Detailed Digest of Gamboa vs. Finance Secretary, G.R. No. 176579, June 28, 2011 WILSON P. GAMBOA vs.

FINANCE SECRETARY TEVES G.R. No. 176579, promulgated June 28, 2011 X-----------------------------------------------------------------------------X DECISION CARPIO, J.: I. THE FACTS This is a petition to nullify the sale of shares of stock of Philippine Telecommunications Investment Corporation (PTIC) by the government of the Republic of the Philippines, acting through the Inter-Agency Privatization Council (IPC), to Metro Pacific Assets Holdings, Inc. (MPAH), an affiliate of First Pacific Company Limited (First Pacific), a Hong Kong-based investment management and holding company and a shareholder of the Philippine Long Distance Telephone Company (PLDT). The petitioner questioned the sale on the ground that it also involved an indirect sale of 12 million shares (or about 6.3 percent of the outstanding common shares) of PLDT owned by PTIC to First Pacific. With the this sale, First Pacifics common shareholdings in PLDT increased from 30.7 percent to 37 percent, thereby increasing the total common shareholdings of foreigners in PLDT to about 81.47%. This, according to the petitioner, violates Section 11, Article XII of the 1987 Philippine Constitution which limits foreign ownership of the capital of a public utility to not more than 40%. II. THE ISSUE Does the term capital in Section 11, Article XII of the Constitution refer to the total common shares only, or to the total outstanding capital stock (combined total of common and non-voting preferred shares) of PLDT, a public utility? III. THE RULING [The Court partly granted the petition and held that the term capital in Section 11, Article XII of the Constitution refers only to shares of stock entitled to vote in the election of directors of a public utility, or in the instant case, to the total common shares of PLDT.] 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 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 [of PLDT]. xxx xxx xxx

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. xxx. 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. xxx xxx xxx

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]. xxx xxx xxx

To construe broadly the term capital as the total outstanding capital stock, including both common and nonvoting 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 a ssume 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. xxx xxx xxx

PLDT. This directly contravenes the express command in Section 11, Article XII of the Constitution that [n]o franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to x x x corporations 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; (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, 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, is a glaring confirmation by the market that control and beneficial ownership of PLDT rest with the common shares, not with the preferred shares. xxx xxx xxx

[O]nly holders of common shares can vote in the election of directors [of PLDT], 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), which is a document required to be submitted annually to the Securities and Exchange Commission, foreigners hold 120,046,690 common shares of PLDT whereas Filipinos hold only 66,750,622 common shares. In other words, foreigners hold 64.27% of the total number of 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. As shown in PLDTs 2010 GIS, as submitted to the SEC, the par value of PLDT common shares is P5.00 per share, whereas the par value of preferred shares is P10.00 per share. In other words, preferred shares have twice the par value of common shares but cannot elect directors and have only 1/70 of the dividends of common shares. Moreover, 99.44% of the preferred shares are owned by Filipinos while foreigners own only a minuscule 0.56% of the preferred shares. Worse, preferred shares constitute 77.85% of the authorized capital stock of PLDT while common shares constitute only 22.15%. 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

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. DISSENTING ABAD ABAD, J., dissenting: In the Decision dated June 28, 2011, the Court partially granted the petition for prohibition, injunction, declaratory relief, and declaration of nullity of sale, of Wilson P. Gamboa, a Philippine Long Distance Telephone Company (PLDT) stockholder, and ruled 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 only to common shares, and not to the total outstanding capital stock (common and non-voting preferred shares). The Court also directed the Chairperson of the Securities and Exchange Commission (SEC) to apply this definition of the term "capital" in determining the extent of allowable foreign ownership in PLDT, and to impose the appropriate sanctions if there is a violation of Section 11, Article XII of the 1987 Constitution. Respondents Manuel V. Pangilinan, Napoleon L. Nazareno, Francis Lim, Pablito V. Sanidad, Arno V. Sanidad, and the SEC filed their respective motions for reconsideration.

