The case of Wilson P. Gamboa vs. Finance Secretary Margarito Teves (G.R. No. 176579) promulgated on June 28, 2011 involves the determination of the correct meaning of the word “capital” in Section 11, Article XII (National Economy and Patrimony) of the 1987 Constitution, which provides:
Section 11. No franchise . . . for the operation of a public utility shall be granted except 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 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.
At the outset, we must state that several motions for reconsideration were filed and are still pending resolution by the Supreme Court, so this decision is not yet final and executory.
What went before: The facts of the case
Gamboa involves a petition to nullify the sale of shares of stock of the government-sequestered Philippine Telecommunications Investment Corporation (PTIC) to Metro Pacific Assets Holdings, Inc. (MPAH), an affiliate of First Pacific Company Limited (First Pacific) First Pacific is a Hong Kong-based investment management and holding company and, like PTIC, is a shareholder of the Philippine Long Distance Telephone Company (PLDT).
The petitioner, a nominal shareholder of PLDT, questioned the sale on the ground that it allegedly 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. He argued that with this sale, First Pacific’s common shares in PLDT increased from 30.7% to 37%. More importantly, the sale increased 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%. The petitioner’s thesis: the basis of determining foreign equity in public utilities like PLDT are the common shares and not the total overall shareholding (common and preferred shares) owned by foreigners.
Summary of the opinions
Justice Antonio Carpio wrote the majority opinion for the Court En Banc. Fully concurring with him were Justices Teresita Leonardo-De Castro, Arturo Brion, Diosdado Peralta, Lucas Bersamin, Mariano del Castillo, Martin Villarama Jr., Jose Catral Perez, Jose Mendoza, and Maria Lourdes Sereno.
The High Tribunal 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.
Despite the initial procedural barriers, the Court decided to give due course to this case by treating the petition for declaratory relief as one for mandamus, reasoning that the issue of the interpretation of the term “capital” has far-reaching implications to the Philippine national economy. The Court also held that the petitioner has legal standing to bring this suit because he is a stockholder of PLDT [albeit a nominal one] and may thus suffer dire consequences if the subject indirect sale of PLDT shares to a foreign entity indeed violates the Constitution. These consequences arise from the possibility that PLDT’s franchise may be revoked as a result of the said sale. More importantly, the threshold legal issue 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 the action.
On the merits, the Court held that the term “capital” in Section 11, Article XII of the 1987 Constitution refers only to the voting shares of a public utility. Thus, in this case, “capital” refers to the common (i.e., voting) shares of PLDT, NOT to the total outstanding capital stock (i.e., both common and non-voting preferred shares) of the company. The Court found that only holders of PLDT common shares can vote in the election of the PLDT directors, meaning only common shareholders exercise control over PLDT. Holders of preferred shares have no voting rights in the election of directors and therefore do not have any control over the company. In fact, under PLDT’s 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.
The Court then noted that [based on the 2010 General Information Sheet of PLDT]: (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 like PLDT, the Court said, is a mockery of the Constitution.
The Court thus DIRECTED the Respondent Chairperson of the Securities and Exchange Commission (SEC) to apply the foregoing definition of the term “capital” in determining the extent of allowable foreign ownership in respondent PLDT, and if there is a violation of Section 11, Article XII of the Constitution, to impose the appropriate sanctions under the law.
[For a more detailed summary of the majority opinion, click here.]
Meanwhile, Justice Presbitero Velasco Jr., who was joined by Chief Justice Renato Corona, wrote a dissenting opinion. He voted to DISMISS the petition on the ground that the petitioner has no legal standing, and that the Court has no jurisdiction since none of the remedies sought by the petitioner is within the exclusive or original jurisdiction of the Court. Moreover, the petition for declaratory relief cannot be validly treated as one for mandamus, as what the majority did, since the exercise of this discretion by the Court presupposes that the petition is otherwise viable or meritorious, which is not the case in this petition.
Justice Velasco’s argued that Sec. 11 of Article XII imposes no nationality qualification on the shareholders of a public utility as a condition for keeping their shares in the company. The Court could not therefore order the annulment of the sale of the government’s shares [in PTIC] despite the petitioner’s claim that it would [indirectly result to a] breach the maximum 40% foreign ownership limit in PLDT. If the public utility fails to maintain the nationality qualification, only its franchise should be revoked. Moreover, even if the Court can validly nullify the subject sale, procedural due process requires that all the concerned shareholders should be given notice and that a trial be held before their shares are taken. In this case, the petitioner failed to implead all the indispensable parties. Accordingly, the Court has no authority to rule on the present petition, more so because it partakes of a collateral attack on PLDT’s franchise as a public utility.
Granting arguendo that the petition is sufficient in form and substance, it will still suffer the same fate and has to be dismissed. The framers of the Constitution decided to use the word “capital” in all provisions that talk about foreign participation and intentionally left out the phrase “voting stocks” or “controlling interest.” Cassus Omissus Pro Omisso Habendus Est – a person, object or thing omitted must have been omitted intentionally. In this case, the intention of the framers of the Constitution is very clear – to omit the phrases “voting stock” and “controlling interest.” By using the word “capital,” the framers of the Constitution adopted the interpretation that includes all types of shares, whether voting or non-voting.
