EN BANC
G.R. No. 207246, November 22, 2016
JOSE M. ROY III, Petitioner, v. CHAIRPERSON TERESITA HERBOSA,THE SECURITIES AND EXCHANGE COMMISSION, AND PHILILIPPINE LONG DISTANCE TELEPHONE COMPANY, Respondents.
WILSON C. GAMBOA, JR., DANIEL V. CARTAGENA, JOHN WARREN P. GABINETE, ANTONIO V. PESINA, JR., MODESTO MARTIN Y. MAMON III, AND GERARDO C. EREBAREN, Petitioners-in-Intervention,
PHILIPPINE STOCK EXCHANGE, INC., Respondent-in-Intervention,
SHAREHOLDERS' ASSOCIATION OF THE PHILIPPINES, INC., Respondent-in-Intervention.
D E C I S I O N
CAGUIOA, J.:
The petitions1 before the Court are special civil actions for certiorari under Rule 65 of the Rules of Court seeking to annul Memorandum Circular No. 8, Series of 2013 ("SEC-MC No. 8") issued by the Securities and Exchange Commission ("SEC") for allegedly being in violation of the Court's Decision2 ("Gamboa Decision") and Resolution3 ("Gamboa Resolution") in Gamboa v. Finance Secretary Teves, G.R. No. 176579, respectively promulgated on June 28, 2011, and October 9, 2012, which jurisprudentially established the proper interpretation of Section 11, Article XII of the Constitution.chanroblesvirtuallawlibrary
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.Several motions for reconsideration were filed assailing the Gamboa Decision. They were denied in the Gamboa Resolution issued by the Court on October 9, 2012, viz:chanRoblesvirtualLawlibrary
SO ORDERED.4
WHEREFORE, we DENY the motions for reconsideration WITH FINALITY. No further pleadings shall be entertained.The Gamboa Decision attained finality on October 18, 2012, and Entry of Judgment was thereafter issued on December 11, 2012.6
SO ORDERED.5
Section 2. All covered corporations shall, at all times, observe the constitutional or statutory ownership requirement. For purposes of determining compliance therewith, the required percentage of Filipino ownership shall be applied to BOTH (a) the total number of outstanding shares of stock entitled to vote in the election of directors; AND (b) the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors.On June 10, 2013, petitioner Roy, as a lawyer and taxpayer, filed the Petition,15 assailing the validity of SEC-MC No. 8 for not conforming to the letter and spirit of the Gamboa Decision and Resolution and for having been issued by the SEC with grave abuse of discretion. Petitioner Roy seeks to apply the 60-40 Filipino ownership requirement separately to each class of shares of a public utility corporation, whether common, preferred nonvoting, preferred voting or any other class of shares. Petitioner Roy also questions the ruling of the SEC that respondent Philippine Long Distance Telephone Company ("PLDT") is compliant with the constitutional rule on foreign ownership. He prays that the Court declare SEC-MC No. 8 unconstitutional and direct the SEC to issue new guidelines regarding the determination of compliance with Section 11, Article XII of the Constitution in accordance with Gamboa.
Corporations covered by special laws which provide specific citizenship requirements shall comply with the provisions of said law.14
3. The standing interpretation of the SEC found in MC8 practically encourages circumvention of the 60-40 ownership rule by impliedly allowing the creation of several classes of voting shares with different degrees of beneficial ownership over the same, but at the same time, not imposing a 40% limit on foreign ownership of the higher yielding stocks.38Petitioners' hypothetical illustration as to how SEC-MC No. 8 "practically encourages circumvention of the 60-40 ownership rule" is evidently speculative and fraught with conjectures and assumptions. There is clearly wanting specific facts against which the veracity of the conclusions purportedly following from the speculations and assumptions can be validated. The lack of a specific factual milieu from which the petitions originated renders any pronouncement from the Court as a purely advisory opinion and not a decision binding on identified and definite parties and on a known set of facts.
4. For instance, a situation may arise where a corporation may issue several classes of shares of stock, one of which are common shares with rights to elect directors, another are preferred shares with rights to elect directors but with much lesser entitlement to dividends, and still another class of preferred shares with no rights to elect the directors and even less dividends. In this situation, the corporation may issue common shares to foreigners amounting to forty percent (40%) of the outstanding capital stock and issue preferred shares entitled to vote the directors of the corporation to Filipinos consisting of 60%39 percent (sic) of the outstanding capital stock entitled to vote. Although it may appear that the 60-40 rule has been complied with, the beneficial ownership of the corporation remains with the foreign stockholder since the Filipino owners of the preferred shares have only a miniscule share in the dividends and profit of the corporation. Plainly, this situation runs contrary to the Constitution and the ruling of this x x x Court.40
The Court must enjoin the observance of the policy on the hierarchy of courts, and now affirms that the policy is not to be ignored without serious consequences. The strictness of the policy is designed to shied the Court from having to deal with causes that are also well within the competence of the lower courts, and thus leave time to the Court to deal with the more fundamental and more essential tasks that the Constitution has assigned to it. The Court may act on petitions for the extraordinary writs of certiorari, prohibition and mandamus only when absolutely necessary or when serious and important reasons exist to justifY an exception to the policy. x x xPetitioners' invocation of "transcendental importance" is hollow and does not merit the relaxation of the rule on hierarchy of courts. There being no special, important or compelling reason that justified the direct filing of the petitions in the Court in violation of the policy on hierarchy of courts, their outright dismissal on this ground is further warranted.54x x x Where the issuance of an extraordinary writ is also within the competence of the Court of Appeals or a Regional Trial Court, it is in either of these courts that the specific action for the writ's procurement must be presented. This is and should continue to be the policy in this regard, a policy that courts and lawyers must strictly observe. x x x53
WHEREFORE, we PARTLY GRANT the petition and rule that the term "capital" in Section II, Article XII of the I987 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 II, Article XII of the Constitution, to impose the appropriate sanctions under the law.61In turn, the Gamboa Resolution stated:chanRoblesvirtualLawlibrary
In any event, the SEC has expressly manifested62 that it will abide by the Court's decision and defer to the Court's definition of the term "capital" in Section II, Article XII of the Constitution. Further, the SEC entered its special appearance in this case and argued during the Oral Arguments, indicating its submission to the Court's jurisdiction. It is clear, therefore, that there exists no legal impediment against the proper and immediate implementation of the Court's directive to the SEC.To recall, the sole issue in the Gamboa case was: "whether the term 'capital' in Section 11, Article XII of the Constitution refers 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."64
x x x x
x x x The dispositive portion of the Court's ruling is addressed not to PLDT but solely to the SEC, which is the administrative agency tasked to enforce the 60-40 ownership requirement in favor of Filipino citizens in Section 11, Article XII of the Constitution.63
x x x 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.The decretal portion of the Gamboa Decision follows the definition of the term "capital" in the body of the decision, to wit: "x x x we x x x 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)."66
x x x x
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.65
Compliance with the required Filipino ownership of a corporation shall be determined on the basis of outstanding capital stock whether fully paid or not, but only such stocks which are generally entitled to vote are considered.Echoing the FIA-IRR, the Court stated in the Gamboa Decision that:chanRoblesvirtualLawlibrary
For stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate voting rights is essential. Thus, stocks, the voting rights of which have been assigned or transferred to aliens cannot be considered held by Philippine citizens or Philippine nationals.70
Mere legal title is insufficient to meet the 60 percent Filipinoowned "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]."Was the definition of the term "capital" in Section 11, Article XII of the 1987 Constitution declared for the first time by the Court in the Gamboa Decision modified in the Gamboa Resolution?
x x x x
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 State's grant of authority to operate a public utility. x x x71
Everything told, the Court, in both the Gamboa Decision and Gamboa Resolution, finally settled with the PIA's definition of "Philippine national" as expounded in the FIA-IRR in construing the term "capital" in Section 11, Article XII of the 1987 Constitution.XII.
