G.R. No. 176579 June 28, 2011 Capital, submitted their bids. Parallax won with a bid of P25.
Capital, submitted their bids. Parallax won with a bid of P25.6 billion or US$510
WILSON P. GAMBOA, Petitioner, - versus - FINANCE SECRETARY MARGARITO
B. TEVES, FINANCE UNDERSECRETARY JOHN P. SEVILLA, AND
COMMISSIONER RICARDO ABCEDE OF THE PRESIDENTIAL COMMISSION ON
GOOD GOVERNMENT (PCGG) IN THEIR CAPACITIES AS CHAIR AND
MEMBERS, RESPECTIVELY, OF THE PRIVATIZATION COUNCIL,CHAIRMAN
ANTHONI SALIM OF FIRST PACIFIC CO., LTD. IN HIS CAPACITY AS DIRECTOR
OF METRO PACIFIC ASSET HOLDINGS INC., CHAIRMAN MANUEL V.
PANGILINAN OF PHILIPPINE LONG DISTANCE TELEPHONE COMPANY (PLDT)
IN HIS CAPACITY AS MANAGING DIRECTOR OF FIRST PACIFIC CO., LTD.,
PRESIDENT NAPOLEON L. NAZARENO OF PHILIPPINE LONG DISTANCE
TELEPHONE COMPANY, CHAIR FE BARIN OF THE SECURITIES EXCHANGE
COMMISSION, and PRESIDENT FRANCIS LIM OF THE PHILIPPINE STOCK
EXCHANGE,Respondents. PABLITO V. SANIDAD and ARNO V. SANIDAD,
Petitioners-in-Intervention.
CARPIO, J.:
The Case
This is an original petition for prohibition, injunction, declaratory relief and declaration
of nullity of the sale of shares of stock of Philippine Telecommunications Investment
Corporation (PTIC) by the government of the Republic of the Philippines to Metro
Pacific Assets Holdings, Inc. (MPAH), an affiliate of First Pacific Company Limited
(First Pacific).
The Antecedents
The facts, according to petitioner Wilson P. Gamboa, a stockholder of Philippine Long
Distance Telephone Company (PLDT), are as follows:1
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. 2
In 1999, First Pacific, a Bermuda-registered, Hong Kong-based investment firm,
acquired the remaining 54 percent of the outstanding capital stock of PTIC. On 20
November 2006, the Inter-Agency Privatization Council (IPC) of the Philippine
Government announced that it would sell the 111,415 PTIC shares, or 46.125 percent
of the outstanding capital stock of PTIC, through a public bidding to be conducted on
4 December 2006. Subsequently, the public bidding was reset to 8 December 2006,
and only two bidders, Parallax Venture Fund XXVII (Parallax) and Pan-Asia Presidio
million.
Thereafter, First Pacific announced that it would exercise its right of first refusal as a
PTIC stockholder and buy the 111,415 PTIC shares by matching the bid price of
Parallax. However, First Pacific failed to do so by the 1 February 2007 deadline set by
IPC and instead, yielded its right to PTIC itself which was then given by IPC until 2
March 2007 to buy the PTIC shares. On 14 February 2007, First Pacific, through its
subsidiary, MPAH, entered into a Conditional Sale and Purchase Agreement of the
111,415 PTIC shares, or 46.125 percent of the outstanding capital stock of PTIC, with
the Philippine Government for the price of P25,217,556,000 or US$510,580,189. The
sale was completed on 28 February 2007.
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.3
On the other hand, public respondents Finance Secretary Margarito B. Teves,
Undersecretary John P. Sevilla, and PCGG Commissioner Ricardo Abcede allege the
following relevant facts:
On 9 November 1967, PTIC was incorporated and had since engaged in the business
of investment holdings. PTIC held 26,034,263 PLDT common shares, or 13.847
percent of the total PLDT outstanding common shares. PHI, on the other hand, was
incorporated in 1977, and became the owner of 111,415 PTIC shares or 46.125
percent of the outstanding capital stock of PTIC by virtue of three Deeds of
Assignment executed by Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the
111,415 PTIC shares held by PHI were sequestered by the PCGG, and subsequently
declared by this Court as part of the ill-gotten wealth of former President Ferdinand
Marcos. The sequestered PTIC shares were reconveyed to the Republic of the
Philippines in accordance with this Courts decision 4 which became final
and executory on 8 August 2006.
The Philippine Government decided to sell the 111,415 PTIC shares, which represent
6.4 percent of the outstanding common shares of stock of PLDT, and designated the
Inter-Agency Privatization Council (IPC), composed of the Department of Finance and
the PCGG, as the disposing entity. An invitation to bid was published in seven
different newspapers from 13 to 24 November 2006. On 20 November 2006, a pre-
bid conference was held, and the original deadline for bidding scheduled on 4
December 2006 was reset to 8 December 2006. The extension was published in nine
different newspapers.
During the 8 December 2006 bidding, Parallax Capital Management LP emerged as
the highest bidder with a bid of P25,217,556,000. The government notified First
Pacific, the majority owner of PTIC shares, of the bidding results and gave First
Pacific until 1 February 2007 to exercise its right of first refusal in accordance with
PTICs Articles of Incorporation. First Pacific announced its intention to match
Parallaxs bid.

On 31 January 2007, the House of Representatives (HR) Committee on Good
Government conducted a public hearing on the particulars of the then impending sale
of the 111,415 PTIC shares. Respondents Teves and Sevilla were among those who
attended the public hearing. The HR Committee Report No. 2270 concluded that: (a)
the auction of the governments 111,415 PTIC shares bore due diligence,
transparency and conformity with existing legal procedures; and (b) First Pacifics
intended acquisition of the governments 111,415 PTIC shares resulting in First
Pacifics 100% ownership of PTIC will not violate the 40 percent constitutional
limit on foreign ownership of a public utility since PTIC holds only 13.847
percent of the total outstanding common shares of PLDT.5 On 28 February 2007,
First Pacific completed the acquisition of the 111,415 shares of stock of PTIC.
Respondent Manuel V. Pangilinan admits the following facts: (a) the IPC conducted a
public bidding for the sale of 111,415 PTIC shares or 46 percent of the outstanding
capital stock of PTIC (the remaining 54 percent of PTIC shares was already owned by
First Pacific and its affiliates); (b) Parallax offered the highest bid amounting
to P25,217,556,000; (c) pursuant to the right of first refusal in favor of PTIC and its
shareholders granted in PTICs Articles of Incorporation, MPAH, a First Pacific
affiliate, exercised its right of first refusal by matching the highest bid offered for PTIC
shares on 13 February 2007; and (d) on 28 February 2007, the sale was
consummated when MPAH paid IPC P25,217,556,000 and the government delivered
the certificates for the 111,415 PTIC shares. Respondent Pangilinan denies the other
allegations of facts of petitioner.
On 28 February 2007, petitioner filed the instant petition for prohibition, injunction,
declaratory relief, and declaration of nullity of sale of the 111,415 PTIC shares.
Petitioner claims, among others, that the sale of the 111,415 PTIC shares would
result in an increase in First Pacifics common shareholdings in PLDT from 30.7
percent to 37 percent, and this, combined with Japanese NTT DoCoMos common
shareholdings in PLDT, would result to a total foreign common shareholdings in PLDT
of 51.56 percent which is over the 40 percent constitutional limit. 6 Petitioner asserts:
If and when the sale is completed, First Pacifics equity in PLDT will go up from
30.7 percent to 37.0 percent of its common or voting- stockholdings, x x x.
Hence, the consummation of the sale will put the two largest foreign investors in
PLDT First Pacific and Japans NTT DoCoMo, which is the worlds largest
wireless telecommunications firm, owning 51.56 percent of PLDT common
equity. x x x With the completion of the sale, data culled from the official website
of the New York Stock Exchange (www.nyse.com) showed that those foreign
entities, which own at least five percent of common equity, will collectively own
81.47 percent of PLDTs common equity. x x x
x x x as the annual disclosure reports, also referred to as Form 20-K reports
x x x which PLDT submitted to the New York Stock Exchange for the period
2003-2005, revealed that First Pacific and several other foreign entities
breached the constitutional limit of 40 percent ownership as early as 2003.
x x x7
Petitioner raises the following issues: (1) whether the consummation of the then
impending sale of 111,415 PTIC shares to First Pacific violates the constitutional limit
on foreign ownership of a public utility; (2) whether public respondents committed
grave abuse of discretion in allowing the sale of the 111,415 PTIC shares to First
Pacific; and (3) whether the sale of common shares to foreigners in excess of 40
percent of the entire subscribed common capital stock violates the constitutional limit
on foreign ownership of a public utility.8
On 13 August 2007, Pablito V. Sanidad and Arno V. Sanidad filed a Motion for Leave
to Intervene and Admit Attached Petition-in-Intervention. In the Resolution of 28
August 2007, the Court granted the motion and noted the Petition-in-Intervention.
Petitioners-in-intervention join petitioner Wilson Gamboa x x x in seeking, among
others, to enjoin and/or nullify the sale by respondents of the 111,415 PTIC shares to
First Pacific or assignee. Petitioners-in-intervention claim that, as PLDT subscribers,
they have a stake in the outcome of the controversy x x x where the Philippine
Government is completing the sale of government owned assets in [PLDT],
unquestionably a public utility, in violation of the nationality restrictions of the
Philippine Constitution.
The Issue
This Court is not a trier of facts. Factual questions such as those raised by
petitioner,9 which indisputably demand a thorough examination of the evidence of the
parties, are generally beyond this Courts jurisdiction. Adhering to this well-settled
principle, the Court shall confine the resolution of the instant controversy solely on
the threshold and purely legal issue of whether the term capital in Section 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 Ruling of the Court
The petition is partly meritorious.
Petition for declaratory relief treated as petition for mandamus
At the outset, petitioner is faced with a procedural barrier. Among the remedies
petitioner seeks, only the petition for prohibition is within the original jurisdiction of this
court, which however is not exclusive but is concurrent with the Regional Trial Court
and the Court of Appeals. The actions for declaratory relief, 10 injunction, and
annulment of sale are not embraced within the original jurisdiction of the Supreme
Court. On this ground alone, the petition could have been dismissed outright.
While direct resort to this Court may be justified in a petition for prohibition, 11 the
Court shall nevertheless refrain from discussing the grounds in support of the petition
for prohibition since on 28 February 2007, the questioned sale was consummated
when MPAH paid IPC P25,217,556,000 and the government delivered the certificates
for the 111,415 PTIC shares.
However, since the threshold and purely legal issue on the definition of the term
capital in Section 11, Article XII of the Constitution has far-reaching implications to the
national economy, the Court treats the petition for declaratory relief as one for
mandamus.12

In Salvacion v. Central Bank of the Philippines,13 the Court treated the petition for
declaratory relief as one for mandamus considering the grave injustice that would
result in the interpretation of a banking law. In that case, which involved the crime of
rape committed by a foreign tourist against a Filipino minor and the execution of the
final judgment in the civil case for damages on the tourists dollar deposit with a local
bank, the Court declared Section 113 of Central Bank Circular No. 960, exempting
foreign currency deposits from attachment, garnishment or any other order or process
of any court, inapplicable due to the peculiar circumstances of the case. The Court
held that injustice would result especially to a citizen aggrieved by a foreign guest like
accused x x x that would negate Article 10 of the Civil Code which provides that in
case of doubt in the interpretation or application of laws, it is presumed that the
lawmaking body intended right and justice to prevail. The Court therefore required
respondents Central Bank of the Philippines, the local bank, and the accused to
comply with the writ of execution issued in the civil case for damages and to release
the dollar deposit of the accused to satisfy the judgment.
In Alliance of Government Workers v. Minister of Labor,14 the Court similarly brushed
aside the procedural infirmity of the petition for declaratory relief and treated the same
as one for mandamus. In Alliance, the issue was whether the government unlawfully
excluded petitioners, who were government employees, from the enjoyment of rights
to which they were entitled under the law. Specifically, the question was: Are the
branches, agencies, subdivisions, and instrumentalities of the Government, including
government owned or controlled corporations included among the four employers
under Presidential Decree No. 851 which are required to pay their employees x x x a
thirteenth (13th) month pay x x x ? The Constitutional principle involved therein
affected all government employees, clearly justifying a relaxation of the technical
rules of procedure, and certainly requiring the interpretation of the assailed
presidential decree.
In short, it is well-settled that this Court may treat a petition for declaratory relief as
one for mandamus if the issue involved has far-reaching implications. As this Court
held in Salvacion:
The Court has no original and exclusive jurisdiction over a petition for declaratory
relief. However, exceptions to this rule have been recognized. Thus, where
the petition has far-reaching implications and raises questions that should
be resolved, it may be treated as one for mandamus.15 (Emphasis supplied)
In the present case, petitioner seeks primarily the interpretation of the term capital in
Section 11, Article XII of the Constitution. He prays that this Court declare that the
term capital refers to common shares only, and that such shares constitute the sole
basis in determining foreign equity in a public utility. Petitioner further asks this Court
to declare any ruling inconsistent with such interpretation unconstitutional.
The interpretation of the term capital in Section 11, Article XII of the Constitution has
far-reaching implications to the national economy. In fact, a resolution of this issue will
determine whether Filipinos are masters, or second class citizens, in their own
country. What is at stake here is whether Filipinos or foreigners will have effective
control of the national economy. Indeed, if ever there is a legal issue that has far-
reaching implications to the entire nation, and to future generations of Filipinos, it is
the threshhold legal issue presented in this case.
The Court first encountered the issue on the definition of the term capital in Section
11, Article XII of the Constitution in the case of Fernandez v. Cojuangco, docketed as
G.R. No. 157360.16 That case involved the same public utility (PLDT) and
substantially the same private respondents. Despite the importance and novelty of the
constitutional issue raised therein and despite the fact that the petition involved a
purely legal question, the Court declined to resolve the case on the merits, and
instead denied the same for disregarding the hierarchy of courts. 17 There, petitioner
Fernandez assailed on a pure question of law the Regional Trial Courts Decision of
21 February 2003 via a petition for review under Rule 45. The Courts Resolution,
denying the petition, became final on 21 December 2004.
The instant petition therefore presents the Court with another opportunity to finally
settle this purely legal issue which is of transcendental importance to the national
economy and a fundamental requirement to a faithful adherence to our Constitution.
The Court must forthwith seize such opportunity, not only for the benefit of the
litigants, but more significantly for the benefit of the entire Filipino people, to ensure,
in the words of the Constitution, a self-reliant and independent national
economy effectively controlled by Filipinos.18 Besides, in the light of vague and
confusing positions taken by government agencies on this purely legal issue, present
and future foreign investors in this country deserve, as a matter of basic fairness, a
categorical ruling from this Court on the extent of their participation in the capital of
public utilities and other nationalized businesses.
Despite its far-reaching implications to the national economy, this purely legal issue
has remained unresolved for over 75 years since the 1935 Constitution. There is no
reason for this Court to evade this ever recurring fundamental issue and delay again
defining the term capital, which appears not only in Section 11, Article XII of the
Constitution, but also in Section 2, Article XII on co-production and joint venture
agreements for the development of our natural resources, 19 in Section 7, Article XII on
ownership of private lands,20 in Section 10, Article XII on the reservation of certain
investments to Filipino citizens,21 in Section 4(2), Article XIV on the ownership of
educational institutions,22 and in Section 11(2), Article XVI on the ownership of
advertising companies.23
Petitioner has locus standi
There is no dispute that petitioner is a stockholder of PLDT. As such, he has the right
to question the subject sale, which he claims to violate the nationality requirement
prescribed in Section 11, Article XII of the Constitution. If the sale indeed violates the
Constitution, then there is a possibility that PLDTs franchise could be revoked, a dire
consequence directly affecting petitioners interest as a stockholder.
More importantly, there is no question that the instant petition raises matters of
transcendental importance to the public. The fundamental and threshold legal issue in
this case, involving the national economy and the economic welfare of the Filipino
people, far outweighs any perceived impediment in the legal personality of the
petitioner to bring this action.
In Chavez v. PCGG,24 the Court upheld the right of a citizen to bring a suit on matters
of transcendental importance to the public, thus:
In Taada v. Tuvera, the Court asserted that when the issue concerns a public right
and the object of mandamus is to obtain the enforcement of a public duty, the
people are regarded as the real parties in interest; and because it is sufficient
that petitioner is a citizen and as such is interested in the execution of the laws,
he need not show that he has any legal or special interest in the result of the
action. In the aforesaid case, the petitioners sought to enforce their right to be
informed on matters of public concern, a right then recognized in Section 6, Article IV
of the 1973 Constitution, in connection with the rule that laws in order to be valid and
enforceable must be published in the Official Gazette or otherwise effectively
promulgated. In ruling for the petitioners legal standing, the Court declared that the
right they sought to be enforced is a public right recognized by no less than the
fundamental law of the land.
Legaspi v. Civil Service Commission, while reiterating Taada, further declared
that when a mandamus proceeding involves the assertion of a public right, the
requirement of personal interest is satisfied by the mere fact that petitioner is a
citizen and, therefore, part of the general public which possesses the right.
Further, in Albano v. Reyes, we said that while expenditure of public funds may not
have been involved under the questioned contract for the development, management
and operation of the Manila International Container Terminal, public interest [was]
definitely involved considering the important role [of the subject contract] . . . in
the economic development of the country and the magnitude of the financial
consideration involved. We concluded that, as a consequence, the disclosure
provision in the Constitution would constitute sufficient authority for upholding the
petitioners standing. (Emphasis supplied)
Clearly, since the instant petition, brought by a citizen, involves matters of
transcendental public importance, the petitioner has the requisite locus standi.
Definition of the Term Capital in
Section 11, Article XII of the 1987 Constitution
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)
The above provision substantially reiterates Section 5, Article XIV of the 1973
Constitution, thus:
Section 5. 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 the capital of which 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 National Assembly when the public
interest 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 the capital thereof. (Emphasis supplied)
The foregoing provision in the 1973 Constitution reproduced Section 8, Article XIV of
the 1935 Constitution, viz:
Section 8. 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 other entities organized under the laws of
the Philippines sixty per centum of the capital of which is owned by
citizens of the Philippines, nor shall such franchise, certificate, or authorization
be exclusive in character or for a longer period than fifty years. No franchise or
right shall be granted to any individual, firm, or corporation, except under the
condition that it shall be subject to amendment, alteration, or repeal by the
Congress when the public interest so requires. (Emphasis supplied)
Father Joaquin G. Bernas, S.J., a leading member of the 1986 Constitutional
Commission, reminds us that the Filipinization provision in the 1987 Constitution is
one of the products of the spirit of nationalism which gripped the 1935 Constitutional
Convention.25 The 1987 Constitution provides for the Filipinization of public utilities by
requiring that any form of authorization for the operation of public utilities should be
granted only 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. The provision is [an express] recognition of the sensitive and
vital position of public utilities both in the national economy and for national
security.26 The evident purpose of the citizenship requirement is to prevent aliens
from assuming control of public utilities, which may be inimical to the national
interest.27 This specific provision explicitly reserves to Filipino citizens control of public
utilities, pursuant to an overriding economic goal of the 1987 Constitution: to conserve
and develop our patrimony28 and ensure a self-reliant and independent national
economy effectively controlled by Filipinos.29
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.
The crux of the controversy is the definition of the term capital. 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)?
Petitioner submits that the 40 percent foreign equity limitation in domestic public
utilities refers only to common shares because such shares are entitled to vote and it
is through voting that control over a corporation is exercised. Petitioner posits that the
term capital in Section 11, Article XII of the Constitution refers to the ownership of
common capital stock subscribed and outstanding, which class of shares alone,
under the corporate set-up of PLDT, can vote and elect members of the board of
directors. It is undisputed that PLDTs non-voting preferred shares are held mostly by
Filipino citizens.30 This arose from Presidential Decree No. 217,31 issued on 16 June
1973 by then President Ferdinand Marcos, requiring every applicant of a PLDT
telephone line to subscribe to non-voting preferred shares to pay for the investment
cost of installing the telephone line.32
Petitioners-in-intervention basically reiterate petitioners arguments and adopt
petitioners definition of the term capital. 33 Petitioners-in-intervention allege that the
approximate foreign ownership of common capital stock of PLDT x x x already
amounts to at least 63.54% of the total outstanding common stock, which means that
foreigners exercise significant control over PLDT, patently violating the 40 percent
foreign equity limitation in public utilities prescribed by the Constitution.
Respondents, on the other hand, do not offer any definition of the term capital in
Section 11, Article XII of the Constitution. More importantly, private
respondents Nazareno and Pangilinan of PLDT do not dispute that more than 40
percent of the common shares of PLDT are held by foreigners.
In particular, respondent Nazarenos Memorandum, consisting of 73 pages, harps
mainly on the procedural infirmities of the petition and the supposed violation of the
due process rights of the affected foreign common shareholders.
Respondent Nazareno does not deny petitioners allegation of foreigners dominating
the common shareholdings of PLDT. Nazarenostressed mainly that the petition seeks
to divest foreign common shareholders purportedly exceeding 40% of the total
common shareholdings in PLDT of their ownership over their shares. Thus, the
foreign natural and juridical PLDT shareholders must be impleaded in this suit so that
they can be heard.34 Essentially, Nazareno invokes denial of due process on behalf of
the foreign common shareholders.
While Nazareno does not introduce any definition of the term capital, he states
that among the factual assertions that need to be established to counter
petitioners allegations is the uniform interpretation by government agencies
(such as the SEC), institutions and corporations (such as the Philippine
National Oil Company-Energy Development Corporation or PNOC-EDC) of
including both preferred shares and common shares in controlling interest in
view of testing compliance with the 40% constitutional limitation on foreign
ownership in public utilities.35
Similarly, respondent Manuel V. Pangilinan does not define the term capital in Section
11, Article XII of the Constitution. Neither does he refute petitioners claim of
foreigners holding more than 40 percent of PLDTs common shares. Instead,
respondent Pangilinan focuses on the procedural flaws of the petition and the alleged
violation of the due process rights of foreigners. Respondent Pangilinan emphasizes
in his Memorandum (1) the absence of this Courts jurisdiction over the petition; (2)
petitioners lack of standing; (3) mootness of the petition; (4) non-availability of
declaratory relief; and (5) the denial of due process rights. Moreover,
respondent Pangilinan alleges that the issue should be whether owners of shares in
PLDT as well as owners of shares in companies holding shares in PLDT may be
required to relinquish their shares in PLDT and in those companies without any law
requiring them to surrender their shares and also without notice and trial.
Respondent Pangilinan further asserts that Section 11, [Article XII of the
Constitution] imposes no nationality requirement on the shareholders of the
utility company as a condition for keeping their shares in the utility
company. According to him, Section 11 does not authorize taking one persons
property (the shareholders stock in the utility company) on the basis of another partys
alleged failure to satisfy a requirement that is a condition only for that other partys
retention of another piece of property (the utility company being at least 60% Filipino-
owned to keep its franchise).36
The OSG, representing public respondents Secretary Margarito Teves,
Undersecretary John P. Sevilla, Commissioner Ricardo Abcede, and Chairman
Fe Barin, is likewise silent on the definition of the term capital. In its
Memorandum37 dated 24 September 2007, the OSG also limits its discussion on the
supposed procedural defects of the petition, i.e. lack of standing, lack of jurisdiction,
non-inclusion of interested parties, and lack of basis for injunction. The OSG does not
present any definition or interpretation of the term capital in Section 11, Article XII of
the Constitution. The OSG contends that the petition actually partakes of a collateral
attack on PLDTs franchise as a public utility, which in effect requires a full-blown trial
where all the parties in interest are given their day in court.38
Respondent Francisco Ed Lim, impleaded as President and Chief Executive Officer of
the Philippine Stock Exchange (PSE), does not also define the term capital and seeks
the dismissal of the petition on the following grounds: (1) failure to state a cause of
action against Lim; (2) the PSE allegedly implemented its rules and required all listed
companies, including PLDT, to make proper and timely disclosures; and (3) the reliefs
prayed for in the petition would adversely impact the stock market.
In the earlier case of Fernandez v. Cojuangco, petitioner Fernandez who claimed to
be a stockholder of record of PLDT, contended that the term capital in the 1987
Constitution refers to shares entitled to vote or the common shares. Fernandez
explained thus:
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, considering that it is through voting that control is being
exercised. x x x
Obviously, 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 Courts ruling upholding respondents 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 Courts ruling adopting
 respondents 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.
xxxx
Thus, the 40% foreign ownership limitation should be interpreted to apply to both
the beneficial ownership and the controlling interest.
xxxx
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.
