GAMBOA VS TEVES

Gamboa v. Teves etal., GR No. 176579, October 9, 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 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: Whether or not the Court made an erroneous interpretation of the term ‘capital’ in its 2011 decision?

Held/Reason: The Court said that the Constitution is clear in expressing its State policy of developing an
economy ‘effectively controlled’ by Filipinos. Asserting the ideals that our Constitution’s Preamble want to
achieve, that is – to conserve and develop our patrimony , hence, the State should fortify a Filipino-controlled
economy. In the 2011 decision, the Court finds no wrong in the construction of the term ‘capital’ which refers
to the ‘shares with voting rights, as well as with full beneficial ownership’ (Art. 12, sec. 10) which implies that
the right to vote in the election of directors, coupled with benefits, is tantamount to an effective control.
Therefore, the Court’s interpretation of the term ‘capital’ was not erroneous. Thus, the motion for
reconsideration is denied.

Gamboa vs Teves
G.R. No. 176579 June 28, 2011

Facts: On 28 November 1928, the Philippine Legislature enacted Act No. 3436 which granted PLDT a franchise
and the right to engage in telecommunications business. In 1969, General Telephone and Electronics
Corporation (GTE), an American company and a major PLDT stockholder, sold 26 percent of the outstanding
common shares of PLDT to PTIC. In 1977, Prime Holdings, Inc. (PHI) was incorporated by several persons,
including Roland Gapud and Jose Campos, Jr. Subsequently, PHI became the owner of 111,415 shares of stock
of PTIC by virtue of three Deeds of Assignment executed by PTIC stockholders Ramon Cojuangco and Luis
Tirso Rivilla. In 1986, the 111,415 shares of stock of PTIC held by PHI were sequestered by the Presidential
Commission on Good Government (PCGG). The 111,415 PTIC shares, which represent about 46.125 percent of
the outstanding capital stock of PTIC, were later declared by this Court to be owned by the Republic of the
Philippines. Since PTIC is a stockholder of PLDT, the sale by the Philippine Government of 46.125 percent of
PTIC shares is actually an indirect sale of 12 million shares or about 6.3 percent of the outstanding common
shares of PLDT. With the sale, First Pacifics common shareholdings in PLDT increased from 30.7 percent to 37
percent, thereby increasing the common shareholdings of foreigners in PLDT to about 81.47 percent. This
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 percent.

Issue: Whether or not the term capital in Section 11, Article XII of the Constitution refers to the common shares
of PLDT, a public utility.

Held: Yes. Section 11, Article XII (National Economy and Patrimony) of the 1987 Constitution mandates the
Filipinization of public utilities, to wit:

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)

Any citizen or juridical entity desiring to operate a public utility must therefore meet the minimum nationality
requirement prescribed in Section 11, Article XII of the Constitution. Hence, for a corporation to be granted
authority to operate a public utility, at least 60 percent of its capital must be owned by Filipino citizens.

Thus, the 40% foreign ownership limitation should be interpreted to apply to both the beneficial ownership and
the controlling interest.

Clearly, therefore, the forty percent (40%) foreign equity limitation in public utilities prescribed by the
Constitution refers to ownership of shares of stock entitled to vote, i.e., common shares. Furthermore,
ownership of record of shares will not suffice but it must be shown that the legal and beneficial ownership rests
in the hands of Filipino citizens. Consequently, in the case of petitioner PLDT, since it is already admitted that
the voting interests of foreigners which would gain entry to petitioner PLDT by the acquisition of SMART
shares through the Questioned Transactions is equivalent to 82.99%, and the nominee arrangements between the
foreign principals and the Filipino owners is likewise admitted, there is, therefore, a violation of Section 11,
Article XII of the Constitution.

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.

As shown in PLDTs 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%.62 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.
Mercantile Law – Corporation Code – Capital – What “Capital” means

In 1928, the Philippine Long Distance Telephone Company (PLDT) was granted a franchise to engage in the
business of telecommunications. Telecommunications is a nationalized area of activity where a corporation
engaged therein must have 60% of its capital be owned by Filipinos as provided for by Section 11, Article XII
(National Economy and Patrimony) of the 1987 Constitution, to wit:

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; xxx

In 1999, First Pacific, a foreign corporation, acquired 37% of PLDT common shares. Wilson Gamboa opposed
said acquisition because at that time, 44.47% of PLDT common shares already belong to various other foreign
corporations. Hence, if First Pacific’s share is added, foreign shares will amount to 81.47% or more than the
40% threshold prescribed by the Constitution.

Margarito Teves, as Secretary of Finance, and the other respondents argued that this is okay because in totality,
most of the capital stocks of PLDT is Filipino owned. It was explained that all PLDT subscribers, pursuant to a
law passed by Marcos, are considered shareholders (they hold serial preferred shares). Broken down, preferred
shares consist of 77.85% while common shares consist of 22.15%.

Gamboa argued that the term “capital” should only pertain to the common shares because that is the share
which is entitled to vote and thus have effective control over the corporation.

ISSUE: What does the term “capital” pertain to? Does the term “capital” in Section 11, Article XII of the
Constitution refer to common shares or to the total outstanding capital stock (combined total of common and
non-voting preferred shares)?

HELD: Gamboa is correct. Capital only pertains to common shares. It will be absurd for capital to pertain as
inclusive of non-voting shares. This is because a corporation consisting of 1,000,000 capital stocks, 100 of
which are common shares which are foreign owned and the rest (999,900 shares) are preferred shares which are
non-voting shares and are Filipino owned, would seem compliant to the constitutional requirement – here
99.999% is Filipino owned. But if scrutinized, the controlling stock – the voting stock – or that miniscule .001%
is foreign owned. That is absurd.

In this case, it is true that at least 77.85% of the capital is owned by Filipinos (the PLDT subscribers). But these
subscribers, who hold non-voting preferred shares, have no control over the corporation. Hence, capital should
only pertain to common shares.

Thus, to be compliant with the constitution, 60% of the common shares of PLDT should be Filipino owned.
That is not so in this case as it appears that 81.47% of the common shares are already foreign owned (split
between First Pacific (37%) and a Japanese corporation).

When may preferred shares be considered part of the capital share?

If the preferred shares are allowed to vote like common shares.

Read full texts: 2011 Decision | 2012 Decision on MFR (affirmed 2011 Decision)

Related News: Son continues father’s fight vs. giant firm (July 30, 2013, The Manila Times)

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capital, case digest, commercial law, common shares, corporation code, G.R. No. 176579, Gamboa vs PLDT,
Gamboa vs Teves, Jurisprudence, mercantile law, preferred shares, Sanidad vs Teves, voting shares, What
“Capital” means, Wilson Gamboa vs Secretary Margarito Teves
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