EXPRESS INVESTMENTS III PRIVATE LTD.
, et al v BAYAN  On various dates between the years 1995 and 2001, Bayantel
TELECOMMUNICATIONS
December 5, 2012 | Villarama, Jr., J. | Topic
Digester: Angat, Christine Joy F.
SUMMARY: Bayan Telecommunications, a domestic corporation
engaged in providing telecommunication services, contracted
several loans with some local and foreign-owned banks and credit
facilities. It eventually defaulted in its obligation. After its
repeated failure to pay its debts, Bank of New York, a trustee of its
creditors, petitioned that it be placed under corporate
rehabilitation. The Amended Rehabilitation Plan stated that its
unsustainable debt will be converted to equity, however the same
shall be limited to 40% of its paid-up capital, in conformity with
the limitation on foreign ownership stated in the Constitution. The
creditors, consisting of foreign entities, contested the said
provision in the Rehabilitation Plan, alleging that their 77.7%
equity conversion proposal does not violate the Constitution. The
Court ruled otherwise, stating that since (1) the plan provides that
the debt will be converted to common stocks, which have voting
rights, and (2) Bayantel is considered a public utility, the
conversion must observe the constitutional limit of 40%. To rule
otherwise will be contrary to the vision of “Filipinization” of the
economy as it will allow foreign entities to have bigger shares in
the capital of public utilities.
DOCTRINE: 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.
FACTS:
 Bayan Telecommunications (Bayantel), is a duly organized
domestic corporation engaged in the business of providing
telecommunication services.
o 98.6% of Bayantel is owned by Bayan Telecommunications
Holdings Corporations (BTHC), which in turn is 85.4%
owned by Lopez Group of Companies.
entered into serveral credit agreements with local and foreign-
owned banks and credit facilities (see Notes for complete list).
 As a security for the loans contracted, Bayantel executed an
Omnibus Agreement and an EVTELCO Mortgage Trust
Indenture.
o Under the Omnibus Agreement, Bayantel executed an
Assignment Agreement whereby it bound itself to assign,
convey, and transfer to the Collateral Agent some of its
properties (i.e. accounts receivables, project documents
and rights, intangibles, and all other proceeds, products,
property, assets and revenues) as collateral security for its
obligations (the creditors under this Agreement were terms
Bank Creditors)
o Under the Mortgage Trust Indenture, Bayantel issued
bonds and debentures in in favor of its creditors, to be paid
pursuant to the maturity date and other terms stated
therein (the creditors under this Agreement were called
Holders of Notes)
 Bayantel eventually defaulted in its obligation. It then sent a
proposal for restructuring of its debts.
o An Informal Steering Committee was formed, composed of
some of Bayantel’s creditors. They arrived with the “First
Term Sheet”, where Bayantel was allowed to pay the
restructured debt, pari passu (equally), out of its cash flow.
 Bayantel continued to pay reduced interest on its debt to Bank
Creditors but stopped paying the Holders of Notes.
o By then, Bayantel’s total debt had reached US$674M
(PhP35.928B) in unpaid principal and interest.
o 43.2% or US$291M of the total debt is owed to the Holders
of the Notes.
 Bank of New York, a trustee for the Holders of Notes, wrote
Bayantel an Acceleration Letter demanding immediate
payment of its obligations. When Bayantel failed to comply, it
filed a petition for corporate rehabilitation of Bayantel.
 Pursuant to the petition for rehabilitation, a Stay Order was
issued, suspending all claims against Bayantel and requiring all
its creditors and interested parties to file their comment or
opposition to the petition.
