Wilson P. Gamboa v. Finance Secretary Margarito Teves, et al.

,
G.R. No. 176579, June 28, 2011
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 Pacific’s common shareholdings in PLDT increased from 30.7
percent to 37 percent, thereby increasing the total common shareholdings of foreigners in PLDT to
about 81.47%. This, according to the petitioner, violates Section 11, Article XII of the 1987 Philippine
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 non-voting preferred shares, grossly contravenes the intent and letter of the
Constitution that the “State shall develop a self-reliant and independent national economy effectively
controlled by Filipinos.” A broad definition unjustifiably disregards who owns the all-important voting
stock, which necessarily equates to control of the public utility.
   
Holders of PLDT preferred shares are explicitly denied of the right to vote in the election of
directors. PLDT’s Articles of Incorporation expressly state that “the holders of Serial Preferred
Stock shall not be entitled to vote at any meeting of the stockholders for the election of
directors or for any other purpose or otherwise participate in any action taken by the corporation
or its stockholders, or to receive notice of any meeting of stockholders.” On the other hand, holders
of common shares are granted the exclusive right to vote in the election of directors. PLDT’s Articles
of Incorporation state that “each holder of Common Capital Stock shall have one vote in respect of
each share of such stock held by him on all matters voted upon by the stockholders, and the
holders of Common Capital Stock shall have the exclusive right to vote for the election of
directors and for all other purposes.”
  
It must be stressed, and respondents do not dispute, that foreigners hold a majority of the
common shares of PLDT. In fact, based on PLDT’s 2010 General Information Sheet (GIS), which is
a document required to be submitted annually to the Securities and Exchange
Commission, foreigners hold 120,046,690 common shares of PLDT whereas Filipinos hold only
66,750,622 common shares. In other words, foreigners hold 64.27% of the total number of PLDT’s
common shares, while Filipinos hold only 35.73%. Since holding a majority of the common shares
equates to control, it is clear that foreigners exercise control over PLDT. Such amount of control
unmistakably exceeds the allowable 40 percent limit on foreign ownership of public utilities expressly
mandated in Section 11, Article XII of the Constitution.

As shown in PLDT’s 2010 GIS, as submitted to the SEC, the par value of PLDT common
shares is P5.00 per share, whereas the par value of preferred shares is P10.00 per share. In other
words, preferred shares have twice the par value of common shares but cannot elect directors and
have only 1/70 of the dividends of common shares. Moreover, 99.44% of the preferred shares are
owned by Filipinos while foreigners own only a minuscule 0.56% of the preferred shares. Worse,
preferred shares constitute 77.85% of the authorized capital stock of PLDT while common shares
constitute only 22.15%. This undeniably shows that beneficial interest in PLDT is not with the non-
voting preferred shares but with the common shares, blatantly violating the constitutional
requirement of 60 percent Filipino control and Filipino beneficial ownership in a public utility.
  
In short, Filipinos hold less than 60 percent of the voting stock, and earn less than 60
percent of the dividends, of PLDT. This directly contravenes the express command in Section 11,
Article XII of the Constitution that “[n]o franchise, certificate, or any other form of authorization for the
operation of a public utility shall be granted except to x x x corporations x x x organized under the
laws of the Philippines, at least sixty per centum of whose capital is owned by such citizens x x x.”

To repeat, (1) foreigners own 64.27% of the common shares of PLDT, which class of shares
exercises the sole right to vote in the election of directors, and thus exercise control over PLDT; (2)
Filipinos own only 35.73% of PLDT’s common shares, constituting a minority of the voting stock, and
thus do not exercise control over PLDT; (3) preferred shares, 99.44% owned by Filipinos, have no
voting rights; (4) preferred shares earn only 1/70 of the dividends that common shares earn; (5)
preferred shares have twice the par value of common shares; and (6) preferred shares constitute
77.85% of the authorized capital stock of PLDT and common shares only 22.15%. This kind of
ownership and control of a public utility is a mockery of the Constitution.

[Thus, the Respondent Chairperson of the Securities and Exchange Commission

was DIRECTED by the Court to apply the foregoing definition of the term “capital” in determining the
extent of allowable foreign ownership in respondent Philippine Long Distance Telephone Company,
and if there is a violation of Section 11, Article XII of the Constitution, to impose the appropriate
sanctions under the law.]

Gamboa v. Teves etal., GR No. 176579, October 9, 2012

Facts:

The issue started when petitioner Gamboa questioned the indirect sale of shares involving almost 12
million shares of the Philippine Long Distance Telephone Company (PLDT) owned by PTIC to First Pacific.
Thus, First Pacific’s common shareholdings in PLDT increased from 30.7 percent to 37 percent, thereby
increasing the total common shareholdings of foreigners in PLDT to about 81.47%. The petitioner
contends that it violates the Constitutional provision on filipinazation of public utility, stated in Section
11, Article XII of the 1987 Philippine Constitution, which limits foreign ownership of the capital of a
public utility to not more than 40%. Then, in 2011, the court ruled the case in favor of the petitioner,
hence this new case, resolving the motion for reconsideration for the 2011 decision filed by the
respondents.

Issue: Whether or not the Court made an erroneous interpretation of the term ‘capital’ in its 2011
decision?

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