Parenthetically, the Opinions dated February 15, 1988 and April 14, 1987 cited
by the Trial Court to support the proposition that the meaning of the word capital
as used in Section 11, Article XII of the Constitution allegedly refers to the sum
total of the shares subscribed and paid-in by the shareholder and it allegedly is
immaterial how the stock is classified, whether as common or preferred, cannot
stand in the face of a clear legislative policy as stated in the FIA which took effect
in 1991 or way after said opinions were rendered, and as clarified by the above-
quoted Amendments. In this regard, suffice it to state that as between the law
and an opinion rendered by an administrative agency, the law indubitably
prevails. Moreover, said Opinions are merely advisory and cannot prevail over
the clear intent of the framers of the Constitution.
In the same vein, the SECs construction of Section 11, Article XII of the
Constitution is at best merely advisory for it is the courts that finally determine
what a law means.39
On the other hand, respondents therein, Antonio O. Cojuangco, Manuel
V. Pangilinan, Carlos A. Arellano, Helen Y. Dee, Magdangal B. Elma, Mariles Cacho-
Romulo, Fr. Bienvenido F. Nebres, Ray C. Espinosa, Napoleon L. Nazareno, Albert
F. Del Rosario, and Orlando B. Vea, argued that the term capital in Section 11, Article
XII of the Constitution includes preferred shares since the Constitution does not
distinguish among classes of stock, thus:
16. The Constitution applies its foreign ownership limitation on the corporations
capital, without distinction as to classes of shares. x x x
In this connection, the Corporation Code which was already in force at the time
the present (1987) Constitution was drafted defined outstanding capital stock as
follows:
Section 137. Outstanding capital stock defined. The term outstanding capital
stock, as used in this Code, means the total shares of stock issued under binding
subscription agreements to subscribers or stockholders, whether or not fully or
partially paid, except treasury shares.
Section 137 of the Corporation Code also does not distinguish between common
and preferred shares, nor exclude either class of shares, in determining the
outstanding capital stock (the capital) of a corporation. Consequently, petitioners
suggestion to reckon PLDTs foreign equity only on the basis of PLDTs
outstanding common shares is without legal basis. The language of the
Constitution should be understood in the sense it has in common use.
xxxx
17. But even assuming that resort to the proceedings of the Constitutional
Commission is necessary, there is nothing in the Record of the Constitutional
Commission (Vol. III) which petitioner misleadingly cited in the Petition
x x x which supports petitioners view that only common shares should form the
basis for computing a public utilitys foreign equity.
xxxx
18. In addition, the SEC the government agency primarily responsible for
implementing the Corporation Code, and which also has the responsibility of
ensuring compliance with the Constitutions foreign equity restrictions as regards
nationalized activities x x x has categorically ruled that both common and
preferred shares are properly considered in determining outstanding capital stock
and the nationality composition thereof.40
We agree with petitioner and petitioners-in-intervention. 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, 41 and not
to the total outstanding capital stock comprising both common and non-voting
preferred shares.
The Corporation Code of the Philippines42 classifies shares as common or preferred,
thus:
Sec. 6. Classification of shares. - The shares of stock of stock corporations may
be divided into classes or series of shares, or both, any of which classes or
series of shares may have such rights, privileges or restrictions as may be stated
in the articles of incorporation: Provided, That no share may be deprived of
voting rights except those classified and issued as preferred or redeemable
shares, unless otherwise provided in this Code: Provided, further, That there
shall always be a class or series of shares which have complete voting rights.
Any or all of the shares or series of shares may have a par value or have no par
value as may be provided for in the articles of incorporation: Provided,
however, That banks, trust companies, insurance companies, public utilities, and
building and loan associations shall not be permitted to issue no-par value
shares of stock.
Preferred shares of stock issued by any corporation may be given preference in
the distribution of the assets of the corporation in case of liquidation and in the
 distribution of dividends, or such other preferences as may be stated in the
articles of incorporation which are not violative of the provisions of this Code:
Provided, That preferred shares of stock may be issued only with a stated par
value. The Board of Directors, where authorized in the articles of incorporation,
may fix the terms and conditions of preferred shares of stock or any series
thereof: Provided, That such terms and conditions shall be effective upon the
filing of a certificate thereof with the Securities and Exchange Commission.
Shares of capital stock issued without par value shall be deemed fully paid and
non-assessable and the holder of such shares shall not be liable to the
corporation or to its creditors in respect thereto: Provided; That shares without
par value may not be issued for a consideration less than the value of five
(P5.00) pesos per share: Provided, further, That the entire consideration received
by the corporation for its no-par value shares shall be treated as capital and shall
not be available for distribution as dividends.
A corporation may, furthermore, classify its shares for the purpose of insuring
compliance with constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and stated in the
certificate of stock, each share shall be equal in all respects to every other share.
Where the articles of incorporation provide for non-voting shares in the cases
allowed by this Code, the holders of such shares shall nevertheless be entitled to
vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or
other corporations;
7. Investment of corporate funds in another corporation or business in
accordance with this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote necessary
to approve a particular corporate act as provided in this Code shall be deemed to
refer only to stocks with voting rights.
Indisputably, one of the rights of a stockholder is the right to participate in the control
or management of the corporation.43 This is exercised through his vote in the election
of directors because it is the board of directors that controls or manages the
corporation.44 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. 45 In fact, under the
Corporation Code only preferred or redeemable shares can be deprived of the right to
vote.46 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.47
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 revealed in the deliberations of the Constitutional Commission, capital refers to the
voting stock or controlling interest of a corporation, to wit:
MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino
equity and foreign equity; namely, 60-40 in Section 3, 60-40 in Section 9 and 2/3-
1/3 in Section 15.
MR. VILLEGAS. That is right.
MR. NOLLEDO. In teaching law, we are always faced with this question: Where
do we base the equity requirement, is it on the authorized capital stock, on the
subscribed capital stock, or on the paid-up capital stock of a corporation? Will the
Committee please enlighten me on this?
MR. VILLEGAS. We have just had a long discussion with the members of the
team from the UP Law Center who provided us a draft. The phrase that is
contained here which we adopted from the UP draft is 60 percent of voting
stock.
MR. NOLLEDO. That must be based on the subscribed capital stock, because
unless declared delinquent, unpaid capital stock shall be entitled to vote.
MR. VILLEGAS. That is right.
MR. NOLLEDO. Thank you.
With respect to an investment by one corporation in another corporation, say, a
corporation with 60-40 percent equity invests in another corporation which is
permitted by the Corporation Code, does the Committee adopt the grandfather
rule?
MR. VILLEGAS. Yes, that is the understanding of the Committee.
MR. NOLLEDO. Therefore, we need additional Filipino capital?
MR. VILLEGAS. Yes.48

xxxx
MR. AZCUNA. May I be clarified as to that portion that was accepted by
the Committee.
MR. VILLEGAS. The portion accepted by the Committee is the deletion of the
phrase voting stock or controlling interest.
MR. AZCUNA. Hence, without the Davide amendment, the committee report
would read: corporations or associations at least sixty percent of whose
CAPITAL is owned by such citizens.
MR. VILLEGAS. Yes.
MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60 percent
of the capital to be owned by citizens.
MR. VILLEGAS. That is right.
MR. AZCUNA. But the control can be with the foreigners even if they are
the minority. Let us say 40 percent of the capital is owned by them, but it is
the voting capital, whereas, the Filipinos own the nonvoting shares. So we
can have a situation where the corporation is controlled by foreigners
despite being the minority because they have the voting capital. That is the
anomaly that would result here.
MR. BENGZON. No, the reason we eliminated the word stock as stated in
the 1973 and 1935 Constitutions is that according to Commissioner
Rodrigo, there are associations that do not have stocks. That is why we say
CAPITAL.
MR. AZCUNA. We should not eliminate the phrase controlling interest.
MR. BENGZON. In the case of stock corporations, it is
assumed.49 (Emphasis supplied)
Thus, 60 percent of the capital assumes, or should result in, controlling interest in
the corporation. Reinforcing this interpretation of the term capital, as referring to
controlling interest or shares entitled to vote, is the definition of a Philippine national in
the Foreign Investments Act of 1991,50 to wit:
SEC. 3. Definitions. - As used in this Act:
a. The term Philippine national shall mean 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 sixty percent (60%) of the capital stock outstanding and entitled to
vote is owned and held by citizens of the Philippines; or a corporation
organized abroad and registered as doing business in the Philippines under the
Corporation Code of which one hundred percent (100%) of the capital stock
outstanding and entitled to vote is wholly owned by Filipinos or a trustee of funds
for pension or other employee retirement or separation benefits, where the
trustee is a Philippine national and at least sixty percent (60%) of the fund will
accrue to the benefit of Philippine nationals: Provided, That where a corporation
and its non-Filipino stockholders own stocks in a Securities and Exchange
Commission (SEC) registered enterprise, at least sixty percent (60%) of the
capital stock outstanding and entitled to vote of each of both corporations must
be owned and held by citizens of the Philippines and at least sixty percent (60%)
of the members of the Board of Directors of each of both corporations must be
citizens of the Philippines, in order that the corporation, shall be considered a
Philippine national. (Emphasis supplied)
In explaining the definition of a Philippine national, the Implementing Rules and
Regulations of the Foreign Investments Act of 1991 provide:
b. Philippine national shall mean a citizen of the Philippines or a domestic
partnership or association wholly owned by the citizens of the Philippines; or a
corporation organized under the laws of the Philippines of which at least
sixty percent [60%] of the capital stock outstanding and entitled to vote is
owned and held by citizens of the Philippines; or a trustee of funds for
pension or other employee retirement or separation benefits, where the trustee is
a Philippine national and at least sixty percent [60%] of the fund will accrue to the
benefit of the Philippine nationals; Provided,that where a corporation its non-
Filipino stockholders own stocks in a Securities and Exchange Commission
[SEC] registered enterprise, at least sixty percent [60%] of the capital stock
outstanding and entitled to vote of both corporations must be owned and held by
citizens of the Philippines and at least sixty percent [60%] of the members of the
Board of Directors of each of both corporation must be citizens of the Philippines,
in order that the corporation shall be considered a Philippine national. The control
test shall be applied for this purpose.
Compliance with the required Filipino ownership of a corporation shall be
determined on the basis of outstanding capital stock whether fully paid or
not, but only such stocks which are generally entitled to vote are
considered.
For 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. Thus, stocks, the voting rights of
which have been assigned or transferred to aliens cannot be considered
held by Philippine citizens or Philippine nationals.
Individuals or juridical entities not meeting the aforementioned
qualifications are considered as non-Philippine nationals. (Emphasis
supplied)
Mere legal title is insufficient to meet the 60 percent Filipino-owned capital required in
the Constitution. Full beneficial ownership of 60 percent of the outstanding capital
stock, coupled with 60 percent of the voting rights, is required. The legal and
beneficial ownership of 60 percent of the outstanding capital stock must rest in the
hands of Filipino nationals in accordance with the constitutional mandate. Otherwise,
the corporation is considered as non-Philippine national[s].

Under Section 10, Article XII of the Constitution, Congress may reserve to citizens of
the Philippines or to corporations or associations at least sixty per centum of whose
capital is owned by such citizens, or such higher percentage as Congress
may prescribe, certain areas of investments. Thus, in numerous laws Congress has
reserved certain areas of investments to Filipino citizens or to corporations at least
sixty percent of the capital of which is owned by Filipino citizens. Some of these laws
are: (1) Regulation of Award of Government Contracts or R.A. No. 5183; (2)
Philippine Inventors Incentives Act or R.A. No. 3850; (3) Magna Carta for Micro,
Small and Medium Enterprises or R.A. No. 6977; (4) Philippine Overseas Shipping
Development Act or R.A. No. 7471; (5) Domestic Shipping Development Act of 2004
or R.A. No. 9295; (6) Philippine Technology Transfer Act of 2009 or R.A. No. 10055;
and (7) Ship Mortgage Decree or P.D. No. 1521. Hence, the term capital in Section
11, Article XII of the Constitution is also used in the same context in numerous
lawsreserving certain areas of investments to Filipino citizens.
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.
We shall illustrate the glaring anomaly in giving a broad definition to the term capital.
Let us assume that a corporation has 100 common shares owned by foreigners and
1,000,000 non-voting preferred shares owned by Filipinos, with both classes of share
having a par value of one peso (P1.00) per share. Under the broad definition of the
term capital, such corporation would be considered compliant with the 40 percent
constitutional limit on foreign equity of public utilities since the overwhelming majority,
or more than 99.999 percent, of the total outstanding capital stock is Filipino owned.
This is obviously absurd.
In the example given, only the foreigners holding the common shares have voting
rights in the election of directors, even if they hold only 100 shares. The foreigners,
with a minuscule equity of less than 0.001 percent, exercise control over the public
utility. On the other hand, the Filipinos, holding more than 99.999 percent of the
equity, cannot vote in the election of directors and hence, have no control over the
public utility. This starkly circumvents the intent of the framers of the Constitution, as
well as the clear language of the Constitution, to place the control of public utilities in
the hands of Filipinos. It also renders illusory the State policy of an independent
national economy effectively controlled by Filipinos.
The example given is not theoretical but can be found in the real world, and in fact
exists in the present case.
Holders of PLDT preferred shares are explicitly denied of the right to vote in the
election of directors. PLDTs 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.51
On the other hand, holders of common shares are granted the exclusive right to vote
in the election of directors. PLDTs Articles of Incorporation52 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.53
In short, only holders of common shares can vote in the election of directors, meaning
only common shareholders exercise control over PLDT. Conversely, holders of
preferred shares, who have no voting rights in the election of directors, do not have
any control over PLDT. In fact, under PLDTs Articles of Incorporation, holders of
common shares have voting rights for all purposes, while holders of preferred shares
have no voting right for any purpose whatsoever.
It must be stressed, and respondents do not dispute, that foreigners hold a majority
of the common shares of PLDT. In fact, based on PLDTs 2010 General Information
Sheet (GIS),54which is a document required to be submitted annually to the Securities
and Exchange Commission,55 foreigners hold 120,046,690 common shares of PLDT
whereas Filipinos hold only 66,750,622 common shares. 56 In other words, foreigners
hold 64.27% of the total number of PLDTs 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.
Moreover, the Dividend Declarations of PLDT for 2009,57 as submitted to the SEC,
shows that per share the SIP58 preferred shares earn a pittance in dividends
compared to the common shares. PLDT declared dividends for the common shares
at P70.00 per share, while the declared dividends for the preferred shares amounted
to a measly P1.00 per share.59 So the preferred shares not only cannot vote in the
election of directors, they also have very little and obviously negligible dividend
earning capacity compared to common shares.
As shown in PLDTs 2010 GIS,60 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. 61 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.
The legal and beneficial ownership of 60 percent of the outstanding capital stock must
rest in the hands of Filipinos in accordance with the constitutional mandate. Full
beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60
percent of the voting rights, is constitutionally required for the States grant of authority
to operate a public utility. The undisputed fact that the PLDT preferred shares,
99.44% owned by Filipinos, are non-voting and earn only 1/70 of the dividends that
PLDT common shares earn, grossly violates the constitutional requirement of 60
percent Filipino control and Filipino beneficial ownership of 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 xcorporations 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 PLDTs 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; 63 (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.
Incidentally, the fact that PLDT common shares with a par value of P5.00 have a
current stock market value of P2,328.00 per share,64 while PLDT preferred shares
with a par value of P10.00 per share have a current stock market value ranging from
only P10.92 to P11.06 per share,65 is a glaring confirmation by the market that control
and beneficial ownership of PLDT rest with the common shares, not with the
preferred shares.
Indisputably, construing the term capital in Section 11, Article XII of the Constitution to
include both voting and non-voting shares will result in the abject surrender of our
telecommunications industry to foreigners, amounting to a clear abdication of the
States constitutional duty to limit control of public utilities to Filipino citizens. Such an
interpretation certainly runs counter to the constitutional provision reserving certain
areas of investment to Filipino citizens, such as the exploitation of natural resources
as well as the ownership of land, educational institutions and advertising businesses.
The Court should never open to foreign control what the Constitution has expressly
reserved to Filipinos for that would be a betrayal of the Constitution and of the
national interest. The Court must perform its solemn duty to defend and uphold the
intent and letter of the Constitution to ensure, in the words of the Constitution, a self-
reliant and independent national economy effectively controlled by Filipinos.
Section 11, Article XII of the Constitution, like other provisions of the Constitution
expressly reserving to Filipinos specific areas of investment, such as the development
of natural resources and ownership of land, educational institutions and advertising
business, is self-executing. There is no need for legislation to implement these self-
executing provisions of the Constitution. The rationale why these constitutional
provisions are self-executing was explained in Manila Prince Hotel v. GSIS,66 thus:
x x x Hence, unless it is expressly provided that a legislative act is necessary to
enforce a constitutional mandate, the presumption now is that all provisions of
the constitution are self-executing. If the constitutional provisions are treated as
requiring legislation instead of self-executing, the legislature would have the
power to ignore and practically nullify the mandate of the fundamental law. This
can be cataclysmic. That is why the prevailing view is, as it has always been, that
. . . in case of doubt, the Constitution should be considered self-executing
rather than non-self-executing. . . . Unless the contrary is clearly
intended, the provisions of the Constitution should be considered self-
executing, as a contrary rule would give the legislature discretion to
determine when, or whether, they shall be effective. These provisions
would be subordinated to the will of the lawmaking body, which could make
them entirely meaningless by simply refusing to pass the needed
implementing statute. (Emphasis supplied)
In Manila Prince Hotel, even the Dissenting Opinion of then Associate
Justice Reynato S. Puno, later Chief Justice, agreed that constitutional provisions are
presumed to be self-executing. Justice Puno stated:
Courts as a rule consider the provisions of the Constitution as self-executing,
rather than as requiring future legislation for their enforcement. The reason is not
difficult to discern. For if they are not treated as self-executing, the mandate
of the fundamental law ratified by the sovereign people can be easily
ignored and nullified by Congress. Suffused with wisdom of the ages is the
unyielding rule that legislative actions may give breath to constitutional
rights but congressional inaction should not suffocate them.
Thus, we have treated as self-executing the provisions in the Bill of Rights on
arrests, searches and seizures, the rights of a person under custodial
investigation, the rights of an accused, and the privilege against self-
incrimination. It is recognized that legislation is unnecessary to enable courts to
effectuate constitutional provisions guaranteeing the fundamental rights of life,
liberty and the protection of property. The same treatment is accorded to
constitutional provisions forbidding the taking or damaging of property for public
use without just compensation. (Emphasis supplied)
Thus, in numerous cases,67 this Court, even in the absence of implementing
legislation, applied directly the provisions of the 1935, 1973 and 1987 Constitutions
limiting land ownership to Filipinos. In Soriano v. Ong Hoo,68 this Court ruled:
x x x As the Constitution is silent as to the effects or consequences of a sale by a
citizen of his land to an alien, and as both the citizen and the alien have violated
the law, none of them should have a recourse against the other, and it should
only be the State that should be allowed to intervene and determine what is to be
done with the property subject of the violation. We have said that what the State
should do or could do in such matters is a matter of public policy, entirely beyond
the scope of judicial authority. (Dinglasan, et al. vs. Lee Bun Ting, et al., 6 G. R.
No. L-5996, June 27, 1956.) While the legislature has not definitely decided
what policy should be followed in cases of violations against the
constitutional prohibition, courts of justice cannot go beyond by declaring
the disposition to be null and void as violative of the Constitution.
x x x (Emphasis supplied)
To treat Section 11, Article XII of the Constitution as not self-executing would mean
that since the 1935 Constitution, or over the last 75 years, not one of the
constitutional provisions expressly reserving specific areas of investments to
corporations, at least 60 percent of the capital of which is owned by Filipinos, was
enforceable. In short, the framers of the 1935, 1973 and 1987 Constitutions miserably
failed to effectively reserve to Filipinos specific areas of investment, like the operation
by corporations of public utilities, the exploitation by corporations of mineral
resources, the ownership by corporations of real estate, and the ownership of
educational institutions. All the legislatures that convened since 1935 also miserably
failed to enact legislations to implement these vital constitutional provisions that
determine who will effectively control the national economy, Filipinos or foreigners.
This Court cannot allow such an absurd interpretation of the Constitution.
This Court has held that the SEC has both regulatory and adjudicative
functions.69 Under its regulatory functions, the SEC can be compelled by mandamus
to perform its statutory duty when it unlawfully neglects to perform the same. Under
its adjudicative or quasi-judicial functions, the SEC can be also be compelled by
mandamus to hear and decide a possible violation of any law it administers or
enforces when it is mandated by law to investigate such violation.
Under Section 17(4)70 of the Corporation Code, the SEC has the regulatory function
to reject or disapprove the Articles of Incorporation of any corporation where the
required percentage of ownership of the capital stock to be owned by citizens
of the Philippines has not been complied with as required by existing laws or
the Constitution. Thus, the SEC is the government agency tasked with the statutory
duty to enforce the nationality requirement prescribed in Section 11, Article XII of the
Constitution on the ownership of public utilities. This Court, in a petition for
declaratory relief that is treated as a petition for mandamus as in the present case,
can direct the SEC to perform its statutory duty under the law, a duty that the SEC
has apparently unlawfully neglected to do based on the 2010 GIS that respondent
PLDT submitted to the SEC.
Under Section 5(m) of the Securities Regulation Code,71 the SEC is vested with the
power and function to suspend or revoke, after proper notice and hearing, the
franchise or certificate of registration of corporations, partnerships or
associations, upon any of the grounds provided by law. The SEC is mandated
under Section 5(d) of the same Code with the power and function to investigate
x x x the activities of persons to ensure compliance with the laws and regulations
that SEC administers or enforces. The GIS that all corporations are required to submit
to SEC annually should put the SEC on guard against violations of the nationality
requirement prescribed in the Constitution and existing laws. This Court can compel
the SEC, in a petition for declaratory relief that is treated as a petition for mandamus
as in the present case, to hear and decide a possible violation of Section 11, Article
XII of the Constitution in view of the ownership structure of PLDTs voting shares, as
admitted by respondents and as stated in PLDTs 2010 GIS that PLDT submitted to
SEC.
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.
SO ORDERED.
1 Rollo (Vol. I) , pp. 15-103, (Vol. II), pp. 762-768.
2 See Cojuangco v. Sandiganbayan, G.R. No. 183278, 24 April 2009, 586 SCRA 790.
3 Section 11, Article XII of the 1987 Constitution provides:
ARTICLE XII
NATIONAL ECONOMY AND PATRIMONY
xxxx
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.
4 Yuchengco v. Sandiganbayan, G.R. No. 149802, 20 January 2006, 479 SCRA 1.
5 Rollo, (Vol. II), p. 806.
6 Rollo (Vol. I), p. 23.
7 Id. at 23-24, 26.
8 Id. at 41.
9 Id.
10 Governed by Rule 63 of the Rules of Court. Section 1, Rule 63 of the Rules of
Court states:
RULE 63
Declaratory Relief and Similar Remedies
Section 1. Who may file petition. Any person interested under a deed, will, contract or
other written instrument, or whose rights are affected by a statute, executive order or
regulation, ordinance, or any other governmental regulation may, before breach or
violation thereof bring an action in the appropriate Regional Trial Court to determine
any question of construction or validity arising, and for a declaration of his rights or
duties, thereunder. (Bar Matter No. 803, 17 February 1998)
11 Section 2, Rule 65 of the Rules of Court provides:
SEC. 2. Petition for prohibition. When the proceedings of any tribunal,
corporation, board, officer, or person, whether exercising judicial, quasi-
judicial or ministerial functions, are without or in excess of its or his
jurisdiction, or with grave abuse of discretion amounting to lack or excess of
jurisdiction, and there is no appeal or any other plain, speedy and adequate
 remedy in the ordinary course of law, a person aggrieved thereby may file a
verified petition in the proper court, alleging the facts with certainty and
praying that judgment be rendered commanding the respondent to desist
from further proceedings in the action or matter specified therein, or
otherwise granting such incidental relief as law and justice may require.
xxxx
12 Section 3, Rule 65 of the Rules of Court states:
SEC. 3. Petition for mandamus. When any tribunal, corporation, board,
officer or person unlawfully neglects the performance of an act which the law
specifically enjoins as a duty resulting from an office, trust, or station, or
unlawfully excludes another from the use and enjoyment of a right or office
to which such other is entitled, and there is no other plain, speedy and
adequate remedy in the ordinary course of law, the person aggrieved
thereby may file a verified petition in the proper court, alleging the facts with
certainty and praying that judgment be rendered commanding the
respondent, immediately or at some other time to be specified by the court,
to do the act required to be done to protect the rights of the petitioner and to
pay the damages sustained by the petitioner by reason of the wrongful acts
of the respondent.
xxxx
13 343 Phil. 539 (1997).