Final Word
The Constitution expressly declares as State policy the development of an economy "effectively controlled" by Filipinos. Consistent with such State policy, the Constitution explicitly reserves the ownership and operation of public utilities to Philippine nationals, who are defined in the Foreign Investments Act of 1991 as Filipino citizens, or corporations or associations at least 60 percent of whose capital with voting rights belongs to Filipinos. The FIA's implementing rules explain that "[f]or stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not enough to meet the required Filipino equity. Full beneficial ownership of stocks, coupled with appropriate voting rights is essential." In effect, the FIA clarifies, reiterates and confirms the interpretation that the term "capital" in Section 11, Article XII of the 1987 Constitution refers to shares with voting rights, as well as with full beneficial ownership. This is precisely because the right to vote in the election of directors, coupled with full beneficial ownership of stocks, translates to effective control of a corporation.77
Section 2. All covered corporations shall, at all times, observe the constitutional or statutory ownership requirement. For purposes of determining compliance therewith, the required percentage of Filipino ownership shall be applied to BOTH (a) the total number of outstanding shares of stock entitled to vote in the election of directors; AND (b) the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors.78Section 2 of SEC-MC No. 8 clearly incorporates the Voting Control Test or the controlling interest requirement. In fact, Section 2 goes beyond requiring a 60-40 ratio in favor of Filipino nationals in the voting stocks; it moreover requires the 60-40 percentage ownership in the total number of outstanding shares of stock, whether voting or not. The SEC formulated SEC-MC No. 8 to adhere to the Court's unambiguous pronouncement that "[f]ull beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60 percent of the voting rights is required."79 Clearly, SEC-MC No. 8 cannot be said to have been issued with grave abuse of discretion.
100 common shares
100 Class A preferred shares (with right to elect directors)
100 Class B preferred shares (without right to elect directors)
SEC-MC No. 8 | GAMBOA DECISION |
(1) 60% (required percentage of Filipino) applied to the total number of outstanding shares of stock entitled to vote in the election of directors | "shares of stock entitled to vote in the election of directors"80 (60% of the voting rights) |
SEC-MC No. 8 | GAMBOA DECISION/RESOLUTION |
(2) 60% (required percentage of Filipino) applied to BOTH (a) the total number of outstanding shares of stock, entitled to vote in the election of directors; AND (b) the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors. | "Full beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60 percent of the voting rights"81 or "Full beneficial ownership of the stocks, coupled with appropriate voting rights x x x shares with voting rights, as well as with full beneficial ownership"82 |
x x x The words "own and control," used to qualify the minimum Filipino participation in Section 11, Article XII of the Constitution, reflects the importance of Filipinos having both the ability to influence the corporation through voting rights and economic benefits. In other words, full ownership up to 60% of a public utility encompasses both control and economic rights, both of which must stay in Filipino hands. Filipinos, who own 60% of the controlling interest, must also own 60% of the economic interest in a public utility.The definition of "beneficial owner" or "beneficial ownership" in the Implementing Rules and Regulations of the Securities Regulation Code ("SRC-IRR") is consistent with the concept of"full beneficial ownership" in the FIA-IRR.
x x x In mixed class or dual structured corporations, however, there is variance in the proportion of stockholders' controlling interest visa-vis their economic ownership rights. This resulting variation is recognized by the Implementing Rules and Regulations (IRR) of the Securities Regulation Code, which defined beneficial ownership as that may exist either through voting power and/or through investment returns. By using and/or in defining beneficial ownership, the IRR, in effect, recognizes a possible situation where voting power is not commensurate to investment power.
Compliance with the required Filipino ownership of a corporation shall be determined on the basis of outstanding capital stock whether fully paid or not, but only such stocks which are generally entitled to vote are considered.The emphasized portions in the foregoing provision is the equivalent of the so-called "beneficial ownership test". That is all.
For stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate voting rights is essential. Thus, stocks, the voting rights of which have been assigned or transferred to aliens cannot be considered held by Philippine citizens or Philippine nationals.85
Mere legal title is insufficient to meet the 60 percent Filipinoowned "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. x x xAnd the "Final Word" of the Gamboa Resolution is in full accord with the foregoing pronouncement of the Court, to wit:chanRoblesvirtualLawlibrary
x x x x
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 (or the State's grant of authority to operate a public utility. x x x.86
Given that beneficial ownership of the outstanding capital stock of the public utility corporation has to be determined for purposes of compliance with the 60% Filipino ownership requirement, the definition in the SRC-IRR can now be applied to resolve only the question of who is the beneficial owner or who has beneficial ownership of each "specific stock" of the said corporation. Thus, if a "specific stock" is owned by a Filipino in the books of the corporation, but the stock's voting power or disposing power belongs to a foreigner, then that "specific stock" will not be deemed as "beneficially owned" by a Filipino.XII.
Final Word
x x x The FIA's implementing rules explain that "[f]or stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate voting rights is essential."87
Sec. 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 or 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.As worded, effective control by Filipino citizens of a public utility is already assured in the provision. With respect to a stock corporation engaged in the business of a public utility, the constitutional provision mandates three safeguards: (1) 60% of its capital must be owned by Filipino citizens; (2) participation of foreign investors in its board of directors is limited to their proportionate share in its capital; and (3) all its executive and managing officers must be citizens of the Philippines.
Illustration - preference sharesThe fact that from an accounting standpoint, the substance or essence of the financial instrument is the key determinant whether it should be categorized as a financial liability or an equity instrument, there is no compelling reason why the same treatment may not be recognized from a legal perspective. Thus, to require Filipino shareholders to acquire preferred shares that are substantially debts, in order to meet the "restrictive" Filipino ownership requirement that petitioners espouse, may not bode well for the Philippine corporation and its Filipino shareholders.
If an entity issues preference (preferred) shares that pay a fixed rate of dividend and that have a mandatory redemption feature at a future date, the substance is that they are a contractual obligation to deliver cash and, therefore, should be recognized as a liability. [IAS 32.18(a)] In contrast, preference shares that do not have a fixed maturity, and where the issuer does not have a contractual obligation to make any payment are equity. In this example even though both instruments are legally termed preference shares they have different contractual terms and one is a financial liability while the other is equity.
Illustration - issuance of fixed monetary amount of equity instruments
A contractual right or obligation to receive or deliver a number of its own shares or other equity instruments that varies so that the fair value of the entity's own equity instruments to be received or delivered equals the fixed monetary amount of the contractual right or obligation is a financial liability. [IAS 32.20]
Illustration - one party bas a choice over bow an instrument is settled
When a derivative financial instrument gives one party a choice over how it is settled (for instance, the issuer or the holder can choose settlement net in cash or by exchanging shares for cash), it is a financial asset or a financial liability unless all of the settlement alternatives would result in it being an equity instrument. [IAS 32.26]92
The Corporation Code of the Philippines classifies shares as common or preferred, thus:chanRoblesvirtualLawlibraryThe Gamboa Decision held that preferred shares are to be factored in only if they are entitled to vote in the election of directors. If preferred shares have no voting rights, then they cannot elect members of the board of directors, which wields control of the corporation. As to the right of non voting preferred shares to vote in the 8 instances enumerated in Section 6 of the Corporation Code, the Gamboa Decision considered them but, in the end, did not find them significant in resolving the issue of the proper interpretation of the word "capital" in Section 11, Article XII of the Constitution.Sec. 6. Classification of shares. The shares of stock of stock corporations may be divided into classes or series of shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of incorporation: Provided, That no share may be deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares, unless otherwise provided in this Code: Provided, further, That there shall always be a class or series of shares which have complete voting rights. Any or all of the shares or series of shares may have a par value or have no par value as may be provided for in the articles of incorporation: Provided, however, That banks, trust companies, insurance companies, public utilities, and building and loan associations shall not be permitted to issue no-par value shares of stock.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. In fact, under the Corporation Code only preferred or redeemable shares can be deprived of the right to vote. Common shares cannot be deprived of the right to vote in any corporate meeting, and any provision in the articles of incorporation restricting the right of common shareholders to vote is invalid.
Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the corporation in case of liquidation and in the distribution of dividends, or such other preferences as may be stated in the articles of incorporation which are not violative of the provisions of this Code: Provided, That preferred shares of stock may be issued only with a stated par value. The Board of Directors, where authorized in the articles of incorporation, may fix the terms and conditions of preferred shares of stock or any series thereof: Provided, That such terms and conditions shall be effective upon the filing of a certificate thereof with the Securities and Exchange Commission.
x x x x
A corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be equal in all respects to every other share.
Where the articles of incorporation provide for non voting shares in the cases allowed by this Code, the holders of such shares shall nevertheless be entitled to vote on the following matters:cralawlawlibrary
1. Amendment of the articles of incorporation;ChanRoblesVirtualawlibrary
2. Adoption and amendment of by-laws;ChanRoblesVirtualawlibrary
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property;ChanRoblesVirtualawlibrary
4. Incurring, creating or increasing bonded indebtedness;ChanRoblesVirtualawlibrary
5. Increase or decrease of capital stock;ChanRoblesVirtualawlibrary
6. Merger or consolidation of the corporation with another corporation or other corporations;ChanRoblesVirtualawlibrary
7. Investment of corporate funds in another corporation or business in accordance with this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights.
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.
This interpretation is consistent with the intent of the framers of the Constitution to place in the hands of Filipino citizens the control and management of public utilities. As revealed in the deliberations of the Constitutional Commission, "capital" refers to the voting stock or controlling interest of a corporation x x x.94
80. [R]edefining "capital" as used in Section 11, Article XII of the 1987 Constitution and adopting the supposed "Effective Control Test" will lead to disastrous consequences to the Philippine stock market.In its Omnibus Motion [1] For Leave to Intervene; and [2] To Admit Attached Comment-in-Intervention dated May 30, 2016,99 SHAREPHIL further warns that "[t]he restrictive re-interpretation of the term "capital" will result in massive forced divestment of foreign stockholdings in Philippine corporations."100 SHAREPHIL explains:chanRoblesvirtualLawlibrary
81. Current data of the PSE show that, if the "Effective Control Test" were applied, the total value of shares that would be deemed in excess of the foreign-ownership limits based on stock prices as of 30 April 2014 is One Hundred Fifty Nine Billion Six Hundred Thirty Eight Million Eight Hundred Forty Five Thousand Two Hundred Six Pesos and Eighty Nine Cents (Php159,638,845,206.89).
82. The aforementioned value of investments would have to be discharged by foreign holders, and consequently must be absorbed by Filipino investors. Needless to state, the lack of investments may lead to shutdown of the affected enterprises and to immeasurable consequences to the Philippine economy.98
4.51. On 16 October 2012, Deutsche Bank released a Market Research Study, which analyzed the implications of the ruling in Gamboa. The Market Research Study stated that:chanRoblesvirtualLawlibraryPetitioners have failed to counter or refute these submissions of the PSE and SHAREPHIL. These unrefuted observations indicate to the Court that a restrictive interpretation - or rather, re-interpretation, of "capital", as already defined with finality in the Gamboa Decision and Resolution - directly affects the well-being of the country and cannot be labelled as "irrelevant and impertinent concerns x x x add[ing] burden [to] the Court."102 These observations by the PSE103 and SHAREPHIL,104 unless refuted, must be considered by the Court to be valid and sound."If this thinking is applied and becomes established precedent, it would significantly expand on the rules for determining nationality in partially nationalized industries. If that were to happen, not only will PLDT's move to issue the 150m voting prefs be inadequate to address the issue, a large number of listed companies with similar capital structures could also be affected."4.52. In five (5) companies alone, One Hundred Fifty Eight Billion Pesos (PhP158,000,000,000.00) worth of shares will have to be sold by foreign shareholders in a forced divestment, if the obiter in Gamboa were to be implemented. Foreign shareholders of PLDT will have to divest One Hundred Three Billion Eight Hundred Sixty Million Pesos (PhP103,860,000,000.00) worth of shares.4.53. Clearly, the local stock market which has an average value turn-over of Seven Billion Pesos cannot adequately absorb the influx of shares caused by the forced divestment. As a result, foreign stockholders will have to sell these shares at bargain prices just to comply with the Obiter.
- Foreign shareholders of Globe Telecom will have to divest Thirty Eight Billion Two Hundred Fifty Million Pesos (PhP38,250,000,000.00) worth of shares.
- Foreign shareholders of Ayala Land will have to divest Seventeen Billion Five Hundred Fifty Million Pesos (PhP17,550,000,000.00) worth of shares.
- Foreign shareholders of ICTSI will have to divest Six Billion Four Hundred Ninety Million Pesos (PhP6,490,000,000.00) worth of shares.
- Foreign shareholders of MWC will have to divest Seven Billion Seven Hundred Fourteen Million Pesos (PhP7,714,000,000.00) worth of shares.
4.54. These shares being part of the Philippine index, their forced divestment vis-a-vis the inability of the local stock market to absorb these shares will necessarily bring immense downward pressure on the index. A domino-effect implosion of the Philippine stock market and the Philippine economy, in general is not remote. x x x.101
Where a petition for certiorari under Rule 65 of the Rules of Court alleges grave abuse of discretion, the petitioner should establish that the respondent court or tribunal acted in a capricious, whimsical, arbitrary or despotic manner in the exercise of its jurisdiction as to be equivalent to lack of jurisdiction. This is so because "grave abuse of discretion" is well-defined and not an amorphous concept that may easily be manipulated to suit one's purpose. In this connection, Yu v. Judge Reyes-Carpio, is instructive:chanRoblesvirtualLawlibraryThe onus rests on petitioners to clearly and sufficiently establish that the SEC, in issuing SEC-MC No. 8, acted in a capricious, whimsical, arbitrary or despotic manner in the exercise of its jurisdiction as to be equivalent to lack of jurisdiction or that the SEC's abuse of discretion is so patent and gross as to amount to an evasion of a positive duty or to a virtual refusal to perform a duty enjoined by law, or to act at all in contemplation of law and the Gamboa Decision and Resolution. Petitioners miserably failed in this respect.The term "grave abuse of discretion" has a specific meaning. An act of a court or tribunal can only be considered as with grave abuse of discretion when such act is done in a "capricious or whimsical exercise of judgment as is equivalent to lack of jurisdiction." The abuse of discretion must be so patent and gross as to amount to an "evasion of a positive duty or to a virtual refusal to perform a duty enjoined by law, or to act at all in contemplation of law, as where the power is exercised in an arbitrary and despotic manner by reason of passion and hostility." Furthermore, the use of a petition for certiorari is restricted only to "truly extraordinary cases wherein the act of the lower court or quasi-judicial body is wholly void." From the foregoing definition, it is clear that the special civil action of certiorari under Rule 65 can only strike an act down for having been done with grave abuse of discretion if the petitioner could manifestly show that such act was patent and gross. x x x.
Endnotes:
* On official leave.chanrobleslaw
1 These are the Petition for Certiorari filed on June 10, 2013 (the "Petition") and Petition-in-Intervention (for Certiorari) filed on July 30, 2013 (the "Petition-in-Intervention"). They will be referred to collectively as the "petitions".
2Gamboa v. Finance Secretary Teves, 668 Phil. 1 (2011).
3Heirs of Wilson P. Gamboa v. Finance Sec. Teves, 696 Phil. 276 (2012).
4Gamboa v. Finance Secretary Teves, supra note 2, at 69-70.
5Heirs of Wilson P. Gamboa v. Finance Sec. Teves, supra note 3, at 363.
6Rollo (Vol. II), pp. 605-609.
7 Id. at 547.
8 Id. at 548.
9 Id. at 605-609.
10 Id. at 548.
11 Id.
12Rollo (Vol. 1), pp. 31-33.
13Rollo (Vol. II), pp. 549, 587-288.
14 Id. at 588.
15Rollo (VoL I), pp. 3-206 (with annexes).
16 Son of deceased petitioner Wilson P. Gamboa in Gamboa.
17Rollo (Vol. I), pp. 222-230 (with annex).
18 Id. at 231-446 (with annexes).
19 Id. at 466-530.
20Rollo (Vol. II), pp. 544-615 (with annexes).
