GAMBOA V TEVES
Section 11. No franchise, certificate, or any other
FACTS:
This is a petition to nullify the sale of shares of
stock of Philippine Telecommunications
Investment Corporation (PTIC) by the
government, acting through the Inter-Agency
Privitization Council (IPC), to Metro Pacific Assets
Holdings, Inc. (MPAH), an affiliate First Pacific
Company Limited (First Pacific), a Hong Kong
based investment management and holding
company and a shareholder of the Philippine
Long Distance Company (PLDT).
The issue started when petitioner Gamboa
questioned the indirect sale of shares involving
almost 12 million shares of the Philippine Long
Distance Telephone Company (PLDT) owned by
PTIC to First Pacific. Thus, 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%. The petitioner contends
that it violates the Constitutional provision on
filipinization of public utility, stated 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%. Then, in
2011, the court ruled the case in favor of the
petitioner, hence this new case, resolving the
motion for reconsideration for the 2011 decision
filed by the respondents.
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 of PLDT, a public utility?
HELD:
Section 11, Article XII (National Economy and
Patrimony) of the 1987 Constitution mandates
the Filipinization of public utilities, to wit:
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.
The intent of the framers of the Constitution in
imposing limitations and restrictions on fully
nationalized and partially nationalized activities
is for Filipino nationals to be always in control of
the corporation undertaking said activities.
Otherwise, if the Trial Court ruling upholding
respondent's arguments were to be given
credence, it would be possible for the ownership
structure of a public utility corporation to be
divided into one percent (1%) common stocks
and ninety-nine percent (99%) preferred stocks.
Following the Trial Court ruling adopting
respondent's arguments, the common shares
can be owned entirely by foreigners thus
creating an absurd situation wherein foreigners,
who are supposed to be minority shareholders,
control the public utility corporation.
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.
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. 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.
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. Thus, 60 percent
of the "capital" assumes, or should result in,
"controlling interest" in the corporation and thus
in the present case, only to common shares, and
not to the total outstanding capital stock
(common and non-voting preferred shares).
NARRA NICKEL MINING AND DEV’T CORP., ET
AL. V. REDMONT CONSOLIDATED MINES CORP.,
G.R. NO. 195580, 21 APRIL 2014
FACTS:
On January 2, 2007, Redmont filed before the
Panel of Arbitrators (POA) of the DENR three (3)
separate petitions for the denial of petitioners’
applications for Mineral Production Sharing
Agreement (MPSA).
In the petitions, Redmont alleged that at least
60% of the capital stock of McArthur, Tesoro and
Narra are owned and controlled by MBMI
Resources, Inc. (MBMI), a 100% Canadian
corporation. Redmont reasoned that since
MBMI is a considerable stockholder of
petitioners, it was the driving force behind
petitioners’ filing of the MPSAs over the areas
covered by applications since it knows that it can
only participate in mining activities through
corporations which are deemed Filipino citizens.
Redmont argued that given that petitioners’
capital stocks were mostly owned by MBMI, they
were likewise disqualified from engaging in
mining activities through MPSAs, which are
reserved only for Filipino citizens.
McArthur Mining, Inc., is composed, among
others, by Madridejos Mining Corporation
(Filipino) owning 5,997 out of 10,000 shares, and
MBMI Resources, Inc. (Canadian) owning 3,998
out of 10,000 shares; MBMI also owns 3,331 out
of 10,000 shares of Madridejos Mining
Corporation;
Tesoro and Mining and Development, Inc., is
composed, among others, by Sara Marie Mining,
Inc. (Filipino) owning 5,997 out of 10,000 shares,
and MBMI Resources, Inc. (Canadian) owning
3,998 out of 10,000 shares; MBMI also owns
3,331 out of 10,000 shares of Sara Marie Mining,
Inc.;
Narra Nickel Mining and Development
Corporation, is composed, among others, by
Patricia Louise Mining & Development
Corporation (Filipino) owning 5,997 out of
10,000 shares, and MBMI Resources, Inc.
(Canadian) owning 3,998 out of 10,000 shares;
MBMI also owns 3,396 out of 10,000 shares of
Patricia Louise Mining & Development
Corporation;
ISSUES:
(1) Is the Grandfather Rule applicable?
(2) Whether or not McArthur, Tesoro and Narra
are Filipino nationals.
HELD:
(1) YES.
The instant case presents a situation which
exhibits a scheme employed by stockholders to
circumvent the law, creating a cloud of doubt in
the Court’s mind. To determine, therefore, the
actual participation, direct or indirect, of MBMI,
the grandfather rule must be used.
The Strict Rule or the Grandfather Rule pertains
to the portion in Paragraph 7 of the 1967 SEC
Rules which states, “but if the percentage of
Filipino ownership in the corporation or
partnership is less than 60%, only the number of
shares corresponding to such percentage shall
be counted as of Philippine nationality.” Under
the Strict Rule or Grandfather Rule Proper, the
combined totals in the Investing Corporation and
the Investee Corporation must be traced (i.e.,
“grandfathered”) to determine the total
percentage of Filipino ownership.
(2) NO.
[P]etitioners McArthur, Tesoro and Narra are not
Filipino since MBMI, a 100% Canadian
corporation, owns 60% or more of their equity
interests. Such conclusion is derived from
grandfathering petitioners’ corporate owners.
xxx Noticeably, the ownership of the “layered”
corporations boils down to xxx group wherein
MBMI has joint venture agreements with,
practically exercising majority control over the
corporations mentioned. In effect, whether
looking at the capital structure or the underlying
relationships between and among the
corporations, petitioners are NOT Filipino
nationals and must be considered foreign since
60% or more of their capital stocks or equity
interests are owned by MBMI.
Note: Control Test and Grandfather Rule
Shares belonging to corporations or partnerships
at least 60% of the capital of which is owned by
Filipino citizens shall be considered as of
Philippine nationality, but if the percentage of
Filipino ownership in the corporation or
partnership is less than 60%, only the number of
shares corresponding to such percentage shall
be counted as of Philippine nationality. Thus, if
100,000 shares are registered in the name of a
corporation or partnership at least 60% of the
capital stock or capital, respectively, of which
belong to Filipino citizens, all of the shares shall
be recorded as owned by Filipinos. But if less
than 60%, or say, 50% of the capital stock or
capital of the corporation or partnership,
respectively, belongs to Filipino citizens, only
50,000 shares shall be counted as owned by
Filipinos and the other 50,000 shall be recorded
as belonging to aliens.

The first part of paragraph 7, DOJ Opinion No.

020, stating "shares belonging to corporations or
partnerships at least 60% of the capital of which
is owned by Filipino citizens shall be considered
as of Philippine nationality," pertains to the
control test or the liberal rule. On the other
hand, the second part of the DOJ Opinion which
provides, "if the percentage of the Filipino
ownership in the corporation or partnership is
less than 60%, only the number of shares
corresponding to such percentage shall be
counted as Philippine nationality," pertains to
the stricter, more stringent grandfather rule.