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[10] Heirs OF Gamboa VS Teves

Fundamentals Of Political Science (Far Eastern University)

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[10] HEIRS OF GAMBOA VS TEVES

G.R. No. 176579; October 9, 2012
J. Carpio

FACTS: Respondents (movants) Philippine Stock Exchange (PSE) President, Manuel V.

Pangilinan, Napoleon Nazareno, and the Securities and Exchange Commission (SEC) filed
motions for reconsideration assailing the Court’s decision dated June 28 2011.

CONTEXT:
Gamboa vs Teves; G.R. No. 176579, June 28 2011
● Petitioners filed for prohibition, injunction, declaratory relief and declaration of nullity of the sale
of shares of stock of Philippine Telecommunications Investment Corporation (PTIC) by the
government of the Republic of the Philippines to Metro Pacific Assets Holdings, Inc. (MPAH), an
affiliate of First Pacific Company Limited (First Pacific). First Pacific is a Bermuda-registered,
Hong Kong based investment firm.
● 1928: PLDT granted a franchise by Congress.
○ 1969: General Telephone and Electronics Corp (GTE), an American company and major
stockholder of PLDT, sold 26% of common shares to PTIC.
○ Subsequently, Prime Holdings Inc (PHI) became incorporated and acquired 111,415
shares of PTIC by virtue of Assignment.
● 1986: The 111,415 shares of stock of PTIC held by PHI were sequestered by the PCGG. The
shares represented 46.125% of the outstanding capital stock of the PTIC which were then
declared to be owned by the Republic.
○ 1999: First Pacific acquired the remaining 54% of PTIC’s outstanding capital stock.
○ 2006: Inter-agency Privatization Council (IPC) of the PH announced that it would sell the
111,415 PTIC shares, or 46.125 percent of the outstanding capital stock of PTIC,
through a public bidding.
● 2007: Eventually, the shares were sold to MPAH, a subsidiary of First Pacific for the price of
P25,217,556,000 or US$510,580,189.
● Since PTIC is a stockholder of PLDT, the sale by the Philippine Government of 46.125
percent of PTIC shares is actually an indirect sale of 12 million shares or about 6.3 percent
of the outstanding common shares of PLDT.
○ With the sale, First Pacific's common shareholdings in PLDT increased from 30.7
percent to 37 percent, thereby increasing the common shareholdings of foreigners
in PLDT to about 81.47 percent.
○ This 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 percent.

IN TURN, THE COURT GRANTED THE PETITION. It discussed the difference between common and
preferred shares in relation to the term “capital” found in Sec 11, Art XII.

(NOTE: THIS IS CORPO BUT INCLUDING THIS FOR CONTEXT)

● 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

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preferred shareholders are merely investors in the corporation for income in the same
manner as bondholders.
○ In fact, under the Corporation Code only preferred or redeemable shares can be deprived
of the right to vote.
○ Common shares cannot be deprived of the right to vote in any corporate meeting,
and any provision in the articles of incorporation restricting the right of common
shareholders to vote is invalid.

SC RULING: 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. This interpretation is consistent
with the intent of the framers of the Constitution to place in the hands of Filipino citizens
the control and management of public utilities
○ Constitutional Commission: "Capital" refers to the voting stock or controlling interest of a
corporation
○ Thus, 60 percent of the "capital" assumes, or should result in, "controlling interest" in the
corporation. Reinforcing this interpretation of the term "capital," as referring to controlling
interest or shares entitled to vote, is the definition of a "Philippine national" in the
Foreign Investments Act (FIA) of 1991
● The SC held that 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.

TO ILLUSTRATE THE PLDT CASE:

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.

In short, only holders of common shares can vote in the election of directors, 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.
→ PROBLEMATIC BECAUSE FOREIGNERS HOLD MAJORITY OF THE COMMON SHARES
OF PLDT
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● Thus, 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

FINAL RULING: 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.

THE RESOLUTION (OCT 19 2012 CASE)

One of the movants’ main contention is that the June 28 decision introduced a “new”
definition or "midstream redefinition" of the term "capital" in Section 11, Article XII of the
Constitution.
● According to the movants, 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.

SC: NO CHANGE OF ANY LONG-STANDING RULE; NO REDEFINITION OF THE TERM

CAPITAL.
● The Court held that it has not interpreted the term “capital” in the 1935, 1973, and 1987
Constitutions. 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 Constitutions.

The Court also pointed out that the opinions of the SEC, as well as the DOJ on the term
“capital” as referring to both voting and non-voting shares (combined total of common
and preferred shares) are, in the first place, CONFLICTING AND INCONSISTENT. There is
no basis whatsoever to the claim that the SEC and the DOJ have consistently and
uniformly adopted a definition of the term "capital" contrary to the definition that this
Court adopted in its 28 June 2011 Decision.

