JURISPRUDENCE

WILSON P. GAMBOA V. FINANCE SECRETARY MARGARITO TEVES, ET AL., G.R. NO.

176579, JUNE 28, 2011
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)

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?

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 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.

HEIRS OF GAMBOA V. TEVES, ET AL., G.R. NO. 176579, 09 OCTOBER 2012

FACTS
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
filipinazation 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,
in2011, 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
Whether the term “capital” includes both voting and non-voting shares.
RULING
No. 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 FIA’s 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.

NARRA NICKEL MINING VS REDMONT, GR 185590, APR 21 2014

FACTS:
Respondent filed petition before DENR seeking the denial of permits of petitioners (Narra,
Tesoro and MacArthur corporations) on the ground that these corporations are in reality foreign-
owned. MBMI, a 100% Canadian corporation, owns 40% of the shares of PLMC (which owns
5,997 shares of Narra), 40% of the shares of MMC (which owns 5,997 shares of McArthur) and
40% of the shares of SLMC (which, in turn, owns 5,997 shares of Tesoro). Aside from the
MPSA, the three corporations also applied for FTAA with the Office of the President. In their
answer, they countered that (1) the liberal Control Test must be used in determining the
nationality of a corporation as based on Sec 3 of the Foreign Investment Act – which as they
claimed admits of corporate layering schemes, and that (2) the nationality question is no longer
material because of their subsequent application for FTAA.
ISSUE:
Whether or not the Grandfather Rule must be applied in this case?
RULING:
Yes. It is the intention of the framers of the Constitution to apply the Grandfather Rule in cases
where corporate layering is present. The Grandfather Rule must be applied when the 60-40
Filipino-foreign equity ownership is in doubt. Doubt is present in the Filipino equity ownership of
Narra, Tesoro, and MacArthur since their common investor, the 100% Canadian-owned
corporation – MBMI, funded them.
Under the Grandfather Rule, it is not enough that the corporation does have the required 60%
Filipino stockholdings at face value. To determine the percentage of the ultimate Filipino
ownership, it must first be traced to the level of the investing corporation and added to the
shares directly owned in the investee corporation. Applying this rule, it turns out that the
Canadian corporation owns more than 60% of the equity interests of Narra, Tesoro and
MacArthur. Hence, the latter are disqualified to participate in the exploration, development and
utilization of the Philippine’s natural resources.

NARRA NICKEL MINING VS REDMONT, G.R. NO. 195580, JANUARY 28, 2015
FACTS:
Narra and its co-petitioner corporations – Tesoro and MacArthur, filed a motion before the SC to
reconsider its April 21, 2014 Decision which upheld the denial of their MPSA applications. The SC
affirmed the CA ruling that there is a doubt to their nationality, and that in applying the Grandfather
Rule, the finding is that MBMI, a 100% Canadian-owned corporation, effectively owns 60% of the
common stocks of petitioners by owning equity interests of the petitioners’ other majority corporate
shareholders. Narra, Tesoro and MacArthur argued that the application of the Grandfather Rule to
determine their nationality is erroneous and allegedly without basis in the Constitution, the FIA, the
Philippine Mining Act, and the Rules issued by the SEC. These laws and rules supposedly espouse
the application of the Control Test in verifying the Philippine nationality of corporate entities for
purposes of determining compliance with Sec. 2, Art. XII of the Constitution that only corporations or
associations at least 60% of whose capital is owned by such Filipino citizens may enjoy certain
rights and privileges, like the exploration and development of natural resources.
ISSUE:
Whether or not the application by the SC of the grandfather resulted to the abandonment of the
‘control test’?
RULING:
No. The ‘control test’ can be applied jointly with the Grandfather Rule to determine the observance
of foreign ownership restriction in nationalized economic activities. The Control Test and the
Grandfather Rule are not incompatible ownership-determinant methods that can only be applied
alternative to each other. Rather, these methods can, if appropriate, be used cumulatively in the
determination of the ownership and control of corporations engaged in fully or partly nationalized
activities, as the mining operation involved in this case or the operation of public utilities.
The Grandfather Rule, standing alone, should not be used to determine the Filipino ownership and
control in a corporation, as it could result in an otherwise foreign corporation rendered qualified to
perform nationalized or partly nationalized activities. Hence, it is only when the Control Test is first
complied with that the Grandfather Rule may be applied. Put in another manner, if the subject
corporation’s Filipino equity falls below the threshold 60%, the corporation is immediately considered
foreign-owned, in which case, the need to resort to the Grandfather Rule disappears.
In this case, using the ‘control test’, Narra, Tesoro and MacArthur appear to have satisfied the 60-40
equity requirement. But the nationality of these corporations and the foreign-owned common
investor that funds them was in doubt, hence, the need to apply the Grandfather Rule.

JOSE M. ROY III VS CHAIRPERSON TERESITA HERBOSA, GR NO. 207246, November 22,
2016

FACTS:

Petitioner assailed the validity of SEC-MC No. 8 which provides that the required percentage
of Filipino ownership shall be applied to BOTH (a) the total number of outstanding shares of stock
entitled to vote in the election of directors; AND (b) the total number of outstanding shares of stock,
whether or not entitled to vote in the election of directors. According to petitioner SEC gravely abuse
its authority as the same is contrary to Gamboa Decision and Resolution.

ISSUE:

  Whether or not the SEC gravely abused its discretion in issuing SEC-MC No. 8 in light of the
Gamboa Decision and Gamboa Resolution?

RULING:

No. SEC did not commit grave abuse of discretion amounting to lack or excess of jurisdiction
when it issued SEC-MC No. 8. To the contrary, the Court finds SEC-MC No. 8 to have been issued
in fealty to the Gamboa Decision and Resolution. Gamboa Decision "capital" in Section II, Article XII
of the I987 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).

Foreign Investments Act of 1991 ("FIA") Gamboa Resolution put to rest the Court's interpretation of
the term "capital" Full beneficial ownership of stocks, coupled with appropriate voting rights is
essential...reiterates and confirms the interpretation that the term "capital" in Section 11, Article XII of
the1987 Constitution refers to shares with voting rights, as well as with full beneficial ownership.
Section 2 of SEC-MC No. 8 clearly incorporates the Voting Control Test or the controlling interest
requirement. In fact, Section 2 goes beyond requiring a 60-40 ratio in favor of Filipino nationals in the
voting stocks; it moreover requires the 60-40 percentage ownership in the total number of
outstanding shares of stock, whether voting or not. The SEC formulated SEC-MC No. 8 to adhere to
the Court's unambiguous pronouncement that "[f]ull beneficial ownership of 60 percent of the
outstanding capital stock, coupled with 60 percent of the voting rights is required. "Clearly, SEC-MC
No. 8 cannot be said to have been issued with grave abuse of discretion While SEC-MC No. 8 does
not expressly mention the Beneficial Ownership Test or full beneficial ownership of stocks
requirement in the FIA, this will not, as it does not, render it invalid meaning, it does not follow that
the SEC will not apply this test in determining whether the shares claimed to be owned by Philippine
nationals are Filipino, i.e., are held by them by mere title or in full beneficial ownership. To be sure,
the SEC takes its guiding lights also from the FIA and its implementing rules, the Securities
Regulation Code.