21 Id. at 633-654.
22 Petitioner Roy and intervenors Gamboa, et al. will be col1ectively referred to as the "petitioners".
23Rollo (Vol. II), pp. 723-762 (with annex).
24 Id. at 765-828.
25 Id. at 839-847.
26 Id. at 848-879.
27 Id. at 880.
28 Id. at 964-1077.
29 A non-stock and non-profit association composed of shareholders of Philippine companies, which aims to advocate changes in the legal and regulatory framework that will help improve the rights of minority shareholders and to promote and protect all types of shareholders' rights under existing laws, rules and regulations. Id. at 1081.
30 Id. at 1080-1114.
31 Resolution dated June 14, 2016, id. at 1115-1116.
32 Id. at 1117-1133.
33 Id. at 1134-1138.
34 Id. at 544-615 (with annex).
35 Id. at 580.
36Belgica v. Ochoa, 721 Phil. 416, 518-519 (2013), citing Joya v. Presidential Commission on Good Government (PCGG), 296-A Phil. 595, 602 (1993) and Biraogo v. The Philippine Truth Commission of 2010, 651 Phil. 374, 438 (2010); Hon. General v. Hon. Urro, 662 Phil. 132, 144 (2011), citing Integrated Bar of the Philippines v. Zamora, 392 Phil. 618, 632 (2000).
37 Id. at 519-520. Citations omitted.
38 ";"instead of "." in the Petition-in-Intervention.
39 "%" is omitted in the Petition-in-Intervention.
40 ";" instead of "." in the Petition-in-Intervention. Petition for Certiorari, rollo (Vol. I), p. 12; Petition-inintervention, id. at 243.
41Galicto v. Aquino III, 683 Phil. 141, 170-171 (2012), citing Miñoza v. Lopez, 664 Phil. 115, 123 (2011).
42 Id. at 170, citing Tolentino v. Commission on Elections, 465 Phil. 385, 402 (2004).
43 Id. at 172. Citations omitted.
44Rollo (Vol. I), p. 7.
45 Motion for Leave to file Petition-In-Intervention, id. at 224-225.
46Galicto v. Aquino III, supra note 41, at 172-173, citing Integrated Bar of the Philippines v. Zamora, supra note 36, at 633.
47 Automotive Industry Workers Alliance v. Romulo, 489 Phil. 710, 719 (2005). Citations omitted.
48 PLDT's Consolidated Memorandum, rollo (Vol. II), p. 992.
49 Petition for Certiorari, rollo (Vol. I), p.10, and Petition-in-intervention (For Certiorari), rollo (Vol. I), p. 240.
50Republic v. Roque, 718 Phil. 294, 307 (2013), citing Southern Hemisphere Engagement Network, Inc. v. Anti-Terrorism Council, 646 Phil. 452, 478 (2010).
51 See Galicto v. Aquino III, supra note 41, at 170, citing Lozano v. Nograles, 607 Phil. 334, 344 (2009).
52 693 Phil. 399 (2012).
53 Id. at 412.
54 Id. at 414.
55Rollo (Vol. II), pp. 848-879.
56 Id. at 1080-1114.
57 See Cua, Jr. v. Tan, 622 Phil. 661, 720 (2009).
58De Galicia v. Mercado, 519 Phil. 122, 127 (2006).
59Rollo (Vol. II), p. 1107.
60 See Suntay v. Cojuangco-Suntay, 360 Phil. 932 (1998).
61Gamboa v. Finance Secretary Teves, supra note 2.
62 In its Manifestation and Omnibus Motion dated July 29, 2011, the SEC stated: "x x x The Commission, however, would submit to whatever would be the final decision of this Honorable Court on the meaning of the term "capital"."
In its Memorandum, the SEC also stated: "In the event that this Honorable Court rules with finality on the meaning of "capital," the SEC will yield to the Court and follow its interpretation." (Heirs of Wilson P. Gamboa v. Finance Sec. Teves, supra note 3, at 356-357, footnote 54; emphasis omitted.)
63Heirs of Wilson P. Gamboa v. Finance Sec. Teves, id. at 356, 358.
64Gamboa v. Finance Secretary Teves, supra note 2, at 35.
65 Id. at 51-53.
66 Id. at 69-70.
67 Id. at 58.
68 Id. at 44.
69 Id. at 53-54.
70 Id. at 55-57.
71 Id. at 57, 63.
72 Department of Justice.
73 Executive Order No. 226 or the Omnibus Investments Code of 1987; Presidential Decree No. 1789 or the Omnibus Investments Code of 1981, and Republic Act No. 5186 or the Investment Incentives Act of 1967.
74Heirs of Wilson P. Gamboa v. Finance Secretary Teves, supra note 3, at 321.
75 Id. at 331.
76 Id. at 342.
77 Id. at 361-362.
78Rollo (Vol. I), p. 35.
79Gamboa v. Finance Secretary Teves, supra note 2, at 57.
80 Id. at 69-70.
81 Id. at 57.
82Heirs of Gamboa v. Finance Secretary Teves, supra note 3, at 361.
83 For definition of "Beneficial owner or beneficial ownership" and "Control", please refer to Sections 3.1.2 and 3.1.8, respectively of the 2015 Implementing Rules and Regulations of the Securities Regulation Code.
84 2015 Implementing Rules and Regulations of the Securities Regulations Code, Sec. 3.1.2.
85 Implementing Rules and Regulations of Republic Act No. 7042 (Foreign Investment Act of 1991) as Amended by Republic Act No. 8179, Sec. 1, b; underscoring and emphasis supplied.
86Gamboa v. Finance Secretary Teves, supra note 2, at 57, 63. Emphasis and underscoring supplied.
87Heirs of Gamboa v. Finance Secretary Teves, supra note 3, at 361.
88 A financial instrument is a contract that gives rise to a financial a set of one entity and a financial liability or equity instrument of another entity. [IAS 32 --- Financial Instruments: Presentation, Key definitions [IAS 32.11, available at <http://www.iasplus.com/en/standards/ias/ias32>, last accessed on November 28, 2016]. The common examples of financial instruments within the scope of International Auditing Standards (IAS) 39 are as follows: cash; demand and time deposit; commercial paper; accounts, notes, and loans receivable and payable; debt and equity securities which includes investments in subsidiaries, associates, and joint ventures; asset backed securities such as collateralised mortgage obligations, repurchase agreements, and securitised packages of receivables; and derivatives, including options, rights, warrants, futures contracts, forward contracts, and swaps. [IAS 39 - Financial Instruments: Recognition and Measurement, available at <http://www.iasplus.com/en/standards/ias/ias39>, last accessed on November 28, 2016].
89 IAS 32 Financial Instruments: Presentation, <http://www.ifrs.org/Documents/IAS32.pdf>, last accessed on November 28, 2016.
90 International Accounting Standards.
91 <http://www.iasplus.com/en/standards/ias/ias32>, last accessed on November 28, 2016.
92 Id.
93Biraogo v. The Philippine Truth Commission of 2010, supra note 36, at 463.
94Gamboa v. Finance Secretary Teves, supra note 2, at 51-54. Underscoring supplied.
95 Sec. 16 (Amendment of Articles of Incorporation); Sec. 37 (Power to extend or shorten corporate term); Sec. 38 (Power to increase or decrease capital stock; create or increase bonded indebtedness); Sec. 40 (Sale or other dispositions of [all or substantially all] assets); Sec. 42 (Power to invest corporate funds in another corporation or business or for any other purpose); Sec. 48 (Amendments to by-laws); Sec. 77 (Stockholder's or member's approval [of plan of merger or consolidation]); Sec. 118 (Voluntary dissolution where no creditors are affected); and Sec. 119 (Voluntary dissolution where creditors are affected).
96 Sec. 81. Instances of appraisal right. Any stockholder of a corporation shall have the right to dissent and demand payment of the fair value of his shares in the following instances:cralawlawlibrary
1. In case any amendment to the articles of incorporation has the effect of changing or restricting the rights of any stockholder or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class, or of extending or shortening the term of corporate existence;ChanRoblesVirtualawlibrary
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets as provided in the Code; and
3. In case of merger or consolidation.
97Rollo (Vol. II), pp. 848-879.