DOJ Opinion No. 130 (Oct 7 1985): The scope of the term "capital" in Section 9, Article XIV of
the 1973 Constitution was raised, that is, whether the term "capital" includes "both preferred and
common stocks."
● Former Minister of Justice Estelito Mendoza categorically rejected the theory that the
term "capital" in Section 9, Article XIV of the 1973 Constitution includes "both
preferred and common stocks" treated as the same class of shares regardless of
differences in voting rights and privileges.
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● Minister Mendoza stressed that the 60-40 ownership requirement in favor of

Filipino citizens in the Constitution is not complied with unless the corporation
"satisfies the criterion of beneficial ownership" and that in applying the same
"the primordial consideration is situs of control."
o This is in the context of a stock-swap between a Filipino and Japanese
corporation, both stockholders of a domestic corporation that owned lands in
the Philippines.
o Mendoza ruled that the resulting ownership structure of the corporation
would be unconstitutional because 60% of the voting stock would be
owned by Japanese while Filipinos would own only 40% of the voting
stock, although when the non-voting stock is added, Filipinos would
own 60% of the combined voting and non-voting stock. This ownership
structure is remarkably similar to the current ownership structure of
PLDT.

SEC Opinion No. 23-10 (August 18 2010): SEC General Counsel Vernette Umali-Paco applied
the Voting Control Test, that is, using only the voting stock to determine whether a
corporation is a Philippine national.
● The Opinion stated that: Applying the foregoing, particularly the Control Test, MLRC
is deemed as a Philippine national because: (1) 60% of its outstanding capital
stock entitled to vote is owned by a Philippine national, the Trustee; and (2) at
60% of the ERF will accrue to the benefit of Philippine nationals.
● Still pursuant to the Control Test, MLRC’s investment in 60% of BFDC’s outstanding
capital stock entitled to vote shall be deemed as of Philippine nationality, thereby
qualifying BFDC to own private land.

SC HELD THAT DOJ AND SEC OPINIONS ARE COMPATIBLE WITH THE COURT’S
INTERPRETATION OF THE 60-40 OWNERSHIP REQUIREMENT IN FAVOR OF FILIPINO
CITIZENS MANDATED BY THE CONSTITUTION FOR CERTAIN ECONOMIC ACTIVITIES.

AT THE SAME TIME, THESE OPINIONS HIGHLIGHT THE CONFLICTING,

CONTRADICTORY, AND INCONSISTENT POSITIONS TAKEN BY THE DOJ AND THE SEC
ON THE DEFINITION OF THE TERM "CAPITAL" FOUND IN THE ECONOMIC PROVISIONS
OF THE CONSTITUTION.

ISSUE: Whether or not the opinions issued by the SEC legal officers have the force and effect
of SEC rules and regulations – NO.

RULING: The Court held that such opinions don’t have the force and effect of rules and
regulations as only the SEC en banc can adopt rules and regulations.
● As expressly provided in Section 4.6 of the Securities Regulation Code, the SEC
cannot delegate to any of its individual Commissioners or staff the power to
adopt any rule or regulation.
o Sec 4.6: The Commission may, for purposes of efficiency, delegate any of its
functions to any department or office of the Commission, an individual
Commissioner or staff member of the Commission except its review or
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appellate authority and its power to adopt, alter and supplement any
rule or regulation. The Commission may review upon its own initiative or
upon the petition of any interested party any action of any department or
office, individual Commissioner, or staff member of the Commission.
● Further, under Section 5.1 of the same Code, it is the SEC as a collegial body, and
not any of its legal officers, that is empowered to issue opinions and approve
rules and regulations
o Sec 5.1 (g): The Commission shall act with transparency and shall have the
powers and functions provided by this Code, Presidential Decree No. 902-A,
the Corporation Code, the Investment Houses Law, the Financing Company
Act and other existing laws. Pursuant thereto the Commission shall have,
among others, the following powers and functions: x x x x (g) Prepare,
approve, amend or repeal rules, regulations and orders, and issue
opinions and provide guidance on and supervise compliance with such
rules, regulations and orders;
● Thus, the act of the individual Commissioners or legal officers of the SEC in
issuing opinions that have the effect of SEC rules or regulations is ultra vires.
o Under Sections 4.6 and 5.1(g) of the Code, only the SEC en banc can
"issue opinions" that have the force and effect of rules or regulations.
o Section 4.6 of the Code bars the SEC en banc from delegating to any
individual Commissioner or staff the power to adopt rules or
regulations.
o In short, any opinion of individual Commissioners or SEC legal officers
does not constitute a rule or regulation of the SEC.
● In fact, the SEC during the Oral Arguments admitted that only the SEC en banc, and
not any of its individual commissioners or legal staff, is empowered to issue opinions
which have the same binding effect as SEC rules and regulations.
● The interpretation by legal officers of the SEC of the term "capital," embodied
in various opinions which respondents relied upon, is merely preliminary and
an opinion only of such officers. To repeat, any such opinion does not
constitute an SEC rule or regulation.
o In fact, many of these opinions contain a disclaimer which expressly
states: "the foregoing opinion is based solely on facts disclosed in your
query and relevant only to the particular issue raised therein and shall
not be used in the nature of a standing rule binding upon the
Commission in other cases whether of similar or dissimilar
circumstances."
o Thus, the opinions clearly make a caveat that they do not constitute
binding precedents on any one, not even on the SEC itself.