Thereafter, the Court conducted oral arguments to hear the parties on the following issues: 1.Whether the term "capital" in Section 11, Article XII of the 1987 Constitution refers only to shares of stock with the right to vote in the election of directors (common shares), or to all kinds of shares of stock, including those with no right to vote in the election of directors; 2.Assuming the term "capital" refers only to shares of stock with the right to vote in the election of directors, whether this ruling of the Court should have retroactive effect to affect such shares of stock owned by foreigners prior to this ruling; 3.Whether PLDT and its foreign stockholders are indispensable parties in the resolution of the legal issue on the definition of the term "capital" in Section 11, Article XII of the 1987 Constitution; and SacTCA 3.1If so, whether the Court has acquired jurisdiction over the persons of PLDT and its foreign stockholders. I am constrained to maintain my dissent to the majority opinion. One. To reiterate, the authority to define and interpret the meaning of "capital" in Section 11, Article XII of the 1987 Constitution belongs, not to the Court, but to Congress, as part of its policy making powers. This matter is addressed to the sound discretion of the lawmaking department of government since the power to authorize and control a public utility is admittedly a prerogative that stems from Congress. 1 It may very well in its wisdom define the limit of foreign ownership in public utilities. Section 11, Article XII of the 1987 Constitution which reads: 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. is one of the constitutional provisions that are not selfexecuting and need sufficient details for a meaningful implementation. While the provision states that no franchise for the operation of a public utility shall be granted to a corporation organized under Philippine laws unless at least 60% of its capital is owned by Filipino citizens, it does not provide for the meaning of the term "capital." As Fr. Joaquin G. Bernas, S.J. explained, acting as Amicus Curiae, the result of the absence of a clear definition of the term "capital," was to base the 60-40 proportion on the total outstanding capital stock, that is, the combined total of both common and non-voting preferred shares. But while this has become the popular and common understanding of the people, it is still incomplete. He added that in the Foreign Investments Act of 1991 (FIA), Congress tried to clarify this understanding by specifying what capital means for the purpose of determining corporate citizenship, thus: TcSCEa Sec. 3.Definitions. As used in this Act: a.The term "Philippine national" shall mean a citizen of the Philippines; of 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." (As amended by Republic Act 8179) Indeed, the majority opinion also resorted to the various investment laws 2 in construing the term "capital." But while these laws admittedly govern foreign investments in the country, they do not expressly or impliedly seek to supplant

the ambiguity in the definition of the term "capital" nor do they seek to modify foreign ownership limitation in public utilities. It is a rule that when the operation of the statute is limited, the law should receive a restricted construction. 3 More particularly, much discussion was made on the FIA since it was enacted after the 1987 Constitution took effect. Yet it does not seem to be a supplementary or enabling legislation which accurately defines the term "capital." For one, it specifically applies only to companies which intend to invest in certain areas of investment. It does not apply to companies which intend to apply for a franchise, much less to those which are already enjoying their franchise. It aims "to attract, promote or welcome productive investments from foreign individuals, partnerships, corporations and government, including their political subdivisions, in activities which significantly contribute to national industrialization and socio-economic development." 4 What the FIA provides are new rules for investing in the country. IEaATD Moreover, with its adoption of the definition of the term "Philippine national," has the previous understanding that the term "capital" referred to the total outstanding capital stock, as Fr. Bernas explained, been supplanted or modified? While it is clear that the term "Philippine national" shall mean a corporation organized under Philippine laws at least 60% of the capital stock outstanding and entitled to vote is owned and held by Filipino citizens "as used in [the FIA]," it is not evident whether Congress intended this definition to be used in all other cases where the term "capital" presents itself as an issue. Two. Granting that it is the Court, and not Congress, which must define the meaning of "capital," I submit that it must be interpreted to encompass the entirety of a corporation's outstanding capital stock (both common and preferred shares, voting or non-voting). First, the term "capital" is also used in the fourth sentence of Section 11, Article XII, as follows: Section 11.. . . 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. If the term "capital" as used in the first sentence is interpreted as pertaining only to shares of stock with the right to vote in the election of directors, then such sentence will already prescribe the limit of foreign participation in the election of the board of directors. On the basis of the first sentence alone, the capacity of foreign stockholders to elect the directors will already be limited by their ownership of 40% of the voting shares. This will then render the fourth sentence meaningless and will run counter to the principle that the provisions of the Constitution should be read in consonance with its other related provisions. DCESaI Second, Dr. Bernardo M. Villegas, also an Amicus Curiae, who was the Chairman of the Committee on the National Economy that drafted Article XII of the 1987 Constitution, emphasized that by employing the term "capital," the 1987 Constitution itself did not distinguish among classes of shares. During their Committee meetings, Dr. Villegas explained that in both economic and business terms, the term "capital" found in the balance sheet of any corporation always meant the entire

