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 X----------------------------------------------------------------------------X

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,

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. alteration. THE ISSUE Does the term “capital” in 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%. Article XII of the Constitution refers only to shares of stock entitled to vote in the election of directors. certificate. or authorization be exclusive in character or for a longer period than fifty years. and not to the total outstanding capital stock comprising both common and non-voting preferred shares [of PLDT]. to the total common shares of PLDT. Neither shall any such franchise or right be granted except under the condition that it shall be subject to amendment. and thus in the present case only to common shares.] Section 11. nor shall such franchise. or to the total outstanding capital stock (combined total of common and non-voting preferred shares) of PLDT. at least sixty per centum of whose capital is owned by such citizens. certificate. THE RULING [The Court partly granted the petition and held that the term “capital” in Section 11. The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its capital. a public utility? III. The State shall encourage equity participation in public utilities by the general public. Article XII of the Constitution refers only to shares of stock entitled to vote in the election of directors of a public utility. and all the executive and managing officers of such corporation or association must be citizens of the Philippines. Article XII of the Constitution refer to the total common shares only. to wit: Section 11. II. or repeal by the Congress when the common good so requires. (Emphasis supplied) The term “capital” in Section 11. or in the instant case. No franchise. . Article XII (National Economy and Patrimony) of the 1987 Constitution mandates the Filipinization of public utilities.

” A broad definition unjustifiably disregards who owns the all-important voting stock. Article XII of the Constitution refers only to common shares. This is exercised through his vote in the election of directors because it is the board of directors that controls or manages the corporation. preferred shares have the same voting rights as common shares. the corporation is “considered as nonPhilippine national[s]. coupled with 60 percent of the voting rights. on the theory that the preferred shareholders are merely investors in the corporation for income in the same manner as bondholders. 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. preferred shareholders are often excluded from any control. . as opposed to preferred shares which usually have no voting rights. the term “capital” in Section 11. 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. the term “capital” in Section 11. is required. xxx xxx xxx Mere legal title is insufficient to meet the 60 percent Filipino-owned “capital” required in the Constitution. including both common and non-voting preferred shares. Otherwise.xxx xxx xxx Indisputably. if the preferred shares also have the right to vote in the election of directors. In the absence of provisions in the articles of incorporation denying voting rights to 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. However. one of the rights of a stockholder is the right to participate in the control or management of the corporation. However. deprived of the right to vote in the election of directors and on other matters.” xxx xxx xxx To construe broadly the term “capital” as the total outstanding capital stock. xxx. Full beneficial ownership of 60 percent of the outstanding capital stock. Considering that common shares have voting rights which translate to control. In short. which necessarily equates to control of the public utility. that is. Article XII of the Constitution refers only to shares of stock that can vote in the election of directors.

under PLDT’s Articles of Incorporation. The example given is not theoretical but can be found in the real world. it is clear that foreigners exercise control over PLDT. Under the broad definition of the term “capital. This is obviously absurd.690 common shares of PLDT whereas Filipinos hold only 66.750. which is a document required to be submitted annually to the Securities and Exchange Commission. On the other hand.27% of the total number of PLDT’s common shares. as well as the clear language of the Constitution. It also renders illusory the State policy of an independent national economy effectively controlled by Filipinos. of the total outstanding capital stock is Filipino owned. foreigners hold 120. the Filipinos. only the foreigners holding the common shares have voting rights in the election of directors. In other words. and respondents do not dispute. to place the control of public utilities in the hands of Filipinos. This starkly circumvents the intent of the framers of the Constitution. while holders of preferred shares have no voting right for any purpose whatsoever.” Let us assume that a corporation has 100 common shares owned by foreigners and 1.622 common shares. with both classes of share having a par value of one peso (P1. Such . based on PLDT’s 2010 General Information Sheet (GIS). who have no voting rights in the election of directors. have no control over the public utility. exercise control over the public utility. or more than 99.00) per share. foreigners hold 64. with a minuscule equity of less than 0.999 percent.We shall illustrate the glaring anomaly in giving a broad definition to the term “capital. In fact. even if they hold only 100 shares. holders of common shares have voting rights for all purposes. In the example given.001 percent.046. that foreigners hold a majority of the common shares of PLDT. do not have any control over PLDT.” such corporation would be considered compliant with the 40 percent constitutional limit on foreign equity of public utilities since the overwhelming majority.999 percent of the equity. In fact. and in fact exists in the present case.000 non-voting preferred shares owned by Filipinos. while Filipinos hold only 35. It must be stressed. xxx xxx xxx [O]nly holders of common shares can vote in the election of directors [of PLDT]. cannot vote in the election of directors and hence. meaning only common shareholders exercise control over PLDT.73%. Since holding a majority of the common shares equates to control. Conversely. holding more than 99.000. The foreigners. holders of preferred shares.