98 Id. at 870. Emphasis supplied.
99 Id. at 1080-1114.
100 Id. 1105.
101 Id. at 1106-1107.
102 Petitioner Roy's Opposition and Reply to Interventions of Philippine Stock Exchange and SHAREPHIL dated June 30, 2016, id. at 1128.
103 The PSE is an entity mandated to provide and maintain a convenient, economical, and suitable market for the exchange of stocks, to formulate and implement rules and regulations to ensure that the interests of all market participants are protected, and to provide an efficient and fair market for buyers and sellers alike. The PSE alleges that, in case the petitions are granted, it stands to be injured and there will be damaging consequences on the market, as it will force the reduction of foreign investment and restrict capital outflow. PSE's Comment-in-Intervention, p. 2, id. at 849.
104 SHAREPHIL, as an association forwarding the rights and welfare of shareholders, alleges that it aims to protect shareholders who have direct and substantial interest in this case and will no doubt be adversely affected by the restrictive re-interpretation of the Gamboa ruling forwarded by the petitioners. SHAREPHIL's Omnibus Motion 1 For Leave to Intervene; and 2 To Admit Attached Comment-in-Intervention, par. 5, p. 3, id. at 1082.
105 518 Phil. 478 (2006).
106 Id. at 482.
107Heirs of Wilson P. Gamboa v. Finance Secretary Teves, supra note 3, at 339.
108 716 Phil. 500, 515-516 (2013). Emphasis supplied; citations omitted.
109Suntay v. Cojuangco-Suntay, supra note 60, at 944-945 (1998).
110Contreras and Gingco v. Felix and China Banking Corp., 78 Phil. 570, 577-578 (1947). Citations omitted.
111 Id. at 575.
112 See Land Bank of the Philippines v. Suntay, 678 Phil. 879, 913-914 (2011).
113FGU Insurance Corp. v. RTC of Makati City, Branch 66, 659 Phil. 117, 123 (2011).
114 Id.
115 A.M. No. 10-4-20-SC, Rule 15, Sec. 3. Second motion for reconsideration. - The Court shall not entertain a second motion for reconsideration, and any exception to this rule can only be granted in the higher interest of justice by the Court en banc upon a vote of at least two-thirds of its actual membership. There is reconsideration "in the higher interest of justice" when the assailed decision is not only legally erroneous, but is likewise patently unjust and potentially capable of causing unwarranted and irremediable injury or damage to the parties. A second motion for reconsideration can only be entertained before the ruling sought to be reconsidered becomes final by operation oflaw or by the Court's declaration.
x x x x
116 See Spouses Mahusay v. B.E. San Diego, Inc., 666 Phil. 528, 536 (2011).
117 See Commissioner on Higher Education v. Mercado, 519 Phil. 399, 406 (2006).
SERENO, C.J.:
Section 2. All covered corporations shall, at all times, observe the constitutional or statutory ownership requirement. For purposes of determining compliance therewith, the required percentage of Filipino ownership shall be applied to BOTH (a) the total number of outstanding shares of stock entitled to vote in the election of directors; AND (b) the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors. (Emphasis supplied)Evidently, the circular limits the application of the ownership requirement only to the number of stocks in a corporation. It does not take into consideration the par value, which, in tum, affects the dividends or earnings of the 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 ifthere is a violation of Section 11, Article XII of the Constitution, to impose the appropriate sanctions under the law. (Emphasis in the original)From that determination, the SEC may be able to gather the necessary information to correctly classify various kinds of shares in different combinations of numbers, par values, and dividends. However, with the SEC considering only the matter of the number of shares under the assailed circular, and absent any deeper analysis of PLDT equity structure, any disposition in this case would be premature.
Endnotes:
1Gamboa v. Teves, 668 Phil. 1 (2011) and Heirs of Gamboa v. Teves, 696 Phil. 276-485 (2012).chanrobleslaw
CARPIO, J.:
x x x. 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]."5 (Emphasis supplied)Significantly, in the 9 October 2012 Resolution in Gamboa (Gamboa Resolution)6 denying the motion for reconsideration, the Court reiterated the twin requirement of full beneficial ownership of at least 60 percent of the outstanding capital stock and at least 60 percent of the voting rights. This is consistent with the Foreign Investments Act, as well as its Implementing Rules, thus:chanRoblesvirtualLawlibrary
This is consistent with Section 3 of the FIA which provides that where 100% of the capital stock is held by "a trustee of funds for pension or other employee retirement or separation benefits," the trustee is a Philippine national if "at least sixty percent (60%) of the fund will accrue to the benefit of Philippine nationals." Likewise, Section 1(b) of the Implementing Rules of the FIA provides that "for stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate voting rights, is essential."7 (Emphasis in the original)The Court further clarified, in no uncertain terms, that the 60 percent constitutional requirement of Filipino ownership applies uniformly and across the board to all classes of shares comprising the capital of a corporation. The 60 percent Filipino ownership requirement applies to each class of share, not to the total outstanding capital stock as a single class of share. The Court explained:chanRoblesvirtualLawlibrary
Since the constitutional requirement of at least 60 percent Filipino ownership applies not only to voting control of the corporation but also to the beneficial ownership of the corporation, it is therefore imperative that such requirement apply uniformly and across the board to all classes of shares, regardless of nomenclature and category, comprising the capital of a corporation. Under the Corporation Code, capital stock consists of all classes of shares issued to stockholders, that is, common shares as well as preferred shares, which may have different rights, privileges or restrictions as stated in the articles of incorporation.Clearly, in both Gamboa Decision and Resolution, the Court categorically declared that the 60 percent minimum Filipino ownership refers not only to voting rights but likewise to full beneficial ownership of the stocks. Likewise, the 60 percent Filipino ownership applies uniformly to each class of shares. Such interpretation ensures effective control by Filipinos of public utilities, as expressly mandated by the Constitution.
x x x x
x x x In short, the 60-40 ownership requirement in favor of Filipino citizens must apply separately to each class of shares, whether common, preferred non-voting, preferred voting or any other class of shares. This uniform application of the 60-40 ownership requirement in favor of Filipino citizens clearly breathes life to the constitutional command that the ownership and operation of public utilities shall be reserved exclusively to corporations at least 60 percent of whose capital is Filipino-owned. Applying uniformly the 60-40 ownership requirement in favor of Filipino citizens to each class of shares, regardless of differences in voting rights, privileges and restrictions, guarantees effective Filipino control of public utilities, as mandated by the Constitution.
Moreover, such uniform application to each class of shares insures that the "controlling interest" in public utilities always lies in the hands of Filipino citizens. x x x.
As we held in our 28 June 2011 Decision, to construe broadly the term "capital" as the total outstanding capital stock, treated as a single class regardless of the actual classification of shares, grossly contravenes the intent and letter of the Constitution that the "State shall develop a selfreliant and independent national economy effectively controlled by Filipinos." We illustrated the glaring anomaly which would result in defining the term "capital" as the total outstanding capital stock of a corporation, treated as a single class of shares regardless of the actual classification of shares, to wit:chanRoblesvirtualLawlibraryLet 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. x x x.8 (Emphasis supplied)
Section 2. All covered corporations shall, at all times, observe the constitutional or statutory ownership requirement. For purposes of determining compliance therewith, the required percentage of Filipino ownership shall be applied to BOTH (a) the total number of outstanding shares of stock entitled to vote in the election of directors; AND (b) the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors. (Emphasis supplied)SEC Memorandum Circular No. 8 provides for two conditions in determining whether a corporation intending to operate or operating a public utility complies with the mandatory 60 percent Filipino ownership requirement. It expressly states that the 60 percent Filipino ownership requirement "shall be applied to BOTH (a) the total number of outstanding shares of stock entitled to vote in the election of directors; AND (b) the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors." Section 2 of SEC Memorandum Circular No. 8 therefore mandates that the 60 percent Filipino ownership requirement shall be applied separately to both the total number of stocks with voting rights, and to the entire outstanding stock with and without voting rights. If the 60 percent Filipino ownership requirement is not met either by the outstanding voting stock or by the total outstanding voting and non-voting stock, then the Constitutional requirement is violated.