capital stock, both common and preferred. He added that even the non-voting shares in a corporation have a great influence in its major decisions such as: (1) the amendment of the articles of incorporation; (2) the adoption and amendment of by-laws; (3) the 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) the increase or decrease of capital stock; (6) the merger or consolidation of the corporation with another corporation or other corporations; (7) the investment of corporate funds in another corporation or business in accordance with this Code; and (8) the dissolution of the corporation. Thus, the Committee decisively rejected in the end the proposal of the UP Law Center to define the term "capital" as voting stock or controlling interest. To quote Dr. Villegas, "in the minds of the Commissioners the word 'capital' in Section 11 of Article XII refers, not to voting stock, but to total subscribed capital, both common and preferred." Finally, Dr. Villegas observed that our existing policy on foreign ownership in public utilities already discourages, as it is, foreign investments to come in. To impose additional restrictions, such as the restrictive interpretation of the term "capital," will only aggravate our already slow economic growth and incapacity to compete with our East Asian neighbours. The Court can simply adopt the interpretations given by Fr. Bernas and Dr. Villegas since they were both part of the Constitutional Commission that drafted the 1987 Constitution. No one is in a better position to determine the intent of the framers of the questioned provision than they are. Furthermore, their interpretations also coincide with the longstanding practice to base the 60-40 proportion on the total outstanding capital stock, that is, both common and preferred shares. IEAacT For sure, both common and preferred shares have always been considered part of the corporation's capital stock. Its shareholders are no different from ordinary investors who take on the same investment risks. They participate in the same venture, willing to share in the profits and losses of the enterprise. Under the doctrine of equality of shares all stocks issued by the corporation are presumed equal with the same privileges and liabilities, provided that the Articles of Incorporation is silent on such differences. 5 As a final note, the Filipinization of public utilities under the 1987 Constitution is a recognition of the very strategic position of public utilities both in the national economy and for national security. 6 The participation of foreign capital is enjoined since the establishment and operation of public utilities may require the investment of substantial capital which Filipino citizens may not afford. But at the same time, foreign involvement is limited to prevent them from assuming control of public utilities which may be inimical to national interest. 7 Section 11, Article XII of the 1987 Constitution already provides three limitations on foreign participation in public utilities. The Court need not add more by further restricting the meaning of the term "capital" when none was intended by the framers of the 1987 Constitution. Based on these considerations, I vote to GRANT the motions for reconsideration. CASE DIGEST (SMALLER version) DECISION

CARPIO, J.: I. THE FACTS This is a petition to nullify the sale of shares of stock of Philippine Telecommunications Investment Corporation (PTIC) by the government of the Republic of the Philippines, acting through the Inter-Agency Privatization Council (IPC), to Metro Pacific Assets Holdings, Inc. (MPAH), an affiliate of First Pacific Company Limited (First Pacific), a Hong Kong-based investment management and holding company and a shareholder of the Philippine Long Distance Telephone Company (PLDT). The petitioner questioned the sale on the ground that it also involved an indirect sale of 12 million shares (or about 6.3 percent of the outstanding common shares) of PLDT owned by PTIC to First Pacific. With the this sale, First Pacifics common shareholdings in PLDT increased from 30.7 percent to 37 percent, thereby increasing the total common shareholdings of foreigners in PLDT to about 81.47%. This, according to the petitioner, violates Section 11, Article XII of the 1987 Philippine Constitution which limits foreign ownership of the capital of a public utility to not more than 40%, thus: Section 11. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines, at least sixty per centum of whose capital is owned by such citizens; nor shall such franchise, certificate, or authorization be exclusive in character or for a longer period than fifty years. Neither shall any such franchise or right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress when the common good so requires. The State shall encourage equity participation in public utilities by the general public. The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its capital, and all the executive and managing officers of such corporation or association must be citizens of the Philippines. (Emphasis supplied) II. THE ISSUE Does the term capital in Section 11, Article XII of the Constitution refer to the total common shares only, or to the total outstanding capital stock (combined total of common and non-voting preferred shares) of PLDT, a public utility? III. THE RULING [The Court partly granted the petition and held that the term capital in Section 11, Article XII of the Constitution refers only to shares of stock entitled to vote in the election of directors of a public utility, i.e., to the total common shares in PLDT.] Considering that common shares have voting rights which translate to control, as opposed to preferred shares which usually have no voting rights, the term capital in Section 11, Article XII of the Constitution refers only to common shares. However, if the preferred shares also have the right to vote in the election of directors, then the term capital shall include such preferred shares because the right to participate in the control or management of the corporation is exercised through the right to vote in the election of directors. In short, the term capital in Section 11, Article XII of the Constitution refers only to shares of stock that can vote in the election of directors.