15%. have no voting rights. of PLDT.73% of PLDT’s common shares. are non-voting and earn only 1/70 of the dividends that PLDT common shares earn. Worse. As shown in PLDT’s 2010 GIS. constituting a minority of the voting stock. certificate. and (6) preferred shares constitute 77.27% of the common shares of PLDT. 99. Article XII of the Constitution. The undisputed fact that the PLDT preferred shares. at least sixty per centum of whose capital is owned by such citizens x x x. and thus exercise control over PLDT. 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. This directly contravenes the express command in Section 11. (1) foreigners own 64. Article XII of the Constitution that “[n]o franchise. and earn less than 60 percent of the dividends. In short. preferred shares constitute 77.85% of the authorized capital stock of PLDT and common shares only 22. 99. (4) preferred shares earn only 1/70 of the dividends that common shares earn.amount of control unmistakably exceeds the allowable 40 percent limit on foreign ownership of public utilities expressly mandated in Section 11. the par value of PLDT common shares is P5.00 per share. 99. as submitted to the SEC. (3) preferred shares. coupled with 60 percent of the voting rights. 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. Moreover. This undeniably shows that beneficial interest in PLDT is not with the non-voting preferred shares but with the common shares. This kind of ownership and control of a public utility is a mockery of the Constitution. Filipinos hold less than 60 percent of the voting stock.44% owned by Filipinos. In other words. 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.15%. whereas the par value of preferred shares is P10.00 per share.44% owned by Filipinos. is constitutionally required for the State’s grant of authority to operate a public utility. Full beneficial ownership of 60 percent of the outstanding capital stock. (2) Filipinos own only 35.56% of the preferred shares.85% of the authorized capital stock of PLDT while common shares constitute only 22. and thus do not exercise control over PLDT. grossly violates the constitutional requirement of 60 percent Filipino control and Filipino beneficial ownership of a public utility. (5) preferred shares have twice the par value of common shares.” To repeat.44% of the preferred shares are owned by Filipinos while foreigners own only a minuscule 0. which class of shares exercises the sole right to vote in the election of directors. .

] Wilson P.00 per share. and if there is a violation of Section 11. Article XII of the Constitution.R. and thus in the present case only to common shares. Gamboa v. 2011 DECISION CARPIO. not with the preferred shares. the fact that PLDT common shares with a par value of P5. while PLDT preferred shares with a par value of P10.Incidentally. June 28. J. 176579. No. we PARTLY GRANT the petition and rule that the term “capital” in Section 11. 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.00 have a current stock market value of P2. xxx xxx xxx WHEREFORE.00 per share have a current stock market value ranging from only P10. please click here. is a glaring confirmation by the market that control and beneficial ownership of PLDT rest with the common shares. et al. 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. G.: I..06 per share. acting . to impose the appropriate sanctions under the law.328. Finance Secretary Margarito Teves. Article XII of the 1987 Constitution refers only to shares of stock entitled to vote in the election of directors.92 to P11. and not to the total outstanding capital stock (common and non-voting preferred shares). [To read a shorter version of this digest.