14 209 Phil. 1 (1983), citing Nacionalista Party v. Angelo Bautista, 85 Phil. 101,
and Aquino v. Commission on Elections, 62 SCRA 275.
15 Supra note 13.
16 Adverted to in respondent Nazarenos Memorandum dated 27 September
2007. Rollo, p. 929. Nazareno stated: In fact, in Fernandez v. Cojuangco, which
raised markedly similar issues, the Honorable Court refused to entertain the Petition
directly filed with it and dismissed the same for violating the principle of hierarchy of
courts.
17 In a Resolution dated 9 June 2003.
18 Section 19, Article II, Constitution.
19Section 2. All lands of the public domain, waters, minerals, coal,
petroleum, and other mineral oils, all forces of potential energy, fisheries,
forests or timber, wildlife, flora and fauna, and other natural resources are
owned by the State. With the exception of agricultural lands, all other natural
resources shall not be alienated. The exploration, development, and
utilization of natural resources shall be under the full control and supervision
of the State. The State may directly undertake such activities, or it may
enter into co-production, joint venture, or production-sharing
agreements with Filipino citizens, or corporations or associations at
least sixty per centum of whose capital is owned by such citizens. Such
agreements may be for a period not exceeding twenty-five years, renewable
for not more than twenty-five years, and under such terms and conditions as
may be provided by law. In cases of water rights for irrigation, water supply
fisheries, or industrial uses other than the development of water power,
beneficial use may be the measure and limit of the grant.
The State shall protect the nations marine wealth in its archipelagic waters,
territorial sea, and exclusive economic zone, and reserve its use and
enjoyment exclusively to Filipino citizens.
The Congress may, by law, allow small-scale utilization of natural resources
by Filipino citizens, as well as cooperative fish farming, with priority to
subsistence fishermen and fish- workers in rivers, lakes, bays, and lagoons.
The President may enter into agreements with foreign-owned corporations
involving either technical or financial assistance for large-scale exploration,
development, and utilization of minerals, petroleum, and other mineral oils
according to the general terms and conditions provided by law, based on
real contributions to the economic growth and general welfare of the country.
In such agreements, the State shall promote the development and use of
local scientific and technical resources.
The President shall notify the Congress of every contract entered into in accordance
with this provision, within thirty days from its execution.
20 Section 7. Save in cases of hereditary succession, no private lands shall be
transferred or conveyed except to individuals, corporations, or associations
qualified to acquire or hold lands of the public domain.
21Section 10. The Congress shall, upon recommendation of the
economic and planning agency, when the national interest dictates,
reserve to citizens of the Philippines or to corporations or associations
at least sixty per centumof whose capital is owned by such citizens, or
such higher percentage as Congress may prescribe, certain areas of
investments. The Congress shall enact measures that will encourage the
formation and operation of enterprises whose capital is wholly owned by
Filipinos.
In the grant of rights, privileges, and concessions covering the national
economy and patrimony, the State shall give preference to qualified
Filipinos.
The State shall regulate and exercise authority over foreign investments
within its national jurisdiction and in accordance with its national goals and
priorities.
22Section 4(2), Article XIV of the 1987 Constitution provides: Educational
institutions, other than those established by religious groups and
mission boards, shall be owned solely by citizens of the Philippines or
corporations or associations at least sixty per centum of the capital of
which is owned by such citizens. The Congress may, however, require
increased Filipino equity participation in all educational institutions.
The control and administration of educational institutions shall be vested in
citizens of the Philippines.
xxxx
23Section 11(2), Article XVI of the 1987 Constitution provides: The
advertising industry is impressed with public interest, and shall be regulated
by law for the protection of consumers and the promotion of the general
welfare.
Only Filipino citizens or corporations or associations at least seventy per
centum of the capital of which is owned by such citizens shall be allowed to
engage in the advertising industry.
The participation of foreign investors in the governing body of entities in such industry
shall be limited to their proportionate share in the capital thereof, and all the executive
and managing officers of such entities must be citizens of the Philippines.
24 G.R. No. 130716, 9 December 1998, 299 SCRA 744 cited in Chavez v. Public
Estates Authority, 433 Phil. 506 (2002). See also David v. Macapagal-Arroyo, G.R.
No. 171396, 3 May 2006, 489 SCRA 160; Santiago v. Commission on Elections, G.R.
No. 127325, 19 March 1997, 270 SCRA 106; Kilosbayan, Inc. v. Guingona, Jr., G.R.
No. 113375, 5 May 1994, 232 SCRA 110 (1994).
25 Bernas, The Constitution of the Republic of the Philippines, p. 452, citing Smith,
Bell and Co. v. Natividad, 40 Phil. 136, 148 (1919); Luzon Stevedoring Corporation v.
Anti-Dummy Board, 46 SCRA 474, 490 (1972).
26 Id.
27 De Leon, Hector, Philippine Constitutional Law (Principles and Cases), Volume 2,
1999 Ed., p. 848.
28 Preamble, 1987 Constitution; De Leon, Hector, Philippine Constitutional Law
(Principles and Cases), Volume 2, 1999 Ed., p. 788.
29 Section 19, Article II, Constitution.
30 http://www.pldt.com.ph/investor/shareholder/Documents/GIS_2010_%28as%20of
%207.2.10%29_final.pdf
31 ESTABLISHING BASIC POLICIES FOR THE TELEPHONE INDUSTRY,
AMENDING FOR THE PURPOSE THE PERTINENT PROVISIONS OF
COMMONWEALTH ACT NO. 146, AS AMENDED, OTHERWISE KNOWN AS THE
PUBLIC SERVICE ACT, AS AMENDED, AND ALL INCONSISTENT LEGISLATIVE
AND MUNICIPAL FRANCHISE OF THE PHILIPPINE LONG DISTANCE
TELEPHONE COMPANY UNDER ACT NO. 3436, AS AMENDED, AND ALL
INCONSISTENT LEGISLATIVE AND MUNICIPAL FRANCHISES INCLUDING
OTHER EXISTING LAWS.
32 Upon approval by the National Telecommunications Commission, this mandatory
requirement to subscribe to non-voting preferred shares was made optional starting
22 April 2003. See PLDT 20- F 2005 filing with the United States Securities and
Exchange Commission
at http://www.wikinvest.com/stock/Philippine_Long_Distance_Telephone Company_(
PHI)/ Filing/20-F/25/F2923101. See also Philippine Consumers Foundation, Inc. v.
NTC and PLDT, G.R. No. L-63318, 18 April 1984, on the origin and rationale of the
SIP.
33 Rollo (Vol. I), pp. 414-451.
34 Rollo (Vol. II), p. 991.
35 Id. at 951.
36 Id. at 838.
37 Id. at 898-923.
38 Rollo (Vol. II), p. 913.
39 Rollo (G.R. No. 157360), pp. 55-62.
40 Rollo (G.R. No. 157360), pp. 1577-1583.
41 In PLDTs case, the preferred stock is non-voting, except as specifically provided
by law.
(http://www.pldt.com.ph/investor/Documents/a2d211230ec3436eab66b41d3d107cfc4
Q2004FSwi thopinion.pdf)
42 Batas Pambansa Blg. 68.
43 As stated in the Corporation Code.
44 See http://www.congress.gov.ph/download/researches/rrb_0303_5.pdf
45 See http://www.congress.gov.ph/download/researches/rrb_0303_5.pdf
46 Section 6, BP Blg. 68 or The Corporation Code.
47 Agpalo, Ruben E., Comments on the Corporation Code of the Philippines, 2001
Second Edition, p. 36.
48 Record of the Constitutional Commission, Vol. III, pp. 255-256.
49 Id. at 360.
50 Republic Act No. 7042 entitled AN ACT TO PROMOTE FOREIGN
INVESTMENTS, PRESCRIBE THE PROCEDURES FOR REGISTERING
ENTERPRISES DOING BUSINESS IN THE PHILIPPINES AND FOR OTHER
PURPOSES.
51 Rollo (G.R. No. 157360), Vol. I, p. 348.
It must be noted that under PLDTs Articles of Incorporation, the PLDT Board of
Directors is expressly authorized to determine, among others, with respect to each
series of Serial Preferred Stock:
xxxx
(b) the dividend rate, if any, on the shares of such series (which, if and to the
extent the Board of Directors, in its sole discretion, shall deem appropriate
under the circumstances, shall be fixed considering the rate of return on
similar securities at the time of issuance of such shares), the terms and
conditions upon which and the periods with respect to which dividends shall
be payable, whether and upon what conditions such dividends shall be
cumulative and, if cumulative, the date or dates from which dividends shall
accumulate;
c. whether or not the shares of such series shall be redeemable, the
limitations with respect to such redemption, the time or times when and the
manner in which such shares shall be redeemable (including the manner of
selecting shares of such series for redemption if less than all shares are to
be redeemed) and the price or prices at which such shares shall be
redeemable, which may not be less than (i) the par value thereof plus (ii)
accrued and unpaid dividends thereon, nor more than (i) 110% of the par
value thereof plus (ii) accrued and unpaid dividends thereon;
d. whether or not the shares of such series
shall be subject to the operation of a purchase, retirement
or sinking fund, and, if so, whether and upon what
conditions such purchase, retirement or sinking fund shall
be cumulative or non-cumulative, the extent to which and
the manner in which such fund shall be applied to the
purchase or redemption of the shares of such series for
retirement or to other corporate purposes and the terms
and provisions relative to the operation thereof;
(e) the rights to which the holders of shares of such series shall be entitled
upon the voluntary or involuntary liquidation, dissolution, distribution of
assets or winding up of the corporation, which rights may vary depending on
whether such liquidation, dissolution, distribution or winding up is voluntary
or involuntary, and if voluntary, may vary at different dates, provided,
however, that the amount which the holders of shares of such series shall be
 entitled to receive in the event of any voluntary or involuntary liquidation,
dissolution, distribution of assets or winding up of the corporation
Further, the holders of Serial Preferred Stock shall be entitled to receive,
when, as and if declared by the Board of Directors out of funds legally
available therefore, preferential cash dividends at the rate, under the terms
and conditions, for the periods and on the dates fixed by the resolution or
resolutions of the Board of Directors, x x x and no more, before any
dividends on the Common Capital Stock (other than dividends payable in
Common Capital Stock) shall be paid or set apart for payment with respect
to the same dividend period. All shares of Preferred Stock of all series shall
be of equal rank, preference and priority as to dividends irrespective of
whether or not the rates of dividends to which the same shall be entitled
shall be the same and, when the stated dividends are not paid in full, the
shares of all series of Serial Preferred Stock shall share ratably in the
payment of dividends including accumulations, if any, in accordance with the
sums which would be payable on such shares if all dividends were declared
and paid in full, provided, however, that any two or more series of Serial
Preferred Stock may differ from each other as to the existence and extent of
the right to cumulative dividends as aforesaid.
52 Rollo (G.R. No. 157360), Vol. I, p. 339-355. Adopted on 21 November 1995 and
approved on 18 February 1997.
53 The other rights, limitations and preferences of common capital stock are as
follows:
1. After the requirements with respect to preferential dividends on the Serial
Preferred Stock shall have been met and after the corporation shall have
complied with all the requirements, if any, with respect to the setting aside of
sums as purchase, retirement or sinking funds, then and not otherwise the
holders of the Common Capital Stock shall be entitled to receive such
dividends as may be declared from time to time by the Board of Directors out
of funds legally available therefor.
2. After distribution in full of the preferential amounts to be distributed to the
holders of Serial Preferred Stock in the event of the voluntary or involuntary
liquidation, dissolution, distribution of assets or winding up of the
corporation, the holders of the Common Capital Stock shall be entitled to
receive all the remaining assets of the corporation of whatever kind available
for distribution to stockholders ratably in proportion to the number of shares
of the Common Capital Stock held by them, respectively.
xxxx
4. The ownership of shares of Common Capital Stock shall not entitle the
owner thereof to any right (other than such right, if any, as the Board of
Directors in its discretion may from time to time grant) to subscribe for or to
purchase or to have offered to him for subscription or purchase any shares
of any class of preferred stock of the corporation.
54 http://www.pldt.com.ph/investor/shareholder/Documents/GIS_2010_%28as%20of
%207.2.10%29_final.pdf
55 http://www.sec.gov.ph/index.htm?GIS_Download
56 http://www.pldt.com.ph/investor/shareholder/Documents/GIS_2010_%28as%20of
%207.2.10%29_final.pdf
57 http://www.pldt.com.ph/investor/Documents/2009%20Dividend%20Declarations_U
pdate %2012082009.pdf. See
also http://www.pldt.com.ph/investor/Documents/disclosures_03-01- 2011.pdf
58 Subscription Investment Plan. See PD No. 217.
59 This is the result of the preferred shares being denominated 10% preferred, which
means each preferred share will earn an annual dividend equal to 10% of its par
value of P10, which amounts to P1. Once this dividend is paid to holders of preferred
shares, the rest of the retained earnings can be paid as dividends to the holders of
common shares.
See http://www.pldt.com.ph/investor/Documents/2009%20Dividend%20Declarations_
Update %2012082009.pdf
In 2011, PLDT declared dividends for the common shares at P78.00 per share.
(http://www.pldt.com.ph/investor/Documents/disclosures_03-01-2011.pdf)
60 http://www.pldt.com.ph/investor/shareholder/Documents/GIS_2010_(as%20of %2
07.2.10)_final.pdf
61 Id. Based on PLDTs 2010 GIS, the paid-up capital of PLDT (as of Record Date 12
April 2010) consists of the following:
Filipino (preferred): 403,410,355
Foreigners (preferred): 2,287,207
Total: 405,697,562
62 Based on par value, as stated in PLDTs 2010 GIS sbumitted to the SEC. See
http://www.pldt.com.ph/investor/shareholder/Documents/GIS_2010_%28as%20of
%207.2.10%29_final.pdf (accessed 23 May 2011).
Authorized capital stock of PLDT is broken down as follows:
Common shares: 234,000,000
Preferred shares: 822,500,000
Total: 1,056,000,000
63 For the year 2009.
64 http://www.pse.com.ph/ (accessed 31 May 2011)
65 http://www.pse.com.ph/html/Quotations/2011/stockQuotes_05272011.pdf (access
ed 27 May 2011)
66 335 Phil. 82 (1997).
67Krivenko v. Register of Deeds, 79 Phil. 461
(1947); Rellosa v. Gaw Chee Hun, 93 Phil. 827 (1953); Vasquez v.
Li Seng Giap, 96 Phil. 447 (1955); Soriano v. Ong Hoo, 103 Phil. 829
(1958); Philippine Banking Corporation v. Lui She, 128 Phil. 53
(1967); Frenzel v. Catito, 453 Phil. 885 (2003).
68 Id.
69 Securities and Exchange Commission v. Court of Appeals, et al., 316 Phil. 903
(1995). The Court ruled in this case:
The Securities and Exchange Commission (SEC) has both regulatory and
adjudicative functions.
Under its regulatory responsibilities, the SEC may pass upon
applications for, or may suspend or revoke (after due notice and
hearing), certificates of registration of corporations, partnerships and
associations (excluding cooperatives, homeowners associations, and labor
unions); compel legal and regulatory compliances; conduct inspections; and
impose fines or other penalties for violations of the Revised Securities Act,
 as well as implementing rules and directives of the SEC, such as may be (m) Suspend, or revoke, after proper notice and hearing the franchise or certificate of
warranted. registration of corporations, partnership or associations, upon any of the grounds
provided by law; and
Relative to its adjudicative authority, the SEC has original and exclusive (n) Exercise such other powers as may be provided by law as well as those
jurisdiction to hear and decide controversies and cases involving - which may be implied from, or which are necessary or incidental to the
carrying out of, the express powers granted the Commission to achieve the
a. Intra-corporate and partnership relations between or among the objectives and purposes of these laws.
corporation, officers and stockholders and partners, including their elections
or appointments;
b. State and corporate affairs in relation to the legal existence of
corporations, partnerships and associations or to their franchise; and
c. Investors and corporate affairs particularly in respect of devices and
schemes, such as fraudulent practices, employed by directors, officers,
business associates, and/or other stockholders, partners, or members of
registered firms; x x x
x x x x (Emphasis supplied)
70SEC. 17. Grounds when articles of incorporation or amendment may be
rejected or disapproved. The Securities and Exchange Commission may
reject the articles of incorporation or disapprove any amendment thereto if
the same is not in compliance with the requirements of this Code:
Provided, That the Commission shall give the incorporators a
reasonable time within which to correct or modify the objectionable
portions of the articles or amendment. The following are grounds for such
rejection or disapproval:

xxx

(4) That the required percentage of ownership of the capital stock to be

owned by citizens of the Philippines has not been complied with as
required by existing laws or the Constitution. (Emphasis supplied)
71 Republic Act No. 8799. Section 5 of R.A. No. 8799 provides:

Section 5. Powers and Functions of the Commission. 5.1. The Commission

shall act with transparency and shall have the powers and functions
provided by this Code, Presidential Decree No. 902-A, the Corporation
Code, the Investment Houses Law, the Financing Company Act and other
existing laws. Pursuant thereto the Commission shall have, among others,
the following powers and functions:
(a) Have jurisdiction and supervision over all corporations, partnerships or
associations who are the grantees of primary franchises and/or a license or a permit
issued by the Government;
xxx
(c) Approve, reject, suspend, revoke or require amendments to registration
statements, and registration and licensing applications;
xxx
(f) Impose sanctions for the violation of laws and the rules, regulations and orders,
issued pursuant thereto;
xxx
(i) Issue cease and desist orders to prevent fraud or injury to the investing
public;
xxx
G.R. No. 176579 October 9, 2012
HEIRS OF WILSON P. GAMBOA,* Petitioners, vs. FINANCE
SECRETARYMARGARITO B. TEVES, FINANCE UNDERSECRETARYJOHN P.
SEVILLA, AND COMMISSIONER RICARDO ABCEDE OF THE PRESIDENTIAL
COMMISSION ON GOOD GOVERNMENT(PCGG) IN THEIR CAPACITIES AS
CHAIR AND MEMBERS, RESPECTIVELY, OF THE PRIVATIZATION COUNCIL,
CHAIRMAN ANTHONI SALIM OF FIRST PACIFIC CO., LTD. IN HIS CAPACITY AS
DIRECTOR OF METRO PACIFIC ASSET HOLDINGS INC., CHAIRMAN MANUEL
V. PANGILINAN OF PHILIPPINE LONG DISTANCE TELEPHONE COMPANY
(PLDT) IN HIS CAPACITY AS MANAGING DIRECTOR OF FIRST PACIFIC CO.,
LTD., PRESIDENT NAPOLEON L. NAZARENO OF PHILIPPINE LONG DISTANCE
TELEPHONE COMPANY, CHAIR FE BARIN OF THE SECURITIES AND
EXCHANGE COMMISSION, and PRESIDENT FRANCIS LIM OF THE PHILIPPINE
STOCK EXCHANGE, Respondents.
PABLITO V. SANIDAD and ARNO V. SANIDAD, Petitioner-in-Intervention.
RESOLUTION
CARPIO, J.:
This resolves the motions for reconsideration of the 28 June 2011 Decision filed by
(1) the Philippine Stock Exchange's (PSE) President, 1 (2) Manuel V. Pangilinan
(Pangilinan),2 (3) Napoleon L. Nazareno (Nazareno ),3 and ( 4) the Securities and
Exchange Commission (SEC)4 (collectively, movants ).
The Office of the Solicitor General (OSG) initially filed a motion for reconsideration on
behalfofthe SEC,5 assailing the 28 June 2011 Decision. However, it subsequently filed
a Consolidated Comment on behalf of the State,6declaring expressly that it agrees
with the Court's definition of the term "capital" in Section 11, Article XII of the
Constitution. During the Oral Arguments on 26 June 2012, the OSG reiterated its
position consistent with the Court's 28 June 2011 Decision.
We deny the motions for reconsideration.
I.
Far-reaching implications of the legal issue justify
treatment of petition for declaratory relief as one for mandamus.
As we emphatically stated in the 28 June 2011 Decision, the interpretation of the term
"capital" in Section 11, Article XII of the Constitution has far-reaching implications to
the national economy. In fact, a resolution of this issue will determine whether
Filipinos are masters, or second-class citizens, in their own country. What is at stake
here is whether Filipinos or foreigners will have effective control of the Philippine
national economy. Indeed, if ever there is a legal issue that has far-reaching
implications to the entire nation, and to future generations of Filipinos, it is the
threshold legal issue presented in this case.
Contrary to Pangilinan’s narrow view, the serious economic consequences resulting
in the interpretation of the term "capital" in Section 11, Article XII of the Constitution
undoubtedly demand an immediate adjudication of this issue. Simply put, the far-
reaching implications of this issue justify the treatment of the petition as one
for mandamus.7
In Luzon Stevedoring Corp. v. Anti-Dummy Board,8 the Court deemed it wise and
expedient to resolve the case although the petition for declaratory relief could be
outrightly dismissed for being procedurally defective. There, appellant admittedly had
already committed a breach of the Public Service Act in relation to the Anti-Dummy
Law since it had been employing non- American aliens long before the decision in a
prior similar case. However, the main issue in Luzon Stevedoring was of
transcendental importance, involving the exercise or enjoyment of rights, franchises,
privileges, properties and businesses which only Filipinos and qualified corporations
could exercise or enjoy under the Constitution and the statutes. Moreover, the same
issue could be raised by appellant in an appropriate action. Thus, in Luzon
Stevedoring the Court deemed it necessary to finally dispose of the case for the
guidance of all concerned, despite the apparent procedural flaw in the petition.
The circumstances surrounding the present case, such as the supposed procedural
defect of the petition and the pivotal legal issue involved, resemble those in Luzon
Stevedoring. Consequently, in the interest of substantial justice and faithful
adherence to the Constitution, we opted to resolve this case for the guidance of the
public and all concerned parties.
II.
No change of any long-standing rule;
thus, no redefinition of the term "capital."
Movants contend that the term "capital" in Section 11, Article XII of the Constitution
has long been settled and defined to refer to the total outstanding shares of stock,
whether voting or non-voting. In fact, movants claim that the SEC, which is the
administrative agency tasked to enforce the 60-40 ownership requirement in favor of
Filipino citizens in the Constitution and various statutes, has consistently adopted this
particular definition in its numerous opinions. Movants point out that with the 28 June
2011 Decision, the Court in effect introduced a "new" definition or "midstream
redefinition"9 of the term "capital" in Section 11, Article XII of the Constitution.
This is egregious error.
For more than 75 years since the 1935 Constitution, the Court has not interpreted or
defined the term "capital" found in various economic provisions of the 1935, 1973 and
1987 Constitutions. There has never been a judicial precedent interpreting the term
"capital" in the 1935, 1973 and 1987 Constitutions, until now. Hence, it is patently
wrong and utterly baseless to claim that the Court in defining the term "capital" in its
28 June 2011 Decision modified, reversed, or set aside the purported long-standing
definition of the term "capital," which supposedly refers to the total outstanding shares
of stock, whether voting or non-voting. To repeat, until the present case there has
never been a Court ruling categorically defining the term "capital" found in the various
economic provisions of the 1935, 1973 and 1987 Philippine Constitutions.
The opinions of the SEC, as well as of the Department of Justice (DOJ), on the
definition of the term "capital" as referring to both voting and non-voting shares
(combined total of common and preferred shares) are, in the first place, conflicting
and inconsistent. There is no basis whatsoever to the claim that the SEC and the
DOJ have consistently and uniformly adopted a definition of the term "capital"
contrary to the definition that this Court adopted in its 28 June 2011 Decision.
In DOJ Opinion No. 130, s. 1985,10 dated 7 October 1985, the scope of the term
"capital" in Section 9, Article XIV of the 1973 Constitution was raised, that is, whether
the term "capital" includes "both preferred and common stocks." The issue was raised
in relation to a stock-swap transaction between a Filipino and a Japanese
corporation, both stockholders of a domestic corporation that owned lands in the
Philippines. Then Minister of Justice Estelito P. Mendoza ruled that the resulting
ownership structure of the corporation would be unconstitutional because 60% of
the voting stock would be owned by Japanese while Filipinos would own only 40% of
the voting stock, although when the non-voting stock is added, Filipinos would own
60% of the combined voting and non-voting stock. This ownership structure is
remarkably similar to the current ownership structure of PLDT. Minister
Mendoza ruled:
xxxx
Thus, the Filipino group still owns sixty (60%) of the entire subscribed capital stock
(common and preferred) while the Japanese investors control sixty percent (60%) of
the common (voting) shares.