To construe broadly the term capital as the total outstanding capital stock, including both common and nonvoting preferred shares, grossly contravenes the intent and letter of the Constitution that the State shall develop a self reliant and independent national economy effectively controlled by Filipinos. A broad definition unjustifiably disregards who owns the all-important voting stock, which necessarily equates to control of the public utility. Holders of PLDT preferred shares are explicitly denied of the right to vote in the election of directors. 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. On the other hand, holders of common shares are granted the exclusive right to vote in the election of directors. PLDTs Articles of Incorporation state that each holder of Common Capital Stock shall have one vote in respect of each share of such stock held by him on all matters voted upon by the stockholders, and the holders of Common Capital Stock shall have the exclusive right to vote for the election of directors and for all other purposes. It must be stressed, and respondents do not dispute, that foreigners hold a majority of the common shares of PLDT. In fact, based on PLDTs 2010 General Information Sheet (GIS), which is a document required to be submitted annually to the Securities and Exchange Commission, foreigners hold 120,046,690 common shares of PLDT whereas Filipinos hold only 66,750,622 common shares. In other words, foreigners hold 64.27% of the total number of 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. As shown in PLDTs 2010 GIS, as submitted to the SEC, the par value of PLDT common shares is P5.00 per share, whereas the par value of preferred shares is P10.00 per share. In other words, preferred shares have twice the par value of common shares but cannot elect directors and have only 1/70 of the dividends of common shares. Moreover, 99.44% of the preferred shares are owned by Filipinos while foreigners own only a minuscule 0.56% of the preferred shares. Worse, preferred shares constitute 77.85% of the authorized capital stock of PLDT while common shares constitute only 22.15%. This undeniably shows that beneficial interest in PLDT is not with the non-voting preferred shares but with the common shares, blatantly violating the constitutional requirement of 60 percent Filipino control and Filipino beneficial ownership in a public utility. In short, Filipinos hold less than 60 percent of the voting stock, and earn less than 60 percent of the dividends, of PLDT. This directly contravenes the express command in Section 11, Article XII of the Constitution that [n]o franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to x x x corporations 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; (5) preferred shares have twice the par value of common shares; and (6) preferred shares constitute 77.85% of the authorized capital stock of PLDT and common shares only 22.15%. This kind of ownership and control of a public utility is a mockery of the Constitution. [Thus, the Respondent Chairperson of the Securities and Exchange Commission was DIRECTED by the Court to apply the foregoing definition of the term capital in determining the extent of allowable foreign ownership in respondent Philippine Long Distance Telephone Company, and if there is a violation of Section 11, Article XII of the Constitution, to impose the appropriate sanctions under the law.]

as the case may be. Preferences granted to preferred stockholders, moreover, do not give them a lien upon the property of the corporation nor make them creditors of the corporation, the right of the former being always subordinate to the latter. Dividends are thus payable only when there are profits earned by the corporation and as a general rule, even if there are existing profits, the board of directors has the discretion to determine whether or not dividends are to be declared. Shareholders, both common and preferred, are considered risk takers who invest capital in the business and who can look only to what is left after corporate debts and liabilities are fully paid. 2.ID.; ID.; ID.; ID.; REDEEMABLE SHARES. Redeemable shares, on the other hand, are shares usually preferred, which by their terms are redeemable at a fixed date, or at the option of either issuing corporation, or the stockholder, or both at a certain redemption price. A redemption by the corporation of its stock is, in a sense, a repurchase of it for cancellation. The present Code allows redemption of shares even if there are no unrestricted retained earnings on the books of the corporation. This is a new provision which in effect qualifies the general rule that the corporation cannot purchase its own shares except out of current retained earnings. However, while redeemable shares may be redeemed regardless of the existence of unrestricted retained earnings, this is subject to the condition that the corporation has, after such redemption, assets in its books to cover debts and liabilities inclusive of capital stock. Redemption, therefore, may not be made where the corporation is insolvent or if such redemption will cause insolvency or inability of the corporation to meet its debts as they mature. 3.ID.; ID.; ID.; ID.; WHILE THE STOCK CERTIFICATE IN CASE AT BAR DOES NOT ALLOW REDEMPTION, THE OPTION TO DO SO WAS CLEARLY VESTED IN THE PETITIONER BANK. The petitioner argues that it cannot be compelled to redeem the preferred shares issued to the private respondent. We agree. Respondent judge, in ruling that petitioner must redeem the shares in question, stated that: "On the question of the redemption by the defendant of said preferred shares of stock, the very wordings of the terms and conditions in said stock certificates clearly allows the same." What respondent Judge failed to recognize was that while the stock certificate does allow redemption, the option to do so was clearly vested in the petitioner bank. The redemption therefore is clearly the type known as "optional." Thus, except as otherwise provided in the stock certificate, the redemption rests entirely with the corporation and the stockholder is without right to either compel or refuse the redemption of its stock. Furthermore, the terms and conditions set forth therein use the word "may." It is a settled doctrine in statutory construction that the word "may" denotes discretion, and cannot be construed as having a mandatory effect. We fail to see how respondent judge can ignore what, in his words, are the "very wordings of the terms and conditions in said stock certificates" and construe what is clearly a mere option to be his legal basis for compelling the petitioner to redeem the shares in question. 4.ID.; ID.; ID.; PAYMENT OF DIVIDENDS TO A STOCKHOLDER IS NOT A MATTER OF RIGHT BUT A MATTER OF CONSENSUS. The respondent judge also stated that since the stock certificate granted the private respondents the right to receive a quarterly dividend of One Per Centum (1%), cumulative and participating, it "clearly and unequivocably (sic) indicates that the same are 'interest bearing stocks' or stocks issued by a corporation under an agreement to pay a certain rate of interest thereon. As such, plaintiffs (private respondents herein) become entitled to the payment thereof as a matter of right without necessity of a prior declaration of dividend." There is no legal basis for this observation. Both Sec. 16 of the

[G.R. No. 51765. March 3, 1997.] REPUBLIC PLANTERS BANK, petitioner, vs. HON. ENRIQUE A. AGANA, SR., as Presiding Judge, Court of First Instance of Rizal, Branch XXVIII, Pasay City, ROBES-FRANCISCO REALTY & DEVELOPMENT CORPORATION and ADALIA F. ROBES, respondents.

