CASE DIGEST

Roy III vs. Herbosa

Corporation Law

Court Supreme Court, En Banc

Citation G.R. No. 207246

Date November 22, 2016

Plaintiff-Appellant JOSE M. ROY III

Defendant-Appellant CHAIRPERSON TERESITA HERBOSA, THE SECURITIES AND EXCHANGE

COMMISSION, and PHILIPPINE LONG DISTANCE TELEPHONE COMPANY

Ponente Caguioa, J.

Relevant topic Foreign Corporations

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Prepared by

FACTS:

 On June 28, 2011, the SC issued a decision in Gamboa v. Teves on the matter of "whether the term 'capital' in
Sec. 11, Art. XII of the Constitution refers to the total common shares only or to the total outstanding capital stock
(combined total of voting and non-voting shares) of PLDT, a public utility."

- the Court held that: "The term 'capital' in the said constitutional provision refers only to shares of stock entitled
to vote in the election of directors, and thus in the Gamboa case only to common shares, and not to the total
outstanding capital stock comprising both common and non-voting preferred shares." The Court then directed
the SEC to apply this definition of the term "capital" in determining the extent of allowable foreign ownership in
PLDT.
- Several MRs assailing the Decision in Gamboa were filed but, eventually, denied by the Court in its October 9,
2012 Resolution.

 Pursuant to the Court's directive in Gamboa, the SEC prepared a draft memorandum circular on the guidelines to
be followed in determining compliance with the constitutional and statutory limitations on foreign ownership in
nationalized and partly nationalized industries.

 The SEC then invited the public to a dialogue and submit comments on the draft of the memorandum circular.

- Representatives from various organizations, government agencies, the academe and the private sector
attended the public dialogue and submitted position papers and written comments on the draft to the SEC.

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 On May 20, 2013, the SEC issued MC No. 8. Section 2 of the circular provides:

Sec. 2: All covered corporations shall, at all times, observe the constitutional or statutory ownership
requirement. For purposes of determining compliance therewith, 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. Corporations covered by special laws which provide
specific citizenship requirements shall comply with the provisions of said law.

 Petitioner Jose Roy III takes exception to the foregoing provision alleging that it is not in accord with the ruling of
the Court in Gamboa.

- He contends that the SEC committed grave abuse of discretion since Sec. 2 of MC No. 8 "fails to differentiate
the varying classes of shares and does not require the application of the foreign equity limits to each class of
shares issued by a corporation." Petitioner relies on a portion of the October 9, 2012 Resolution in Gamboa
providing that "the 60-40 ownership requirement must apply to each class of shares, whether common,
preferred nonvoting, preferred voting or any other class of shares."

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 Roy III, thus, prays for the Court to declare MC No. 8 unconstitutional and to direct the SEC to issue new
guidelines regarding the determination of compliance with Section 11, Article XII of the Constitution in accordance
with Gamboa.

ISSUE – HELD – RATIO:

ISSUE HELD

W/N MC No. 8 is unconstitutional? NO

RATIO:

(Discussions on Constitutional Law and Procedural Aspect)

Note: The Court first discussed why the petition of Atty. Roy III must be dismissed on procedural grounds:

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1. The first two requisites of judicial review are not met.

a. No Actual Controversy
b. No Locus Standi

2. The Rule on the Hierarchy of Courts has been violated.

3. The petitioners failed to implead the indispensable parties.
4. The clear and unequivocal definition of "capital" in Gamboa has already attained finality.
5. The petitions are second motions for Reconsideration, which are proscribed.

Accordingly, even if the resolution of the procedural issues were conceded in favor of petitioners, the petitions, must
nonetheless fail because the SEC did not commit grave abuse of discretion when it issued MC No. 8. To the contrary ,
the Court finds MC No. 8 to have been issued in fealty to the Gamboa Decision and Resolution.

(Discussion Relevant to the Topic)

A. The ratio in the Gamboa Decision and Gamboa Resolution

 The sole issue in the Gamboa case was: "whether the term 'capital' in Sec. 11, Article XII of the Constitution refers
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."

 The Court therein ruled that the term 'capital' in the Constitution refers only to shares of stock entitled to vote in the
election of directors, and thus in that case only to common shares, and not to the total outstanding capital stock
(common and non-voting preferred shares)."

 Since Filipinos own at least 60% of the outstanding shares of stock entitled to vote directors, then the Filipino
stockholders control the corporation, i.e., they dictate corporate actions and decisions, and they have all the rights
of ownership. Surely, these "true owners" will not allow any dilution of their ownership and control if such move will
not be beneficial to them.

 As owners of the corporation, the economic benefits will necessarily accrue to them. There is thus no logical
reason why Filipino shareholders will allow foreigners to have greater economic benefits than them. It is illogical to
speculate that they will create shares which have features that will give greater economic interests or benefits than
they are holding and not benefit from such offering, or that they will allow foreigners to profit more than them from
their own corporation — unless they are dummies.