It is your position that x x x since Section 9, Article XIV of the Constitution uses
the word "capital," which is construed "to include both preferred and common
shares" and "that where the law does not distinguish, the courts shall not
distinguish."
xxxx
In light of the foregoing jurisprudence, it is my opinion that the stock-swap
transaction in question may not be constitutionally upheld. While it may be
ordinary corporate practice to classify corporate shares into common voting shares
and preferred non-voting shares, any arrangement which attempts to defeat the
constitutional purpose should be eschewed. Thus, the resultant equity
arrangement which would place ownership of 60%11 of the common (voting)
shares in the Japanese group, while retaining 60% of the total percentage of
common and preferred shares in Filipino hands would amount to
circumvention of the principle of control by Philippine stockholders that is
implicit in the 60% Philippine nationality requirement in the
Constitution. (Emphasis supplied)
In short, Minister Mendoza categorically rejected the theory that the term "capital" in
Section 9, Article XIV of the 1973 Constitution includes "both preferred and common
stocks" treated as the same class of shares regardless of differences in voting rights
and privileges. Minister Mendoza stressed that the 60-40 ownership requirement in
favor of Filipino citizens in the Constitution is not complied with unless the corporation
"satisfies the criterion of beneficial ownership" and that in applying the same "the
primordial consideration is situs of control."
On the other hand, in Opinion No. 23-10 dated 18 August 2010, addressed to Castillo
Laman Tan Pantaleon & San Jose, then SEC General Counsel Vernette G. Umali-
Paco applied the Voting Control Test, that is, using only the voting stock to
determine whether a corporation is a Philippine national. The Opinion states:
Applying the foregoing, particularly the Control Test, MLRC is deemed as a
Philippine national because: (1) sixty percent (60%) of its outstanding capital
stock entitled to vote is owned by a Philippine national, the Trustee; and (2) at least
sixty percent (60%) of the ERF will accrue to the benefit of Philippine nationals. Still
pursuant to the Control Test, MLRC’s investment in 60% of BFDC’s outstanding
capital stock entitled to vote shall be deemed as of Philippine nationality,
thereby qualifying BFDC to own private land.
Further, under, and for purposes of, the FIA, MLRC and BFDC are both Philippine
nationals, considering that: (1) sixty percent (60%) of their respective outstanding
capital stock entitled to vote is owned by a Philippine national (i.e., by the Trustee,
in the case of MLRC; and by MLRC, in the case of BFDC); and (2) at least 60% of
their respective board of directors are Filipino citizens. (Boldfacing and italicization
supplied)
Clearly, these DOJ and SEC opinions are compatible with the Court’s interpretation of
the 60-40 ownership requirement in favor of Filipino citizens mandated by the
Constitution for certain economic activities. At the same time, these opinions highlight
the conflicting, contradictory, and inconsistent positions taken by the DOJ and the
SEC on the definition of the term "capital" found in the economic provisions of the
Constitution.
The opinions issued by SEC legal officers do not have the force and effect of SEC
rules and regulations because only the SEC en banc can adopt rules and regulations.
As expressly provided in Section 4.6 of the Securities Regulation Code, 12 the SEC
cannot delegate to any of its individual Commissioner or staff the power to adopt any
rule or regulation. Further, under Section 5.1 of the same Code, it is the SEC as a
collegial body, and not any of its legal officers, that is empowered to
issue opinions and approve rules and regulations. Thus:
4.6. The Commission may, for purposes of efficiency, delegate any of its functions to
any department or office of the Commission, an individual Commissioner or staff
member of the Commission except its review or appellate authority and its power to
adopt, alter and supplement any rule or regulation.
The Commission may review upon its own initiative or upon the petition of any
interested party any action of any department or office, individual Commissioner, or
staff member of the Commission.
SEC. 5. Powers and Functions of the Commission.- 5.1. The Commission shall act
with transparency and shall have the powers and functions provided by this Code,
Presidential Decree No. 902-A, the Corporation Code, the Investment Houses Law,
the Financing Company Act and other existing laws. Pursuant thereto the
Commission shall have, among others, the following powers and functions:
xxxx
(g) Prepare, approve, amend or repeal rules, regulations and orders, and
issue opinions and provide guidance on and supervise compliance with such
rules, regulations and orders;
x x x x (Emphasis supplied)
Thus, the act of the individual Commissioners or legal officers of the SEC in issuing
opinions that have the effect of SEC rules or regulations is ultra vires. Under Sections
4.6 and 5.1(g) of the Code, only the SEC en banc can "issue opinions" that have the
force and effect of rules or regulations. Section 4.6 of the Code bars the SEC en
banc from delegating to any individual Commissioner or staff the power to adopt rules
or regulations. In short, any opinion of individual Commissioners or SEC legal
officers does not constitute a rule or regulation of the SEC.
The SEC admits during the Oral Arguments that only the SEC en banc, and not any
of its individual commissioners or legal staff, is empowered to issue opinions which
have the same binding effect as SEC rules and regulations, thus:
JUSTICE CARPIO: So, under the law, it is the Commission En Banc that can issue
an SEC Opinion, correct?
COMMISSIONER GAITE:13 That’s correct, Your Honor.
JUSTICE CARPIO: Can the Commission En Banc delegate this function to an SEC
officer?
COMMISSIONER GAITE: Yes, Your Honor, we have delegated it to the General
Counsel.
JUSTICE CARPIO: It can be delegated. What cannot be delegated by the
Commission En Banc to a commissioner or an individual employee of the
Commission?
COMMISSIONER GAITE: Novel opinions that [have] to be decided by the En Banc...
JUSTICE CARPIO: What cannot be delegated, among others, is the power to adopt
or amend rules and regulations, correct?
COMMISSIONER GAITE: That’s correct, Your Honor.
JUSTICE CARPIO: So, you combine the two (2), the SEC officer, if delegated
that power, can issue an opinion but that opinion does not constitute a rule or
regulation, correct?
COMMISSIONER GAITE: Correct, Your Honor.
JUSTICE CARPIO: So, all of these opinions that you mentioned they are not
rules and regulations, correct?
COMMISSIONER GAITE: They are not rules and regulations.
JUSTICE CARPIO: If they are not rules and regulations, they apply only to that
particular situation and will not constitute a precedent, correct?
COMMISSIONER GAITE: Yes, Your Honor.14 (Emphasis supplied)
Significantly, the SEC en banc, which is the collegial body statutorily empowered to
issue rules and opinions on behalf of the SEC, has adopted even the Grandfather
Rule in determining compliance with the 60-40 ownership requirement in favor of
Filipino citizens mandated by the Constitution for certain economic activities. This
prevailing SEC ruling, which the SEC correctly adopted to thwart any circumvention of
the required Filipino "ownership and control," is laid down in the 25 March 2010
SEC en banc ruling in Redmont Consolidated Mines, Corp. v. McArthur Mining, Inc.,
et al.,15 to wit:
The avowed purpose of the Constitution is to place in the hands of Filipinos the
exploitation of our natural resources. Necessarily, therefore, the Rule interpreting
the constitutional provision should not diminish that right through the legal
fiction of corporate ownership and control. But the constitutional provision, as
interpreted and practiced via the 1967 SEC Rules, has favored foreigners contrary to
the command of the Constitution. Hence, the Grandfather Rule must be applied to
accurately determine the actual participation, both direct and indirect, of
foreigners in a corporation engaged in a nationalized activity or business.
Compliance with the constitutional limitation(s) on engaging in nationalized activities
must be determined by ascertaining if 60% of the investing corporation’s outstanding
capital stock is owned by "Filipino citizens", or as interpreted, by natural or individual
Filipino citizens. If such investing corporation is in turn owned to some extent by
another investing corporation, the same process must be observed. One must not
stop until the citizenships of the individual or natural stockholders of layer after layer
of investing corporations have been established, the very essence of the Grandfather
Rule.
Lastly, it was the intent of the framers of the 1987 Constitution to adopt the
Grandfather Rule. In one of the discussions on what is now Article XII of the present
Constitution, the framers made the following exchange:
MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity
and foreign equity; namely, 60-40 in Section 3, 60-40 in Section 9, and 2/3-1/3 in
Section 15.
MR. VILLEGAS. That is right.
MR. NOLLEDO. In teaching law, we are always faced with the question: ‘Where do
we base the equity requirement, is it on the authorized capital stock, on the
subscribed capital stock, or on the paid-up capital stock of a corporation’? Will the
Committee please enlighten me on this?
MR. VILLEGAS. We have just had a long discussion with the members of the team
from the UP Law Center who provided us a draft. The phrase that is contained here
which we adopted from the UP draft is ‘60 percent of voting stock.’
MR. NOLLEDO. That must be based on the subscribed capital stock, because unless
declared delinquent, unpaid capital stock shall be entitled to vote.
MR. VILLEGAS. That is right.
MR. NOLLEDO. Thank you. With respect to an investment by one corporation in
another corporation, say, a corporation with 60-40 percent equity invests in another
corporation which is permitted by the Corporation Code, does the Committee adopt
the grandfather rule?
MR. VILLEGAS. Yes, that is the understanding of the Committee.
MR. NOLLEDO. Therefore, we need additional Filipino capital?
MR. VILLEGAS. Yes. (Boldfacing and underscoring supplied; italicization in the
original)
This SEC en banc ruling conforms to our 28 June 2011 Decision that the 60-40
ownership requirement in favor of Filipino citizens in the Constitution to engage in
certain economic activities applies not only to voting control of the corporation,
but also to the beneficial ownership of the corporation. Thus, in our 28 June 2011
Decision we stated:
Mere legal title is insufficient to meet the 60 percent Filipinoowned "capital" required
in the Constitution. Full beneficial ownership of 60 percent of the outstanding
capital stock, coupled with 60 percent of the voting rights, is required. The legal
and beneficial ownership of 60 percent of the outstanding capital stock must rest in
the hands of Filipino nationals in accordance with the constitutional mandate.
Otherwise, the corporation is "considered as non-Philippine national[s]." (Emphasis
supplied)
Both the Voting Control Test and the Beneficial Ownership Test must be applied to
determine whether a corporation is a "Philippine national."
The interpretation by legal officers of the SEC of the term "capital," embodied in
various opinions which respondents relied upon, is merely preliminary and an opinion
only of such officers. To repeat, any such opinion does not constitute an SEC rule or
regulation. In fact, many of these opinions contain a disclaimer which expressly
states: "x x x the foregoing opinion is based solely on facts disclosed in your query
and relevant only to the particular issue raised therein and shall not be used in the
nature of a standing rule binding upon the Commission in other cases whether
of similar or dissimilar circumstances."16 Thus, the opinions clearly make
a caveat that they do not constitute binding precedents on any one, not even on the
SEC itself.
Likewise, the opinions of the SEC en banc, as well as of the DOJ, interpreting the law
are neither conclusive nor controlling and thus, do not bind the Court. It is hornbook
doctrine that any interpretation of the law that administrative or quasi-judicial agencies
make is only preliminary, never conclusive on the Court. The power to make a final
interpretation of the law, in this case the term "capital" in Section 11, Article XII of the
1987 Constitution, lies with this Court, not with any other government entity.
In his motion for reconsideration, the PSE President cites the cases of National
Telecommunications Commission v. Court of Appeals 17 and Philippine Long Distance
Telephone Company v. National Telecommunications Commission18 in arguing that
the Court has already defined the term "capital" in Section 11, Article XII of the 1987
Constitution.19
The PSE President is grossly mistaken. In both cases of National
Telecommunications v. Court of Appeals20 and Philippine Long Distance Telephone
Company v. National Telecommunications Commission,21 the Court did not define the
term "capital" as found in Section 11, Article XII of the 1987 Constitution. In fact,
these two cases never mentioned, discussed or cited Section 11, Article XII of
the Constitution or any of its economic provisions, and thus cannot serve as
precedent in the interpretation of Section 11, Article XII of the Constitution.
These two cases dealt solely with the determination of the correct regulatory fees
under Section 40(e) and (f) of the Public Service Act, to wit:
(e) For annual reimbursement of the expenses incurred by the Commission in the
supervision of other public services and/or in the regulation or fixing of their rates,
twenty centavos for each one hundred pesos or fraction thereof, of the capital stock
subscribed or paid, or if no shares have been issued, of the capital invested, or of
the property and equipment whichever is higher.
(f) For the issue or increase of capital stock, twenty centavos for each one hundred
pesos or fraction thereof, of the increased capital. (Emphasis supplied)
The Court’s interpretation in these two cases of the terms "capital stock subscribed or
paid," "capital stock" and "capital" does not pertain to, and cannot control, the
definition of the term "capital" as used in Section 11, Article XII of the Constitution, or
any of the economic provisions of the Constitution where the term "capital" is found.
The definition of the term "capital" found in the Constitution must not be taken out of
context. A careful reading of these two cases reveals that the terms "capital stock
subscribed or paid," "capital stock" and "capital" were defined solely to determine the
basis for computing the supervision and regulation fees under Section 40(e) and (f) of
the Public Service Act.
III.
Filipinization of Public Utilities
The Preamble of the 1987 Constitution, as the prologue of the supreme law of the
land, embodies the ideals that the Constitution intends to achieve. 22 The Preamble
reads:
We, the sovereign Filipino people, imploring the aid of Almighty God, in order to build
a just and humane society, and establish a Government that shall embody our ideals
and aspirations, promote the common good, conserve and develop our patrimony,
and secure to ourselves and our posterity, the blessings of independence and
democracy under the rule of law and a regime of truth, justice, freedom, love,
equality, and peace, do ordain and promulgate this Constitution. (Emphasis supplied)
Consistent with these ideals, Section 19, Article II of the 1987 Constitution declares
as State policy the development of a national economy "effectively controlled" by
Filipinos:
Section 19. The State shall develop a self-reliant and independent national
economy effectively controlled by Filipinos.
Fortifying the State policy of a Filipino-controlled economy, the Constitution decrees:
Section 10. The Congress shall, upon recommendation of the economic and planning
agency, when the national interest dictates, reserve to citizens of the Philippines or to
corporations or associations at least sixty per centum of whose capital is owned by
such citizens, or such higher percentage as Congress may prescribe, certain areas of
investments. The Congress shall enact measures that will encourage the formation
and operation of enterprises whose capital is wholly owned by Filipinos.
In the grant of rights, privileges, and concessions covering the national economy and
patrimony, the State shall give preference to qualified Filipinos.
The State shall regulate and exercise authority over foreign investments within its
national jurisdiction and in accordance with its national goals and priorities. 23
Under Section 10, Article XII of the 1987 Constitution, Congress may "reserve to
citizens of the Philippines or to corporations or associations at least sixty per
centum of whose capital is owned by such citizens, or such higher percentage as
Congress may prescribe, certain areas of investments." Thus, in numerous laws
Congress has reserved certain areas of investments to Filipino citizens or to
corporations at least sixty percent of the "capital" of which is owned by Filipino
citizens. Some of these laws are: (1) Regulation of Award of Government Contracts
or R.A. No. 5183; (2) Philippine Inventors Incentives Act or R.A. No. 3850; (3) Magna
Carta for Micro, Small and Medium Enterprises or R.A. No. 6977; (4) Philippine
Overseas Shipping Development Act or R.A. No. 7471; (5) Domestic Shipping
Development Act of 2004 or R.A. No. 9295; (6) Philippine Technology Transfer Act of
2009 or R.A. No. 10055; and (7) Ship Mortgage Decree or P.D. No. 1521.
With respect to public utilities, the 1987 Constitution specifically ordains:
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)
This provision, which mandates the Filipinization of public utilities, requires that any
form of authorization for the operation of public utilities shall be granted only 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." "The provision is [an express] recognition of the sensitive and vital
position of public utilities both in the national economy and for national
security."24
The 1987 Constitution reserves the ownership and operation of public utilities
exclusively to (1) Filipino citizens, or (2) corporations or associations at least 60
percent of whose "capital" is owned by Filipino citizens. Hence, in the case of
individuals, only Filipino citizens can validly own and operate a public utility. In the
case of corporations or associations, at least 60 percent of their "capital" must be
owned by Filipino citizens. In other words, under Section 11, Article XII of the
1987 Constitution, to own and operate a public utility a corporation’s capital
must at least be 60 percent owned by Philippine nationals.
IV.
Definition of "Philippine National"
Pursuant to the express mandate of Section 11, Article XII of the 1987 Constitution,
Congress enacted Republic Act No. 7042 or the Foreign Investments Act of
1991 (FIA), as amended, which defined a "Philippine national" as follows:
SEC. 3. Definitions. - As used in this Act:
a. The term "Philippine national" shall mean 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 sixty
percent (60%) of the capital stock outstanding and entitled to vote is owned and
held by citizens of the Philippines; or a corporation organized abroad and
registered as doing business in the Philippines under the Corporation Code of which
one hundred percent (100%) of the capital stock outstanding and entitled to vote is
wholly owned by Filipinos or a trustee of funds for pension or other employee
retirement or separation benefits, where the trustee is a Philippine national and at
least sixty percent (60%) of the fund will accrue to the benefit of Philippine
nationals: Provided, That where a corporation and its non-Filipino stockholders own
stocks in a Securities and Exchange Commission (SEC) registered enterprise, at
least sixty percent (60%) of the capital stock outstanding and entitled to vote of each
of both corporations must be owned and held by citizens of the Philippines and at
least sixty percent (60%) of the members of the Board of Directors of each of both
corporations must be citizens of the Philippines, in order that the corporation, shall be
considered a "Philippine national." (Boldfacing, italicization and underscoring
supplied)
Thus, the FIA clearly and unequivocally defines a "Philippine national" as a
Philippine citizen, or a domestic corporation at least "60% of the capital stock
outstanding and entitled to vote" is owned by Philippine citizens.
The definition of a "Philippine national" in the FIA reiterated the meaning of such term
as provided in its predecessor statute, Executive Order No. 226 or the Omnibus
Investments Code of 1987,25 which was issued by then President Corazon C. Aquino.
Article 15 of this Code states:
Article 15. "Philippine national" shall mean a citizen of the Philippines or a diplomatic
partnership or association wholly-owned by citizens of the Philippines; or a
corporation organized under the laws of the Philippines of which at least sixty
per cent (60%) of the capital stock outstanding and entitled to vote is owned
and held by citizens of the Philippines; or a trustee of funds for pension or other
employee retirement or separation benefits, where the trustee is a Philippine national
and at least sixty per cent (60%) of the fund will accrue to the benefit of Philippine
nationals: Provided, That where a corporation and its non-Filipino stockholders own
stock in a registered enterprise, at least sixty per cent (60%) of the capital stock
outstanding and entitled to vote of both corporations must be owned and held by the
citizens of the Philippines and at least sixty per cent (60%) of the members of the
Board of Directors of both corporations must be citizens of the Philippines in order
that the corporation shall be considered a Philippine national. (Boldfacing, italicization
and underscoring supplied)
Under Article 48(3)26 of the Omnibus Investments Code of 1987, "no corporation x x x
which is not a ‘Philippine national’ x x x shall do business
x x x in the Philippines x x x without first securing from the Board of Investments a
written certificate to the effect that such business or economic activity x x x
would not conflict with the Constitution or laws of the Philippines." 27 Thus, a "non-
Philippine national" cannot own and operate a reserved economic activity like a public
utility. This means, of course, that only a "Philippine national" can own and operate a
public utility.
In turn, the definition of a "Philippine national" under Article 15 of the Omnibus
Investments Code of 1987 was a reiteration of the meaning of such term as provided
in Article 14 of the Omnibus Investments Code of 1981,28 to wit:
Article 14. "Philippine national" shall mean 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 sixty
per cent (60%) of the capital stock outstanding and entitled to vote is owned
and held by citizens of the Philippines; or a trustee of funds for pension or other
employee retirement or separation benefits, where the trustee is a Philippine national
and at least sixty per cent (60%) of the fund will accrue to the benefit of Philippine
nationals: Provided, That where a corporation and its non-Filipino stockholders own
stock in a registered enterprise, at least sixty per cent (60%) of the capital stock
outstanding and entitled to vote of both corporations must be owned and held by the
citizens of the Philippines and at least sixty per cent (60%) of the members of the
Board of Directors of both corporations must be citizens of the Philippines in order
that the corporation shall be considered a Philippine national. (Boldfacing, italicization
and underscoring supplied)
Under Article 69(3) of the Omnibus Investments Code of 1981, "no corporation x x x
which is not a ‘Philippine national’ x x x shall do business x x x in the Philippines x x x
without first securing a written certificate from the Board of Investments to the effect
that such business or economic activity x x x would not conflict with the Constitution
or laws of the Philippines."29 Thus, a "non-Philippine national" cannot own and
operate a reserved economic activity like a public utility. Again, this means that only a
"Philippine national" can own and operate a public utility.
Prior to the Omnibus Investments Code of 1981, Republic Act No. 5186 30 or
the Investment Incentives Act, which took effect on 16 September 1967, contained a
similar definition of a "Philippine national," to wit:
(f) "Philippine National" shall mean a citizen of the Philippines; or a partnership or
association wholly owned by citizens of the Philippines; or a corporation organized
under the laws of the Philippines of which at least sixty per cent of the capital
stock outstanding and entitled to vote is owned and held by citizens of the
Philippines; or a trustee of funds for pension or other employee retirement or
separation benefits, where the trustee is a Philippine National and at least sixty per
cent of the fund will accrue to the benefit of Philippine Nationals: Provided, That
where a corporation and its non-Filipino stockholders own stock in a registered
enterprise, at least sixty per cent of the capital stock outstanding and entitled to vote
of both corporations must be owned and held by the citizens of the Philippines and at
least sixty per cent of the members of the Board of Directors of both corporations
must be citizens of the Philippines in order that the corporation shall be considered a
Philippine National. (Boldfacing, italicization and underscoring supplied)
Under Section 3 of Republic Act No. 5455 or the Foreign Business Regulations Act,
which took effect on 30 September 1968, if the investment in a domestic enterprise by
non-Philippine nationals exceeds 30% of its outstanding capital stock, such enterprise
must obtain prior approval from the Board of Investments before accepting such
investment. Such approval shall not be granted if the investment "would conflict with
existing constitutional provisions and laws regulating the degree of required
ownership by Philippine nationals in the enterprise." 31 A "non-Philippine national"
cannot own and operate a reserved economic activity like a public utility. Again, this
means that only a "Philippine national" can own and operate a public utility.
The FIA, like all its predecessor statutes, clearly defines a "Philippine national" as
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. This definition of a "Philippine national" is crucial
in the present case because the FIA reiterates and clarifies Section 11, Article XII of
the 1987 Constitution, which limits the ownership and operation of public utilities to
Filipino citizens or to corporations or associations at least 60% Filipino-owned.
The FIA is the basic law governing foreign investments in the Philippines, irrespective
of the nature of business and area of investment. The FIA spells out the procedures
by which non-Philippine nationals can invest in the Philippines. Among the key
features of this law is the concept of a negative list or the Foreign Investments
Negative List.32 Section 8 of the law states:
SEC. 8. List of Investment Areas Reserved to Philippine Nationals [Foreign
Investment Negative List]. - The Foreign Investment Negative List shall have
two 2 component lists: A and B:
a. List A shall enumerate the areas of activities reserved to Philippine nationals
by mandate of the Constitution and specific laws.
b. List B shall contain the areas of activities and enterprises regulated pursuant to
law:
1. which are defense-related activities, requiring prior clearance and authorization
from the Department of National Defense [DND] to engage in such activity, such as
the manufacture, repair, storage and/or distribution of firearms, ammunition, lethal
weapons, military ordinance, explosives, pyrotechnics and similar materials; unless
such manufacturing or repair activity is specifically authorized, with a substantial
export component, to a non-Philippine national by the Secretary of National Defense;
or
2. which have implications on public health and morals, such as the manufacture and
distribution of dangerous drugs; all forms of gambling; nightclubs, bars, beer houses,
dance halls, sauna and steam bathhouses and massage clinics. (Boldfacing,
underscoring and italicization supplied)
Section 8 of the FIA enumerates the investment areas "reserved to Philippine
nationals." Foreign Investment Negative List A consists of "areas of activities
reserved to Philippine nationals by mandate of the Constitution and specific
laws," where foreign equity participation in any enterprise shall be limited to
the maximum percentage expressly prescribed by the Constitution and other
specific laws. In short, to own and operate a public utility in the Philippines one
must be a "Philippine national" as defined in the FIA. The FIA is abundant
notice to foreign investors to what extent they can invest in public utilities in
the Philippines.
