Professional Documents
Culture Documents
Gamboa vs. Teves
Gamboa vs. Teves
G.R. No.: 176579 Ponente: Carpio, J. 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
Related Article: Tickler:
least sixty per centum of whose capital is owned
NATIONALITY OF by such citizens; nor shall such franchise, certificate,
CORPORATIONS; or authorization be exclusive in character or for a
CONTROL TEST, longer period than fifty years. Neither shall any such
BENEFICIAL franchise or right be granted except under the condition
OWNERSHIP that it shall be subject to amendment, alteration, or
TEST; repeal by the Congress when the common good so
requires. The State shall encourage equity
GRANDFATHER
participation in public utilities by the general public. The
RULE 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
Doctrine of the Case:
and managing officers of such corporation or
The term "capital" in Section 11, Article XII of the association must be citizens of the Philippines.
Constitution refers only to shares of stock entitled to (Emphasis supplied)
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 Issue/s
non-voting preferred shares. 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
Parties – Roles
PLDT, a public utility?
[Name of Digester]
3B [SUBJECT] Digests
important voting stock, which necessarily equates to other form of authorization for the operation of a public
control of the public utility. utility shall be granted except to x x x corporations x x
x organized under the laws of the Philippines, at least
Holders of PLDT preferred shares are sixty per centum of whose capital is owned by such
explicitly denied of the right to vote in the election of citizens x x x.”
directors. PLDT’s Articles of Incorporation expressly
state that “the holders of Serial Preferred Stock To repeat, (1) foreigners own 64.27% of the
shall not be entitled to vote at any meeting of the common shares of PLDT, which class of shares
stockholders for the election of directors or for any exercises the sole right to vote in the election of
other purpose or otherwise participate in any action directors, and thus exercise control over PLDT; (2)
taken by the corporation or its stockholders, or to Filipinos own only 35.73% of PLDT’s common shares,
receive notice of any meeting of stockholders.” On the constituting a minority of the voting stock, and thus do
other hand, holders of common shares are granted the not exercise control over PLDT; (3) preferred shares,
exclusive right to vote in the election of directors. 99.44% owned by Filipinos, have no voting rights; (4)
PLDT’s Articles of Incorporation state that “each holder preferred shares earn only 1/70 of the dividends that
of Common Capital Stock shall have one vote in common shares earn; (5) preferred shares have twice
respect of each share of such stock held by him on all the par value of common shares; and (6) preferred
matters voted upon by the stockholders, and the shares constitute 77.85% of the authorized capital
holders of Common Capital Stock shall have the stock of PLDT and common shares only 22.15%. This
exclusive right to vote for the election of directors kind of ownership and control of a public utility is a
and for all other purposes.” mockery of the Constitution.
It must be stressed, and respondents do not [Thus, the Respondent Chairperson of the
dispute, that foreigners hold a majority of the common Securities and Exchange Commission
shares of PLDT. In fact, based on PLDT’s 2010 was DIRECTED by the Court to apply the foregoing
General Information Sheet (GIS), which is a document definition of the term “capital” in determining the extent
required to be submitted annually to the Securities and of allowable foreign ownership in respondent Philippine
Exchange Commission, foreigners hold 120,046,690 Long Distance Telephone Company, and if there is a
common shares of PLDT whereas Filipinos hold only violation of Section 11, Article XII of the Constitution, to
66,750,622 common shares. In other words, foreigners impose the appropriate sanctions under the law.]
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 Disposition: WHEREFORE, we PARTLY GRANT the
allowable 40 percent limit on foreign ownership of petition and rule that the term "capital" in Section 11,
public utilities expressly mandated in Section 11, Article XII of the 1987 Constitution refers only to shares
Article XII of the Constitution. of stock entitled to vote in the election of directors, and
thus in the present case only to common shares, and
As shown in PLDT’s 2010 GIS, as submitted not to the total outstanding capital stock (common and
to the SEC, the par value of PLDT common shares non-voting preferred shares). Respondent
is P5.00 per share, whereas the par value of preferred Chairperson of the Securities and Exchange
shares is P10.00 per share. In other words, preferred Commission is DIRECTED to apply this definition of
shares have twice the par value of common shares but the term "capital" in determining the extent of allowable
cannot elect directors and have only 1/70 of the foreign ownership in respondent Philippine Long
dividends of common shares. Moreover, 99.44% of the Distance Telephone Company, and if there is a
preferred shares are owned by Filipinos while violation of Section 11, Article XII of the Constitution, to
foreigners own only a minuscule 0.56% of the preferred impose the appropriate sanctions under the law.
shares. Worse, preferred shares constitute 77.85% of aDSTIC
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.