Endnotes:
1 668 Phil. 1 (2011).chanrobleslaw
2 Id. at 45.
3 Id. at 53.
4 Id. at 57.
5 Id.
6 696 Phil. 276 (2012).
7 Id. at 338-339.
8 Id. at 339, 341, 345.
9Spouses Bela v. Philippine National Bank, 405 Phil. 851 (2001); Soriano v. Offshore Shipping and Manning Corp., 258 Phil. 309 (1989).
VELASCO, JR., J.:
Section 2. All covered corporations shall, at all times, observe the constitutional or statutory ownership requirement. For purposes of determining compliance therewith, the required percentage of Filipino ownership shall be applied to BOTH (a) the total number of outstanding shares of stock entitled to vote in the election of directors; AND (b) the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors.Petitioner Jose Roy III takes exception to the foregoing provision alleging that it is not in accord with the ruling of the Court in Gamboa. He contends that the SEC committed grave abuse of discretion since Section 2 of MC No. 8 "fails to differentiate the varying classes of shares and does not require the application of the foreign equity limits to each class of shares issued by a corporation." Petitioner relies on a portion of the October 9, 2012 Resolution in Gamboa providing that "the 60-40 ownership requirement must apply to each class of shares, whether common, preferred non-voting, preferred voting or any other class of shares." He, thus, prays for this Court to declare MC No. 8 unconstitutional and to direct the SEC to issue new guidelines regarding the determination of compliance with Section 11, Article XII of the Constitution in accordance with Gamboa.
Corporations covered by special laws which provide specific citizenship requirements shall comply with the provisions of said law.
When questions of constitutional significance are raised, the Court can exercise its power of judicial review only if the following requisites are present: (1) the existence of an actual and appropriate case; (2) the existence of personal and substantial interest on the part of the party raising the constitutional question; (3) recourse to judicial review is made at the earliest opportunity; and (4) the constitutional question is the lis mota of the case.5The petitioner's failure to sufficiently allege, much less prove the existence of the first two requisites, warrants the outright dismissal of the petition.
... The rationale for this constitutional requirement of locus standi is by no means trifle. Not only does it assure the vigorous adversary presentation of the case; more importantly, it must suffice to warrant the Judiciary's overruling the determination of a coordinate, democratically elected organ of government, such as the President, and the clear approval by Congress, in this case. Indeed, the rationale goes to the very essence of representative democracies.10 (emphasis supplied)The liberality of the Court in bypassing the locus standi rule cannot, therefore, be abused. If the Court is to maintain the respect demanded by the concept of separation of governmental powers, it must subject applications for exemptions from the requirements of judicial review to the highest possible judicial inquiry. In the present case, the anemic allegations of the petitioner and petitioners-in-intervention do not warrant the application of the exceptions rather than the rule on locus standi.
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 Court explained in the June 28, 2011 Decision in Gamboa that the term "capital" in Section 11, Article XII refers "only to shares of stock entitled to vote in the election of directors." The rationale provided by the majority was that this interpretation ensures that control of the Board of Directors stays in the hands of Filipinos, since foreigners can only own a maximum of 40% of said shares and, accordingly, can only elect the equivalent percentage of directors. As a necessary corollary, Filipino stockholders can always elect 60% of the Board of Directors which, to the majority of the Court, translates to control over the corporation. The June 28, 2011 Decision, thus, reads:chanRoblesvirtualLawlibrary
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.The dispositive portion of the June 28, 2011 Decision in Gamboa clearly spelled out the doctrinal declaration of the Court on the meaning of "capital" in Section 11, Article XII of the Constitution, viz:chanRoblesvirtualLawlibrary
This interpretation is consistent with the intent of the framers of the Constitution to place in the hands of Filipino citizens the control and management of public utilities. As revealed in the deliberations of the Constitutional Commission, "capital" refers to the voting stock or controlling interest of a corporation x x x.
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. (emphasis supplied)The motions for reconsideration of the June 28, 2011 Decision filed by the movants in Gamboa argued against the application of the term "capital" to the voting shares alone and in favor of applying the term to the total outstanding capital stock (combined total of voting and non-voting shares). Notably, none of them contended or moved for the application of the capital or the 60-40 requirement to "each and every class of shares" of a public utility, as it was never an issue in the case.
WHEREFORE, we DENY the motions for reconsideration WITH FINALITY. No further pleadings shall be entertained.Clearly, the Court had no intention, express or otherwise, to amend the construction of the term "capital" in the June 28, 2011 Decision in Gamboa, much less in the manner proposed by petitioner Roy. Hence, no grave abuse of discretion can be attributed to the SEC in applying the term "capital" to the "voting shares" of a corporation.
An obiter dictum has been defined as an opinion expressed by a court upon some question of law that is not necessary in the determination of the case before the court. It is a remark made, or opinion expressed, by a judge, in his decision upon a cause by the way, that is, incidentally or collaterally, and not directly upon the question before him, or upon a point not necessarily involved in the determination of the cause, or introduced by way of illustration, or analogy or argument. It does not embody the resolution or determination of the court, and is made without argument, or full consideration of the point. It lacks the force of an adjudication, being a mere expression of an opinion with no binding force for purposes of res judicata.21 (emphasis and underscoring supplied)What is more, requiring the SEC to impose the 60-40 requirement to "each and every class of shares" in a public utility is not only unsupported by Section 11, Article XXI, it is also administratively and technically infeasible to implement and enforce given the variety and number of classes that may be issued by public utility corporations.
a) The term "Philippine national" shall mean a citizen of the Philippines or 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 trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty (60%) of the fund will accrue to the benefit of the 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 stocks outstanding and entitled to vote 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 both corporations must be citizens of the Philippines, in order that the corporations shall be considered a Philippine national.The definition was taken a step further in the Implementing Rules and Regulations of the law where the phrase "beneficial ownership" was used, as follows:chanRoblesvirtualLawlibrary
b. Philippine national shall mean a citizen of the Philippines or a domestic partnership or association wholly owned by the 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 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 the Philippine nationals; Provided, that where a corporation 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 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 both corporation must be citizens of the Philippines, in order that the corporation shall be considered a Philippine national. The control test shall be applied for this purpose.While the foregoing provisions were cited in Gamboa in identifying the "capital stock outstanding and entitled to vote" as equivalent to "capital" in Section 11, Article XII of the Constitution, nothing in either provision requires the application of the 60% threshold to "each and every class of shares" of public utilities.
The term Philippine national shall not include juridical entities organized and existing under the laws of any other country even if wholly owned by Philippine citizens.
Compliance with the required Filipino ownership of a corporation shall be determined on the basis of outstanding capital stock whether fully paid or not, but only such stocks which are generally entitled to vote are considered.
For stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate voting rights is essential. Thus, stocks, the voting rights of which have been assigned or transferred to aliens cannot be considered held by Philippine citizens or Philippine nationals.
Individuals or juridical entities not meeting the aforementioned qualifications are considered as non-Philippine nationals. (emphasis and underscoring supplied)
[L]et us suppose that the authorized capital stock of a public utility corporation is divided into 100 common shares and 1,000,000 non-voting preferred shares. Since, according to the Court's June 28, 2011 Decision, the word "capital" in Sec. 11, Art. XII refers only to the voting shares, then the 40% cap on foreign ownership applies only to the 100 common shares. Foreigners can, therefore, own 100% of the 1,000,000 non-voting preferred shares. But then again, the ponencia continues, at least, the "control" rests with the Filipinos because the 60% Filipino-owned common shares will necessarily ordain the majority in the governing body of the public utility corporation, the board of directors/trustees. Hence, Filipinos are assured of control over the day-to-day activities of the public utility corporation.Thus, the zealous watchfulness demonstrated by the SEC in imposing another tier of protection for Filipino stockholders cannot, therefore, be penalized on a misreading of the October 9, 2012 Resolution in Gamboa, which neither added nor subtracted anything from the June 28, 2011 Decision defining capital as "shares of stock entitled to vote in the election of directors."