To repeat, among the areas of investment covered by the Foreign Investment
Negative List A is the ownership and operation of public utilities, which the
Constitution expressly reserves to Filipino citizens and to corporations at least 60%
owned by Filipino citizens. In other words, Negative List A of the FIA reserves the
ownership and operation of public utilities only to "Philippine nationals,"
defined in Section 3(a) of the FIA as "(1) a citizen of the Philippines; x x x or (3) a
corporation organized under the laws of the Philippines of which at least sixty
percent (60%) of the capital stock outstanding and entitled to vote is owned and
held by citizens of the Philippines; or (4) a corporation organized abroad and
registered as doing business in the Philippines under the Corporation Code of which
one hundred percent (100%) of the capital stock outstanding and entitled to vote is
wholly owned by Filipinos or a trustee of funds for pension or other employee
retirement or separation benefits, where the trustee is a Philippine national and at
least sixty percent (60%) of the fund will accrue to the benefit of Philippine nationals."
Clearly, from the effectivity of the Investment Incentives Act of 1967 to the adoption of
the Omnibus Investments Code of 1981, to the enactment of the Omnibus
Investments Code of 1987, and to the passage of the present Foreign Investments
Act of 1991, or for more than four decades, the statutory definition of the term
"Philippine national" has been uniform and consistent: it means a Filipino
citizen, or a domestic corporation at least 60% of the voting stock is owned by
Filipinos. Likewise, these same statutes have uniformly and consistently
required that only "Philippine nationals" could own and operate public utilities
in the Philippines. The following exchange during the Oral Arguments is revealing:
JUSTICE CARPIO: Counsel, I have some questions. You are aware of the Foreign
Investments Act of 1991, x x x? And the FIA of 1991 took effect in 1991, correct?
That’s over twenty (20) years ago, correct?
COMMISSIONER GAITE: Correct, Your Honor.
JUSTICE CARPIO: And Section 8 of the Foreign Investments Act of 1991 states that
[]only Philippine nationals can own and operate public utilities[], correct?
COMMISSIONER GAITE: Yes, Your Honor.
JUSTICE CARPIO: And the same Foreign Investments Act of 1991 defines a
"Philippine national" either as a citizen of the Philippines, or if it is a corporation at
least sixty percent (60%) of the voting stock is owned by citizens of the Philippines,
correct?
COMMISSIONER GAITE: Correct, Your Honor.
JUSTICE CARPIO: And, you are also aware that under the predecessor law of the
Foreign Investments Act of 1991, the Omnibus Investments Act of 1987, the same
provisions apply: x x x only Philippine nationals can own and operate a public utility
and the Philippine national, if it is a corporation, x x x sixty percent (60%) of the
capital stock of that corporation must be owned by citizens of the Philippines, correct?
COMMISSIONER GAITE: Correct, Your Honor.
JUSTICE CARPIO: And even prior to the Omnibus Investments Act of 1987, under
the Omnibus Investments Act of 1981, the same rules apply: x x x only a Philippine
national can own and operate a public utility and a Philippine national, if it is a
corporation, sixty percent (60%) of its x x x voting stock, must be owned by citizens of
the Philippines, correct?
COMMISSIONER GAITE: Correct, Your Honor.
JUSTICE CARPIO: And even prior to that, under [the]1967 Investments Incentives
Act and the Foreign Company Act of 1968, the same rules applied, correct?
COMMISSIONER GAITE: Correct, Your Honor.
JUSTICE CARPIO: So, for the last four (4) decades, x x x, the law has been very
consistent – only a Philippine national can own and operate a public utility, and
a Philippine national, if it is a corporation, x x x at least sixty percent (60%) of
the voting stock must be owned by citizens of the Philippines, correct?
COMMISSIONER GAITE: Correct, Your Honor.33 (Emphasis supplied)
Government agencies like the SEC cannot simply ignore Sections 3(a) and 8 of the
FIA which categorically prescribe that certain economic activities, like the ownership
and operation of public utilities, are reserved to corporations "at least sixty percent
(60%) of the capital stock outstanding and entitled to vote is owned and held by
citizens of the Philippines." Foreign Investment Negative List A refers to "activities
reserved to Philippine nationals by mandate of the Constitution and specific
laws." The FIA is the basic statute regulating foreign investments in the
Philippines. Government agencies tasked with regulating or monitoring foreign
investments, as well as counsels of foreign investors, should start with the FIA in
determining to what extent a particular foreign investment is allowed in the
Philippines. Foreign investors and their counsels who ignore the FIA do so at their
own peril. Foreign investors and their counsels who rely on opinions of SEC legal
officers that obviously contradict the FIA do so also at their own peril.
Occasional opinions of SEC legal officers that obviously contradict the FIA should
immediately raise a red flag. There are already numerous opinions of SEC legal
officers that cite the definition of a "Philippine national" in Section 3(a) of the FIA in
determining whether a particular corporation is qualified to own and operate a
nationalized or partially nationalized business in the Philippines. This shows that SEC
legal officers are not only aware of, but also rely on and invoke, the provisions of the
FIA in ascertaining the eligibility of a corporation to engage in partially nationalized
industries. The following are some of such opinions:
1. Opinion of 23 March 1993, addressed to Mr. Francis F. How;
2. Opinion of 14 April 1993, addressed to Director Angeles T. Wong of the
Philippine Overseas Employment Administration;
3. Opinion of 23 November 1993, addressed to Messrs. Dominador Almeda and
Renato S. Calma;
4. Opinion of 7 December 1993, addressed to Roco Bunag Kapunan Migallos &
Jardeleza;
5. SEC Opinion No. 49-04, addressed to Romulo Mabanta Buenaventura Sayoc
& De Los Angeles;
6. SEC-OGC Opinion No. 17-07, addressed to Mr. Reynaldo G. David; and
7. SEC-OGC Opinion No. 03-08, addressed to Attys. Ruby Rose J. Yusi and
Rudyard S. Arbolado.
The SEC legal officers’ occasional but blatant disregard of the definition of the term
"Philippine national" in the FIA signifies their lack of integrity and competence in
resolving issues on the 60-40 ownership requirement in favor of Filipino citizens in
Section 11, Article XII of the Constitution.
The PSE President argues that the term "Philippine national" defined in the FIA
should be limited and interpreted to refer to corporations seeking to avail of tax and
fiscal incentives under investment incentives laws and cannot be equated with the
term "capital" in Section 11, Article XII of the 1987 Constitution. Pangilinan similarly
contends that the FIA and its predecessor statutes do not apply to "companies which
have not registered and obtained special incentives under the schemes established
by those laws."
Both are desperately grasping at straws. The FIA does not grant tax or fiscal
incentives to any enterprise. Tax and fiscal incentives to investments are granted
separately under the Omnibus Investments Code of 1987, not under the FIA. In fact,
the FIA expressly repealed Articles 44 to 56 of Book II of the Omnibus Investments
Code of 1987, which articles previously regulated foreign investments in nationalized
or partially nationalized industries.
The FIA is the applicable law regulating foreign investments in nationalized or partially
nationalized industries. There is nothing in the FIA, or even in the Omnibus
Investments Code of 1987 or its predecessor statutes, that states, expressly or
impliedly, that the FIA or its predecessor statutes do not apply to enterprises not
availing of tax and fiscal incentives under the Code. The FIA and its predecessor
statutes apply to investments in all domestic enterprises, whether or not such
enterprises enjoy tax and fiscal incentives under the Omnibus Investments Code of
1987 or its predecessor statutes. The reason is quite obvious – mere non-
availment of tax and fiscal incentives by a non-Philippine national cannot
exempt it from Section 11, Article XII of the Constitution regulating foreign
investments in public utilities. In fact, the Board of Investments’ Primer on
Investment Policies in the Philippines,34 which is given out to foreign investors,
provides:
PART III. FOREIGN INVESTMENTS WITHOUT INCENTIVES
Investors who do not seek incentives and/or whose chosen activities do not qualify for
incentives, (i.e., the activity is not listed in the IPP, and they are not exporting at least
70% of their production) may go ahead and make the investments without seeking
incentives. They only have to be guided by the Foreign Investments Negative
List (FINL).
The FINL clearly defines investment areas requiring at least 60% Filipino ownership.
All other areas outside of this list are fully open to foreign investors. (Emphasis
supplied)
V.
Right to elect directors, coupled with beneficial ownership,
translates to effective control.
The 28 June 2011 Decision declares that the 60 percent Filipino ownership required
by the Constitution to engage in certain economic activities applies not only to voting
control of the corporation, but also to the beneficial ownership of the corporation.
To repeat, we held:
Mere legal title is insufficient to meet the 60 percent Filipino-owned "capital" required
in the Constitution. Full beneficial ownership of 60 percent of the outstanding
capital stock, coupled with 60 percent of the voting rights, is required. The legal
and beneficial ownership of 60 percent of the outstanding capital stock must rest in
the hands of Filipino nationals in accordance with the constitutional mandate.
Otherwise, the corporation is "considered as non-Philippine national[s]." (Emphasis
supplied)
This is consistent with Section 3 of the FIA which provides that where 100% of the
capital stock is held by "a trustee of funds for pension or other employee retirement or
separation benefits," the trustee is a Philippine national if "at least sixty percent (60%)
of the fund will accrue to the benefit of Philippine nationals." Likewise, Section 1(b) of
the Implementing Rules of the FIA provides that "for 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."
Since the constitutional requirement of at least 60 percent Filipino ownership applies
not only to voting control of the corporation but also to the beneficial ownership of the
corporation, it is therefore imperative that such requirement apply uniformly and
across the board to all classes of shares, regardless of nomenclature and category,
comprising the capital of a corporation. Under the Corporation Code, capital
stock35 consists of all classes of shares issued to stockholders, that is, common
shares as well as preferred shares, which may have different rights, privileges or
restrictions as stated in the articles of incorporation.36
The Corporation Code allows denial of the right to vote to preferred and redeemable
shares, but disallows denial of the right to vote in specific corporate matters. Thus,
common shares have the right to vote in the election of directors, while preferred
shares may be denied such right. Nonetheless, preferred shares, even if denied the
right to vote in the election of directors, are entitled to vote on the following corporate
matters: (1) amendment of articles of incorporation; (2) increase and decrease of
capital stock; (3) incurring, creating or increasing bonded indebtedness; (4) sale,
lease, mortgage or other disposition of substantially all corporate assets; (5)
investment of funds in another business or corporation or for a purpose other than the
primary purpose for which the corporation was organized; (6) adoption, amendment
and repeal of by-laws; (7) merger and consolidation; and (8) dissolution of
corporation.37
Since a specific class of shares may have rights and privileges or restrictions different
from the rest of the shares in a corporation, the 60-40 ownership requirement in favor
of Filipino citizens in Section 11, Article XII of the Constitution must apply not only to
shares with voting rights but also to shares without voting rights. Preferred shares,
denied the right to vote in the election of directors, are anyway still entitled to vote on
the eight specific corporate matters mentioned above. Thus, if a corporation,
engaged in a partially nationalized industry, issues a mixture of common and
preferred non-voting shares, at least 60 percent of the common shares and at
least 60 percent of the preferred non-voting shares must be owned by
Filipinos. Of course, if a corporation issues only a single class of shares, at least 60
percent of such shares must necessarily be owned by Filipinos. In short, 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 uniform application of the 60-40 ownership
requirement in favor of Filipino citizens clearly breathes life to the constitutional
command that the ownership and operation of public utilities shall be reserved
exclusively to corporations at least 60 percent of whose capital is Filipino-owned.
Applying uniformly the 60-40 ownership requirement in favor of Filipino citizens to
each class of shares, regardless of differences in voting rights, privileges and
restrictions, guarantees effective Filipino control of public utilities, as mandated by the
Constitution.
Moreover, such uniform application to each class of shares insures that the
"controlling interest" in public utilities always lies in the hands of Filipino citizens. This
addresses and extinguishes Pangilinan’s worry that foreigners, owning most of the
non-voting shares, will exercise greater control over fundamental corporate matters
requiring two-thirds or majority vote of all shareholders.
VI.
Intent of the framers of the Constitution
While Justice Velasco quoted in his Dissenting Opinion 38 a portion of the deliberations
of the Constitutional Commission to support his claim that the term "capital" refers to
the total outstanding shares of stock, whether voting or non-voting, the following
excerpts of the deliberations reveal otherwise. It is clear from the following exchange
that the term "capital" refers to controlling interest of a corporation, thus:
MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity
and foreign equity; namely, 60-40 in Section 3, 60-40 in Section 9 and 2/3-1/3 in
Section 15.
MR. VILLEGAS. That is right.
MR. NOLLEDO. In teaching law, we are always faced with this question: "Where do
we base the equity requirement, is it on the authorized capital stock, on the
subscribed capital stock, or on the paid-up capital stock of a corporation"? Will the
Committee please enlighten me on this?
MR. VILLEGAS. We have just had a long discussion with the members of the team
from the UP Law Center who provided us a draft. The phrase that is contained here
which we adopted from the UP draft is "60 percent of voting stock."
MR. NOLLEDO. That must be based on the subscribed capital stock, because unless
declared delinquent, unpaid capital stock shall be entitled to vote.
MR. VILLEGAS. That is right.
MR. NOLLEDO. Thank you.
With respect to an investment by one corporation in another corporation, say, a
corporation with 60-40 percent equity invests in another corporation which is
permitted by the Corporation Code, does the Committee adopt the grandfather rule?
MR. VILLEGAS. Yes, that is the understanding of the Committee.
MR. NOLLEDO. Therefore, we need additional Filipino capital?
MR. VILLEGAS. Yes.39
xxxx
MR. AZCUNA. May I be clarified as to that portion that was accepted by the
Committee.
MR. VILLEGAS. The portion accepted by the Committee is the deletion of the phrase
"voting stock or controlling interest."
MR. AZCUNA. Hence, without the Davide amendment, the committee report would
read: "corporations or associations at least sixty percent of whose CAPITAL is owned
by such citizens."
MR. VILLEGAS. Yes.
MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60 percent of
the capital to be owned by citizens.
MR. VILLEGAS. That is right.
MR. AZCUNA. But the control can be with the foreigners even if they are the
minority. Let us say 40 percent of the capital is owned by them, but it is the
voting capital, whereas, the Filipinos own the nonvoting shares. So we can
have a situation where the corporation is controlled by foreigners despite being
the minority because they have the voting capital. That is the anomaly that
would result here.
MR. BENGZON. No, the reason we eliminated the word "stock" as stated in the
1973 and 1935 Constitutions is that according to Commissioner Rodrigo, there
are associations that do not have stocks. That is why we say "CAPITAL."
MR. AZCUNA. We should not eliminate the phrase "controlling interest."
MR. BENGZON. In the case of stock corporations, it is assumed.40 (Boldfacing
and underscoring supplied)
Thus, 60 percent of the "capital" assumes, or should result in, a "controlling
interest" in the corporation.
The use of the term "capital" was intended to replace the word "stock" because
associations without stocks can operate public utilities as long as they meet the 60-40
ownership requirement in favor of Filipino citizens prescribed in Section 11, Article XII
of the Constitution. However, this did not change the intent of the framers of the
Constitution to reserve exclusively to Philippine nationals the "controlling interest" in
public utilities.
During the drafting of the 1935 Constitution, economic protectionism was "the battle-
cry of the nationalists in the Convention." 41 The same battle-cry resulted in the
nationalization of the public utilities.42 This is also the same intent of the framers of the
1987 Constitution who adopted the exact formulation embodied in the 1935 and 1973
Constitutions on foreign equity limitations in partially nationalized industries.
The OSG, in its own behalf and as counsel for the State, 43 agrees fully with the
Court’s interpretation of the term "capital." In its Consolidated Comment, the OSG
explains that the deletion of the phrase "controlling interest" and replacement of the
word "stock" with the term "capital" were intended specifically to extend the scope of
the entities qualified to operate public utilities to include associations without stocks.
The framers’ omission of the phrase "controlling interest" did not mean the inclusion
of all shares of stock, whether voting or non-voting. The OSG reiterated essentially
the Court’s declaration that the Constitution reserved exclusively to Philippine
nationals the ownership and operation of public utilities consistent with the State’s
policy to "develop a self-reliant and independent national economy effectively
controlled by Filipinos."
As we held in our 28 June 2011 Decision, to construe broadly the term "capital" as
the total outstanding capital stock, treated as a single class regardless of the actual
classification of 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." We illustrated the glaring anomaly
which would result in defining the term "capital" as the total outstanding capital stock
of a corporation, treated as a single class of shares regardless of the actual
classification of shares, to wit:
Let us assume that a corporation has 100 common shares owned by foreigners and
1,000,000 non-voting preferred shares owned by Filipinos, with both classes of share
having a par value of one peso (₱ 1.00) per share. Under the broad definition of the
term "capital," such corporation would be considered compliant with the 40 percent
constitutional limit on foreign equity of public utilities since the overwhelming majority,
or more than 99.999 percent, of the total outstanding capital stock is Filipino owned.
This is obviously absurd.
In the example given, only the foreigners holding the common shares have voting
rights in the election of directors, even if they hold only 100 shares. The foreigners,
with a minuscule equity of less than 0.001 percent, exercise control over the public
utility. On the other hand, the Filipinos, holding more than 99.999 percent of the
equity, cannot vote in the election of directors and hence, have no control over the
public utility. This starkly circumvents the intent of the framers of the Constitution, as
well as the clear language of the Constitution, to place the control of public utilities in
the hands of Filipinos. x x x
Further, even if foreigners who own more than forty percent of the voting shares elect
an all-Filipino board of directors, this situation does not guarantee Filipino control and
does not in any way cure the violation of the Constitution. The independence of the
Filipino board members so elected by such foreign shareholders is highly doubtful. As
the OSG pointed out, quoting Justice George Sutherland’s words in Humphrey’s
Executor v. US,44 "x x x it is quite evident that one who holds his office only during the
pleasure of another cannot be depended upon to maintain an attitude of
independence against the latter’s will." Allowing foreign shareholders to elect a
controlling majority of the board, even if all the directors are Filipinos, grossly
circumvents the letter and intent of the Constitution and defeats the very purpose of
our nationalization laws.
VII.
Last sentence of Section 11, Article XII of the Constitution
The last sentence of Section 11, Article XII of the 1987 Constitution reads:
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.
During the Oral Arguments, the OSG emphasized that there was never a question on
the intent of the framers of the Constitution to limit foreign ownership, and assure
majority Filipino ownership and control of public utilities. The OSG argued, "while the
delegates disagreed as to the percentage threshold to adopt, x x x the records show
they clearly understood that Filipino control of the public utility corporation can only be
and is obtained only through the election of a majority of the members of the board."
Indeed, the only point of contention during the deliberations of the Constitutional
Commission on 23 August 1986 was the extent of majority Filipino control of public
utilities. This is evident from the following exchange:
THE PRESIDENT. Commissioner Jamir is recognized.
MR. JAMIR. Madam President, my proposed amendment on lines 20 and 21 is to
delete the phrase "two thirds of whose voting stock or controlling interest," and
instead substitute the words "SIXTY PERCENT OF WHOSE CAPITAL" so that the
sentence will read: "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 PERCENT OF WHOSE CAPITAL is owned by such citizens."
xxxx
THE PRESIDENT: Will Commissioner Jamir first explain?
MR. JAMIR. Yes, in this Article on National Economy and Patrimony, there were two
previous sections in which we fixed the Filipino equity to 60 percent as against 40
percent for foreigners. It is only in this Section 15 with respect to public utilities that
the committee proposal was increased to two-thirds. I think it would be better to
harmonize this provision by providing that even in the case of public utilities, the
minimum equity for Filipino citizens should be 60 percent.
MR. ROMULO. Madam President.
THE PRESIDENT. Commissioner Romulo is recognized.
MR. ROMULO. My reason for supporting the amendment is based on the discussions
I have had with representatives of the Filipino majority owners of the international
record carriers, and the subsequent memoranda they submitted to me. x x x
Their second point is that under the Corporation Code, the management and control
of a corporation is vested in the board of directors, not in the officers but in the board
of directors. The officers are only agents of the board. And they believe that with 60
percent of the equity, the Filipino majority stockholders undeniably control the board.
Only on important corporate acts can the 40-percent foreign equity exercise a veto, x
x x.
x x x x45
MS. ROSARIO BRAID. Madam President.
THE PRESIDENT. Commissioner Rosario Braid is recognized.
MS. ROSARIO BRAID. Yes, in the interest of equal time, may I also read from a
memorandum by the spokesman of the Philippine Chamber of Communications on
why they would like to maintain the present equity, I am referring to the 66 2/3. They
would prefer to have a 75-25 ratio but would settle for 66 2/3. x x x
xxxx
THE PRESIDENT. Just to clarify, would Commissioner Rosario Braid support the
proposal of two-thirds rather than the 60 percent?
MS. ROSARIO BRAID. I have added a clause that will put management in the hands
of Filipino citizens.
x x x x46
While they had differing views on the percentage of Filipino ownership of capital, it is
clear that the framers of the Constitution intended public utilities to
be majority Filipino-owned and controlled. To ensure that Filipinos control public
utilities, the framers of the Constitution approved, as additional safeguard, the
inclusion of the last sentence of Section 11, Article XII of the Constitution
commanding that "[t]he 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." In other words, the last sentence of Section 11, Article XII
of the Constitution mandates that (1) the participation of foreign investors in the
governing body of the corporation or association shall be limited to their proportionate
share in the capital of such entity; and (2) all officers of the corporation or association
must be Filipino citizens.
Commissioner Rosario Braid proposed the inclusion of the phrase requiring the
managing officers of the corporation or association to be Filipino citizens specifically
to prevent management contracts, which were designed primarily to circumvent the
Filipinization of public utilities, and to assure Filipino control of public utilities, thus:
MS. ROSARIO BRAID. x x x They also like to suggest that we amend this provision
by adding a phrase which states: "THE MANAGEMENT BODY OF EVERY
CORPORATION OR ASSOCIATION SHALL IN ALL CASES BE CONTROLLED BY
CITIZENS OF THE PHILIPPINES." I have with me their position paper.
THE PRESIDENT. The Commissioner may proceed.
MS. ROSARIO BRAID. The three major international record carriers in the
Philippines, which Commissioner Romulo mentioned – Philippine Global
Communications, Eastern Telecommunications, Globe Mackay Cable – are 40-
percent owned by foreign multinational companies and 60-percent owned by their
respective Filipino partners. All three, however, also have management contracts with
these foreign companies – Philcom with RCA, ETPI with Cable and Wireless PLC,
and GMCR with ITT. Up to the present time, the general managers of these carriers
are foreigners. While the foreigners in these common carriers are only minority
owners, the foreign multinationals are the ones managing and controlling their
operations by virtue of their management contracts and by virtue of their strength in
the governing bodies of these carriers.47
xxxx
MR. OPLE. I think a number of us have agreed to ask Commissioner Rosario Braid to
propose an amendment with respect to the operating management of public utilities,
and in this amendment, we are associated with Fr. Bernas, Commissioners Nieva and
Rodrigo. Commissioner Rosario Braid will state this amendment now.
Thank you.
MS. ROSARIO BRAID. Madam President.
THE PRESIDENT. This is still on Section 15.
MS. ROSARIO BRAID. Yes.
MR. VILLEGAS. Yes, Madam President.
xxxx
MS. ROSARIO BRAID. Madam President, I propose a new section to read: ‘THE
MANAGEMENT BODY OF EVERY CORPORATION OR ASSOCIATION SHALL IN
ALL CASES BE CONTROLLED BY CITIZENS OF THE PHILIPPINES."
This will prevent management contracts and assure control by Filipino
citizens. Will the committee assure us that this amendment will insure that past
activities such as management contracts will no longer be possible under this
amendment?
xxxx
FR. BERNAS. Madam President.
THE PRESIDENT. Commissioner Bernas is recognized.
FR. BERNAS. Will the committee accept a reformulation of the first part?
MR. BENGZON. Let us hear it.
FR. BERNAS. The reformulation will be essentially the formula of the 1973
Constitution which reads: "THE PARTICIPATION OF FOREIGN INVESTORS IN THE
GOVERNING BODY OF ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED
TO THEIR PROPORTIONATE SHARE IN THE CAPITAL THEREOF AND..."