The Chief Legal Counsel and Dorado Sarmen Sarson Ian & Associates for petitioner. Rodrigo P. Villaroman and Roberto Y Miranda for private respondents.

SYLLABUS 1.COMMERCIAL LAW; CORPORATION CODE; SHARES OF STOCK; PREFERRED SHARES OF STOCK; NATURE THEREOF. A preferred share of stock, on one hand, is one which entitles the holder thereof to certain preferences over the holders of common stock. The preferences are designed to induce persons to subscribe for shares of a corporation. Preferred shares take a multiplicity of forms. The most common forms may be classified into two: (1) preferred shares as to assets; and (2) preferred shares as to dividends. The former is a share which gives the holder thereof preference in the distribution of the assets of the corporation in case of liquidation; the latter is a share the holder of which is entitled to receive dividends on said share to the extent agreed upon before any dividends at all are paid to the holders of common stock. There is no guaranty, however, that the share will receive any dividends. Under the old Corporation Law in force at the time the contract between the petitioner and the private respondents was entered into, it was provided that "no corporation shall make or declare any dividend except from the surplus profits arising from its business, or distribute its capital stock or property other than actual profits among its members or stockholders until after the payment of its debts and the termination of its existence by limitation or lawful dissolution." Similarly, the present Corporation Code provides that the board of directors of a stock corporation may declare dividends only out of unrestricted retained earnings. The Code, in Section 43, adopting the change made in accounting terminology, substituted the phrase "unrestricted retained earnings," which may be a more precise term, in place of "surplus profits arising from its business" in the former law. Thus, the declaration of dividends is dependent upon the availability of surplus profit or unrestricted retained earnings,

Corporation Law and Sec. 43 of the present Corporation Code prohibit the issuance of any stock dividend without the approval of stockholders, representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. These provisions underscore the fact that payment of dividends to a stockholder is not a matter of right but a matter of consensus. Furthermore, "interest bearing stocks," on which the corporation agrees absolutely to pay interest before dividends are paid to common stockholders, is legal only when construed as requiring payment of interest as dividends from net earnings or surplus only. Clearly, the respondent judge, in compelling the petitioner to redeem the shares in question and to pay the corresponding dividends, committed grave abuse of discretion amounting to lack or excess of jurisdiction in ignoring both the terms and conditions specified in the stock certificate, as well as the clear mandate of the law. 5.CIVIL LAW; PRESCRIPTION OF ACTIONS; THE CLAIM OF PRIVATE RESPONDENT IS ALREADY BARRED BY PRESCRIPTION AS WELL AS LACHES. This Court so holds that the claim of private respondent is already barred by prescription as well as laches. Art. 1144 of the New Civil Code provides that a right of action that is founded upon a written contract prescribes in ten (10) years. The letter-demand made by the private respondents to the petitioner was made only on January 5, 1979, or almost eighteen years after receipt of the written contract in the form of the stock certificate. As noted earlier, this letter-demand, significantly, was not formally offered in evidence, nor were any other evidence of demand presented. Therefore, we conclude that the only time the private respondents saw it fit to assert their rights, if any, to the preferred shares of stock, was after the lapse of almost eighteen years. The same clearly indicates that the right of the private respondents to any relief under the law has already prescribed. Moreover, the claim of the private respondents is also barred by laches. Laches has been defined as the failure or neglect, for an unreasonable length of time, to do that which by exercising due diligence could or should have been done earlier; it is negligence or omission to assert a right within a reasonable time, warranting a presumption that the party entitled to assert it either has abandoned it or declined to assert it. 6.CONSTITUTIONAL LAW; BILL OF RIGHTS; THE DIRECTIVE ISSUED BY THE CENTRAL BANK GOVERNOR PROHIBITING THE PETITIONER BANK FROM REDEEMING ANY PREFERRED SHARE ON THE GROUND THAT SAID REDEMPTION WOULD REDUCE THE ASSETS OF THE BANK TO THE PREJUDICE OF ITS DEPOSITORS AND CREDITORS MAY BE CONSIDERED AS AN EXERCISE OF POLICE POWER; IT DOES NOT CONSTITUTE AN IMPAIRMENT OF THE OBLIGATION OF CONTRACTS; CASE AT BAR. The redemption of shares in case at bar cannot be allowed. As pointed out by the petitioner, the Central Bank made a finding that said petitioner has been suffering from chronic reserve deficiency, and that such finding resulted in a directive, issued on January 31, 1973 by then Gov. G. S. Licaros of the Central Bank, to the President and Acting Chairman of the Board of the petitioner bank prohibiting the latter from redeeming any preferred share, on the ground that said redemption would reduce the assets of the Bank to the prejudice of its depositors and creditors. Redemption of preferred shares was prohibited for a just and valid reason. The directive issued by the Central Bank Governor was obviously meant to preserve the status quo, and to prevent the financial ruin of a banking institution that would have resulted in adverse repercussions, not only to its depositors and creditors, but also to the banking industry as a whole. The directive, in limiting the exercise of a right granted by law to a corporate entity, may thus be considered as an exercise of police power. The respondent judge insists that the directive constitutes an impairment of the obligation of contracts. It has,

however, been settled that the constitutional guaranty of nonimpairment of obligations of contract is limited by the exercise of the police power of the state, the reason being that public welfare is superior to private rights.

