3B [SUBJECT] Digests
FULL CASE TITLE
Date
G.R. No.: 176579 Ponente: Carpio, J.
Related Article: Tickler:
NATIONALITY OF
CORPORATIONS;
CONTROL TEST,
BENEFICIAL
OWNERSHIP
TEST;
GRANDFATHER
RULE
Doctrine of the Case:
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.
Parties – Roles
Wilson P. Gamboa – Petitioner, stockholder of PLDT
Finance Secretary, PCGG, PLDT, SEC, Philippine
Stock Exchange- Respondent
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
[Name of Digester]
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/s
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
[Name of Digester]
3B [SUBJECT] Digests
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, 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.
[Thus, 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, and if there is a
violation of Section 11, Article XII of the Constitution, to
impose the appropriate sanctions under the law.]
Disposition: WHEREFORE, we PARTLY GRANT the
petition and rule that 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.
aDSTIC

VELASCO (Separate Dissenting Opinion)
The present petition partakes of a collateral attack on
PLDT’s franchise as a public utility with petitioner
pleading as ground PLDT’s alleged breach of the 40%
limit on foreign equity. Such is not allowed. As
discussed in PLDT v. National Telecommunications
Commission, a franchise is a property right that can
only be questioned in a direct proceeding.
(1) The intent of the framers of the Constitution was not
to limit the application of the word “capital” to voting or
common shares alone. Constitutional Commission
records show that by using the word “capital,” the
framers of the Constitution adopted the definition or
interpretation that includes all types of shares, whether
voting or non-voting.
(2) Cassus Omissus Pro Omisso Habendus Est––a
person, object or thing omitted must have been omitted
intentionally. In this case, the intention of the framers
of the Constitution is very clear––to omit the phrases
“voting stock” and “controlling interest.”
(3) The FIA should also be read in harmony with the
Constitution. Since the Constitution only provides for a
single requirement for the operation of a public utility
under Sec. 11, i.e., 60% capital must be Filipino-
owned, a mere statute cannot add another
requirement. Otherwise, such statute may be
considered unconstitutional. Accordingly, the phrase
“entitled to vote” should not be interpreted to be limited
to common shares alone or those shares entitled to
vote in the election of members of the Board of
Directors.
(4) Further, the FIA did not say “entitled to vote in the
management affairs of the corporation” or “entitled to
vote in the election of the members of the Board of
Directors.” Verily, where the law does not distinguish,
neither should We. Hence, the proper interpretation of
the phrase “entitled to vote” under the FIA should be
that it applies to all shares, whether classified as voting
or non-voting shares.
(5) Additionally, control is another inherent right of
ownership. The circumstances enumerated in Sec. 6 of
the Corporation Code clearly evince this. It gives voting
rights to the stocks deemed as non-voting as to
fundamental and major corporate changes. Thus, the
issue should not only dwell on the daily management
affairs of the corporation but also on the equally
important fundamental changes that may need to be
voted on.
(6) The SEC rules, opinions and jurisprudence use the
“control test”, which requires that the nationality of a
corporation is determined by the total outstanding
capital stock irrespective of the number of shares, and
[Name of Digester]
3B [SUBJECT] Digests
“capital” denotes the total shares subscribed and paid
irrespective of their nomenclature.
(7) Lastly, the last sentence of Sec. 11, Art. XII limits
the participation of the foreign investors in the
governing body to their proportionate share in the
capital of the corporation.
ABAD (Dissenting Opinion)
(1) Authority to define and interpret the meaning
of “capital” in Sec. 11, Art. XII belongs to Congress as
part of it’s policy making powers, as the power to
authorize and control a public utility is a prerogative of
Congress. Sec. 11, Art. XII is no self-executing and
requires Congressional action to clarify it’s meaning.
FIA is restricted to certain areas of investment and
should not be construed to clarify the meaning of
“capital” under the constitutional provision as they are
rules which apply to future investors.
(2) “Capital” refers to the entirety of the
corporation’s outstanding voting stock as, first, the 40
percent limit (if held only to preferred shareholders)
would render meaningless the fourth sentence which
limits foreign participation in the governing body of
public utilities, and, second, amicus curiae Dr. Villegas,
Chairman of the Committee of National Economy, said
that the term “capital” did not distinguish among the
classes of shares. In both economic and business
terms, capital always meant the entire shares of stock.
Further, Philippine policy on foreign ownership already
discourages foreign investments and to impose
additional restrictions would aggravate economic
growth.