ULTIMATELY, THE SC DECLARED: The opinions of the SEC en banc, as well as of the
DOJ, interpreting the law are neither conclusive nor controlling and thus, do not bind the
Court.
● It is hornbook doctrine that any interpretation of the law that administrative or
quasi-judicial agencies make is only preliminary, never conclusive on the
Court.
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● The power to make a final interpretation of the law, in this case the term
"capital" in Section 11, Article XII of the 1987 Constitution, lies with this Court,
not with any other government entity.

FINAL RULING: MOTION FOR RECONSIDERATION DENIED.

____________________________________________________________________________

DISSENTING OPINION: J VELASCO

I. SEC has reflected the popular contemporaneous construction of capital in

computing the nationality requirement based on the total capital stock, not only
the voting stock, of a corporation.
● Thus, courts must give due deference to an administrative agency’s reasonable
interpretation of the statute it enforces.
● SEC is the government agency invested with the jurisdiction to determine at the
first instance the observance by a public utility of the constitutional nationality
requirement prescribed vis-à-vis the ownership of public utilities and to interpret
legislative acts, like the FIA.
○ The rationale behind the doctrine of primary jurisdiction lies on the
postulate that such administrative agency has the "special knowledge,
experience and tools to determine technical and intricate matters of fact…"
○ Thus, the determination of the SEC is afforded great respect by other
executive agencies, like the Department of Justice (DOJ), and by the
courts.
● For J Velasco, the long-established interpretation and mode of computing by the
SEC of the total capital stock strongly recognize the intent of the framers of the
Constitution to allow access to much-needed foreign investments confined to 40%
of the capital stock of public utilities.

II. VERBA LEGIS: The term “capital” shall be understood in its plain, ordinary
meaning
● The plain meaning of "capital" in the first sentence of Sec. 11, Art. XII of the
Constitution includes both voting and non-voting shares
○ "Capital" in the first sentence of Sec. 11, Art. XII must then be accorded a
meaning accepted, understood, and used by an ordinary person not versed in
the technicalities of law.
○ As defined in a non-legal dictionary, capital stock or capital is ordinarily taken to
mean "the outstanding shares of a joint stock company considered as an
aggregate" or "the ownership element of a corporation divided into shares and
represented by certificates." The term "capital" includes all the outstanding
shares of a company that represent "the proprietary claim in a business."
■ It does not distinguish based on the voting feature of the stocks but
refers to all shares, be they voting or non-voting. Neither is the term
limited to the management aspect of the corporation but clearly
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refers to the separate aspect of ownership of the corporate shares

thereby encompassing all shares representing the equity of the
corporation.
○ This plain meaning, as understood, accepted, and used in ordinary
parlance, hews with the definition given by Black who equates capital to
capital stock and defines it as "the total number of shares of stock that a
corporation may issue under its charter or articles of incorporation,
including both common stock and preferred stock."
● J. Velasco: Hence, following the verba legis approach, I see no reason to stray away
from what appears to be a common and settled acceptation of the word "capital," given
that, as used in the constitutional provision in question, it stands unqualified by any
restrictive or expansive word as to reasonably justify a distinction or a delimitation of the
meaning of the word.
○ Ubi lex non distinguit nos distinguere debemus, when the law does not
distinguish, we must not distinguish.
○ Using this plain meaning of "capital" within the context of Sec. 11, Art. XII,
foreigners are entitled to own not more than 40% of the outstanding capital
stock, which would include both voting and non-voting shares.
● Citing Consti Commission deliberations, J Velasco argued that the view advanced
by Justice Carpio is incorrect as the deliberations easily reveal that the intent of
the framers was not to limit the definition of the word "capital" as meaning voting
shares/stocks.

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