DECISION

HERMOSISIMA, JR., J p: This is a petition for certiorari seeking the annulment of the Decision 1 of the then Court of First Instance of Rizal 2 for having been rendered in grave abuse of discretion. Private respondents Robes-Francisco Realty and Development Corporation (hereafter, "the Corporation") and Adalia F. Robes filed in the court a quo, an action for specific performance to compel petitioner to redeem 800 preferred shares of stock with a face value of P8,000.00 and to pay 1% quarterly interest thereon as quarterly dividend owing them under the terms and conditions of the certificates of stock. The court a quo rendered judgment in favor of private respondents; hence, this instant petition. Herein parties debate only legal issues, no issues of fact having been raised by them in the court a quo. For ready reference, however, the following narration of pertinent transactions and events is in order: On September 18, 1961, private respondent Corporation secured a loan from petitioner in the amount of P120,000.00. As part of the proceeds of the loan, preferred shares of stocks were issued to private respondent Corporation, through its officers then, private respondent Adalia F. Robes and one Carlos F. Robes. In other words, instead of giving the legal tender totaling to the full amount of the loan, which is P120,000.00, petitioner lent such amount partially in the form of money and partially in the form of stock certificates numbered 3204 and 3205, each for 400 shares with a par value of P10.00 per share, or for P4,000.00 each, for a total of P8,000.00. Said stock certificates were in the name of private respondent Adalia F. Robes and Carlos F. Robes, who subsequently, however, endorsed his shares in favor of Adalia F. Robes. Said certificates of stock bear the following terms and conditions: "The Preferred Stock shall have the following rights, preferences, qualifications and limitations, to wit: 1.Of the right to receive a quarterly dividend of One Per Centum (1%), cumulative and participating. xxx xxx xxx 2.That such preferred shares may be redeemed, by the system of drawing lots, at any time after two (2) years from the date of

issue at the option of the Corporation. . . ." On January 31, 1979, private respondents proceeded against petitioner and filed a complaint anchored on private respondents' alleged rights to collect dividends under the preferred shares in question and to have petitioner redeem the same under the terms and conditions of the stock certificates. Private respondents attached to their complaint, a letterdemand dated January 5, 1979 which, significantly, was not formally offered in evidence. Petitioner filed a Motion to Dismiss 3 private respondents' Complaint on the following grounds: (1) that the trial court had no jurisdiction over the subject-matter of the action; (2) that the action was unenforceable under substantive law; and (3) that the action was barred by the statute of limitations and/or laches. Petitioner's Motion to Dismiss was denied by the trial court in an order dated March 16, 1979. 4 Petitioner then filed its Answer on May 2, 1979. 5 Thereafter, the trial court gave the parties ten (10) days from July 30, 1979 to submit their respective memoranda after the submission of which the case would be deemed submitted for resolution. 6 On September 7, 1979, the trial court rendered the herein assailed decision in favor of private respondents. In ordering petitioner to pay private respondents the face value of the stock certificates as redemption price, plus 1% quarterly interest thereon until full payment, the trial court ruled: "There being no issue of fact raised by either of the parties who filed their respective memoranda delineating their respective contentions, a judgment on the pleadings, conformably with an earlier order of the Court, appears to be in order. From a further perusal of the pleadings, it appears that the provision of the stock certificates in question to the effect that the plaintiffs shall have the right to receive a quarterly dividend of One Per Centum (1%), cumulative and participating, clearly and unequivocably [sic] indicates that the same are 'interest bearing stocks' which are stocks issued by a corporation under an agreement to pay a certain rate of interest thereon (5 Thompson, Sec. 3439). As such, plaintiffs become entitled to the payment thereof as a matter of right without necessity of a prior declaration of dividend. On the question of the redemption by the defendant of said preferred shares of stock, the very wordings of the terms and conditions in said stock certificates clearly allows the same. To allow the herein defendant not to redeem said preferred shares of stock and/or pay the interest due thereon despite the clear import of said provisions by the mere invocation of alleged Central Bank Circulars prohibiting the same is tantamount to an impairment of the obligation of contracts enshrined in no less than the fundamental law itself.

