16.
SELF RELIANT AND INDEPENDENT NATIONAL ECONOMY Considering that common shares have voting rights which translate to control,
WILSON P. GAMBOA v. FINANCE SECRETARY MARGARITO B. TEVES
G.R. No. 176579 June 28, 2011
CARPIO, J.:
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).
FACTS:
On 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.
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 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.
Parallax won with a bid.
Thereafter, 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 and the sale was completed.
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.
On 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 voting- stockholdings, x x x.
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
ISSUE: 1. 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.
HELD: The Court partly granted the petition and held that the term “capital” in
Section 11, Article XII of the Constitution refers only to shares of stock entitled
to vote in the election of directors of a public utility, i.e., to the total common
shares in PLDT.
as opposed to preferred shares which usually have no voting rights, the term
“capital” in Section 11, Article XII of the Constitution refers only to common
shares. However, if the preferred shares also have the right to vote in the
election of directors, then the term “capital” shall include such preferred shares
because the right to participate in the control or management of the
corporation is exercised through the right to vote in the election of directors. In
short, the term “capital” in Section 11, Article XII of the Constitution refers only
to shares of stock that can vote in the election of directors.
To construe broadly the term “capital” as the total outstanding capital stock,
including both common and non-voting preferred shares, grossly contravenes
the intent and letter of the Constitution that the “State shall develop a self-
reliant and independent national economy effectively controlled by Filipinos.” A
broad definition unjustifiably disregards who owns the all-important voting
stock, which necessarily equates to control of the public utility.
Holders of PLDT preferred shares are explicitly denied of the right to vote in
the election of directors. PLDT’s Articles of Incorporation expressly state that
“the holders of Serial Preferred Stock shall not be entitled to vote at any
meeting of the stockholders for the election of directors or for any other
purpose or otherwise participate in any action taken by the corporation or its
stockholders, or to receive notice of any meeting of stockholders.” On the other
hand, holders of common shares are granted the exclusive right to vote in the
election of directors. PLDT’s Articles of Incorporation state that “each holder of
Common Capital Stock shall have one vote in respect of each share of such
stock held by him on all matters voted upon by the stockholders, and the
holders of Common Capital Stock shall have the exclusive right to vote for the
election of directors and for all other purposes.”
It must be stressed, and respondents do not dispute, that foreigners hold a
majority of the common shares of PLDT. In fact, based on PLDT’s 2010
General Information Sheet (GIS), which is a document required to be
submitted annually to the Securities and Exchange Commission, foreigners
hold 120,046,690 common shares of PLDT whereas Filipinos hold only
66,750,622 common shares. In other words, foreigners hold 64.27% of the
total number of PLDT’s common shares, while Filipinos hold only 35.73%.
Since holding a majority of the common shares equates to control, it is clear
that foreigners exercise control over PLDT. Such amount of control
unmistakably exceeds the allowable 40 percent limit on foreign ownership of
public utilities expressly mandated in Section 11, Article XII of the Constitution.
As shown in PLDT’s 2010 GIS, as submitted to the SEC, the par value of
PLDT common shares is P5.00 per share, whereas the par value of preferred
shares is P10.00 per share. In other words, preferred shares have twice the
par value of common shares but cannot elect directors and have only 1/70 of
the dividends of common shares. Moreover, 99.44% of the preferred shares
are owned by Filipinos while foreigners own only a minuscule 0.56% of the
preferred shares. Worse, preferred shares constitute 77.85% of the authorized
capital stock of PLDT while common shares constitute only 22.15%. This
undeniably shows that beneficial interest in PLDT is not with the non-voting
preferred shares but with the common shares, blatantly violating the
constitutional requirement of 60 percent Filipino control and Filipino beneficial
ownership in a public utility.
In short, Filipinos hold less than 60 percent of the voting stock, and earn less
than 60 percent of the dividends, of PLDT. This directly contravenes the
express command in Section 11, Article XII of the Constitution that “[n]o
franchise, certificate, or any other form of authorization for the operation of a
public utility shall be granted except to x x x corporations x x x organized under
the laws of the Philippines, at least sixty per centum of whose capital is owned
by such citizens x x x.”