MR. VILLEGAS. "ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH
CORPORATIONS AND ASSOCIATIONS MUST BE CITIZENS OF THE
PHILIPPINES."
MR. BENGZON. Will Commissioner Bernas read the whole thing again?
FR. BERNAS. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE
GOVERNING BODY OF ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED
TO THEIR PROPORTIONATE SHARE IN THE CAPITAL THEREOF..." I do not have
the rest of the copy.
MR. BENGZON. "AND ALL THE EXECUTIVE AND MANAGING OFFICERS OF
SUCH CORPORATIONS OR ASSOCIATIONS MUST BE CITIZENS OF THE
PHILIPPINES." Is that correct?
MR. VILLEGAS. Yes.
MR. BENGZON. Madam President, I think that was said in a more elegant language.
We accept the amendment. Is that all right with Commissioner Rosario Braid?
MS. ROSARIO BRAID. Yes.
xxxx
MR. DE LOS REYES. The governing body refers to the board of directors and
trustees.
MR. VILLEGAS. That is right.
MR. BENGZON. Yes, the governing body refers to the board of directors.
MR. REGALADO. It is accepted.
MR. RAMA. The body is now ready to vote, Madam President.
VOTING
xxxx
The results show 29 votes in favor and none against; so the proposed amendment is
approved.
xxxx
THE PRESIDENT. All right. Can we proceed now to vote on Section 15?
MR. RAMA. Yes, Madam President.
THE PRESIDENT. Will the chairman of the committee please read Section 15?
MR. VILLEGAS. The entire Section 15, as amended, reads: "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 60 PERCENT OF WHOSE CAPITAL is
owned by such citizens." May I request Commissioner Bengzon to please continue
reading.
MR. BENGZON. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE
GOVERNING BODY OF ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED
TO THEIR PROPORTIONATE SHARE IN THE CAPITAL THEREOF AND ALL THE
EXECUTIVE AND MANAGING OFFICERS OF SUCH CORPORATIONS OR
ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES."
MR. VILLEGAS. "NOR SHALL SUCH FRANCHISE, CERTIFICATE OR
AUTHORIZATION BE EXCLUSIVE IN CHARACTER OR FOR A PERIOD LONGER
THAN TWENTY-FIVE YEARS RENEWABLE FOR NOT MORE THAN TWENTY-
FIVE 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 Congress
when the common good so requires. The State shall encourage equity participation in
public utilities by the general public."
VOTING
xxxx
The results show 29 votes in favor and 4 against; Section 15, as amended, is
approved.48 (Emphasis supplied)
The last sentence of Section 11, Article XII of the 1987 Constitution, particularly the
provision on the limited participation of foreign investors in the governing body of
public utilities, is a reiteration of the last sentence of Section 5, Article XIV of the 1973
Constitution,49 signifying its importance in reserving ownership and control of public
utilities to Filipino citizens.
 VIII.
The undisputed facts
There is no dispute, and respondents do not claim the contrary, that (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 foreigners control PLDT; (2)
Filipinos own only 35.73% of PLDT’s common shares, constituting a minority of the
voting stock, and thus Filipinos do not control 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;50 (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%.
Despite the foregoing facts, the Court did not decide, and in fact refrained from ruling
on the question of whether PLDT violated the 60-40 ownership requirement in favor of
Filipino citizens in Section 11, Article XII of the 1987 Constitution. Such question
indisputably calls for a presentation and determination of evidence through a hearing,
which is generally outside the province of the Court’s jurisdiction, but well within the
SEC’s statutory powers. Thus, for obvious reasons, the Court limited its decision on
the purely legal and threshold issue on the definition of the term "capital" in Section
11, Article XII of the Constitution and directed the SEC to apply such definition in
determining the exact percentage of foreign ownership in PLDT.
IX.
PLDT is not an indispensable party;
SEC is impleaded in this case.
In his petition, Gamboa prays, among others:
xxxx
5. For the Honorable Court to issue a declaratory relief that ownership of common or
voting shares is the sole basis in determining foreign equity in a public utility and that
any other government rulings, opinions, and regulations inconsistent with this
declaratory relief be declared unconstitutional and a violation of the intent and spirit of
the 1987 Constitution;
6. For the Honorable Court to declare null and void all sales of common stocks to
foreigners in excess of 40 percent of the total subscribed common shareholdings; and
7. For the Honorable Court to direct the Securities and Exchange
Commission and Philippine Stock Exchange to require PLDT to make a public
disclosure of all of its foreign shareholdings and their actual and real beneficial
owners.
Other relief(s) just and equitable are likewise prayed for. (Emphasis supplied)
As can be gleaned from his prayer, Gamboa clearly asks this Court to compel the
SEC to perform its statutory duty to investigate whether "the required percentage of
ownership of the capital stock to be owned by citizens of the Philippines has been
complied with [by PLDT] as required by x x x the Constitution." 51 Such plea clearly
negates SEC’s argument that it was not impleaded.
Granting that only the SEC Chairman was impleaded in this case, the Court has
ample powers to order the SEC’s compliance with its directive contained in the 28
June 2011 Decision in view of the far-reaching implications of this case. In Domingo
v. Scheer,52 the Court dispensed with the amendment of the pleadings to implead the
Bureau of Customs considering (1) the unique backdrop of the case; (2) the utmost
need to avoid further delays; and (3) the issue of public interest involved. The Court
held:
The Court may be curing the defect in this case by adding the BOC as party-
petitioner. The petition should not be dismissed because the second action would
only be a repetition of the first. In Salvador, et al., v. Court of Appeals, et al., we held
that this Court has full powers, apart from that power and authority which is inherent,
to amend the processes, pleadings, proceedings and decisions by substituting as
party-plaintiff the real party-in-interest. The Court has the power to avoid delay in
the disposition of this case, to order its amendment as to implead the BOC as
party-respondent. Indeed, it may no longer be necessary to do so taking into
account the unique backdrop in this case, involving as it does an issue of
public interest. After all, the Office of the Solicitor General has represented the
petitioner in the instant proceedings, as well as in the appellate court, and maintained
the validity of the deportation order and of the BOC’s Omnibus Resolution. It cannot,
thus, be claimed by the State that the BOC was not afforded its day in court, simply
because only the petitioner, the Chairperson of the BOC, was the respondent in the
CA, and the petitioner in the instant recourse. In Alonso v. Villamor, we had the
occasion to state:
There is nothing sacred about processes or pleadings, their forms or contents.
Their sole purpose is to facilitate the application of justice to the rival claims of
contending parties. They were created, not to hinder and delay, but to facilitate and
promote, the administration of justice. They do not constitute the thing itself, which
courts are always striving to secure to litigants. They are designed as the means best
adapted to obtain that thing. In other words, they are a means to an end. When they
lose the character of the one and become the other, the administration of justice is at
fault and courts are correspondingly remiss in the performance of their obvious
duty.53 (Emphasis supplied)
In any event, the SEC has expressly manifested 54 that it will abide by the
Court’s decision and defer to the Court’s definition of the term "capital" in
Section 11, Article XII of the Constitution. Further, the SEC entered its special
appearance in this case and argued during the Oral Arguments, indicating its
submission to the Court’s jurisdiction. It is clear, therefore, that there exists no
legal impediment against the proper and immediate implementation of the
Court’s directive to the SEC.
PLDT is an indispensable party only insofar as the other issues, particularly the
factual questions, are concerned. In other words, PLDT must be impleaded in order to
fully resolve the issues on (1) whether the sale of 111,415 PTIC shares to First Pacific
violates the constitutional limit on foreign ownership of PLDT; (2) whether the sale of
common shares to foreigners exceeded the 40 percent limit on foreign equity in
PLDT; and (3) whether the total percentage of the PLDT common shares with voting
rights complies with the 60-40 ownership requirement in favor of Filipino citizens
under the Constitution for the ownership and operation of PLDT. These issues
indisputably call for an examination of the parties’ respective evidence, and thus are
clearly within the jurisdiction of the SEC. In short, PLDT must be impleaded, and must
necessarily be heard, in the proceedings before the SEC where the factual issues will
be thoroughly threshed out and resolved.
Notably, the foregoing issues were left untouched by the Court. The Court did
not rule on the factual issues raised by Gamboa, except the single and purely legal
issue on the definition of the term "capital" in Section 11, Article XII of the
Constitution. The Court confined the resolution of the instant case to this threshold
legal issue in deference to the fact-finding power of the SEC.
Needless to state, the Court can validly, properly, and fully dispose of the
fundamental legal issue in this case even without the participation of PLDT since
defining the term "capital" in Section 11, Article XII of the Constitution does not, in any
way, depend on whether PLDT was impleaded. Simply put, PLDT is not
indispensable for a complete resolution of the purely legal question in this case. 55 In
fact, the Court, by treating the petition as one for mandamus,56 merely directed the
SEC to apply the Court’s definition of the term "capital" in Section 11, Article XII of the
Constitution in determining whether PLDT committed any violation of the said
constitutional provision. The dispositive portion of the Court’s ruling is addressed
not to PLDT but solely to the SEC, which is the administrative agency tasked to
enforce the 60-40 ownership requirement in favor of Filipino citizens in Section
11, Article XII of the Constitution.
Since the Court limited its resolution on the purely legal issue on the definition of the
term "capital" in Section 11, Article XII of the 1987 Constitution, and directed the SEC
to investigate any violation by PLDT of the 60-40 ownership requirement in favor of
Filipino citizens under the Constitution,57 there is no deprivation of PLDT’s property or
denial of PLDT’s right to due process, contrary to Pangilinan and Nazareno’s
misimpression. Due process will be afforded to PLDT when it presents proof to the
SEC that it complies, as it claims here, with Section 11, Article XII of the Constitution.
X.
Foreign Investments in the Philippines
Movants fear that the 28 June 2011 Decision would spell disaster to our economy, as
it may result in a sudden flight of existing foreign investors to "friendlier" countries and
simultaneously deterring new foreign investors to our country. In particular, the PSE
claims that the 28 June 2011 Decision may result in the following: (1) loss of more
than ₱ 630 billion in foreign investments in PSE-listed shares; (2) massive decrease
in foreign trading transactions; (3) lower PSE Composite Index; and (4) local investors
not investing in PSE-listed shares.58
Dr. Bernardo M. Villegas, one of the amici curiae in the Oral Arguments, shared
movants’ apprehension. Without providing specific details, he pointed out the
depressing state of the Philippine economy compared to our neighboring countries
which boast of growing economies. Further, Dr. Villegas explained that the solution to
our economic woes is for the government to "take-over" strategic industries, such as
the public utilities sector, thus:
JUSTICE CARPIO: I would like also to get from you Dr. Villegas if you have additional
information on whether this high FDI59 countries in East Asia have allowed foreigners
x x x control [of] their public utilities, so that we can compare apples with apples.
DR. VILLEGAS: Correct, but let me just make a comment. When these neighbors of
ours find an industry strategic, their solution is not to "Filipinize" or "Vietnamize" or
"Singaporize." Their solution is to make sure that those industries are in the
hands of state enterprises. So, in these countries, nationalization means the
government takes over. And because their governments are competent and
honest enough to the public, that is the solution. x x x 60 (Emphasis supplied)
If government ownership of public utilities is the solution, then foreign investments in
our public utilities serve no purpose. Obviously, there can never be foreign
investments in public utilities if, as Dr. Villegas claims, the "solution is to make sure
that those industries are in the hands of state enterprises." Dr. Villegas’s argument
that foreign investments in telecommunication companies like PLDT are badly
needed to save our ailing economy contradicts his own theory that the solution is for
government to take over these companies. Dr. Villegas is barking up the wrong tree
since State ownership of public utilities and foreign investments in such industries are
diametrically opposed concepts, which cannot possibly be reconciled.
In any event, the experience of our neighboring countries cannot be used as
argument to decide the present case differently for two reasons. First, the
governments of our neighboring countries have, as claimed by Dr. Villegas, taken
over ownership and control of their strategic public utilities like the
telecommunications industry. Second, our Constitution has specific provisions limiting
foreign ownership in public utilities which the Court is sworn to uphold regardless of
the experience of our neighboring countries.
In our jurisdiction, the Constitution expressly reserves the ownership and operation of
public utilities to Filipino citizens, or corporations or associations at least 60 percent of
whose capital belongs to Filipinos. Following Dr. Villegas’s claim, the Philippines
appears to be more liberal in allowing foreign investors to own 40 percent of public
utilities, unlike in other Asian countries whose governments own and operate such
industries.
XI.
Prospective Application of Sanctions
In its Motion for Partial Reconsideration, the SEC sought to clarify the reckoning
period of the application and imposition of appropriate sanctions against PLDT if
found violating Section 11, Article XII of the Constitution.1avvphi1
As discussed, the Court has directed the SEC to investigate and determine whether
PLDT violated Section 11, Article XII of the Constitution. Thus, there is no dispute that
it is only after the SEC has determined PLDT’s violation, if any exists at the time of
the commencement of the administrative case or investigation, that the SEC may
impose the statutory sanctions against PLDT. In other words, once the 28 June 2011
Decision becomes final, the SEC shall impose the appropriate sanctions only if it finds
after due hearing that, at the start of the administrative case or investigation, there is
an existing violation of Section 11, Article XII of the Constitution. Under prevailing
jurisprudence, public utilities that fail to comply with the nationality requirement under
Section 11, Article XII and the FIA can cure their deficiencies prior to the start of the
administrative case or investigation.61
XII.
Final Word
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.
Any other construction of the term "capital" in Section 11, Article XII of the
Constitution contravenes the letter and intent of the Constitution. Any other meaning
of the term "capital" openly invites alien domination of economic activities reserved
exclusively to Philippine nationals. Therefore, respondents’ interpretation will
ultimately result in handing over effective control of our national economy to
foreigners in patent violation of the Constitution, making Filipinos second-class
citizens in their own country.
Filipinos have only to remind themselves of how this country was exploited under the
Parity Amendment, which gave Americans the same rights as Filipinos in the
exploitation of natural resources, and in the ownership and control of public utilities, in
the Philippines. To do this the 1935 Constitution, which contained the same 60
percent Filipino ownership and control requirement as the present 1987 Constitution,
had to be amended to give Americans parity rights with Filipinos. There was bitter
opposition to the Parity Amendment62 and many Filipinos eagerly awaited its
expiration. In late 1968, PLDT was one of the American-controlled public utilities that
became Filipino-controlled when the controlling American stockholders divested in
anticipation of the expiration of the Parity Amendment on 3 July 1974.63 No economic
suicide happened when control of public utilities and mining corporations passed to
Filipinos’ hands upon expiration of the Parity Amendment.
Movants’ interpretation of the term "capital" would bring us back to the same evils
spawned by the Parity Amendment, effectively giving foreigners parity rights with
Filipinos, but this time even without any amendment to the present
Constitution. Worse, movants’ interpretation opens up our national economy
to effective control not only by Americans but also by all foreigners, be they
Indonesians, Malaysians or Chinese, even in the absence of reciprocal treaty
arrangements. At least the Parity Amendment, as implemented by the Laurel-
Langley Agreement, gave the capital-starved Filipinos theoretical parity – the same
rights as Americans to exploit natural resources, and to own and control public
utilities, in the United States of America. Here, movants’ interpretation would
effectively mean a unilateral opening up of our national economy to all
foreigners, without any reciprocal arrangements. That would mean that
Indonesians, Malaysians and Chinese nationals could effectively control our mining
companies and public utilities while Filipinos, even if they have the capital, could not
control similar corporations in these countries.
The 1935, 1973 and 1987 Constitutions have the same 60 percent Filipino ownership
and control requirement for public utilities like PLOT. Any deviation from this
requirement necessitates an amendment to the Constitution as exemplified by the
Parity Amendment. This Court has no power to amend the Constitution for its power
and duty is only to faithfully apply and interpret the Constitution.
WHEREFORE, we DENY the motions for reconsideration WITH FINALITY. No
further pleadings shall be entertained.
SO ORDERED.
G.R. No. 207246, November 22, 2016
JOSE M. ROY III, Petitioner, v. CHAIRPERSON TERESITA HERBOSA,THE
SECURITIES AND EXCHANGE COMMISSION, AND PHILILIPPINE LONG
DISTANCE TELEPHONE COMPANY, Respondents.
WILSON C. GAMBOA, JR., DANIEL V. CARTAGENA, JOHN WARREN P.
GABINETE, ANTONIO V. PESINA, JR., MODESTO MARTIN Y. MAMON III, AND
GERARDO C. EREBAREN, Petitioners-in-Intervention,
PHILIPPINE STOCK EXCHANGE, INC., Respondent-in-Intervention,
SHAREHOLDERS' ASSOCIATION OF THE PHILIPPINES, INC., Respondent-in-
Intervention.
DECISION
CAGUIOA, J.:
The petitions1 before the Court are special civil actions for certiorari under Rule 65 of
the Rules of Court seeking to annul Memorandum Circular No. 8, Series of 2013
("SEC-MC No. 8") issued by the Securities and Exchange Commission ("SEC") for
allegedly being in violation of the Court's Decision2 ("Gamboa Decision") and
Resolution3 ("Gamboa Resolution") in Gamboa v. Finance Secretary Teves, G.R. No.
176579, respectively promulgated on June 28, 2011, and October 9, 2012, which
jurisprudentially established the proper interpretation of Section 11, Article XII of the
Constitution.
The Antecedents
On June 28, 2011, the Court issued the Gamboa Decision, the dispositive portion of
which reads:
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.
SO ORDERED.4
Several motions for reconsideration were filed assailing the Gamboa Decision. They
were denied in the Gamboa Resolution issued by the Court on October 9, 2012, viz:
WHEREFORE, we DENY the motions for reconsideration WITH FINALITY. No
further pleadings shall be entertained.
SO ORDERED.5
The Gamboa Decision attained finality on October 18, 2012, and Entry of Judgment
was thereafter issued on December 11, 2012.6
On November 6, 2012, the SEC posted a Notice in its website inviting the public to
attend a public dialogue and to submit comments on the draft memorandum circular
(attached thereto) on the guidelines to be followed in determining compliance with the
Filipino ownership requirement in public utilities under Section 11, Article XII of the
Constitution pursuant to the Court's directive in the Gamboa Decision.7
On November 9, 2012, the SEC held the scheduled dialogue and more than 100
representatives from various organizations, government agencies, the academe and
the private sector attended.8
On January 8, 2013, the SEC received a copy of the Entry of Judgment 9 from the
Court certifying that on October 18, 2012, the Gamboa Decision had become final
and executory.10
On March 25, 2013, the SEC posted another Notice in its website soliciting from the
public comments and suggestions on the draft guidelines. 11
On April 22, 2013, petitioner Atty. Jose M. Roy III ("Roy") submitted his written
comments on the draft guidelines.12
On May 20, 2013, the SEC, through respondent Chairperson Teresita J. Herbosa,
issued SEC-MC No. 8 entitled "Guidelines on Compliance with the Filipino-Foreign
Ownership Requirements Prescribed in the Constitution and/or Existing Laws by
Corporations Engaged in Nationalized and Partly Nationalized Activities." It was
published in the Philippine Daily Inquirer and the Business Mirror on May 22,
2013.13Section 2 of SEC-MC No. 8 provides:
Section 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.14
On June 10, 2013, petitioner Roy, as a lawyer and taxpayer, filed the
Petition,15 assailing the validity of SEC-MC No. 8 for not conforming to the letter and
spirit of the Gamboa Decision and Resolution and for having been issued by the SEC
with grave abuse of discretion. Petitioner Roy seeks to apply the 60-40 Filipino
ownership requirement separately to each class of shares of a public utility
corporation, whether common, preferred nonvoting, preferred voting or any other
class of shares. Petitioner Roy also questions the ruling of the SEC that respondent
Philippine Long Distance Telephone Company ("PLDT") is compliant with the
constitutional rule on foreign ownership. He prays that the Court declare SEC-MC No.
8 unconstitutional and direct the SEC to issue new guidelines regarding the
determination of compliance with Section 11, Article XII of the Constitution in
accordance with Gamboa.
Wilson C. Gamboa, Jr.,16 Daniel V. Cartagena, John Warren P. Gabinete, Antonio V.
Pesina, Jr., Modesto Martin Y. Mamon III, and Gerardo C. Erebaren ("intervenors
Gamboa, et al.") filed a Motion for Leave to File Petition-in-Intervention17 on July 30,
2013, which the Court granted. The Petition-in-Intervention18filed by intervenors
Gamboa, et al. mirrored the issues, arguments and prayer of petitioner Roy.
On September 5, 2013, respondent PLDT filed its Comment (on the Petition dated 10
June 2013).19 PLDT posited that the Petition should be dismissed because it violates
the doctrine of hierarchy of courts as there are no compelling reasons to invoke the
Court's original jurisdiction; it is prematurely filed because petitioner Roy failed to
exhaust administrative remedies before the SEC; the principal actions/remedies
of mandamus and declaratory relief are not within the exclusive and/or original
jurisdiction of the Court; the petition for certiorari is an inappropriate remedy since the
SEC issued SEC-MC No. 8 in the exercise of its quasi-legislative power; it deprives
the necessary and indispensable parties of their constitutional right to due process;
and the SEC merely implemented the dispositive portion of the Gamboa Decision.
On September 20, 2013, respondents Chairperson Teresita Herbosa and SEC filed
their Consolidated Comment.20 They sought the dismissal of the petitions on the
following grounds: (1) the petitioners do not possess locus standi to assail the
constitutionality of SEC-MC No. 8; (2) a petition for certiorari under Rule 65 is not the
appropriate and proper remedy to assail the validity and constitutionality of the SEC-
MC No. 8; (3) the direct resort to the Court violates the doctrine of hierarchy of courts;
(4) the SEC did not abuse its discretion; (5) on PLDT's compliance with the capital
requirement as stated in the Gamboaruling, the petitioners' challenge is premature
considering that the SEC has not yet issued a definitive ruling thereon.
On October 22, 2013, PLDT filed its Comment (on the Petition-in-Intervention dated
16 July 2013).21PLDT adopted the position that intervenors Gamboa, et al. have no
standing and are not the proper party to question the constitutionality of SEC-MC No.
8; they are in no position to assail SEC-MC No. 8 considering that they did not
participate in the public consultations or give comments thereon; and their Petition-in-
Intervention is a disguised motion for reconsideration of the Gamboa Decision and
Resolution.
On May 7, 2014, Petitioner Roy and intervenors Gamboa, et al.22 filed their Joint
Consolidated Reply with Motion for Issuance of Temporary Restraining Order.23
On May 22, 2014, PLDT filed its Rejoinder [To Petitioner and Petitioners-in-
Intervention's Joint Consolidated Reply dated 7 May 2014] and Opposition [To
Petitioner and Petitioners-in-Intervention's Motion for Issuance of a Temporary
Restraining Order dated 7 May 2014].24
On June 18, 2014, the Philippine Stock Exchange, Inc. ("PSE") filed its Motion to
Intervene with Leave of Court25 and its Comment-in Intervention.26 The PSE alleged
that it has standing to intervene as the primary regulator of the stock exchange and
will sustain direct injury should the petitions be granted. The PSE argued that in
the Gamboa ruling, "capital" refers only to shares entitled to vote in the election of
directors, and excludes those not so entitled; and the dispositive portion of the
decision is the controlling factor that determines and settles the questions presented
in the case. The PSE further argued that adopting a new interpretation of Section 11,
Article XII of the Constitution violates the policy of conclusiveness of judgment, stare
decisis, and the State's obligation to maintain a stable and predictable legal
framework for foreign investors under international treaties; and adopting a new
definition of "capital" will prove disastrous for the Philippine stock market. The Court
granted the Motion to Intervene filed by PSE.27
PLDT filed its Consolidated Memorandum28 on February 10, 2015.
On June 1, 2016, Shareholders' Association of the Philippines, Inc. 29 ("SHAREPHIL")
filed an Omnibus Motion [1] For Leave to Intervene; and [2] To Admit Attached
Comment-in-Intervention.30 The Court granted the Omnibus Motion of SHAREPHIL.31
On June 30, 2016, petitioner Roy filed his Opposition and Reply to Interventions of
Philippine Stock Exchange and Sharephil.32 Intervenors Gamboa, et al. then filed on
September 14, 2016, their Reply (to Interventions by Philippine Stock Exchange and
Sharephil).33
The Issues
The twin issues of the Petition and the Petition-in-Intervention are: (1) whether the
SEC gravely abused its discretion in issuing SEC-MC No. 8 in light of
the Gamboa Decision and Gamboa Resolution, and (2) whether the SEC gravely
abused its discretion in ruling that PLDT is compliant with the constitutional limitation
on foreign ownership.
