Wilson P. Gamboa v. Finance Secretary Margarito Teves, et al., G.R. No. 176579, June 28, 2011 CARPIO, I.
J .:
THE FACTS This is a petition to nullify the sale of shares of stock of Philippine Telecommunications Investment Corporation (PTIC) by the government of the Republic of the Philippines, acting through the Inter-Agency Privatization Council (IPC), to Metro Pacific Assets Holdings, Inc. (MPAH), an affiliate of First Pacific Company Limited (First Pacific), a Hong Kong-based investment management and holding company and a shareholder of the Philippine Long Distance Telephone Company (PLDT). The petitioner questioned the sale on the ground that it also involved an indirect sale of 12 million shares (or about 6.3 percent of the outstanding common shares) of PLDT owned by PTIC to First Pacific. With the this sale, First Pacific’s common shareholdings in PLDT increased from 30.7 percent to 37 percent, thereby increasing the total common shareholdings of foreigners in PLDT to about 81.47%. This, according to the petitioner, 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%, thus: 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; 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)
II.
THE ISSUE Does the term “capital” in Section 11, Article XII of the C onstitution refer 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?
III. THE RULING [The Court partly granted the petition and held that the term “capital” in Section 11, Article XII of the Constitution refers only to shares of stock entitled to vote in the election of directors of a public utility, i.e., to the total common shares in PLDT.] 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. To construe broadly the term “capital” as the total outstanding capital stock, including both common and non-voting preferred 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 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 “ 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 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.” 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 a ny 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.]
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.
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 F ilipino 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 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 c onservative 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 s tock 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.
