Detailed Digest of Gamboa vs. Finance Secretary, G.R. No.

176579, June 28, 2011

WILSON P. GAMBOA vs. FINANCE SECRETARY TEVES

G.R. No. 176579, promulgated June 28, 2011

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DECISION

CARPIO, J.:

I. 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%.

II. THE ISSUE

Does the term “capital” in Section 11, Article XII of the Constitution 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, or in the instant case, to the total common shares
of PLDT.]

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 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, and not to the total outstanding capital stock comprising both
common and non-voting preferred shares [of PLDT].

xxx xxx xxx

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

control or management of the corporation. This is exercised through his vote in the
election of directors because it is the board of directors that controls or manages the
corporation. 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. xxx.

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.

xxx xxx xxx

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].”

xxx xxx xxx

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.

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
economy effectively 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.

xxx xxx xxx

[O]nly holders of common shares can vote in the election of directors [of PLDT],
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 PLDT’s 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 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.

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 State’s 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 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.

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, while PLDT preferred shares with
a par value of P10.00 per share have a current stock market value ranging from
only P10.92 to P11.06 per share, is a glaring confirmation by the market that control
and beneficial ownership of PLDT rest with the common shares, not with the preferred
shares.

xxx xxx xxx

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.
 Wilson P. Gamboa v. Finance Secretary Margarito Teves, et al.,
G.R. No. 176579, June 28, 2011
DECISION
CARPIO, J.:

I. 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; 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 Constitution 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? 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.

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 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.]

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.