WILSON P. GAMBOA vs.

FINANCE
SECRETARY TEVES
G.R. No. 176579, promulgated June 28, 2011
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].
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.
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].
To construe broadly the term capital as the total outstanding capital stock, including
both common and non-voting preferred shares, grossly contravenes the intent and letter of the
Constitution that the State shall develop a self-reliant and independent national
economy effectively controlled by Filipinos. A broad definition unjustifiably disregards who owns
the all-important voting stock, which necessarily equates to control of the public utility.
We shall illustrate the glaring anomaly in giving a broad definition to the term capital.
Let us assume that a corporation has 100 common shares owned by foreigners and 1,000,000
non-voting preferred shares owned by Filipinos, with both classes of share having a par value of
one peso (P1.00) per share. Under the broad definition of the term capital, such corporation
would be considered compliant with the 40 percent constitutional limit on foreign equity of public
utilities since the overwhelming majority, or more than 99.999 percent, of the total outstanding
capital stock is Filipino owned. This is obviously absurd.
In the example given, only the foreigners holding the common shares have voting rights
in the election of directors, even if they hold only 100 shares. The foreigners, with a minuscule
equity of less than 0.001 percent, exercise control over the public utility. On the other hand, the

Filipinos, holding more than 99.999 percent of the equity, cannot vote in the election of directors
and hence, have no control over the public utility. This starkly circumvents the intent of the
framers of the Constitution, as well as the clear language of the Constitution, to place the control
of public utilities in the hands of Filipinos. It also renders illusory the State policy of an
independent national economy effectively controlled by Filipinos.
The example given is not theoretical but can be found in the real world, and in fact exists
in the present case.
[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 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.
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.