[Name of Digester]
3B [SUBJECT] Digests
VELASCO (Separate Dissenting Opinion) “capital” denotes the total shares subscribed and paid
The present petition partakes of a collateral attack on irrespective of their nomenclature.
PLDT’s franchise as a public utility with petitioner (7) Lastly, the last sentence of Sec. 11, Art. XII limits
pleading as ground PLDT’s alleged breach of the 40% the participation of the foreign investors in the
limit on foreign equity. Such is not allowed. As governing body to their proportionate share in the
discussed in PLDT v. National Telecommunications capital of the corporation.
Commission, a franchise is a property right that can ABAD (Dissenting Opinion)
only be questioned in a direct proceeding. (1) Authority to define and interpret the meaning
(1) The intent of the framers of the Constitution was not of “capital” in Sec. 11, Art. XII belongs to Congress as
to limit the application of the word “capital” to voting or part of it’s policy making powers, as the power to
common shares alone. Constitutional Commission authorize and control a public utility is a prerogative of
records show that by using the word “capital,” the Congress. Sec. 11, Art. XII is no self-executing and
framers of the Constitution adopted the definition or requires Congressional action to clarify it’s meaning.
interpretation that includes all types of shares, whether FIA is restricted to certain areas of investment and
voting or non-voting. should not be construed to clarify the meaning of
(2) Cassus Omissus Pro Omisso Habendus Est––a “capital” under the constitutional provision as they are
person, object or thing omitted must have been omitted rules which apply to future investors.
intentionally. In this case, the intention of the framers (2) “Capital” refers to the entirety of the
of the Constitution is very clear––to omit the phrases corporation’s outstanding voting stock as, first, the 40
“voting stock” and “controlling interest.” percent limit (if held only to preferred shareholders)
(3) The FIA should also be read in harmony with the would render meaningless the fourth sentence which
Constitution. Since the Constitution only provides for a limits foreign participation in the governing body of
single requirement for the operation of a public utility public utilities, and, second, amicus curiae Dr. Villegas,
under Sec. 11, i.e., 60% capital must be Filipino- Chairman of the Committee of National Economy, said
owned, a mere statute cannot add another that the term “capital” did not distinguish among the
requirement. Otherwise, such statute may be classes of shares. In both economic and business
considered unconstitutional. Accordingly, the phrase terms, capital always meant the entire shares of stock.
“entitled to vote” should not be interpreted to be limited Further, Philippine policy on foreign ownership already
to common shares alone or those shares entitled to discourages foreign investments and to impose
vote in the election of members of the Board of additional restrictions would aggravate economic
Directors. growth.
(4) Further, the FIA did not say “entitled to vote in the (3) Sec. 11, Article XII already provides 3
management affairs of the corporation” or “entitled to limitations on foreign participation in public utilities and
vote in the election of the members of the Board of the Court need not add more by restricting the
Directors.” Verily, where the law does not distinguish, definition of capital.