Let us, however, take this corporate scenario a little bit farther and consider the irresistible implications of changes and circumstances that are inevitable and common in the business world. Consider the simple matter of a possible investment of corporate funds in another corporation or business, or a merger of the public utility corporation, or a possible dissolution of the public utility corporation. Who has the "control" over these vital and important corporate matters? The last paragraph of Sec. 6 of the Corporation Code provides:cralawlawlibrary
Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such (non-voting) shares shall nevertheless be entitled to vote on the following matters:In our hypothetical case, all 1,000,100 (voting and non-voting) shares are entitled to vote in cases involving fundamental and major changes in the corporate structure, such as those listed in Sec. 6 of the Corporation Code. Hence, with only 60 out of the 1,000,100 shares in the hands of the Filipino shareholders, control is definitely in the hands of the foreigners. The foreigners can opt to invest in other businesses and corporations, increase its bonded indebtedness, and even dissolve the public utility corporation against the interest of the Filipino holders of the majority voting shares. This cannot plausibly be the constitutional intent.
- Amendment of the articles of incorporation;ChanRoblesVirtualawlibrary
- Adoption and amendment of by-laws;ChanRoblesVirtualawlibrary
- Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property;ChanRoblesVirtualawlibrary
- Incurring, creating or increasing bonded indebtedness;ChanRoblesVirtualawlibrary
- Increase or decrease of capital stock;ChanRoblesVirtualawlibrary
- Merger or consolidation of the corporation with another corporation or other corporations;ChanRoblesVirtualawlibrary
- Investment of corporate funds in another corporation or business in accordance with this Code; and
- Dissolution of the corporation. (Emphasis and underscoring supplied.)
Consider further a situation where the majority holders of the total outstanding capital stock, both voting and non-voting, decide to dissolve our hypothetical public utility corporation. Who will eventually acquire the beneficial ownership of the corporate assets upon dissolution and liquidation? Note that Sec. 122 of the Corporation Code states:chanRoblesvirtualLawlibrarySection 122. Corporate liquidation. - Every corporation whose charter expires by its own limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall nevertheless be continued as a body corporate for three (3) years ... to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the business for which it was established.Clearly then, the bulk of the assets of our imaginary public utility corporation, which may include private lands, will go to the beneficial ownership of the foreigners who can hold up to 40 out of the 100 common shares and the entire 1,000,000 preferred non-voting shares of the corporation. These foreign shareholders will enjoy the bulk of the proceeds of the sale of the corporate lands, or worse, exercise control over these lands behind the fa ade of corporations nominally owned by Filipino shareholders. Bluntly, while the Constitution expressly prohibits the transfer of land to aliens, foreign stockholders may resort to schemes or arrangements where such land will be conveyed to their dummies or nominees. Is this not circumvention, if not an outright violation, of the fundamental Constitutional tenet that only Filipinos can own Philippine land?
At any time during said three (3) years, the corporation is authorized and empowered to convey all of its property to trustees for the benefit of stockholders, members, creditors, and other persons in interest. From and after any such conveyance by the corporation of its property in trust for the benefit of its stockholders, members, creditors and others in interest, all interest which the corporation had in the property terminates, the legal interest vests in the trustees, and the beneficial interest in the stockholders, members, creditors or other persons in interest. (Emphasis and underscoring supplied.)
A construction of "capital" as referring to the total shareholdings of the company is an acknowledgment of the existence of numerous corporate control-enhancing mechanisms, besides ownership of voting rights, that limits the proportion between the separate and distinct concepts of economic right to the cash flow of the corporation and the right to corporate control (hence, they are also referred to as proportionality limiting measures). This corporate reality is reflected in SRC Rule 3 (E) of the Amended Implementing Rules and Regulations (IRR) of the SRC and Sec. 3 (g) of The Real Estate Investment Trust Act (REIT) of 2009, 72 which both provide that control can exist regardless of ownership of voting shares. The SRC IRR states:chanRoblesvirtualLawlibraryControl is the power to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. Control is presumed to exist when the parent owns, directly or indirectly through subsidiaries, more than one half of the voting power of an enterprise unless, in exceptional circumstances, it can be clearly demonstrated that such ownership does not constitute control. Control also exists even when the parent owns one half or less of the voting power of an enterprise when there is:As shown above, ownership of voting shares or power alone without economic control of the company does not necessarily equate to corporate control. A shareholder's agreement can effectively clip the voting power of a shareholder holding voting shares. In the same way, a voting right ceiling, which is "a restriction prohibiting shareholders to vote above a certain threshold irrespective of the number of voting shares they hold," 73 can limit the control that may be exerted by a person who owns voting stocks but who does not have a substantial economic interest over the company. So also does the use of financial derivatives with attached conditions to ensure the acquisition of corporate control separately from the ownership of voting shares, or the use of supermajority provisions in the by-laws and articles of incorporation or association. Indeed, there are innumerable ways and means, both explicit and implicit, by which the control of a corporation can be attained and retained even with very limited voting shares, i.e., there are a number of ways by which control can be disproportionately increased compared to ownership 74 so long as economic rights over the majority of the assets and equity of the corporation are maintained.
i. Power over more than one half of the voting rights by virtue of an agreement with other investors;ChanRoblesVirtualawlibrary
ii. Power to govern the financial and operating policies of the enterprise under a statute or an agreement;ChanRoblesVirtualawlibrary
iii. Power to appoint or remove the majority of the members of the board of directors or equivalent governing body;ChanRoblesVirtualawlibrary
iv. Power to cast the majority of votes at meetings of the board of directors or equivalent governing body. (Emphasis and underscoring supplied.)
Hence, if We follow the construction of "capital" in Sec. 11, Art. XII stated in the ponencia of June 28, 2011 and turn a blind eye to these realities of the business world, this Court may have veritably put a limit on the foreign ownership of common shares but have indirectly allowed foreigners to acquire greater economic right to the cash flow of public utility corporations, which is a leverage to bargain for far greater control through the various enhancing mechanisms or proportionality-limiting measures available in the business world.
In our extremely hypothetical public utility corporation with the equity structure as thus described, since the majority recognized only the 100 common shares as the "capital" referred to in the Constitution, the entire economic right to the cash flow arising from the 1,000,000 non voting preferred shares can be acquired by foreigners. With this economic power, the foreign holders of the minority common shares will, as they easily can, bargain with the holders of the majority common shares for more corporate control in order to protect their economic interest and reduce their economic risk in the public utility corporation. For instance, they can easily demand the right to cast the majority of votes during the meeting of the board of directors. After all, money commands control.
The court cannot, and ought not, accept as correct a holding that routinely disregards legal and practical considerations as significant as above indicated. Committing an error is bad enough, persisting in it is worse.
Endnotes:
1 G.R. No. 176579, June 28, 2011, 652 SCRA 690 and October 9, 2012, 682 SCRA 397.chanrobleslaw
2Emphasis supplied.
3 PLDT's Consolidated Memorandwn, pp. 2-3, citing SEC Notice dated 6 November 2012.
4In Re Save the Supreme Court Judicial Independence and Fiscal Autonomy Movement, UDK-15143, January 21, 2015.
5Hon. Luis Mario M. General v. Hon Alejandro S. Urro, G.R. No. 191560, March 29, 2011 citing Integrated Bar of the Philippines v. Zamora, 392 Phil. 618, 632 (2000).
6Galicto v. Aquino III, G.R. No. 193978, February 28, 2012, citing Integrated Bar of the Philippines (IBP) v. Hon. Zamora, 392 Phil. 618 (2000).
7Automotive Industry Workers Alliance v. Romulo, 489 Phil. 710, 719 (2005); Gonzales v. Narvasa, 392 Phil. 518, 525 (2000).
8Republic v. Roque, G.R. No. 204603, September 24, 2013.
9 G.R. No. 193978, February 28, 2012.
10Emphasis supplied.
11The Liga ng mga Barangay National v. The City Mayor of Manila, G.R. No. 154599, January 21, 2004.
12Vergara Sr. v. Suelto, 240 Phil. 719, 732 (1987); De Castro v. Santos, G.R. No. 194994, April 16, 2013.