Moreover, Justice Velasco argued that the claim of the majority – that since foreigners hold 64.27% of to the total number of PLDT’s common shares, which are entitled to select the Board of Directors, foreigners will be able to elect the majority of the Board of PLDT and, hence, have control over the company – is incorrect. The word “capital” in the first sentence of Sec. 11, is qualified by the last sentence of the same section, which 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.” This limits the participation of the foreign investors in the governing body to their proportionate share in the capital of the corporation, i.e., 40% thereof. In other words, the right of foreign investors to elect the members of the Board of Directors cannot exceed the voting rights of the 40% of the common shares, even though their ownership of common shares may exceed 40%. Thus, since they can only vote up to 40% of the common shares of the corporation, they will never be in a position to elect majority of the members of the Board of Directors. Consequently, control over the membership of the Board of Directors will always be in the hands of Filipino stockholders although they actually own less than 60% of the common shares.
Further, the 2010 General Information Sheet of PLDT reveals that among the 13 members of the PLDT Board of Directors, only 2 are foreigners. It also reveals that the foreign investors only own 13.71% of the capital of PLDT. Obviously, the nomination and election committee of PLDT uses the 40% cap on the foreign ownership of the capital which explains why the foreigners only have two (2) members in the Board of Directors. It is apparent that the 64.27% ownership by foreigners of the common shares cannot be used to elect the majority of the Board of Directors. The fact that the proportionate share of the foreigners in the capital (voting [and] non-voting shares or common [and] preferred shares) is even less than 40%, then they are only entitled to voting rights equivalent to the said proportionate share in the capital and in the process elect only a smaller number of directors. This is the reality in the instant case. Hence, the majority control of Filipinos over the management of PLDT is, at all times, assured.
The view that the definition of the word “capital” is limited to common or voting shares alone would certainly have the effect of removing the 60-40% nationality requirement on the non-voting shares. This would then give rise to a situation where foreign interest would not really be limited to only 40% but may even extend beyond that because foreigners could also own the entire 100% of the preferred or non-voting shares. As a result, Filipinos will no longer have effective ownership of the corporate assets which may include lands. This is because the actual Filipino equity constitutes only a minority of the entire outstanding capital stock. Therefore, the company would then be technically owned by foreigners since the actual ownership of at least 60% of the entire outstanding capital stock would be left to the hands of the foreigners. Allowing this to happen would violate and circumvent the purpose for which the provision in the Constitution was created.
Justice Roberto Abad also wrote a dissenting opinion. He voted to DENY the petition on the ground that the constitutional limit on foreign ownership in public utilities under Section 11, Article XII of the 1987 Constitution is not a self-executing provision and requires an implementing legislation for its enforcement.
Prospects of the motions for reconsideration
With the 10-3 vote in this case, we can safely assume that the Supreme Court will not anymore reverse its ruling. The meaning of the word “capital” vis-a-vis the equity structure of public utilities, as enunciated in this case, is here to stay, at least while the Court’s composition is not significantly altered.
That being said, a closer scrutiny of the [majority] decision will reveal that the dispositive portion thereof may have gone beyond the issue raised in the case, i.e., the validity of the sale of the sequestered PTIC shares. This necessitated the determination of the meaning of the term “capital” in the decision. But even with the majority’s interpretation, and even assuming a finding by the SEC that indeed PLDT’s equity structure violates the 60-40 provision, the most that can be done here is only to nullify the subject sale of shares of stock. The Court cannot overreach and give an imprimatur to what Justice Velasco called a “collateral attack” on PLDT’s franchise as a public utility.
PLDT did not ask for reconsideration of the decision
Incidentally, and contrary to some news stories, PLDT did not file a motion for reconsideration of the Gamboa decision. As indicated in the communication it sent to the Philippine Stock Exchange, which it also furnished to the SEC, PLDT disclosed that it “has not filed a motion for reconsideration of the Supreme Court’s decision in Gamboa vs. Teves, et al.” because it “has never been impleaded and has never been a party to the Gamboa case” and as such it “has never participated in that case and is not bound by the decision or any other orders issued in that case”.
In the said disclosure, PLDT however mentioned that businessman Manuel Pangilinan, the Chairman of the PLDT Board of Directors, and Mr. Napoleon Nazareno, PLDT President and Chief Executive Officer, who were both impleaded as individual respondents in Gamboa, had each filed their respective motions for reconsideration.
Implications of the Gamboa decision
It may be true that if a public utility like PLDT fails to maintain the nationality qualification mandated by the Constitution, its franchise may be revoked. But since PLDT was not impleaded in this case, the Gamboa decision cannot be executed against it. Otherwise, questions of due process will arise. In other words, Gamboa cannot go beyond nullifying the subject sale of the PTIC shares to MPAH. Any direct attack on the equity structure of PLDT will have to be done in a separate proceeding, and Gamboa may well be the main ammunition of those who are minded to do so.
Since a judicial decision can only bind the parties thereto, Gamboa therefore affects only (1) petitioner Wilson P. Gamboa; (2) respondents Chair and Members of the Inter-Agency Privatization Council (Finance Secretary Teves, Finance Undersecretary Sevilla and PCGG Commissioner Abcede); Anthoni Salim in his capacity as Director of Metro Pacific Asset Holdings Inc.; Manuel V. Pangilinan in his capacity as Managing Director of First Pacific Co., Ltd.; President Napoleon L. Nazareno of PLDT; the SEC Chair Fe Garin; and President Francis Lim of the Philippine Stock Exchange; and (3) the intervenors.
It goes without saying that Gamboa has far-reaching implications to PLDT. Once this ruling becomes final and executory, the equity structure of PLDT [and of other similarly-situated public utilities] will become more vulnerable to scrutiny, if not attacks, in light of the Gamboa doctrine. And with the recent approval of the PLDT-Digitel share swap deal by the National Telecommunications Commission, this story can only get more complicated for PLDT. We will thus be following how this development will play out in the future of the Philippines’ biggest telecommunications firm.
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