thus: Section 11. to Metro Pacific Assets Holdings. (Emphasis supplied) II. First Pacific’s common shareholdings in PLDT increased from 30. thereby increasing the total common shareholdings of foreigners in PLDT to about 81. violates Section 11. a Hong Kong-based investment management and holding company and a shareholder of the Philippine Long Distance Telephone Company (PLDT).through the Inter-Agency Privatization Council (IPC). The State shall encourage equity participation in public utilities by the general public. an affiliate of First Pacific Company Limited (First Pacific). Article XII of the Constitution refers only to shares of stock entitled to vote in the election of directors of a public utility.. With the this sale.7 percent to 37 percent. nor shall such franchise. THE ISSUE Does the term “capital” in Section 11. This.3 percent of the outstanding common shares) of PLDT owned by PTIC to First Pacific. or repeal by the Congress when the common good so requires.] . and all the executive and managing officers of such corporation or association must be citizens of the Philippines. The petitioner questioned the sale on the ground that it also involved an indirect sale of 12 million shares (or about 6. No franchise. alteration. Article XII of the 1987 Philippine Constitution which limits foreign ownership of the capital of a public utility to not more than 40%. 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. Article XII of the Constitution refer to the total common shares only. The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its capital. or authorization be exclusive in character or for a longer period than fifty years. to the total common shares in PLDT. i. or to the total outstanding capital stock (combined total of common and non-voting preferred shares) of PLDT. (MPAH). certificate. Inc. at least sixty per centum of whose capital is owned by such citizens.47%. according to the petitioner. certificate. THE RULING [The Court partly granted the petition and held that the term “capital” in Section 11.e. a public utility? III. Neither shall any such franchise or right be granted except under the condition that it shall be subject to amendment.

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. that foreigners hold a majority of the common shares of PLDT. foreigners hold 64. Holders of PLDT preferred shares are explicitly denied of the right to vote in the election of directors.Considering that common shares have voting rights which translate to control. if the preferred shares also have the right to vote in the election of directors.” It must be stressed. and the holders of Common Capital Stock shall have the exclusive right to vote for the election of directors and for all other purposes. the par value of PLDT common shares is P5.73%. while Filipinos hold only 35. and respondents do not dispute. Such amount of control unmistakably exceeds the allowable 40 percent limit on foreign ownership of public utilities expressly mandated in Section 11. the term “capital” in Section 11. In other words. 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.” On the other hand. Article XII of the Constitution. as submitted to the SEC.27% of the total number of PLDT’s common shares. However. as opposed to preferred shares which usually have no voting rights.” A broad definition unjustifiably disregards who owns the all-important voting stock.750.00 per share. holders of common shares are granted the exclusive right to vote in the election of directors. In other words. Article XII of the Constitution refers only to common shares. As shown in PLDT’s 2010 GIS. foreigners hold 120. Article XII of the Constitution refers only to shares of stock that can vote in the election of directors. In short. or to receive notice of any meeting of stockholders. whereas the par value of preferred shares is P10. the term “capital” in Section 11.622 common shares.690 common shares of PLDT whereas Filipinos hold only 66. preferred shares have twice the par value of common shares but cannot elect .046. which is a document required to be submitted annually to the Securities and Exchange Commission. To construe broadly the term “capital” as the total outstanding capital stock. Since holding a majority of the common shares equates to control. including both common and non-voting preferred shares. which necessarily equates to control of the public utility. based on PLDT’s 2010 General Information Sheet (GIS). 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. it is clear that foreigners exercise control over PLDT. 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. In fact.00 per share.

(3) preferred shares.] . at least sixty per centum of whose capital is owned by such citizens x x x. [Thus.56% of the preferred shares.directors and have only 1/70 of the dividends of common shares. This directly contravenes the express command in Section 11.15%.15%.85% of the authorized capital stock of PLDT while common shares constitute only 22. 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.] [Read the discussion and a more detailed digest of this case here and here. This kind of ownership and control of a public utility is a mockery of the Constitution. have no voting rights. 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. certificate. Filipinos hold less than 60 percent of the voting stock.85% of the authorized capital stock of PLDT and common shares only 22. preferred shares constitute 77. and if there is a violation of Section 11. Worse. (4) preferred shares earn only 1/70 of the dividends that common shares earn. of PLDT.44% of the preferred shares are owned by Filipinos while foreigners own only a minuscule 0.” To repeat. Article XII of the Constitution that “[n]o franchise. 99. This undeniably shows that beneficial interest in PLDT is not with the non-voting preferred shares but with the common shares.27% of the common shares of PLDT. Moreover.44% owned by Filipinos. (1) foreigners own 64. In short.73% of PLDT’s common shares. Article XII of the Constitution. which class of shares exercises the sole right to vote in the election of directors. constituting a minority of the voting stock. and thus do not exercise control over PLDT. blatantly violating the constitutional requirement of 60 percent Filipino control and Filipino beneficial ownership in a public utility. and (6) preferred shares constitute 77. to impose the appropriate sanctions under the law. and earn less than 60 percent of the dividends. (2) Filipinos own only 35. 99. (5) preferred shares have twice the par value of common shares. and thus exercise control over PLDT.

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