by
PLDT of the 60-40 ownership requirement in favor of Filipino citizens
under the Constitution,57 there is no deprivation of PLDTs property or
denial of PLDTs right to due process, contrary to Pangilinan and
Nazarenos misimpression. Due process will be afforded to PLDT
when it presents proof to the SEC that it complies, as it claims here,
with Section 11, Article XII of the Constitution.
X.
Foreign Investments in the Philippines
Movants fear that the 28 June 2011 Decision would spell disaster to
our economy, as it may result in a sudden flight of existing foreign
investors to "friendlier" countries and simultaneously deterring new
foreign investors to our country. In particular, the PSE claims that the
28 June 2011 Decision may result in the following: (1) loss of more
than P 630 billion in foreign investments in PSE-listed shares; (2)
massive decrease in foreign trading transactions; (3) lower PSE
Composite Index; and (4) local investors not investing in PSE-listed
shares.58
Dr. Bernardo M. Villegas, one of the amici curiae in the Oral
Arguments, shared movants apprehension. Without providing specific
details, he pointed out the depressing state of the Philippine economy
compared to our neighboring countries which boast of growing
economies. Further, Dr. Villegas explained that the solution to our
economic woes is for the government to "take-over" strategic
industries, such as the public utilities sector, thus:

JUSTICE CARPIO:
I would like also to get from you Dr. Villegas if you have additional
information on whether this high FDI59 countries in East Asia have
allowed foreigners x x x control [of] their public utilities, so that we can
compare apples with apples.

Following Dr. Villegass claim, the Philippines appears to be more

liberal in allowing foreign investors to own 40 percent of public utilities,
unlike in other Asian countries whose governments own and operate
such industries.
XI.
Prospective Application of Sanctions

DR. VILLEGAS:
Correct, but let me just make a comment. When these neighbors of
ours find an industry strategic, their solution is not to "Filipinize" or
"Vietnamize" or "Singaporize." Their solution is to make sure that
those industries are in the hands of state enterprises. So, in
these countries, nationalization means the government takes
over. And because their governments are competent and honest
enough to the public, that is the solution. x x x 60 (Emphasis
supplied)
If government ownership of public utilities is the solution, then foreign
investments in our public utilities serve no purpose. Obviously, there
can never be foreign investments in public utilities if, as Dr. Villegas
claims, the "solution is to make sure that those industries are in the
hands of state enterprises." Dr. Villegass argument that foreign
investments in telecommunication companies like PLDT are badly
needed to save our ailing economy contradicts his own theory that the
solution is for government to take over these companies. Dr. Villegas
is barking up the wrong tree since State ownership of public utilities
and foreign investments in such industries are diametrically opposed
concepts, which cannot possibly be reconciled.
In any event, the experience of our neighboring countries cannot be
used as argument to decide the present case differently for two
reasons. First, the governments of our neighboring countries have, as
claimed by Dr. Villegas, taken over ownership and control of their
strategic public utilities like the telecommunications industry. Second,
our Constitution has specific provisions limiting foreign ownership in
public utilities which the Court is sworn to uphold regardless of the
experience of our neighboring countries.
In our jurisdiction, the Constitution expressly reserves the ownership
and operation of public utilities to Filipino citizens, or corporations or
associations at least 60 percent of whose capital belongs to Filipinos.

In its Motion for Partial Reconsideration, the SEC sought to clarify the
reckoning period of the application and imposition of appropriate
sanctions against PLDT if found violating Section 11, Article XII of the
Constitution.1avvphi1
As discussed, the Court has directed the SEC to investigate and
determine whether PLDT violated Section 11, Article XII of the
Constitution. Thus, there is no dispute that it is only after the SEC has
determined PLDTs violation, if any exists at the time of the
commencement of the administrative case or investigation, that the
SEC may impose the statutory sanctions against PLDT. In other
words, once the 28 June 2011 Decision becomes final, the SEC shall
impose the appropriate sanctions only if it finds after due hearing that,
at the start of the administrative case or investigation, there is an
existing violation of Section 11, Article XII of the Constitution. Under
prevailing jurisprudence, public utilities that fail to comply with the
nationality requirement under Section 11, Article XII and the FIA can
cure their deficiencies prior to the start of the administrative case or
investigation.61
XII.
Final Word
The Constitution expressly declares as State policy the development
of an economy "effectively controlled" by Filipinos. Consistent with
such State policy, the Constitution explicitly reserves the ownership
and operation of public utilities to Philippine nationals, who are
defined in the Foreign Investments Act of 1991 as Filipino citizens, or
corporations or associations at least 60 percent of whose capital with
voting rights belongs to Filipinos. The FIAs implementing rules
explain that "[f]or stocks to be deemed owned and held by Philippine
citizens or Philippine nationals, 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." In effect, the

FIA clarifies, reiterates and confirms the interpretation that the term
"capital" in Section 11, Article XII of the 1987 Constitution refers
to shares with voting rights, as well as with full beneficial
ownership. This is precisely because the right to vote in the election
of directors, coupled with full beneficial ownership of stocks, translates
to effective control of a corporation.
Any other construction of the term "capital" in Section 11, Article XII of
the Constitution contravenes the letter and intent of the Constitution.
Any other meaning of the term "capital" openly invites alien
domination of economic activities reserved exclusively to Philippine
nationals. Therefore, respondents interpretation will ultimately result
in handing over effective control of our national economy to foreigners
in patent violation of the Constitution, making Filipinos second-class
citizens in their own country.
Filipinos have only to remind themselves of how this country was
exploited under the Parity Amendment, which gave Americans the
same rights as Filipinos in the exploitation of natural resources, and in
the ownership and control of public utilities, in the Philippines. To do
this the 1935 Constitution, which contained the same 60 percent
Filipino ownership and control requirement as the present 1987
Constitution, had to be amended to give Americans parity rights with
Filipinos. There was bitter opposition to the Parity Amendment62 and
many Filipinos eagerly awaited its expiration. In late 1968, PLDT was
one of the American-controlled public utilities that became Filipinocontrolled when the controlling American stockholders divested in
anticipation of the expiration of the Parity Amendment on 3 July
1974.63 No economic suicide happened when control of public utilities
and mining corporations passed to Filipinos hands upon expiration of
the Parity Amendment.
Movants interpretation of the term "capital" would bring us back to the
same evils spawned by the Parity Amendment, effectively giving
foreigners parity rights with Filipinos, but this time even without
any amendment to the present Constitution. Worse, movants
interpretation opens up our national economy toeffective control not
only by Americans but also by all foreigners, be they Indonesians,
Malaysians or Chinese, even in the absence of reciprocal treaty
arrangements. At least the Parity Amendment, as implemented by
the Laurel-Langley Agreement, gave the capital-starved Filipinos
theoretical parity the same rights as Americans to exploit natural

resources, and to own and control public utilities, in the United States
of America. Here, movants interpretation would effectively mean
a unilateral opening up of our national economy to all
foreigners, without any reciprocal arrangements. That would mean
that Indonesians, Malaysians and Chinese nationals could effectively
control our mining companies and public utilities while Filipinos, even
if they have the capital, could not control similar corporations in these
countries.
The 1935, 1973 and 1987 Constitutions have the same 60 percent
Filipino ownership and control requirement for public utilities like
PLOT. Any deviation from this requirement necessitates an
amendment to the Constitution as exemplified by the Parity
Amendment. This Court has no power to amend the Constitution for
its power and duty is only to faithfully apply and interpret the
Constitution.
WHEREFORE, we DENY the motions for reconsideration WITH
FINALITY. No further pleadings shall be entertained.
SO ORDERED.