(3) Sec. 11, Article XII already provides 3
limitations on foreign participation in public utilities and
the Court need not add more by restricting the
definition of capital.
Section 10, Article XII of the Philippine Constitution
provides that the Congress must reserve certain areas
of investment to Filipinos or to corporations or
associations of which at least 60 percent of capital is
owned by Filipinos. Section 3 of the Foreign
Investments Act of 1991 defines a “Philippine national”
as a citizen of the Philippines or a domestic partnership
or association wholly owned by citizens of the
Philippines; or a corporation organized under the laws
of the Philippines of which at least 60 percent of the
capital stock outstanding and entitled to vote is owned
and held by citizens of the Philippines, and where a
corporation and its non-Filipino stockholders own
stocks in a SEC registered enterprise, at least 60
percent of the capital stocks outstanding and entitled
to vote of both corporations must be owned and held
by citizens of the Philippines and at least 60 percent of

the members of the Board of Directors of both
corporations must be citizens of the Philippines.
In support of this State policy, the Supreme Court, in
the case of Heirs of Gamboa v. Teves, G.R. No.176579
dated 28 June 2011 and in a resolution dated Oct. 9,
2012, interpreted the term “capital” for the first time. In
this case, the Supreme Court ruled that “capital” under
the 1987 Constitution and the Foreign Investments Act
of 1991 refers to shares with voting rights, as well as
full beneficial ownership, and not to the total
outstanding capital stock. Simply put, the 60-40
ownership requirement in favor of the Filipino citizens
must apply separately to each class of shares, whether
common, preferred non-voting, preferred voting or any
other class of shares.
In arriving at this judgment, the Supreme Court
reasoned that the foreign ownership limitation also
applies to non-voting preferred stocks, that, although
denied the voting rights in the election of directors, are
nevertheless entitled to vote on certain fundamental
corporate acts like amendment of the articles of
incorporation; adoption and amendment of by-laws;
sale, lease, exchange, mortgage, pledge or other
disposition of all or substantially all of the corporate
property; incurring, creating or increasing bonded
indebtedness; increase or decrease of capital stock;
merger or consolidation of the corporation with another
corporation or other corporations; investment of
corporate funds in another corporation or business;
and dissolution of the corporation.
Pursuant to the Heirs of Gamboa case, the Securities
and Exchange Commission issued on May 20, 2013
Memorandum Circular No. 8, which sets the guidelines
for the compliance of businesses engaged in
nationalized and partly nationalized activities. In gist,
the said memorandum circular provides that the
required percentage of Filipino ownership shall be
applied to both the total number of outstanding shares
of stock entitled to vote in the election of directors, and
the total number of outstanding shares of stock,
whether or not entitled to vote in the election of
directors. Consequently, all existing covered
corporations which are not compliant with the
guidelines are given a period of one year from the
effectivity of the issuance within which to comply with
the said ownership requirement.
Certainly, the Securities and Exchange Commission
issuance upholds the protection of vital industries and
certain investment areas from foreign control. It is
effectively backing Article XII of the Constitution, the
Foreign Investment Act definition of what constitutes a
“Philippine national”, and the ruling of the Supreme
Court in Heirs of Gamboa case to reserve certain areas
of investment to Filipinos. It adheres to the
[Name of Digester]
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constitutional directive without compromising the
actual and potential foreign investments. While the
Securities and Exchange Commission issuance is
providing a guiding principle in support of the
conservative approach of the government with regard
to development of the national economy, it is likewise
recognizing the important role of the foreign investors
in the effort to improve the economic standing of the
Philippines.
[Constitutional Law, Corporation]
The term “capital” does not refer to both preferred and
common stocks treated as the same class of shares
regardless of differences in voting rights and
privileges.
Consistent with the constitutional mandate that the
“State shall develop a self-reliant and independent
national economy effectively controlled by Filipinos,”
the term "capital" means the outstanding capital stock
entitled to vote (voting stock), coupled with beneficial
ownership, both of which results to "effective control."
"Mere legal title is insufficient to meet the 60 percent
Filipino owned “capital” required in the Constitution for
certain industries. Full beneficial ownership of 60
percent of the outstanding capital stock, coupled with
60 percent of the voting rights, is required." In this
case, such twin requirements must apply uniformly
and across the board to all classes of shares
comprising the capital. Thus, "the 60-40 ownership
requirement in favor of Filipino citizens must apply
separately to each class of shares, whether common,
preferred non-voting, preferred voting or any other
class of shares." This guarantees that the “controlling
interest” in public utilities always lies in the hands of
Filipino citizens.