The Court's Ruling
At the outset, the Court disposes of the second issue for being without merit. In its
Consolidated Comment dated September 13, 2013,34 the SEC already clarified that it
"has not yet issued a definitive ruling anent PLDT's compliance with the limitation on
foreign ownership imposed under the Constitution and relevant laws [and i]n fact, a
careful perusal of x x x SEC-MC No. 8 readily reveals that all existing covered
corporations which are non-compliant with Section 2 thereof were given a period of
one (1) year from the effectivity of the same within which to comply with said
ownership requirement. x x x."35 Thus, in the absence of a definitive ruling by the SEC
on PLDT's compliance with the capital requirement pursuant to the Gamboa Decision
and Resolution, any question relative to the inexistent ruling is premature.
Also, considering that the Court is not a trier of facts and is in no position to make a
factual determination of PLDT's compliance with the constitutional provision under
review, the Court can only resolve the first issue, which is a pure question of law.
However, before the Court tackles the first issue, it has to rule on certain procedural
challenges that have been raised.
The Procedural Issues
The Court may exercise its power of judicial review and take cognizance of a case
when the following specific requisites are met: (1) there is an actual case or
controversy calling for the exercise of judicial power; (2) the petitioner has standing to
question the validity of the subject act or issuance, i.e., he has a personal and
substantial interest in the case that he has sustained, or will sustain, direct injury as a
result of the enforcement of the act or issuance; (3) the question of constitutionality is
raised at the earliest opportunity; and (4) the constitutional question is the very lis
mota of the case.36
The first two requisites of judicial review are not met.
Petitioners' failure to sufficiently allege, much less establish, the existence of the first
two requisites for the exercise of judicial review warrants the perfunctory dismissal of
the petitions.
a. No actual controversy.
Regarding the first requisite, the Court in Belgica v. Ochoa37 stressed anew that an
actual case or controversy is one which involves a conflict of legal rights, an assertion
of opposite legal claims, susceptible of judicial resolution as distinguished from a
hypothetical or abstract difference or dispute since the courts will decline to pass
upon constitutional issues through advisory opinions, bereft as they are of authority to
resolve hypothetical or moot questions. Related to the requirement of an actual case
or controversy is the requirement of "ripeness", and a question is ripe for adjudication
when the act being challenged has a direct adverse effect on the individual
challenging it.
Petitioners have failed to show that there IS an actual case or controversy which
is ripe for adjudication.
The Petition and the Petition-in-Intervention identically allege:
3. The standing interpretation of the SEC found in MC8 practically encourages
circumvention of the 60-40 ownership rule by impliedly allowing the creation of
several classes of voting shares with different degrees of beneficial ownership over
the same, but at the same time, not imposing a 40% limit on foreign ownership of
the higher yielding stocks.38
4. For instance, a situation may arise where a corporation may issue several
classes of shares of stock, one of which are common shares with rights to elect
directors, another are preferred shares with rights to elect directors but with much
lesser entitlement to dividends, and still another class of preferred shares with no
rights to elect the directors and even less dividends. In this situation, the
corporation may issue common shares to foreigners amounting to forty percent
(40%) of the outstanding capital stock and issue preferred shares entitled to vote
the directors of the corporation to Filipinos consisting of 60%39 percent (sic) of the
outstanding capital stock entitled to vote. Although it may appear that the 60-40 rule
has been complied with, the beneficial ownership of the corporation remains with
the foreign stockholder since the Filipino owners of the preferred shares have only
a miniscule share in the dividends and profit of the corporation. Plainly, this
situation runs contrary to the Constitution and the ruling of this x x x Court. 40
Petitioners' hypothetical illustration as to how SEC-MC No. 8 "practically encourages
circumvention of the 60-40 ownership rule" is evidently speculative and fraught with
conjectures and assumptions. There is clearly wanting specific facts against which
the veracity of the conclusions purportedly following from the speculations and
assumptions can be validated. The lack of a specific factual milieu from which the
petitions originated renders any pronouncement from the Court as a purely advisory
opinion and not a decision binding on identified and definite parties and on a known
set of facts.
Firstly, unlike in Gamboa, the identity of the public utility corporation, the capital of
which is at issue, is unknown. Its outstanding capital stock and the actual composition
thereof in terms of numbers, classes, preferences and features are all theoretical. The
description "preferred shares with rights to elect directors but with much lesser
entitlement to dividends, and still another class of preferred shares with no rights to
elect the directors and even less dividends" is ambiguous. What are the specific
dividend policies or entitlements of the purported preferred shares? How are the
preferred shares' dividend policies different from those of the common shares? Why
and how did the fictional public utility corporation issue those preferred shares
intended to be owned by Filipinos? What are the actual features of the foreign-owned
common shares which make them superior over those owned by Filipinos? How did it
come to be that Filipino holders of preferred shares ended up with "only a miniscule
share in the dividends and profit of the [hypothetical] corporation"? Any answer to any
of these questions will, at best, be contingent, conjectural, indefinite or anticipatory.
Secondly, preferred shares usually have preference over the common shares in the
payment of dividends. If most of the "preferred shares with rights to elect directors but
with much lesser entitlement to dividends" and the other "class of preferred shares
with no rights to elect the directors and even less dividends" are owned by Filipinos,
they stand to receive their dividend entitlement ahead of the foreigners, who are
common shareholders. For the common shareholders to have "bigger dividends" as
compared to the dividends paid to the preferred shareholders, which are supposedly
predominantly owned by Filipinos, there must still be unrestricted retained earnings of
the fictional corporation left after payment of the dividends declared in favor of the
preferred shareholders. The fictional illustration does not even intimate how this
situation can be possible. No permutation of unrestricted retained earnings of the
hypothetical corporation is shown that makes the present conclusion of the petitioners
achievable. Also, no concrete meaning to the petitioners' claim of the Filipinos'
"miniscule share in the dividends and profit of the [fictional] corporation" is
demonstrated.
Thirdly, petitioners fail to allege or show how their hypothetical illustration will directly
and adversely affect them. That is impossible since their relationship to the fictional
corporation is a matter of guesswork.
From the foregoing, it is evident that the Court can only surmise or speculate on the
situation or controversy that the petitioners contemplate to present for judicial
determination. Petitioners are likewise conspicuously silent on the direct adverse
impact to them of the implementation of SEC-MC No. 8. Thus, the petitions must fail
because the Court is barred from rendering a decision based on assumptions,
speculations, conjectures and hypothetical or fictional illustrations, more so in the
present case which is not even ripe for decision.
b. No locus standi.
The personal and substantial interest that enables a party to have legal standing is
one that is both material, an interest in issue and to be affected by the government
action, as distinguished from mere interest in the issue involved, or a mere incidental
interest, and real, which means a present substantial interest, as distinguished from a
mere expectancy or a future, contingent, subordinate, or consequential
interest.41cralawred
As to injury, the party must show that (1) he will personally suffer some actual or
threatened injury because of the allegedly illegal conduct of the government; (2) the
injury is fairly traceable to the challenged action; and (3) the injury is likely to be
redressed by a favorable action.42 If the asserted injury is more imagined than real, or
is merely superficial and insubstantial, an excursion into constitutional adjudication by
the courts is not warranted.43
Petitioners have no legal standing to question the constitutionality of SEC-MC No. 8.
To establish his standing, petitioner Roy merely claimed that he has standing to
question SEC-MC No. 8 "as a concerned citizen, an officer of the Court and as a
taxpayer" as well as "the senior law partner of his own law firm[, which] x x x is a
subscriber of PLDT."44 On the other hand, intervenors Gamboa, et al.allege, as basis
of their locus standi, their "[b]eing lawyers and officers of the Court" and "citizens x x x
and taxpayers."45
The Court has previously emphasized that the locus standi requisite is not met by the
expedient invocation of one's citizenship or membership in the bar who has an
interest in ensuring that laws and orders of the Philippine government are legally and
validly issued as these supposed interests are too general, which are shared by other
groups and by the whole citizenry.46 Per their allegations, the personal interest
invoked by petitioners as citizens and members of the bar in the validity or invalidity of
SEC-MC No. 8 is at best equivocal, and totally insufficient.
Petitioners' status as taxpayers is also of no moment. As often reiterated by the
Court, a taxpayer's suit is allowed only when the petitioner has demonstrated the
direct correlation of the act complained of and the disbursement of public funds in
contravention of law or the Constitution, or has shown that the case involves the
exercise of the spending or taxing power of Congress.47 SEC-MC No. 8 does not
involve an additional expenditure of public funds and the taxing or spending power of
Congress.
The allegation that petitioner Roy's law firm is a "subscriber of PLDT" is ambiguous. It
is unclear whether his law firm is a "subscriber" of PLDT's shares of stock or of its
various telecommunication services. Petitioner Roy has not identified the specific
direct and substantial injury he or his law firm stands to suffer as "subscriber of PLDT"
as a result of the issuance of SEC-MC No. 8 and its enforcement.
As correctly observed by respondent PLDT, "(w]hether or not the constitutionality of
SEC-MC No. 8 is upheld, the rights and privileges of all PLDT subscribers, as with all
the rest of subscribers of other corporations, are necessarily and equally preserved
and protected. Nothing is added [to] or removed from a PLDT subscriber in terms of
the extent of his or her participation, relative to what he or she had originally enjoyed
from the beginning. In the most practical sense, a PLDT subscriber loses or gains
nothing in the event that SEC-MC No. 8 is either sustained or struck down by [the
Court]."48
More importantly, the issue regarding PLDT's compliance with Section 11, Article XII
of the Constitution has been earlier ruled as premature and beyond the Court's
jurisdiction. Thus, petitioner Roy's allegation that his law firm is a "subscriber of
PLDT" is insufficient to clothe him with locus standi.
Petitioners' cursory incantation of "transcendental importance x x x of the rules on
foreign ownership of corporations or entities vested with public interest" 49 does not
automatically justify the brushing aside of the strict observance of the requisites for
the Court's exercise of judicial review. An indiscriminate disregard of the requisites
every time "transcendental or paramount importance or significance" is invoked would
result in an unacceptable corruption of the settled doctrine of locus standi, as every
worthy cause is an interest shared by the general public. 50
In the present case, the general and equivocal allegations of petitioners on their legal
standing do not justify the relaxation of the locus standi rule. While the Court has
taken an increasingly liberal approach to the rule of locus standi, evolving from the
stringent requirements of personal injury to the broader transcendental importance
doctrine, such liberality is not to be abused.51
The Rule on the Hierarchy of Courts has been violated.
The Court in Bañez, Jr. v. Concepcion52 stressed that:
The Court must enjoin the observance of the policy on the hierarchy of courts, and
now affirms that the policy is not to be ignored without serious consequences. The
strictness of the policy is designed to shied the Court from having to deal with causes
that are also well within the competence of the lower courts, and thus leave time to
the Court to deal with the more fundamental and more essential tasks that the
Constitution has assigned to it. The Court may act on petitions for the extraordinary
writs of certiorari, prohibition and mandamus only when absolutely necessary or when
serious and important reasons exist to justifY an exception to the policy. x x x
x x x Where the issuance of an extraordinary writ is also within the competence of the
Court of Appeals or a Regional Trial Court, it is in either of these courts that the
specific action for the writ's procurement must be presented. This is and should
continue to be the policy in this regard, a policy that courts and lawyers must strictly
observe. x x x53
Petitioners' invocation of "transcendental importance" is hollow and does not merit the
relaxation of the rule on hierarchy of courts. There being no special, important or
compelling reason that justified the direct filing of the petitions in the Court in violation
of the policy on hierarchy of courts, their outright dismissal on this ground is further
warranted.54
The petitioners failed to implead indispensable parties
The cogent submissions of the PSE in its Comment-in-Intervention dated June 16,
201455 and SHAREPHIL in its Omnibus Motion [1] For Leave to Intervene; and [2] To
Admit Attached Comment-in-Intervention dated May 30, 201656 demonstrate how
petitioners should have impleaded not only PLDT but all other corporations in
nationalized and partlynationalized industries because the propriety of the SEC's
enforcement of the Court's interpretation of "capital" through SEC-MC No. 8 affects
them as well.
Under Section 3, Rule 7 of the Rules of Court, an indispensable party is a party-in-
interest without whom there can be no final determination of an action. Indispensable
parties are those with such a material and direct interest in the controversy that a final
decree would necessarily affect their rights, so that the court cannot proceed without
their presence.57 The interests of such indispensable parties in the subject matter of
the suit and the relief are so bound with those of the other parties that their legal
presence as parties to the proceeding is an absolute necessity and a complete and
efficient determination of the equities and rights of the parties is not possible if they
are not joined.58
Other than PLDT, the petitions failed to join or implead other public utility corporations
subject to the same restriction imposed by Section 11, Article XII of the Constitution.
These corporations are in danger of losing their franchise and property if they are
found not compliant with the restrictive interpretation of the constitutional provision
under review which is being espoused by petitioners. They should be afforded due
notice and opportunity to be heard, lest they be deprived of their property without due
process.
Not only are public utility corporations other than PLDT directly and materially
affected by the outcome of the petitions, their shareholders also stand to suffer in
case they will be forced to divest their shareholdings to ensure compliance with the
said restrictive interpretation of the term "capital". As explained by SHAREPIDL, in
five corporations alone, more than Php158 Billion worth of shares must be divested
by foreign shareholders and absorbed by Filipino investors if petitioners' position is
upheld.59
Petitioners' disregard of the rights of these other corporations and numerous
shareholders constitutes another fatal procedural flaw, justifYing the dismissal of their
petitions. Without giving all of them their day in court, they will definitely be
deprived of their property without due process of law.
During the deliberations, Justice Velasco stressed on the foregoing procedural
objections to the granting of the petitions; and Justice Bersamin added that the
special civil action for certiorari and prohibition is not the proper remedy to assail
SEC-MC No. 8 because it was not issued under the adjudicatory or quasi-judicial
functions of the SEC.
The Substantive Issue
The only substantive issue that the petitions assert is whether the SEC's issuance of
SEC-MC No. 8 is tainted with grave abuse of discretion.
The Court holds that, even if the resolution of the procedural issues were conceded in
favor of petitioners, the petitions, being anchored on Rule 65, must nonetheless fail
because the SEC did notcommit 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.
The ratio in the Gamboa Decision and Gamboa Resolution.
To determine what the Court directed the SEC to do - and therefore resolve whether
what the SEC did amounted to grave abuse of discretion - the Court resorts to the
decretal portion of the GamboaDecision, as this is the portion of the decision that a
party relies upon to determine his or her rights and duties, 60viz:
WHEREFORE, we PARTLY GRANT the petition and rule that the term "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). 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 II, Article
XII of the Constitution, to impose the appropriate sanctions under the law. 61
In turn, the Gamboa Resolution stated:
In any event, the SEC has expressly manifested 62 that it will abide by the Court's
decision and defer to the Court's definition of the term "capital" in Section II, Article XII
of the Constitution. Further, the SEC entered its special appearance in this case and
argued during the Oral Arguments, indicating its submission to the Court's jurisdiction.
It is clear, therefore, that there exists no legal impediment against the proper and
immediate implementation of the Court's directive to the SEC. x x x x
x x x The dispositive portion of the Court's ruling is addressed not to PLDT but
solely to the SEC, which is the administrative agency tasked to enforce the 60-
40 ownership requirement in favor of Filipino citizens in Section 11, Article XII
of the Constitution.63
To recall, the sole issue in the Gamboa case was: "whether the term 'capital' in
Section 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."64
The Court directly answered the Issue and consistently defined the term "capital" as
follows:
x x x 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.
xxxx
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.65
The decretal portion of the Gamboa Decision follows the definition of the term
"capital" in the body of the decision, to wit: "x x x we x x x 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)."66
The Court adopted the foregoing definition of the term "capital" in Section 11, Article
XII of the 1987 Constitution in furtherance of "the intent and letter of the Constitution
that the 'State shall develop a self-reliant and independent national
economy effectively controlled by Filipinos' [because a] broad definition unjustifiably
disregards who owns the all-important voting stock, which necessarily equates to
control of the public utility."67 The Court, recognizing that the provision is an express
recognition of the sensitive and vital position of public utilities both in the national
economy and for national security, also pronounced that the evident purpose of the
citizenship requirement is to prevent aliens from assuming control of public utilities,
which may be inimical to the national interest. 68 Further, the Court noted that the
foregoing 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; and, as revealed in the deliberations of the Constitutional Commission,
"capital" refers to the voting stock or controlling interest of a corporation.69
In this regard, it would be apropos to state that since Filipinos own at least 60% of the
outstanding shares of stock entitled to vote directors, which is what the Constitution
precisely requires, then the Filipino stockholders control the corporation, i.e., they
dictate corporate actions and decisions, and they have all the rights of ownership
including, but not limited to, offering certain preferred shares that may have greater
economic interest to foreign investors - as the need for capital for corporate pursuits
(such as expansion), may be good for the corporation that they own. 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. But,
Commonwealth Act No. 108, the Anti-Dummy Law, is NOT in issue in these petitions.
Notably, even if the shares of a particular public utility were owned 100% Filipino, that
does not discount the possibility of a dummy situation from arising. Hence, 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 FIA-
IRR provides:
Compliance with the required Filipino ownership of a corporation shall be
determined on the basis of outstanding capital stock whether fully paid or not, but
only such stocks which are generally entitled to vote are considered.
For 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. Thus, stocks, the voting rights of which have been assigned or
transferred to aliens cannot be considered held by Philippine citizens or Philippine
nationals.70
Echoing the FIA-IRR, the Court stated in the Gamboa Decision that:
Mere legal title is insufficient to meet the 60 percent Filipino-owned "capital"
required in the Constitution. Full beneficial ownership of 60 percent of the
outstanding capital stock, coupled with 60 percent of the voting rights, is required.
The legal and beneficial ownership of 60 percent of the outstanding capital stock
must rest in the hands of Filipino nationals in accordance with the constitutional
mandate. Otherwise, the corporation is "considered as non-Philippine national[s]."
xxxx
The legal and beneficial ownership of 60 percent of the outstanding capital stock
must rest in the hands of Filipinos in accordance with the constitutional mandate.
Full beneficial ownership of 60 percent of the outstanding capital stock, coupled
with 60 percent of the voting rights, is constitutionally required for the State's grant
of authority to operate a public utility. x x x71
Was the definition of the term "capital" in Section 11, Article XII of the 1987
Constitution declared for the first time by the Court in the Gamboa Decision modified
in the Gamboa Resolution?
The Court is convinced that it was not. The Gamboa Resolution consists of 51 pages
(excluding the dissenting opinions of Associate Justices Velasco and Abad). For the
most part of the Gamboa Resolution, the Court, after reviewing SEC and
DOJ72 Opinions as well as the provisions of the FIA and its predecessor
statutes,73 reiterated that both the Voting Control Test and the Beneficial Ownership
Test must be applied to determine whether a corporation is a "Philippine
national"74 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."75 The Court also reiterated that,
from the deliberations of the Constitutional Commission, it is evident that the term
"capital" refers to controlling interest of a corporation,76 and the framers of the
Constitution intended public utilities to be majority Filipino-owned and controlled.
The "Final Word" of the Gamboa Resolution put to rest the Court's interpretation of
the term "capital", and this is quoted verbatim, to wit:
XII.
Final Word
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 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. 77
Everything told, the Court, in both the Gamboa Decision and Gamboa Resolution,
finally settled with the PIA's definition of "Philippine national" as expounded in the
FIA-IRR in construing the term "capital" in Section 11, Article XII of the 1987
Constitution.
The assailed SEC-MC No. 8.
The relevant provision in the assailed SEC-MC No. 8 IS Section 2, which provides:
Section 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.78
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."79 Clearly, SEC-MC No. 8 cannot be said to have been issued with grave
abuse of discretion.
A simple illustration involving Company X with three kinds of shares of stock, easily
shows how compliance with the requirements of SEC-MC No. 8 will necessarily result
to full and faithful compliance with the Gamboa Decision as well as
the Gamboa Resolution.
The following is the composition of the outstanding capital stock of Company X:
100 common shares
100 Class A preferred shares (with right to elect directors)
100 Class B preferred shares (without right to elect directors)
SEC-MC No. 8 GAMBOA DECISION
(1) 60% (required percentage of Filipino) "shares of stock entitled to vote in the
applied to the total number of election of directors"80 (60% of the voting
outstanding shares of stock entitled to rights)
vote in the election of directors
If at least a total of 120 of common shares and Class A preferred shares (in any
combination) are owned and controlled by Filipinos, Company X is compliant with the
60% of the voting rights in favor of Filipinos requirement of both SEC-MC No. 8 and
the Gamboa Decision.
SEC-MC No. 8 GAMBOA DECISION/RESOLUTION
(2) 60% (required percentage of Filipino) "Full beneficial ownership of 60 percent
applied to BOTH (a) the total number of of the outstanding capital stock, coupled
outstanding shares of stock, entitled to with 60 percent of the voting rights"81 or
vote in the election of directors; AND (b) "Full beneficial ownership of the stocks,
the total number of outstanding shares of coupled with appropriate voting rights x x
stock, whether or not entitled to vote in x shares with voting rights, as well as
the election of directors. with full beneficial ownership"82
If at least a total of 180 shares of all the outstanding capital stock of Company X are
owned and controlled by Filipinos, provided that among those 180 shares a total of
120 of the common shares and Class A preferred shares (in any combination) are
owned and controlled by Filipinos, then Company X is compliant with both
requirements of voting rights and beneficial ownership under SEC-MC No. 8 and
the Gamboa Decision and Resolution.
From the foregoing illustration, SEC-MC No. 8 simply implemented, and is fully in
accordance with, the Gamboa Decision and Resolution.
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 (Republic Act No. 8799; "SRC") and its implementing
rules.83
The full beneficial ownership test.
The minority justifies the application of the 60-40 Filipino-foreign ownership rule
separately to each class of shares of a public utility corporation in this fashion:
x x x 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 controland 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.
x x x In mixed class or dual structured corporations, however, there is variance in the
proportion of stockholders' controlling interest visa-vis their economic ownership
rights. This resulting variation is recognized by the Implementing Rules and
Regulations (IRR) of the Securities Regulation Code, which defined beneficial
ownership as that may exist either through voting power and/or through investment
returns. By using and/or in defining beneficial ownership, the IRR, in effect,
recognizes a possible situation where voting power is not commensurate to
investment power.
The definition of "beneficial owner" or "beneficial ownership" in the Implementing
Rules and Regulations of the Securities Regulation Code ("SRC-IRR") is consistent
with the concept of "full beneficial ownership" in the FIA-IRR.
As defined in the SRC-IRR, "[b]eneficial owner or beneficial ownership means any
person who, directly or indirectly, through any contract, arrangement, understanding,
relationship or otherwise, has or shares voting power (which includes the power to
vote or direct the voting of such security) and/or investment returns or power (which
includes the power to dispose of, or direct the disposition of such security) x x x."84
While it is correct to state that beneficial ownership is that which may exist either
through voting power and/or investment returns, it does not follow, as espoused by
the minority opinion, that the SRC-IRR, in effect, recognizes a possible situation
where voting power is not commensurate to investment power. That is a wrong
syllogism. The fallacy arises from a misunderstanding on what the definition is for.
The "beneficial ownership" referred to in the definition, while it may ultimately and
indirectly refer to the overall ownership of the corporation, more pertinently refers to
the ownership of the share subject of the question: is it Filipino-owned or not?
As noted earlier, the FIA-IRR states:
Compliance with the required Filipino ownership of a corporation shall be
determined on the basis of outstanding capital stock whether fully paid or not, but only
such stocks which are generally entitled to vote are considered.
For 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.
Thus, stocks, the voting rights of which have been assigned or transferred to aliens
cannot be considered held by Philippine citizens or Philippine nationals.85
The emphasized portions in the foregoing provision is the equivalent of the so-called
"beneficial ownership test". That is all.
The term "full beneficial ownership" found in the FIA-IRR is to be understood in the
context of the entire paragraph defining the term "Philippine national". Mere legal title
is not enough to meet the required Filipino equity, which means that it is not sufficient
that a share is registered in the name of a Filipino citizen or national, i.e., he should
also have full beneficial ownership of the share. If the voting right of a share held in
the name of a Filipino citizen or national is assigned or transferred to an alien, that
share is not to be counted in the determination of the required Filipino equity. In the
same vein, if the dividends and other fruits and accessions of the share do not accrue
to a Filipino citizen or national, then that share is also to be excluded or not counted.