Moreover, the herein defendant is considered in estoppel from taking shelter behind a General Banking Act provision to the effect that it cannot buy its own shares of stocks considering that the very terms and conditions in said stock certificates allowing their redemption are its own handiwork. As to the claim by the defendant that plaintiffs' cause of action is barred by prescription, suffice it to state that the running of the prescriptive period was considered interrupted by the written extrajudicial demands made by the plaintiffs from the defendant." 7 Aggrieved by the decision of the trial court, petitioner elevated the case before us essentially on pure questions of law. Petitioner's statement of the issues that it submits for us to adjudicate upon, is as follows: "A.RESPONDENT JUDGE COMMITTED A GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN ORDERING PETITIONER TO PAY RESPONDENT ADALIA F. ROBES THE AMOUNT OF P8,213.69 AS INTERESTS FROM 1961 To 1979 ON HER PREFERRED SHARES. B.RESPONDENT JUDGE COMMITTED A GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN ORDERING PETITIONER TO REDEEM RESPONDENT ADALIA F. ROBES' PREFERRED SHARES FOR P8,000.00 C.RESPONDENT JUDGE COMMITTED A GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN DISREGARDING THE ORDER OF THE CENTRAL BANK TO PETITIONER TO DESIST FROM REDEEMING ITS PREFERRED SHARES AND FROM PAYING DIVIDENDS THEREON . . .. D.THE TRIAL COURT ERRED IN NOT HOLDING THAT THE COMPLAINT DOES NOT STATE A CAUSE OF ACTION. E.THE TRIAL COURT ERRED IN NOT HOLDING THAT THE CLAIM OF RESPONDENT ADALIA F. ROBES IS BARRED BY PRESCRIPTION OR LACHES." 8 The petition is meritorious. Before passing upon the merits of this petition, it may be pertinent to provide an overview on the nature of preferred shares and the redemption thereof, considering that these issues lie at the heart of the dispute.

A preferred share of stock, on one hand, is one which entitles the holder thereof to certain preferences over the holders of common stock. The preferences are designed to induce persons to subscribe for shares of a corporation. 9 Preferred shares take a multiplicity of forms. The most common forms may be classified into two: (1) preferred shares as to assets; and (2) preferred shares as to dividends. The former is a share which gives the holder thereof preference in the distribution of the assets of the corporation in case of liquidation; 10 the latter is a share the holder of which is entitled to receive dividends on said share to the extent agreed upon before any dividends at all are paid to the holders of common stock. 11 There is no guaranty, however, that the share will receive any dividends. Under the old Corporation Law in force at the time the contract between the petitioner and the private respondents was entered into, it was provided that "no corporation shall make or declare any dividend except from the surplus profits arising from its business, or distribute its capital stock or property other than actual profits among its members or stockholders until after the payment of its debts and the termination of its existence by limitation or lawful dissolution." 12 Similarly, the present Corporation Code 13 provides that the board of directors of a stock corporation may declare dividends only out of unrestricted retained earnings. 14 The Code, in Section 43, adopting the change made in accounting terminology, substituted the phrase "unrestricted retained earnings," which may be a more precise term, in place of "surplus profits arising from its business" in the former law. Thus, the declaration of dividends is dependent upon the availability of surplus profit or unrestricted retained earnings, as the case may be. Preferences granted to preferred stockholders, moreover, do not give them a lien upon the property of the corporation nor make them creditors of the corporation, the right of the former being always subordinate to the latter. Dividends are thus payable only when there are profits earned by the corporation and as a general rule, even if there are existing profits, the board of directors has the discretion to determine whether or not dividends are to be declared. 15 Shareholders, both common and preferred, are considered risk takers who invest capital in the business and who can look only to what is left after corporate debts and liabilities are fully paid. 16 cdasia Redeemable shares, on the other hand, are shares usually preferred, which by their terms are redeemable at a fixed date, or at the option of either issuing corporation, or the stockholder, or both at a certain redemption price. 17 A redemption by the corporation of its stock is, in a sense, a repurchase of it for cancellation. 18 The present Code allows redemption of shares even if there are no unrestricted retained earnings on the books of the corporation. This is a new provision which in effect qualifies the general rule that the corporation cannot purchase its own shares except out of current retained earnings. 19 However, while redeemable shares may be redeemed regardless of the existence of unrestricted retained earnings, this is subject to the condition that the corporation has, after such redemption, assets in its books to cover debts and liabilities inclusive of capital stock. Redemption, therefore, may not be made where the corporation is insolvent or if such redemption will cause insolvency or inability of the corporation to meet its debts as they mature. 20