To repeat, (1) foreigners own 64.27% of the common shares of PLDT, which
class of shares exercises the sole right to vote in the election of directors, and
thus exercise control over PLDT; (2) Filipinos own only 35.73% of PLDT’s
common shares, constituting a minority of the voting stock, and thus do not
exercise control over PLDT; (3) preferred shares, 99.44% owned by Filipinos,
have no voting rights; (4) preferred shares earn only 1/70 of the dividends that
common shares earn; (5) preferred shares have twice the par value of
common shares; and (6) preferred shares constitute 77.85% of the authorized
capital stock of PLDT and common shares only 22.15%. This kind of
ownership and control of a public utility is a mockery of the Constitution.
[Thus, the Respondent Chairperson of the Securities and Exchange
Commission was DIRECTED by the Court to apply the foregoing definition of
the term “capital” in determining the extent of allowable foreign ownership in
respondent Philippine Long Distance Telephone Company, and if there is a
violation of Section 11, Article XII of the Constitution, to impose the appropriate
sanctions under the law.]
DISPOSITIVE PORTION: 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.
VELASCO (Separate Dissenting Opinion)
The present petition partakes of a collateral attack on PLDT’s franchise as a
public utility with petitioner pleading as ground PLDT’s alleged breach of the
40% limit on foreign equity. Such is not allowed. As discussed in PLDT v.
National Telecommunications Commission, a franchise is a property right that
can only be questioned in a direct proceeding.
(1) The intent of the framers of the Constitution was not to limit the application
of the word “capital” to voting or common shares alone. Constitutional
Commission records show that by using the word “capital,” the framers of the
Constitution adopted the definition or interpretation that includes all types of
shares, whether voting or non-voting.
(2) Cassus Omissus Pro Omisso Habendus Est––a person, object or thing
omitted must have been omitted intentionally. In this case, the intention of the
framers of the Constitution is very clear––to omit the phrases “voting stock”
and “controlling interest.”
(3) The FIA should also be read in harmony with the Constitution. Since the
Constitution only provides for a single requirement for the operation of a public
utility under Sec. 11, i.e., 60% capital must be Filipino-owned, a mere statute
cannot add another requirement. Otherwise, such statute may be considered
unconstitutional. Accordingly, the phrase “entitled to vote” should not be
interpreted to be limited to common shares alone or those shares entitled to
vote in the election of members of the Board of Directors.
(4) Further, the FIA did not say “entitled to vote in the management affairs of
the corporation” or “entitled to vote in the election of the members of the Board
of Directors.” Verily, where the law does not distinguish, neither should We.
Hence, the proper interpretation of the phrase “entitled to vote” under the FIA
should be that it applies to all shares, whether classified as voting or non-
voting shares.
(5) Additionally, control is another inherent right of ownership. The
circumstances enumerated in Sec. 6 of the Corporation Code clearly evince
this. It gives voting rights to the stocks deemed as non-voting as to
fundamental and major corporate changes. Thus, the issue should not only
dwell on the daily management affairs of the corporation but also on the
equally important fundamental changes that may need to be voted on.
(6) The SEC rules, opinions and jurisprudence use the “control test”, which
requires that the nationality of a corporation is determined by the total
outstanding capital stock irrespective of the number of shares, and “capital”
denotes the total shares subscribed and paid irrespective of their
nomenclature.
(7) Lastly, the last sentence of Sec. 11, Art. XII limits the participation of the
foreign investors in the governing body to their proportionate share in the
capital of the corporation.
ABAD (Dissenting Opinion)
(1) Authority to define and interpret the meaning of “capital” in Sec. 11,
Art. XII belongs to Congress as part of it’s policy making powers, as the power
to authorize and control a public utility is a prerogative of Congress. Sec. 11,
Art. XII is no self-executing and requires Congressional action to clarify it’s
meaning. FIA is restricted to certain areas of investment and should not be
construed to clarify the meaning of “capital” under the constitutional provision
as they are rules which apply to future investors.
(2) “Capital” refers to the entirety of the corporation’s outstanding voting
stock as, first, the 40 percent limit (if held only to preferred shareholders) would
render meaningless the fourth sentence which limits foreign participation in the
governing body of public utilities, and, second, amicus curiae Dr. Villegas,
Chairman of the Committee of National Economy, said that the term “capital”
did not distinguish among the classes of shares. In both economic and
business terms, capital always meant the entire shares of stock. Further,
Philippine policy on foreign ownership already discourages foreign investments
and to impose additional restrictions would aggravate economic growth.