 The Rehabilitation court, giving due course to the petition,
found that Bayantel may be successfully rehabilitated.
o Bayantel’s creditors were then classified into three: the
Omnibus Creditors (Bank creditors), the Chattel Creditors
 (Holders of Notes), and Financial Creditors/Unsecured
Creditors
 The Rehabilitation Receiver then submitted her Report and
Recommendations, which was approved by the Rehabilitation
Court, subject to some clarifications and/or amendments:
o There will be a pari passu treatment of all creditors,
secured or unsecured
o Despite the pari passu treatment, due regard shall be given
to the rights of the secured creditors and no changes in the
security position of the creditors shall be granted
o The level of sustainable debt of the rehabilitation plan shall
be reduced to US$325M payable in 19 years
o All provisions relating to equity in the rehabilitation
plan must strictly conform to the requirements of the
Constitution limiting foreign ownership to 40%
o A monitoring committee shall be formed and the
rehabilitation receiver’s role shall be limited to the powers
of monitoring and oversight
 Dissatisfied by the ruling of the Rehabilitation Court, the
creditors filed separate appeals, assailing, among others, the
limiting of the equity conversion of Bayantel’s unsustainable
debt to only 40% of its paid-up capital
 CA ruled against the petitioners (creditors), stating that the
Receiver’s recommendation and the rehabilitation court’s
ruling is consistent with the constitutional limitation on the
allowable foreign equity in Filipino corporations.
 Hence, these seven consolidated petitions. Petitioners argue
that:
o The conversion of the unsustainable debt to 77.7% equity in
Bayantel will not violate the nationality requirement since
the domestic bank creditors account is 70.18% of
Bayantel’s total liabilities.
o The acquisition of shares by foreign Omnibus and Financial
creditors shall be done, both directly and indirectly in order
to meet the control test principle under the Foreign
Investments Act.
 Creditors shall own 40% of the outstanding capital stock
of the telecommunications company on a direct basis,
while the remaining 40% of shares shall be registered to
a holding company that shall retain, on a direct basis,
the other 60% equity reserved for Filipino citizens.
o Given the substantial write-off of penalties and default
interest, it is only fair that they be given greater equity in
Bayantel to compensate for the losses.
RULING: Petition denied.
[TOPIC] Whether the conversion of debt to equity in excess
of 40% of the outstanding capital stock in favor of
petitioners violates the constitutional limit on foreign
ownership of a public utility – YES.
 Art. XII, Sec. 11 of the 1987 Constitution reserves to Filipino
citizens control over public utilities pursuant to an overriding
economic goal to conserve and develop our patrimony and
ensure a self-reliant and independent national economy
effectively controlled by Filipinos.
o Art. XII, Sec. 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.
 As held in Gamboa v Teves, the term “capital” in Sec. 11
pertains to shares of stock that can vote in the election of
directors.
o “Capital” refers to common shares, which usually have
voting rights which translate to control, or preferred shares
which are given the right to vote in the election of
directors.
 Following the test laid down by Gamboa v Teves, a two-step
inquiry must be followed to determine whether the proposed
equity conversion of 77.7% violates the Constitution:
o FIRST: Identification into which class of shares the debt
shall be converted: whether common shares, preferred
shares that have the right to vote in the election of
directors, or non-voting preferred shares
 o SECOND: Determination of the number of shares with
voting right held by foreign entities prior to conversion
 IN THIS CASE: The plan of 77.7% equity conversion, as
proposed by the creditors, will violate the constitutional
limit on foreign ownership.
o In the Rehabilitation Plan, it was stated Bayantel’s
shareholders shall “relinquish the agreed-upon amount of
common stock[s] as payment.” The debt will therefore be
converted into common stocks, which have voting rights.
o If the petitioners’ proposal will be followed, the Omnibus
Creditors, which are all foreign corporations, shall have
control over 77.7% of Bayantel., a public utility company – a
far cry from the 40% limit imposed by the Constitution.

NOTES:
 The banks and credit facilities are:
o Express Investments III Private Ltd.
o Export Development Canada
o Asian Finance and Investment Corporation
o Bayesriche Landesbank (Singapore Branch)
o Clearwater Capital Partners Singapore Pte Ltd. (as agent
for Credit Industriel et Commercial – Singapore)
o Deutsche Bank AG
o Equitable PCI Bank
o JP Morgan Chase Bank
o Metropolitan Bank and Trust Co.
o P.T. Negara Indonesia
o TBK Hong Kong Branch
o Rizal Commercial Banking Corporation
o Standard Chartered Bank