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- Even if the 60-40 ownership in favor of Filipinos rule is applied separately to each class of shares of a public
utility corporation, as the petitioners insist, the rule can easily be side-stepped by a dummy relationship. In
other words, even applying the 60- 40 Filipino-foreign ownership rule to each class of shares will not assure
the lofty purpose enunciated by petitioners.

 The Court observed further in the Gamboa Decision that reinforcing this interpretation of the term "capital," as
referring to interests or shares entitled to vote, is the definition of a Philippine national in the Foreign Investments
Act of 1991 ("FIA"), which is explained in the Implementing Rules and Regulations of the FIA ("FIA-IRR").

 The Court also noted that the definition of capital as defined in the Gamboa Decision was not in any way modified
in the Gamboa Resolution.

- For the most part of the Gamboa Resolution, the Court, reiterated that both the Voting Control Test and the
Beneficial Ownership Test must be applied to determine whether a corporation is a "Philippine national" and
that a "Philippine national," as defined in the FIA and all its predecessor statutes, is "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."

 In sum, the Court, in both the Gamboa Decision and Gamboa Resolution finally settled with the FIA's definition of
"Philippine national" as expounded in the FIA-IRR in construing the term "capital" in Sec. 11, Art. XII of the
Constitution.

B. The assailed SEC-MC No. 8.

 Sec. 2 of 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.

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 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 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.

C. The Full Beneficial Ownership Test

 The "beneficial owner or beneficial ownership" definition in the SRC-IRR is understood only in determining the
respective nationalities of the outstanding capital stock of a public utility corporation in order to determine its
compliance with the percentage of Filipino ownership required by the Constitution.

 Thus, the said test does not apply to each class of shares.

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D. The restrictive re-interpretation of "capital" as insisted by the petitioners is unwarranted

 The application of the 60-40 Filipino-foreign ownership requirement separately to each class of shares, whether
common, preferred non-voting, preferred voting or any other class of shares fails to understand and appreciate the
nature and features of stocks as financial instruments.

 Requiring the SEC to impose the 60-40 requirement to "each and every class of shares" in a public utility is not
only unsupported by Section 11, Article XXI, it is also administratively and technically infeasible to implement and
enforce given the variety and number of classes that may be issued by public utility corporations.

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 Without a doubt, the classes and variety of shares that may be issued by a corporation are limited only by the
bounds of the corporate directors' imagination. Worse, they can be classified and re-classified, ad nauseam, from
time to time.

- Thus, to require the SEC and other government agencies to keep track of the ever-changing capital classes of
corporations would be impractical, if not downright impossible.

 Furthermore, the fact that all shares have the right to vote in 8 specific corporate actions as provided in Section 6
of the Corporation Code does not per se justify the favorable adoption of the restrictive re-interpretation of
"capital" as the petitioners espouse.

- The Gamboa Decision held that preferred shares are to be factored in only if they are entitled to vote in the
election of directors. If preferred shares have no voting rights, then they cannot elect members of the board of
directors, which wields control of the corporation.
- As to the right of non-voting preferred shares to vote in the 8 instances enumerated in Section 6 of the
Corporation Code, the Gamboa Decision considered them but, in the end, did not find them significant in
resolving the issue of the proper interpretation of the word "capital" in the Constitution.
- Moreover, the Court noted that the 8 corporate matters enumerated in Section 6 of the Corporation Code
require, at the outset, a favorable recommendation by the management to the board. Hence, if the Filipino
officers, directors and shareholders will not approve of the corporate act, the foreigners are helpless.

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E. Closing Remarks of the Court

 Ultimately, the key to nationalism is in the individual. Particularly for a public utility corporation or association,
whether stock or non-stock, it starts with the Filipino shareholder or member who, together with other Filipino
shareholders or members wielding 60% voting power, elects the Filipino director who, in turn, together with other
Filipino directors comprising a majority of the board of directors or trustees, appoints and employs the all Filipino
management team.

 This is what is envisioned by the Constitution to assure effective control by Filipinos. If the safeguards, which are
already stringent, fail, i.e., a public utility corporation whose voting stocks are beneficially owned by Filipinos, the
majority of its directors are Filipinos, and all its managing officers are Filipinos, is pro-alien (or worse, dummies),
then that is not the fault or failure of the Constitution. It is the breakdown of nationalism in each of the Filipino
shareholders, Filipino directors and Filipino officers of that corporation. No Constitution, no decision of the Court,
no legislation, no matter how ultra-nationalistic they are, can guarantee nationalism.

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RULING:

WHEREFORE, premises considered, the Court DENIES the Petition and Petition-in-Intervention.

Dissenting Opinions:

(Note: Only the disquisitions relevant to the topic are included in the following)

CARPIO, J., dissenting

Clearly, in both Gamboa Decision and Resolution, the Court categorically declared that the 60% minimum Filipino
ownership refers not only to voting rights but likewise to full beneficial ownership of the stocks. Likewise, the 60%
Filipino ownership applies uniformly to each class of shares. Such interpretation ensures effective control by Filipinos
of public utilities, as expressly mandated by the Constitution.

