Wilson P. G+mbo+ v.

Fin+nce
Secret+ry M+rg+rito Teves, et
+l., G.R. No. 176579, June 28,
2011

I.      THE FACTS

This is ' petition to nullify the s'le of

sh'res of stock of Philippine
Telecommunic'tions Investment
Corpor'tion (PTIC) by the government
of the Republic of the Philippines,
'cting through the Inter-Agency
Priv'tiz'tion Council (IPC), to Metro
P'cific Assets Holdings, Inc. (MPAH),
'n 'ffili'te of First P'cific Comp'ny
Limited (First P'cific), ' Hong Kong-
b'sed investment m'n'gement 'nd
holding comp'ny 'nd ' sh'reholder of
the Philippine Long Dist'nce Telephone
Comp'ny (PLDT).

The petitioner questioned the s'le on

the ground th't it 'lso involved 'n
indirect s'le of 12 million sh'res (or
'bout 6.3 percent of the outst'nding
common sh'res) of PLDT owned by
PTIC to First P'cific. With the this s'le,
First P'cificʼs common sh'reholdings in
PLDT incre'sed from 30.7 percent to 37
percent, thereby incre'sing the tot'l
common sh'reholdings of foreigners in
PLDT to 'bout 81.47%. This, 'ccording
to the petitioner, viol'tes Section 11,
Article XII of the 1987 Philippine
Constitution which limits foreign
ownership of the c'pit'l of ' public
utility to not more th'n 40%, thus:

Section 11. No fr+nchise, certific+te,

or +ny other form of +uthoriz+tion
for the oper+tion of + public utility
sh+ll be gr+nted except to citizens
of the Philippines or to corpor+tions
or +ssoci+tions org+nized under the
l+ws of the Philippines, +t le+st sixty
per centum of whose c+pit+l is
owned by such citizens; nor sh'll
such fr'nchise, certific'te, or
'uthoriz'tion be exclusive in ch'r'cter
or for ' longer period th'n fifty ye'rs.
Neither sh'll 'ny such fr'nchise or right
be gr'nted except under the condition
th't it sh'll be subject to 'mendment,
'lter'tion, or repe'l by the Congress
when the common good so requires.
The St'te sh'll encour'ge equity
p'rticip'tion in public utilities by the
gener'l public. The p'rticip'tion of
foreign investors in the governing body
of 'ny public utility enterprise sh'll be
limited to their proportion'te sh're in
its c'pit'l, 'nd 'll the executive 'nd
m'n'ging officers of such corpor'tion
or 'ssoci'tion must be citizens of the
Philippines. (Emph'sis supplied)

II.    THE ISSUE

Does the term “c'pit'l” in Section 11,

Article XII of the Constitution refer to
the tot'l common sh'res only, or to the
tot'l outst'nding c'pit'l stock
(combined tot'l of common 'nd non-
voting preferred sh'res) of PLDT, '
public utility?

III.   THE RULING

[The Court p,rtly gr,nted the petition

,nd held th,t the term “c,pit,l” in
Section 11, Article XII of the
Constitution refers only to sh,res of
stock entitled to vote in the election of
directors of , public utility, i.e., to the
tot,l common sh,res in PLDT.]

Considering th't common sh'res h've

voting rights which tr'nsl'te to control,
's opposed to preferred sh'res which
usu'lly h've no voting rights, the term
“c'pit'l” in Section 11, Article XII of the
Constitution refers only to common
sh'res. However, if the preferred sh'res
'lso h've the right to vote in the
election of directors, then the term
“c'pit'l” sh'll include such preferred
sh'res bec'use the right to p'rticip'te
in the control or m'n'gement of the
corpor'tion is exercised through the
right to vote in the election of
directors. In short, the term “c+pit+l”
in Section 11, Article XII of the
Constitution refers only to sh+res of
stock th+t c+n vote in the election of
directors.
   
To construe bro'dly the term “c'pit'l”
's the tot'l outst'nding c'pit'l stock,
including both common 'nd non-
voting preferred sh'res, grossly
contr'venes the intent 'nd letter of the
Constitution th't the “St'te sh'll
develop ' self-reli'nt 'nd independent
n'tion'l economy effectively
controlled by Filipinos.” A bro'd
definition unjustifi'bly disreg'rds who
owns the 'll-import'nt voting stock,
which necess'rily equ'tes to control of
the public utility.
   
Holders of PLDT preferred sh'res 're
explicitly denied of the right to vote in
the election of directors. PLDTʼs
Articles of Incorpor'tion expressly st'te
th't “the holders of Seri+l Preferred
Stock sh+ll not be entitled to vote +t
+ny meeting of the stockholders for
the election of directors or for +ny
other purpose or otherwise p'rticip'te
in 'ny 'ction t'ken by the corpor'tion
or its stockholders, or to receive notice
of 'ny meeting of stockholders.” On the
other h'nd, holders of common sh'res
're gr'nted the exclusive right to vote
in the election of directors. PLDTʼs
Articles of Incorpor'tion st'te th't
“e'ch holder of Common C'pit'l Stock
sh'll h've one vote in respect of e'ch
sh're of such stock held by him on 'll
m'tters voted upon by the
stockholders, 'nd the holders of
Common C+pit+l Stock sh+ll h+ve
the exclusive right to vote for the
election of directors +nd for +ll other
purposes.”
  