In this regard, it is worth reiterating the Court's pronouncement in
the Gamboa Decision, which is consistent with the FIA-IRR, viz:
Mere legal title is insufficient to meet the 60 percent Filipinoowned "capital" required
in the Constitution. Full beneficial ownership of 60 percent of the outstanding
capital stock, coupled with 60 percent of the voting rights, is required. x x x
xxxx
The legal and beneficial ownership of 60 percent of the outstanding capital stock must
rest in the hands of Filipinos in accordance with the constitutional mandate. Full
beneficial ownership of 60 percent of the outstanding capital stock, coupled
with 60 percent of the voting rights, is constitutionally required (or the State's
grant of authority to operate a public utility. x x x.86
And the "Final Word" of the Gamboa Resolution is in full accord with the foregoing
pronouncement of the Court, to wit:
XII.
Final Word
x x x 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."87
Given that beneficial ownership of the outstanding capital stock of the public utility
corporation has to be determined for purposes of compliance with the 60% Filipino
ownership requirement, the definition in the SRC-IRR can now be applied to
resolve only the question of who is the beneficial owner or who has beneficial
ownership of each "specific stock" of the said corporation. Thus, if a "specific stock" is
owned by a Filipino in the books of the corporation, but the stock's voting power or
disposing power belongs to a foreigner, then that "specific stock" will not be deemed
as "beneficially owned" by a Filipino.
Stated inversely, if the Filipino has the "specific stock's" voting power (he can vote the
stock or direct another to vote for him), or the Filipino has the investment power over
the "specific stock" (he can dispose of the stock or direct another to dispose it for
him), or he has both (he can vote and dispose of the "specific stock" or direct another
to vote or dispose it for him), then such Filipino is the "beneficial owner" of that
"specific stock" and that "specific stock" is considered (or counted) as part of the 60%
Filipino ownership of the corporation. In the end, all those "specific stocks" that are
determined to be Filipino (per definition of "beneficial owner" or "beneficial
ownership") will be added together and their sum must be equivalent to at least 60%
of the total outstanding shares of stock entitled to vote in the election of directors and
at least 60% of the total number of outstanding shares of stock, whether or not
entitled to vote in the election of directors.
To reiterate, 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.
The restrictive re-interpretation of "capital" as insisted by the petitioners is
unwarranted.
Petitioners' insistence that the 60% Filipino equity requirement must be applied to
each class of shares is simply beyond the literal text and contemplation of Section 11,
Article XII of the 1987 Constitution, viz:
Sec. 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 or 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.
As worded, effective control by Filipino citizens of a public utility is already assured
in the provision. With respect to a stock corporation engaged in the business of a
public utility, the constitutional provision mandates three safeguards: (1) 60% of its
capital must be owned by Filipino citizens; (2) participation of foreign investors in its
board of directors is limited to their proportionate share in its capital; and (3) all its
executive and managing officers must be citizens of the Philippines.
In the exhaustive review made by the Court in the Gamboa Resolution of the
deliberations of the Constitutional Commission, the opinions of the framers of the
1987 Constitution, the opinions of the SEC and the DOJ as well as the provisions of
the FIA, its implementing rules and its predecessor statutes, the intention to apply the
voting control test and the beneficial ownership test was not mentioned in reference
to "each class of shares." Even the Gamboa Decision was silent on this point..
To be sure, 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.88
There are basically only two types of shares or stocks, i.e., common stock and
preferred stock. However, the classes and variety of shares that a corporation may
issue are dictated by the confluence of the corporation's financial position and needs,
business opportunities, short-term and long term targets, risks involved, to name a
few; and they can be classified and re-classified from time to time. With respect to
preferred shares, there are cumulative preferred shares, non-cumulative preferred
shares, convertible preferred shares, participating preferred shares.
Because of the different features of preferred shares, it is required that the
presentation and disclosure of these financial instruments in financial statements
should be in accordance with the substance of the contractual arrangement and the
definitions of a financial liability, a financial asset and an equity instrument.89
Under IAS90 32.16, a financial instrument is an equity instrument only if (a) the
instrument includes no contractual obligation to deliver cash or another financial asset
to another entity, and (b) if the instrument will or may be settled in the issuer's own
equity instruments, it is either: (i) a non derivative that includes no contractual
obligation for the issuer to deliver a variable number of its own equity instruments; or
(ii) a derivative that will be settled only by the issuer exchanging a fixed amount of
cash or another financial asset for a fixed number of its own equity instruments. 91
The following are illustrations of how preferred shares should be presented and
disclosed:
Illustration - preference shares
If an entity issues preference (preferred) shares that pay a fixed rate of dividend and
that have a mandatory redemption feature at a future date, the substance is that they
are a contractual obligation to deliver cash and, therefore, should be recognized as a
liability. [IAS 32.18(a)] In contrast, preference shares that do not have a fixed
maturity, and where the issuer does not have a contractual obligation to make any
payment are equity. In this example even though both instruments are legally termed
preference shares they have different contractual terms and one is a financial liability
while the other is equity.
Illustration - issuance of fixed monetary amount of equity instruments
A contractual right or obligation to receive or deliver a number of its own shares or
other equity instruments that varies so that the fair value of the entity's own equity
instruments to be received or delivered equals the fixed monetary amount of the
contractual right or obligation is a financial liability. [IAS 32.20]
Illustration - one party bas a choice over bow an instrument is settled
When a derivative financial instrument gives one party a choice over how it is settled
(for instance, the issuer or the holder can choose settlement net in cash or by
exchanging shares for cash), it is a financial asset or a financial liability unless all of
the settlement alternatives would result in it being an equity instrument. [IAS 32.26] 92
The fact that from an accounting standpoint, the substance or essence of the financial
instrument is the key determinant whether it should be categorized as a financial
liability or an equity instrument, there is no compelling reason why the same
treatment may not be recognized from a legal perspective. Thus, to require Filipino
shareholders to acquire preferred shares that are substantially debts, in order to meet
the "restrictive" Filipino ownership requirement that petitioners espouse, may not
bode well for the Philippine corporation and its Filipino shareholders.
Parenthetically, given the innumerable permutations that the types and classes of
stocks may take, requiring the SEC and other government agencies to keep track of
the ever-changing capital classes of corporations will be impracticable, if not
downright impossible. And the law does not require the impossible. (Lex non cogit ad
impossibilia.)93
That stock corporations are allowed to create shares of different classes with varying
features is a flexibility that is granted, among others, for the corporation to attract and
generate capital (funds) from both local and foreign capital markets. This access to
capital - which a stock corporation may need for expansion, debt relief/repayment,
working capital requirement and other corporate pursuits - will be greatly eroded with
further unwarranted limitations that are not articulated in the Constitution. The
intricacies and delicate balance between debt instruments (liabilities) and equity
(capital) that stock corporations need to calibrate to fund their business requirements
and achieve their financial targets are better left to the judgment of their boards and
officers, whose bounden duty is to steer their companies to financial stability and
profitability and who are ultimately answerable to their shareholders..
Going back to the illustration above, the restrictive meaning of the term "capital"
espoused by petitioners will definitely be complied with if 60% of each of the three
classes of shares of Company X, consisting of 100 common shares, 100 Class A
preferred shares (with right to elect directors) and 100 Class B preferred shares
(without right to elect directors), is owned by Filipinos. However, what if the 60%
Filipino ownership in each class of preferred shares, i.e., 60 Class A preferred shares
and 60 Class B preferred shares, is not fully subscribed or achieved because there
are not enough Filipino takers? Company X will be deprived of capital that would
otherwise be accessible to it were it not for this unwarranted "restrictive" meaning of
"capital".
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. As
observed in the Gamboa Decision, viz:
The Corporation Code of the Philippines classifies shares as common or preferred,
thus:
Sec. 6. Classification of shares. The shares of stock of stock corporations may be
divided into classes or series of shares, or both, any of which classes or series of
shares may have such rights, privileges or restrictions as may be stated in the articles
of incorporation: Provided, That no share may be deprived of voting rights except
those classified and issued as "preferred" or "redeemable" shares, unless
otherwise provided in this Code: Provided, further, That there shall always be a
class or series of shares which have complete voting rights. Any or all of the shares
or series of shares may have a par value or have no par value as may be provided for
in the articles of incorporation: Provided, however, That banks, trust companies,
insurance companies, public utilities, and building and loan associations shall not be
permitted to issue no-par value shares of stock.
Preferred shares of stock issued by any corporation may be given preference in the
distribution of the assets of the corporation in case of liquidation and in the distribution
of dividends, or such other preferences as may be stated in the articles of
incorporation which are not violative of the provisions of this Code: Provided, That
preferred shares of stock may be issued only with a stated par value. The Board of
Directors, where authorized in the articles of incorporation, may fix the terms and
conditions of preferred shares of stock or any series thereof: Provided, That such
terms and conditions shall be effective upon the filing of a certificate thereof with the
Securities and Exchange Commission.
xxxx
A corporation may, furthermore, classify its shares for the purpose of insuring
compliance with constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and stated in the
certificate of stock, each share shall be equal in all respects to every other share.
Where the articles of incorporation provide for non voting shares in the cases allowed
by this Code, the holders of such shares shall nevertheless be entitled to vote on the
following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially
all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other
corporations;
7. Investment of corporate funds in another corporation or business in accordance
with this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote necessary to
approve a particular corporate act as provided in this Code shall be deemed to refer
only to stocks with voting rights.
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 revealed in the deliberations of the Constitutional Commission, "capital" refers to
the voting stock or controlling interest of a corporation x x x.94
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 Section 11, Article XII of the Constitution.
Therefore, to now insist in the present case that preferred shares be regarded
differently from their unambiguous treatment in the Gamboa Decision is enough proof
that the Gamboa Decision, which had attained finality more than 4 years ago, is being
drastically changed or expanded.
In this regard, it should be 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. As mandated by Section 11, Article XII of the Constitution,
all the executive and managing officers of a public utility company must be Filipinos.
Thus, the all-Filipino management team must first be convinced that any of the 8
corporate actions in Section 6 will be to the best interest of the company. Then, when
the all-Filipino management team recommends this to the board, a majority of the
board has to approve the recommendation and, as required by the Constitution,
foreign participation in the board cannot exceed 40% of the total number of board
seats. Since the Filipino directors comprise the majority, they, if united, do not even
need the vote of the foreign directors to approve the intended corporate act. After
approval by the board, all the shareholders (with and without voting rights) will vote on
the corporate action. The required vote in the shareholders' meeting is 2/3 of the
outstanding capital stock.95 Given the super majority vote requirement, foreign
shareholders cannot dictate upon their Filipino counterpart. However, foreigners (if
owning at least a third of the outstanding capital stock) must agree with Filipino
shareholders for the corporate action to be approved. The 2/3 voting requirement
applies to all corporations, given the significance of the 8 corporate actions
contemplated in Section 6 of the Corporation Code.
In short, if the Filipino officers, directors and shareholders will not approve of the
corporate act, the foreigners are helpless.
Allowing stockholders holding preferred shares without voting rights to vote in the 8
corporate matters enumerated in Section 6 is an acknowledgment of their right of
ownership. If the owners of preferred shares without right to vote/elect directors are
not allowed to vote in any of those 8 corporate actions, then they will not be entitled to
the appraisal right provided under Section 81 96 of the Corporation Code in the event
that they dissent in the corporate act. As required in Section 82, the appraisal right
can only be exercised by any stockholder who voted against the proposed action.
Thus, without recognizing the right of every stockholder to vote in the 8 instances
enumerated in Section 6, the stockholder cannot exercise his appraisal right in case
he votes against the corporate action. In simple terms, the right to vote in the 8
instances enumerated in Section 6 is more in furtherance of the stockholder's right of
ownership rather than as a mode of control.
As to financial interest, giving short-lived preferred or superior terms to certain
classes or series of shares may be a welcome option to expand capital, without the
Filipino shareholders putting up additional substantial capital and/or losing ownership
and control of the company. For shareholders who are not keen on the creation of
those shares, they may opt to avail themselves of their appraisal right. As
acknowledged in the Gamboa Decision, preferred shareholders are merely investors
in the company for income in the same manner as bondholders. Without a lucrative
package, including an attractive return of investment, preferred shares will not be
subscribed and the much-needed additional capital will be elusive. A too restrictive
definition of "capital", one which was never contemplated in the GamboaDecision, will
surely have a dampening effect on the business milieu by eroding the flexibility
inherent in the issuance of preferred shares with varying terms and conditions.
Consequently, the rights and prerogatives of the owners of the corporation will be
unwarrantedly stymied.
Moreover, the restrictive interpretation of the term "capital" would have a tremendous
impact on the country as a whole and to all Filipinos.
The PSE's Comment-in-Intervention dated June 16, 201497 warns that:
80. [R]edefining "capital" as used in Section 11, Article XII of the 1987
Constitution and adopting the supposed "Effective Control Test" will lead to
disastrous consequences to the Philippine stock market.
81. Current data of the PSE show that, if the "Effective Control Test" were
applied, the total value of shares that would be deemed in excess of the foreign-
ownership limits based on stock prices as of 30 April 2014 is One Hundred Fifty
Nine Billion Six Hundred Thirty Eight Million Eight Hundred Forty Five
Thousand Two Hundred Six Pesos and Eighty Nine Cents
(Php159,638,845,206.89).
82. The aforementioned value of investments would have to be discharged by
foreign holders, and consequently must be absorbed by Filipino investors.
Needless to state, the lack of investments may lead to shutdown of the affected
enterprises and to immeasurable consequences to the Philippine economy.98
In its Omnibus Motion [1] For Leave to Intervene; and [2] To Admit Attached
Comment-in-Intervention dated May 30, 2016,99 SHAREPHIL further warns that
"[t]he restrictive re-interpretation of the term "capital" will result in massive forced
divestment of foreign stockholdings in Philippine corporations." 100SHAREPHIL
explains:
4.51. On 16 October 2012, Deutsche Bank released a Market Research Study,
which analyzed the implications of the ruling in Gamboa. The Market Research
Study stated that:
"If this thinking is applied and becomes established precedent, it would
significantly expand on the rules for determining nationality in partially
nationalized industries. If that were to happen, not only will PLDT's move to
issue the 150m voting prefs be inadequate to address the issue, a large
number of listed companies with similar capital structures could also be
affected."
4.52. In five (5) companies alone, One Hundred Fifty Eight Billion Pesos
(PhP158,000,000,000.00) worth of shares will have to be sold by foreign
shareholders in a forced divestment, if the obiter in Gamboa were to be
implemented. Foreign shareholders of PLDT will have to divest One Hundred
Three Billion Eight Hundred Sixty Million Pesos (PhP103,860,000,000.00)
worth of shares.
a. Foreign shareholders of Globe Telecom will have to divest Thirty
Eight Billion Two Hundred Fifty Million Pesos (PhP38,250,000,000.00) worth
of shares.
b. Foreign shareholders of Ayala Land will have to divest Seventeen
Billion Five Hundred Fifty Million Pesos (PhP17,550,000,000.00) worth of
shares.
 c. Foreign shareholders of ICTSI will have to divest Six Billion Four
Hundred Ninety Million Pesos (PhP6,490,000,000.00) worth of shares. To revisit or even clarify the unequivocal definition of the term "capital" as referring
"only to shares of stock entitled to vote in the election of directors" and apply the 60%
d. Foreign shareholders of MWC will have to divest Seven Billion Filipino ownership requirement to each class of share is effectively and unwarrantedly
Seven Hundred Fourteen Million Pesos (PhP7,714,000,000.00) worth of amending or changing the Gamboa Decision and Resolution. The Gamboa Decision
shares. and Resolution Doctrine did NOT make any definitive ruling that the 60% Filipino
ownership requirement was intended to apply to each class of share.
4.53. Clearly, the local stock market which has an average value turn-over of
In Malayang Manggagawa ng Stayfast Phils., Inc. v. NLRC,108 the Court stated:
Seven Billion Pesos cannot adequately absorb the influx of shares caused by
the forced divestment. As a result, foreign stockholders will have to sell these
Where a petition for certiorari under Rule 65 of the Rules of Court alleges grave
shares at bargain prices just to comply with the Obiter.
abuse of discretion, the petitioner should establish that the respondent court
or tribunal acted in a capricious, whimsical, arbitrary or despotic manner in
4.54. These shares being part of the Philippine index, their forced divestment
the exercise of its jurisdiction as to be equivalent to lack of jurisdiction.
vis-a-vis the inability of the local stock market to absorb these shares will
This is so because "grave abuse of discretion" is well-defined and not an
necessarily bring immense downward pressure on the index. A domino-effect
amorphous concept that may easily be manipulated to suit one's purpose. In this
implosion of the Philippine stock market and the Philippine economy, in
connection, Yu v. Judge Reyes-Carpio, is instructive:
general is not remote. x x x.101
The term "grave abuse of discretion" has a specific meaning. An act of a court or
Petitioners have failed to counter or refute these submissions of the PSE and
tribunal can only be considered as with grave abuse of discretion when such act
SHAREPHIL. These unrefuted observations indicate to the Court that a
is done in a "capricious or whimsical exercise of judgment as is equivalent to lack
restrictive interpretation - or rather, re-interpretation, of "capital", as already
of jurisdiction." The abuse of discretion must be so patent and gross as to
defined with finality in the Gamboa Decision and Resolution - directly affects
amount to an "evasion of a positive duty or to a virtual refusal to perform a duty
the well-being of the country and cannot be labelled as "irrelevant and
enjoined by law, or to act at all in contemplation of law, as where the power is
impertinent concerns x x x add[ing] burden [to] the Court." 102 These
exercised in an arbitrary and despotic manner by reason of passion and hostility."
observations by the PSE103 and SHAREPHIL,104 unless refuted, must be
Furthermore, the use of a petition for certiorari is restricted only to "truly
considered by the Court to be valid and sound.
extraordinary cases wherein the act of the lower court or quasi-judicial body is
wholly void." From the foregoing definition, it is clear that the special civil action
The Court in Abacus Securities Corp. v. Ampil105 observed that: "[s]tock market
of certiorari under Rule 65 can only strike an act down for having been done with
transactions affect the general public and the national economy. The rise and
grave abuse of discretion if the petitioner could manifestly show that such act
fall of stock market indices reflect to a considerable degree the state of the
was patent and gross. x x x.
economy. Trends in stock prices tend to herald changes in business
conditions. Consequently, securities transactions are impressed with public
The onus rests on petitioners to clearly and sufficiently establish that the SEC, in
interest x x x."106 The importance of the stock market in the economy cannot
issuing SEC-MC No. 8, acted in a capricious, whimsical, arbitrary or despotic
simply be glossed over.
manner in the exercise of its jurisdiction as to be equivalent to lack of jurisdiction
or that the SEC's abuse of discretion is so patent and gross as to amount to an
In view of the foregoing, the pronouncement of the Court in
evasion of a positive duty or to a virtual refusal to perform a duty enjoined by law,
the Gamboa Resolution - the constitutional requirement to apply uniformly and
or to act at all in contemplation of law and the Gamboa Decision and
across the board to all classes of shares, regardless of nomenclature and
Resolution. Petitioners miserably failed in this respect.
category, comprising the capital of a corporation 107 - is clearly an obiter
dictum that cannot override the Court's unequivocal definition of the term
The clear and unequivocal definition of "capital" in Gamboa has attained
"capital" in both the Gamboa Decision and Resolution.
finality.
Nowhere in the discussion of the definition of the term "capital" in Section 11,
It is an elementary principle in procedure that the resolution of the court in a given
Article XII of the 1987 Constitution in the Gamboa Decision did the Court
issue as embodied in the dispositive portion or fallo of a decision controls the
mention the 60% Filipino equity requirement to be applied to each class of
settlement of rights of the parties and the questions, notwithstanding statement in the
shares. The definition of "Philippine national" in the FIA and expounded in its
body of the decision which may be somewhat confusing, inasmuch as the dispositive
IRR, which the Court adopted in its interpretation of the term "capital", does not
part of a final decision is definite, clear and unequivocal and can be wholly given
support such application. In fact, even the Final Word of
effect without need of interpretation or construction.109
the Gamboa Resolution does not even intimate or suggest the need for a
clarification or re-interpretation.
As explained above, the fallo or decretal/dispositive portions of both
the Gamboa Decision and Resolution are definite, clear and unequivocaL While there
is a passage in the body of the Gamboa Resolution that might have appeared Court.115 The parties, particularly intervenors Gamboa, et al., could have filed a
contrary to the fallo of the Gamboa Decision - capitalized upon by petitioners to motion for clarification in Gamboa in order to fill in the perceived shortcoming
espouse a restrictive re-interpretation of "capital" - the definiteness and clarity of occasioned by the non-inclusion in the dispositive portion of the GamboaResolution of
the fallo of the GamboaDecision must control over the obiter dictum in what was discussed in the body.116 The statement in the fallo of
the Gamboa Resolution regarding the application of the 60-40 Filipino-foreign the Gamboa Resolution to the effect that "[n]o further pleadings shall be entertained"
ownership requirement to "each class of shares, regardless of differences in voting could not be a hindrance to a motion for clarification that sought an unadulterated
rights, privileges and restrictions." inquiry arising upon an ambiguity in the decision.117

The final judgment as rendered is the judgment of the court irrespective of all Closing
seemingly contrary statements in the decision because at the root of the doctrine that
the premises must yield to the conclusion is, side by side with the need of Ultimately, the key to nationalism is in the individual. Particularly for a public utility
writing finis to litigations, the recognition of the truth that "the trained intuition of the corporation or association, whether stock or non-stock, it starts with the Filipino
judge continually leads him to right results for which he is puzzled to give shareholder or member who, together with other Filipino shareholders or members
unimpeachable legal reasons."110 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,
Petitioners cannot, after Gamboa has attained finality, seek a belated correction or appoints and employs the all-Filipino management team. This is what is envisioned
reconsideration of the Court's unequivocal definition of the term "capital". At the core by the Constitution to assure effective control by Filipinos. If the safeguards, which
of the doctrine of finality of judgments is that public policy and sound practice demand are already stringent, fail, i.e., a public utility corporation whose voting stocks are
that, at the risk of occasional errors, judgments of courts should become final at some beneficially owned by Filipinos, the majority of its directors are Filipinos, and all its
definite date fixed by law and the very objects for which courts were instituted was to managing officers are Filipinos, is proalien (or worse, dummies), then that is not the
put an end to controversies.111 Indeed, the definition of the term "capital" in the fallo of fault or failure of the Constitution. It is the breakdown of nationalism in each of the
the Gamboa Decision has acquired finality. Filipino shareholders, Filipino directors and Filipino officers of that corporation. No
Constitution, no decision of the Court, no legislation, no matter how ultranationalistic
Because the SEC acted pursuant to the Court's pronouncements in both they are, can guarantee nationalism.
the Gamboa Decision and Gamboa Resolution, then it could not have gravely abused
its discretion. That portion found in the body of the Gamboa Resolution which the WHEREFORE, premises considered, the Court DENIES the Petition and Petition-in-
petitioners rely upon is nothing more than an obiter dictum and the SEC could not be Intervention.
expected to apply it as it was not - is not - a binding pronouncement of the Court.112
SO ORDERED.
Furthermore, as opined by Justice Bersamin during the deliberations, the doctrine of
immutability of judgment precludes the Court from re examining the definition of
"capital" under Section 11, Article XII of the Constitution. Under the doctrine of finality
and immutability of judgment, a decision that has acquired finality becomes
immutable and unalterable, and may no longer be modified in any respect, even if the
modification is meant to correct erroneous conclusions of fact and law, and even if the
modification is made by the court that rendered it or by the Highest Court of the land.
Any act that violates the principle must be immediately stricken down.113 The petitions
have not succeeded in pointing to any exceptions to the doctrine of finality of
judgments, under which the present case falls, to wit: (1) the correction of clerical
errors; (2) the so-called nunc pro tunc entries which cause no prejudice to any party;
(3) void judgments; and (4) whenever circumstances transpire after the finality of the
decision rendering its execution unjust and inequitable. 114

With the foregoing disquisition, the Court rules that SEC-MC No. 8 is not contrary to
the Court's definition and interpretation of the term "capital". Accordingly, the petitions
must be denied for failing to show grave abuse of discretion in the issuance of SEC-
MC No. 8.

The petitions are second motions for Reconsideration, which are proscribed.

As Justice Bersamin further noted during the deliberations, the petitions are in reality
second motions for reconsideration prohibited by the Internal Rules of the Supreme