SEC MC No. 8 can be sustained as valid and fully compliant with the Gamboa Decision and Resolution only if (1) the
stocks with voting rights and (2) the stocks without voting rights, which comprise the capital of a corporation operating
a public utility, have equal par values. If the shares of stock have different par values, then applying SEC MC No. 8
would contravene the Gamboa Decision that the "legal and beneficial ownership of 60 percent of the outstanding
capital stock . . . rests in the hands of Filipino nationals in accordance with the constitutional mandate."

It must be noted that the term "capital" in this constitutional provision does not refer to a specific class of share, as the
Constitution does not distinguish between voting or non-voting, common or preferred shares of stock. Thus, the term
"capital" refers to all shares of stock that are subscribed, which constitute the "capital" of a corporation.

- Consequently, the 60 percent Filipino ownership requirement applies uniformly to all classes of shares that
are subscribed. A simple application of the 60 percent Filipino ownership requirement is to apply the same to
the total capital, taken together regardless of different classes of shares, as what SEC Memorandum Circular
No. 8 does. However, if the shares of stock have different par values, such a simple application will result in
an absurdity or anomaly as explained in the example discussed above.

ACCORDINGLY, I vote to GRANT the petition IN PART . SEC MC No. 8, series of 2013, is valid and constitutional if
all the shares of stock have the same par values. However, if the shares of stock have different par values, the 60
percent Filipino ownership requirement must be applied to each class of shares.

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MENDOZA, J., dissenting :

The same theory is adhered to by the Constitution. The words "own and control," used to qualify the minimum Filipino
participation in Section 11, Article XII of the Constitution, reflects the importance of Filipinos having both the ability to
influence the corporation through voting rights and economic benefits. In other words, full ownership up to 60% of a
public utility encompasses both control and economic rights, both of which must stay in Filipino hands. Filipinos, who
own 60% of the controlling interest, must also own 60% of the economic interest in a public utility.

Clearly the only way to minimize, if not totally prevent disparity of control and economic rights given to Filipinos, and to
obstruct consequences not envisioned by the Constitution, is to apply the 60-40 rule separately to each class of
shares of a public utility corporation. It results in the equalization of Filipino interests, both in terms of control and
economic rights, in each and every class of shares. By making the economic rights and controlling rights of Filipinos in
a public utility paramount, directors and managers would be persuaded to act in the interest of the Filipino
stockholders. In turn, the Filipino stockholders would exercise their corporate ownership rights in ways that would
benefit the entire Filipino people cognizant of the trust and preference accorded to them by the Constitution.

Accordingly, the Security and Exchange Commission should not have been directed to strictly comply with the final
Gamboa ruling, by including in the assailed circular the rule on the application of the 60-40 nationality requirement to
each class of shares regardless of restrictions or privileges in accordance with the foregoing disquisition.

LEONEN, J., dissenting:

A better considered reading of both the 2011 Decision and 2012 Resolution in Gamboa demonstrates this Court's

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adherence to the rule on which the present Decision turns: that the 60 per centum (or higher, in the case of Article XII,
Section 10) Filipino ownership requirement in corporations engaged in nationalized economic activities, as articulated
in Article XII and Article XIV 3 of the 1987 Constitution, must apply "to each class of shares, regardless of differences
in voting rights, privileges and restrictions."

A consideration of the constitutional equity requirement as applying to each and every single class of shares, not just
to those entitled to vote for directors in a corporation, is more in keeping with the "philosophical underpinning" of the
1987 Constitution, i.e., "that capital must be construed in relation to the constitutional goal of securing the controlling
interest in favor of Filipinos."

In the most crucial corporate actions — those that go into the very constitution of the corporation — even so-called
non-voting shares may vote. Not only can they vote; they can be pivotal in deciding the most basic issues confronting
a corporation. Certainly, the ability to decide a corporation's framework of governance, viability, or even its very
existence demonstrates not only a measure of control, but even possibly overruling control. "Non-voting" preferred
and redeemable shares are hardly irrelevant in controlling a corporation.

It is in this light that I emphasize the necessity, not only of legal title, but more so of full beneficial ownership by
Filipinos of the required percentage of capital in certain corporations engaged in nationalized economic activities.

I likewise emphasize "the Control Test as a primary method of determining compliance with the restrictions imposed
by the Constitution on foreign equity participation," along with a recognition of the Grandfather Rule as a "supplement"
to the Control Test.

Appreciating full beneficial ownership and control in a corporation may require a more nuanced approach when the
subject of inquiry is investment returns or power. Control through the capacity to vote can be countervailed, if not
totally negated, by reducing voting shares to empty shells that represent nominal ownership even as the corporation's
economic gains actually redound to the holders of other classes of shares. There exist practices such as corporate
layering which, can be used to undermine the Constitution's equity requirements.

- It is in the spirit of ensuring that effective control is lodged in Filipinos that the dynamics of applying the
Control Test and the Grandfather Rule must be considered.

ACCORDINGLY, I vote to grant the Petition.

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