neither should We. Hence, the proper interpretation of
the phrase “entitled to vote” under the FIA should be Section 10, Article XII of the Philippine Constitution
that it applies to all shares, whether classified as voting provides that the Congress must reserve certain areas
or non-voting shares. of investment to Filipinos or to corporations or
(5) Additionally, control is another inherent right of associations of which at least 60 percent of capital is
ownership. The circumstances enumerated in Sec. 6 of owned by Filipinos. Section 3 of the Foreign
the Corporation Code clearly evince this. It gives voting Investments Act of 1991 defines a “Philippine national”
rights to the stocks deemed as non-voting as to as a citizen of the Philippines or a domestic partnership
fundamental and major corporate changes. Thus, the or association wholly owned by citizens of the
issue should not only dwell on the daily management Philippines; or a corporation organized under the laws
affairs of the corporation but also on the equally of the Philippines of which at least 60 percent of the
important fundamental changes that may need to be capital stock outstanding and entitled to vote is owned
voted on. and held by citizens of the Philippines, and where a
corporation and its non-Filipino stockholders own
(6) The SEC rules, opinions and jurisprudence use the stocks in a SEC registered enterprise, at least 60
“control test”, which requires that the nationality of a percent of the capital stocks outstanding and entitled
corporation is determined by the total outstanding to vote of both corporations must be owned and held
capital stock irrespective of the number of shares, and by citizens of the Philippines and at least 60 percent of
[Name of Digester]
3B [SUBJECT] Digests
the members of the Board of Directors of both constitutional directive without compromising the
corporations must be citizens of the Philippines. actual and potential foreign investments. While the
In support of this State policy, the Supreme Court, in Securities and Exchange Commission issuance is
the case of Heirs of Gamboa v. Teves, G.R. No.176579 providing a guiding principle in support of the
dated 28 June 2011 and in a resolution dated Oct. 9, conservative approach of the government with regard
2012, interpreted the term “capital” for the first time. In to development of the national economy, it is likewise
this case, the Supreme Court ruled that “capital” under recognizing the important role of the foreign investors
the 1987 Constitution and the Foreign Investments Act in the effort to improve the economic standing of the
of 1991 refers to shares with voting rights, as well as Philippines.
full beneficial ownership, and not to the total
outstanding capital stock. Simply put, the 60-40 [Constitutional Law, Corporation]
ownership requirement in favor of the Filipino citizens
must apply separately to each class of shares, whether The term “capital” does not refer to both preferred and
common, preferred non-voting, preferred voting or any common stocks treated as the same class of shares
other class of shares. regardless of differences in voting rights and
In arriving at this judgment, the Supreme Court privileges.
reasoned that the foreign ownership limitation also
applies to non-voting preferred stocks, that, although Consistent with the constitutional mandate that the
denied the voting rights in the election of directors, are “State shall develop a self-reliant and independent
nevertheless entitled to vote on certain fundamental national economy effectively controlled by Filipinos,”
corporate acts like amendment of the articles of the term "capital" means the outstanding capital stock
incorporation; adoption and amendment of by-laws; entitled to vote (voting stock), coupled with beneficial
sale, lease, exchange, mortgage, pledge or other ownership, both of which results to "effective control."
disposition of all or substantially all of the corporate
property; incurring, creating or increasing bonded "Mere legal title is insufficient to meet the 60 percent
indebtedness; increase or decrease of capital stock; Filipino owned “capital” required in the Constitution for
merger or consolidation of the corporation with another certain industries. Full beneficial ownership of 60
corporation or other corporations; investment of percent of the outstanding capital stock, coupled with
corporate funds in another corporation or business; 60 percent of the voting rights, is required." In this
and dissolution of the corporation. case, such twin requirements must apply uniformly
Pursuant to the Heirs of Gamboa case, the Securities and across the board to all classes of shares
and Exchange Commission issued on May 20, 2013 comprising the capital. Thus, "the 60-40 ownership
Memorandum Circular No. 8, which sets the guidelines requirement in favor of Filipino citizens must apply
for the compliance of businesses engaged in separately to each class of shares, whether common,
nationalized and partly nationalized activities. In gist, preferred non-voting, preferred voting or any other
the said memorandum circular provides that the class of shares." This guarantees that the “controlling
required percentage of Filipino ownership shall be interest” in public utilities always lies in the hands of
applied to both the total number of outstanding shares Filipino citizens.
of stock entitled to vote in the election of directors, and
the total number of outstanding shares of stock,
whether or not entitled to vote in the election of
directors. Consequently, all existing covered
corporations which are not compliant with the
guidelines are given a period of one year from the
effectivity of the issuance within which to comply with
the said ownership requirement.
Certainly, the Securities and Exchange Commission
issuance upholds the protection of vital industries and
certain investment areas from foreign control. It is
effectively backing Article XII of the Constitution, the
Foreign Investment Act definition of what constitutes a
“Philippine national”, and the ruling of the Supreme
Court in Heirs of Gamboa case to reserve certain areas
of investment to Filipinos. It adheres to the
[Name of Digester]