It must be stressed, 'nd respondents
do not dispute, th't foreigners hold '
m'jority of the common sh'res of PLDT.
In f'ct, b'sed on PLDTʼs 2010 Gener'l
Inform'tion Sheet (GIS), which is '
document required to be submitted
'nnu'lly to the Securities 'nd
Exch'nge Commission, foreigners hold
120,046,690 common sh'res of PLDT
where's Filipinos hold only 66,750,622
common sh'res. In other words,
foreigners hold 64.27% of the tot'l
number of PLDTʼs common sh'res,
while Filipinos hold only 35.73%. Since
holding ' m'jority of the common
sh'res equ'tes to control, it is cle'r
th't foreigners exercise control over
PLDT. Such 'mount of control
unmist'k'bly exceeds the 'llow'ble 40
percent limit on foreign ownership of
public utilities expressly m'nd'ted in
Section 11, Article XII of the
Constitution.

As shown in PLDTʼs 2010 GIS, 's

submitted to the SEC, the p'r v'lue of
PLDT common sh'res is P5.00 per
sh're, where's the p'r v'lue of
preferred sh'res is P10.00 per sh're. In
other words, preferred sh'res h've
twice the p'r v'lue of common sh'res
but c'nnot elect directors 'nd h've
only 1/70 of the dividends of common
sh'res. Moreover, 99.44% of the
preferred sh'res 're owned by Filipinos
while foreigners own only ' minuscule
0.56% of the preferred sh'res. Worse,
preferred sh'res constitute 77.85% of
the 'uthorized c'pit'l stock of PLDT
while common sh'res constitute only
22.15%. This undeni'bly shows th't
benefici'l interest in PLDT is not with
the non-voting preferred sh'res but
with the common sh'res, bl't'ntly
viol'ting the constitution'l requirement
of 60 percent Filipino control 'nd
Filipino benefici'l ownership in ' public
utility.
  
In short, Filipinos hold less th'n 60
percent of the voting stock, 'nd e'rn
less th'n 60 percent of the dividends,
of PLDT. This directly contr'venes the
express comm'nd in Section 11, Article
XII of the Constitution th't “[n]o
fr'nchise, certific'te, or 'ny other form
of 'uthoriz'tion for the oper'tion of '
public utility sh'll be gr'nted except to
x x x corpor'tions x x x org'nized under
the l'ws of the Philippines, 't le'st sixty
per centum of whose c'pit'l is owned
by such citizens x x x.”

To repe't, (1) foreigners own 64.27% of

the common sh'res of PLDT, which
cl'ss of sh'res exercises the sole right
to vote in the election of directors, 'nd
thus exercise control over PLDT; (2)
Filipinos own only 35.73% of PLDTʼs
common sh'res, constituting ' minority
of the voting stock, 'nd thus do not
exercise control over PLDT; (3)
preferred sh'res, 99.44% owned by
Filipinos, h've no voting rights; (4)
preferred sh'res e'rn only 1/70 of the
dividends th't common sh'res
e'rn; (5) preferred sh'res h've twice
the p'r v'lue of common sh'res; 'nd
(6) preferred sh'res constitute 77.85%
of the 'uthorized c'pit'l stock of PLDT
'nd common sh'res only 22.15%. This
kind of ownership 'nd control of '
public utility is ' mockery of the
Constitution.

[Thus, the Respondent Ch'irperson of

the Securities 'nd Exch'nge
Commission w's DIRECTED by the
Court to 'pply the foregoing definition
of the term “c'pit'l” in determining the
extent of 'llow'ble foreign ownership in
respondent Philippine Long Dist'nce
Telephone Comp'ny, 'nd if there is '
viol'tion of Section 11, Article XII of the
Constitution, to impose the 'ppropri'te
s'nctions under the l'w.]

Addition+l expl+n+tion of the ruling

in rel+tion to corpor+tion l+w...

The term “c'pit'l” does not refer to

both preferred 'nd common stocks
tre'ted 's the s'me cl'ss of sh'res
reg'rdless of differences in voting
rights 'nd privileges.
Consistent with the constitution'l
m'nd'te th't the “St'te sh'll develop '
self-reli'nt 'nd independent n'tion'l
economy effectively controlled by
Filipinos,” the term "c'pit'l" me'ns the
outst'nding c'pit'l stock entitled to
vote (voting stock), coupled with
benefici'l ownership, both of which
results to "effective control."

"Mere leg'l title is insufficient to meet

the 60 percent Filipino owned “c'pit'l”
required in the Constitution for cert'in
industries. Full benefici'l ownership of
60 percent of the outst'nding c'pit'l
stock, coupled with 60 percent of the
voting rights, is required." In this c'se,
such twin requirements must 'pply
uniformly 'nd 'cross the bo'rd to 'll
cl'sses of sh'res comprising the
c'pit'l. Thus, "the 60-40 ownership
requirement in f'vor of Filipino citizens
must 'pply sep'r'tely to e'ch cl'ss of
sh'res, whether common, preferred
non-voting, preferred voting or 'ny
other cl'ss of sh'res." This gu'r'ntees
th't the “controlling interest” in public
utilities 'lw'ys lies in the h'nds of
Filipino citizens.