"On the question of the redemption by the defendant of said preferred shares of stock, the very wordings of the terms and conditions in said stock certificates clearly allows the same." 21 What respondent Judge failed to recognize was that while the stock certificate does allow redemption, the option to do so was clearly vested in the petitioner bank. The redemption therefore is clearly the type known as "optional". Thus, except as otherwise provided in the stock certificate, the redemption rests entirely with the corporation and the stockholder is without right to either compel or refuse the redemption of its stock. 22 Furthermore, the terms and conditions set forth therein use the word "may". It is a settled doctrine in statutory construction that the word "may" denotes discretion, and cannot be construed as having a mandatory effect. We fail to see how respondent judge can ignore what, in his words, are the "very wordings of the terms and conditions in said stock certificates" and construe what is clearly a mere option to be his legal basis for compelling the petitioner to redeem the shares in question. The redemption of said shares cannot be allowed. As pointed out by the petitioner, the Central Bank made a finding that said petitioner has been suffering from chronic reserve deficiency, 23 and that such finding resulted in a directive, issued on January 31, 1973 by then Gov. G. S. Licaros of the Central Bank, to the President and Acting Chairman of the Board of the petitioner bank prohibiting the latter from redeeming any preferred share, on the ground that said redemption would reduce the assets of the Bank to the prejudice of its depositors and creditors. 24 Redemption of preferred shares was prohibited for a just and valid reason. The directive issued by the Central Bank Governor was obviously meant to preserve the status quo, and to prevent the financial ruin of a banking institution that would have resulted in adverse repercussions, not only to its depositors and creditors, but also to the banking industry as a whole. The directive, in limiting the exercise of a right granted by law to a corporate entity, may thus be considered as an exercise of police power. The respondent judge insists that the directive constitutes an impairment of the obligation of contracts. It has, however, been settled that the Constitutional guaranty of non-impairment of obligations of contract is limited by the exercise of the police power of the state, the reason being that public welfare is superior to private rights. 25 The respondent judge also stated that since the stock certificate granted the private respondents the right to receive a quarterly dividend of One Per Centum (1%), cumulative and participating, it "clearly and unequivocably (sic) indicates that the same are 'interest bearing stocks' or stocks issued by a corporation under an agreement to pay a certain rate of interest thereon. As such, plaintiffs (private respondents herein) become entitled to the payment thereof as a matter of right without necessity of a prior declaration of dividend." 26 There is no legal basis for this observation. Both Sec. 16 of the Corporation Law and Sec. 43 of the present Corporation Code prohibit the issuance of any stock dividend without the approval of stockholders, representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. These provisions underscore the fact that payment of dividends to a stockholder is not a matter of right but a matter of consensus. Furthermore, "interest bearing stocks", on which the corporation agrees absolutely to pay interest before dividends are paid to common stockholders, is legal only when construed as requiring payment of interest as dividends from net earnings or surplus only. 27 Clearly, the respondent judge, in compelling the petitioner to redeem the shares in question and to pay the

We come now to the merits of the case. The petitioner argues that it cannot be compelled to redeem the preferred shares issued to the private respondent. We agree. Respondent judge, in ruling that petitioner must redeem the shares in question, stated that:

corresponding dividends, committed grave abuse of discretion amounting to lack or excess of jurisdiction in ignoring both the terms and conditions specified in the stock certificate, as well as the clear mandate of the law. Anent the issue of prescription, this Court so holds that the claim of private respondent is already barred by prescription as well as laches. Art. 1144 of the New Civil Code provides that a right of action that is founded upon a written contract prescribes in ten (10) years. The letter-demand made by the private respondents to the petitioner was made only on January 5, 1979, or almost eighteen years after receipt of the written contract in the form of the stock certificate. As noted earlier, this letter-demand, significantly, was not formally offered in evidence, nor were any other evidence of demand presented. Therefore, we conclude that the only time the private respondents saw it fit to assert their rights, if any, to the preferred shares of stock, was after the lapse of almost eighteen years. The same clearly indicates that the right of the private respondents to any relief under the law has already prescribed. Moreover, the claim of the private respondents is also barred by laches. Laches has been defined as the failure or neglect, for an unreasonable length of time, to do that which by exercising due diligence could or should have been done earlier; it is negligence or omission to assert a right within a reasonable time, warranting a presumption that the party entitled to assert it either has abandoned it or declined to assert it. 28 Considering that the terms and conditions set forth in the stock certificate clearly indicate that redemption of the preferred shares may be made at any time after the lapse of two years from the date of issue, private respondents should have taken it upon themselves, after the lapse of the said period, to inquire from the petitioner the reason why the said shares have not been redeemed. As it is, not only two years had lapsed, as agreed upon, but an additional sixteen years passed before the private respondents saw it fit to demand their right. The petitioner, at the time it issued said preferred shares to the private respondents in 1961, could not have known that it would be suffering from chronic reserve deficiency twelve years later. Had the private respondents been vigilant in asserting their rights, the redemption could have been effected at a time when the petitioner bank was not suffering from any financial crisis. WHEREFORE, the instant petition, being impressed with merit, is hereby GRANTED. The challenged decision of respondent judge is set aside and the complaint against the petitioner is dismissed. Costs against the private respondents. SO ORDERED.