(3) Sec. 11, Article XII already provides 3 limitations on foreign
participation in public utilities and the Court need not add more by restricting
the definition of capital.
another corporation or other corporations; investment of corporate funds in
another corporation or business; and dissolution of the corporation.
Pursuant to the Heirs of Gamboa case, the Securities and Exchange
Commission issued on May 20, 2013 Memorandum Circular No. 8, which sets
the guidelines for the compliance of businesses engaged in nationalized and
partly nationalized activities. In gist, the said memorandum circular provides
that the required percentage of Filipino ownership shall be applied to both the
total number of outstanding shares of stock entitled to vote in the election of
directors, and the total number of outstanding shares of stock, whether or not
entitled to vote in the election of directors. Consequently, all existing covered
corporations which are not compliant with the guidelines are given a period of
one year from the effectivity of the issuance within which to comply with the
said ownership requirement.
Certainly, the Securities and Exchange Commission issuance upholds the
protection of vital industries and certain investment areas from foreign control.
It is effectively backing Article XII of the Constitution, the Foreign Investment
Act definition of what constitutes a “Philippine national”, and the ruling of the
Supreme Court in Heirs of Gamboa case to reserve certain areas of
investment to Filipinos. It adheres to the constitutional directive without
compromising the actual and potential foreign investments. While the
Securities and Exchange Commission issuance is providing a guiding principle
in support of the conservative approach of the government with regard to
development of the national economy, it is likewise recognizing the important
role of the foreign investors in the effort to improve the economic standing of
the Philippines.
[Constitutional Law, Corporation]
The term “capital” does not refer to both preferred and common stocks treated
as the same class of shares regardless of differences in voting rights and
privileges.
Consistent with the constitutional mandate that the “State shall develop a self-
reliant and independent national economy effectively controlled by Filipinos,”
the term "capital" means the outstanding capital stock entitled to vote (voting
stock), coupled with beneficial ownership, both of which results to "effective
control."
"Mere legal title is insufficient to meet the 60 percent Filipino owned “capital”
required in the Constitution for certain industries. Full beneficial ownership of
60 percent of the outstanding capital stock, coupled with 60 percent of the
voting rights, is required." In this case, such twin requirements must apply
uniformly and across the board to all classes of shares comprising the capital.
Thus, "the 60-40 ownership requirement in favor of Filipino citizens must apply
separately to each class of shares, whether common, preferred non-voting,
preferred voting or any other class of shares." This guarantees that the
“controlling interest” in public utilities always lies in the hands of Filipino
citizens.

Section 10, Article XII of the Philippine Constitution provides that the Congress
must reserve certain areas of investment to Filipinos or to corporations or
associations of which at least 60 percent of capital is owned by Filipinos.
Section 3 of the Foreign Investments Act of 1991 defines a “Philippine
national” as a citizen of the Philippines or a domestic partnership or
association wholly owned by citizens of the Philippines; or a corporation
organized under the laws of the Philippines of which at least 60 percent of the
capital stock outstanding and entitled to vote is owned and held by citizens of
the Philippines, and where a corporation and its non-Filipino stockholders own
stocks in a SEC registered enterprise, at least 60 percent of the capital stocks
outstanding and entitled to vote of both corporations must be owned and held
by citizens of the Philippines and at least 60 percent of the members of the
Board of Directors of both corporations must be citizens of the Philippines.
In support of this State policy, the Supreme Court, in the case of Heirs of
Gamboa v. Teves, G.R. No.176579 dated 28 June 2011 and in a resolution
dated Oct. 9, 2012, interpreted the term “capital” for the first time. In this case,
the Supreme Court ruled that “capital” under the 1987 Constitution and the
Foreign Investments Act of 1991 refers to shares with voting rights, as well as
full beneficial ownership, and not to the total outstanding capital stock. Simply
put, the 60-40 ownership requirement in favor of the Filipino citizens must
apply separately to each class of shares, whether common, preferred non-
voting, preferred voting or any other class of shares.
In arriving at this judgment, the Supreme Court reasoned that the foreign
ownership limitation also applies to non-voting preferred stocks, that, although
denied the voting rights in the election of directors, are nevertheless entitled to
vote on certain fundamental corporate acts like amendment of the articles of
incorporation; adoption and amendment of by-laws; sale, lease, exchange,
mortgage, pledge or other disposition of all or substantially all of the corporate
property; incurring, creating or increasing bonded indebtedness; increase or
decrease of capital stock; merger or consolidation of the corporation with