Case Title Case No. & Date Ponente Topic

CASE TITLE HEIRS OF WILSON P. GAMBOA v. FINANCE CASE NO. & G.R. No.
176579;
SECRETARY MARGARITO B. TEVES, ET. AL. DATE October 9, 2012
PONENTE Carpio, J. TOPIC Formation and

Organization of a
Private
Corporation
DOCTRINE The term "capital" in Section 11, Article XII of the 1987 Constitution refers to shares
with voting rights, as well as with full beneficial ownership.
FACTS This resolves the motions for reconsideration of the 28 June 2011 Decision filed by the
Philippine Stock Exchange's (PSE) President, Manuel Pangilinan, Napoleon Nazareno,
and the Securities and Exchange Commission (collectively, movants).
Movants contend that the term "capital" in Section 11, Article XII of the Constitution has
long been settled and defined to refer to the total outstanding shares of stock, whether
voting or non-voting. In fact, movants claim that the SEC, which is the administrative
agency tasked to enforce the 60-40 ownership requirement in favor of Filipino citizens
in the Constitution and various statutes, has consistently adopted this particular
definition in its numerous opinions. Movants point out that with the 28 June 2011
Decision, the Court in effect introduced a "new" definition or "midstream redefinition" of
the term "capital" in Section 11, Article XII of the Constitution.
ISSUES 1) Whether or not there was a redefinition of the term “capital.”
2) Whether or not the right to elect directors, coupled with beneficial ownership,
translates to effective control.
RULING 1) No. Until the present case there has never been a Court ruling categorically
defining the term "capital" found in the various economic provisions of the 1935,
1973 and 1987 Philippine Constitution.
Compliance with the constitutional limitation(s) on engaging in nationalized

activities must be determined by ascertaining if 60% of the investing corporations
outstanding capital stock is owned by "Filipino citizens", or as interpreted, by
natural or individual Filipino citizens. If such investing corporation is in turn owned
to some extent by another investing corporation, the same process must be
observed. One must not stop until the citizenships of the individual or natural
stockholders of layer after layer of investing corporations have been established,
the very essence of the Grandfather Rule. Lastly, it was the intent of the framers
of the 1987 Constitution to adopt the Grandfather Rule. Both the Voting
Control Test and the Beneficial Ownership Test must be applied to determine
whether a corporation is a "Philippine national."
The Constitution expressly declares as State policy the development of an

economy "effectively controlled" by Filipinos. Consistent with such State policy,
the Constitution explicitly reserves the ownership and operation of public utilities to
Philippine nationals, who are defined in the Foreign Investments Act of 1991 as
Filipino citizens, or corporations or associations at least 60 percent of whose
capital with voting rights belongs to Filipinos. The FIAs implementing rules
explain that "[f]or stocks to be deemed owned and held by Philippine citizens or
Philippine nationals, mere legal title is not enough to meet the required Filipino
equity. Full beneficial ownership of the stocks, coupled with appropriate
voting rights is essential." In effect, the FIA clarifies, reiterates and confirms the
interpretation that the term "capital" in Section 11, Article XII of the 1987
Constitution refers to shares with voting rights, as well as with full beneficial
ownership. This is precisely because the right to vote in the election of directors,
coupled with full beneficial ownership of stocks, translates to effective control of a
corporation.
Under Section 11, Article XII of the 1987 Constitution, to own and operate a
public utility a corporations capital must at least be 60 percent owned by
Philippine nationals.
DEFINITION OF "PHILIPPINE NATIONAL"

Republic Act No. 7042 or the Foreign Investments Act of 1991 (FIA), like all its
predecessor statutes, clearly defines a "Philippine national" as a Filipino citizen,
or a domestic corporation "at least sixty percent (60%) of the capital stock
outstanding and entitled to vote" is owned by Filipino citizens. A domestic
corporation is a "Philippine national" only if at least 60% of its voting stock is
owned by Filipino citizens.
2) Yes. The right to elect directors, coupled with beneficial ownership, translates
to effective control. The 28 June 2011 Decision declares that the 60 percent
Filipino ownership required by the Constitution to engage in certain economic
activities applies not only to voting control of the corporation, but also to the
beneficial ownership of the corporation. To repeat, the SC held:
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 nationals."
Since the constitutional requirement of at least 60 percent Filipino ownership

applies not only to voting control of the corporation but also to the beneficial
ownership of the corporation, it is therefore imperative that such requirement
apply uniformly and across the board to all classes of shares, regardless of
nomenclature and category, comprising the capital of a corporation. Under the
Corporation Code, capital stock consists of all classes of shares issued to
stockholders, that is, common shares as well as preferred shares, which may
have different rights, privileges or restrictions as stated in the articles of
incorporation.
Thus, if a corporation, engaged in a partially nationalized industry, issues

a mixture of common and preferred non-voting shares, at least 60 percent
of the common shares and at least 60 percent of the preferred non-voting
shares must be owned by Filipinos. Of course, if a corporation issues only a
single class of shares, at least 60 percent of such shares must necessarily be
owned by Filipinos. In short, 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.

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CASE TITLE HEIRS OF WILSON P. GAMBOA v. FINANCE CASE NO. & G.R. No.

PONENTE Carpio, J. TOPIC Formation and

Compliance with the constitutional limitation(s) on engaging in nationalized

The Constitution expressly declares as State policy the development of an

DEFINITION OF "PHILIPPINE NATIONAL"

Mere legal title is insufficient to meet the 60 percent Filipino-owned

Since the constitutional requirement of at least 60 percent Filipino ownership

Thus, if a corporation, engaged in a partially nationalized industry, issues

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