13De Castro v. Santos, supra note 12, citing Santiago v. Vasquez, G.R. Nos. 99289-90, January 27, 1993, 217 SCRA 633; and People v. Cuaresma, 254 Phil. 418, 427 (1989).
14Cua, Jr. v. Tan, G.R. No. 181455-56, December 4, 2009.
15 Id.; citing Galicia v. Mercado, G.R. No. 146744, March 6, 2006, 484 SCRA 131, 136-137.
16 See David v. Paragas, G.R. No. 176973, February 25, 2015 and Sy v. Court of Appeals, G.R. No. 94285, August 31, 1999.
17 Id.
18OKS Designtech, Inc. v. Caccam, G.R. No. 211263, August 5, 2015.
19Gold City Integrated Services, Inc. v. Intermediate Appellate Court, G.R. Nos. 71771-73, March 31, 1989, citing Arguelles v. Young, G.R. No. L-59880, September 11, 1987, 153 SCRA 690; Republic v. Heirs of Spouses Molinyawe, G.R. No. 217120, April 18, 2016; Olaño v. Lim Eng Co, G.R. No. 195835, March 14, 2016; City of Iloilo v. Honrado, G.R. No. 160399, December 9, 2015; OKS Designtech, Inc. v. Caccam, G.R. No. 211263, August 5, 2015.
20Ocean East Agency, Corp. v. Lopez, G.R. No. 194410, October 14, 2015.
21Landbank of the Philippines v. Suntay, G.R. No. 188376, December 14, 2011.
22Biraogo v. The Philippine Truth Commission, G.R. Nos. 192935 and 193036, December 7, 2010.
23 G.R. No. 176579, October 9, 2012, 682 SCRA 397.
24 Id. at 414.
BERSAMIN, J.:
Section 2. All covered corporations shall, at all times, observe lhe constitutional or statutory ownership requirement. For purposes of determining compliance therewith, the required percentage of Filipino shall be applied to BOTH (a) the total number of outstanding shares of stock entitled to vote in the election of directors; AND (b) the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors. (Bold underscoring supplied for emphasis)I CONCUR.
The background and rationale of the expansion of judicial power under the 1987 Constitution were laid out during the deliberations of the 1986 Constitutional Commission by Commissioner Roberto R. Concepcion (a former Chief Justice of the Philippines) in his sponsorship of the proposed provisions on the Judiciary, where he said:-Araullo did not stop there, however, and went on to discourse on the procedural aspect of enabling the exercise of the expanded jurisdiction m this wise:chanRoblesvirtualLawlibraryThe Supreme Court, like all other courts, has one main function: to settle actual controversies involving conflicts of rights which are demandable and enforceable. There are rights which are guaranteed by law but cannot be enforced by a judicial party. In a decided case, a husband complained that his wife was unwilling to perform her duties as a wife. The Court said: "We can tell your wife what her duties as such are and that she is bound to comply with them, but we cannot force her physically to discharge her main marital duty to her husband. There are some rights guaranteed by law, but they are so personal that to enforce them by actual compulsion would be highly derogatory to human dignity."
This is why the first part of the second paragraph of Section 1 provides that:chanRoblesvirtualLawlibraryJudicial power includes the duty of courts to settle actual controversies involving rights which are legally demandable or enforceable...The courts, therefore, cannot entertain, much less decide, hypothetical questions. In a presidential system of government, the Supreme Court has, also, another important function. The powers of government are generally considered divided into three branches: the Legislative, the Executive and the Judiciary. Each one is supreme within its own sphere and independent of the others. Because of that supremacy power to determine whether a given law is valid or not is vested in courts of justice.
Briefly stated, courts of justice determine the limits of power of the agencies and offices of the government as well as those of its officers. In other words, the judiciary is the final arbiter on the question whether or not a branch of government or any of its officials has acted without jurisdiction or in excess of jurisdiction, or so capriciously as to constitute an abuse of discretion amounting to excess of jurisdiction or lack of jurisdiction. This is not only a judicial power but a duty to pass judgment on matters of this nature.
This is the background of paragraph 2 of Section 1, which means that the courts cannot hereafter evade the duty to settle matters of this nature, by claiming that such matters constitute a political question. (Bold emphasis supplied)
What are the remedies by which the grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or instrumentality of the Government may be determined under the Constitution?The SEC, albeit under the administrative supervision of the Department of Finance,10 did not come under the terms any branch or instrumentality of the Government used in Section 1, Article VIII of the 1987 Constitution. Although it is an agency vested with adjudicatory as well as regulatory powers, its issuance of MC No. 8 cannot be categorized as an act of either an executive or a legislative character within the context of the phrase any branch or instrumentality of the Government used in Section 1, Article VIII of the 1987 Constitution.
The present Rules of Court uses two special civil actions for determining and correcting grave abuse of discretion amounting to lack or excess of jurisdiction. These are the special civil actions for certiorari and prohibition, and both are governed by Rule 65. A similar remedy of certiorari exists under Rule 64, but the remedy is expressly applicable only to the judgments and final orders or resolutions of the Commission on Elections and the Commission on Audit.
The ordinary nature and function of the writ of certiorari in our present system are aptly explained in Delos Santos v. Metropolitan Bank and Trust Company:chanRoblesvirtualLawlibraryIn the common law, from which the remedy of certiorari evolved, the writ of certiorari was issued out of Chancery, or the King's Bench, commanding agents or officers of the inferior courts to return the record of a cause pending before them, so as to give the party more sure and speedy justice, for the writ would enable the superior court to determine from an inspection of the record whether the inferior court's judgment was rendered without authority. The errors were of such a nature that, if allowed to stand, they would result in a substantial injury to the petitioner to whom no other remedy was available. If the inferior court acted without authority, the record was then revised and corrected in matters of law. The writ of certiorari was limited to cases in which the inferior court was said to be exceeding its jurisdiction or was not proceeding according to essential requirements of law and would lie only to review judicial or quasi-judicial acts.Although similar to prohibition in that it will lie for want or excess of jurisdiction, certiorari is to be distinguished from prohibition by the fact that it is a corrective remedy used for the re-examination of some action of an inferior tribunal, and is directed to the cause or proceeding in the lower court and not to the court itself, while prohibition is a preventative remedy issuing to restrain future action, and is directed to the court itself. x x x
The concept of the remedy of certiorari in our judicial system remains much the same as it has been in the common law. In this jurisdiction, however, the exercise of the power to issue the writ of certiorari is largely regulated by laying down the instances or situations in the Rules of Court in which a superior court may issue the writ of certiorari to an inferior court or officer. Section 1, Rule 65 of the Rules of Court compellingly provides the requirements for that purpose, viz:cralawlawlibrary
x x x x
The sole office of the writ of certiorari is the correction of errors of jurisdiction, which includes the commission of grave abuse of discretion amounting to lack of jurisdiction. In this regard, mere abuse of discretion is not enough to warrant the issuance of the writ. The abuse of discretion must be grave, which means either that the judicial or quasi-judicial power was exercised in an arbitrary or despotic manner by reason of passion or personal hostility, or that the respondent judge, tribunal or board evaded a positive duty, or virtually refused to perform the duty enjoined or to act in contemplation of law, such as when such judge, tribunal or board exercising judicial or quasi-judicial powers acted in a capricious or whimsical manner as to be equivalent to lack of jurisdiction.
With respect to the Court, however, the remedies of certiorari and prohibition are necessarily broader in scope and reach, and the writ of certiorari or prohibition may be issued to correct errors of jurisdiction committed not only by a tribunal, corporation, board or officer exercising judicial, quasi-judicial or ministerial functions but also to set right, undo and restrain any act of grave abuse of discretion amounting to lack or excess of ,jurisdiction by any branch or instrumentality of the Government, even if the latter does not exercise judicial, quasi-judicial or ministerial functions. This application is expressly authorized by the text of the second paragraph of Section 1, supra.
Thus, petitions for certiorari and prohibition are appropriate remedies to raise constitutional issues and to review and/or prohibit or nullify the acts of legislative and executive officials.
Necessarily, in discharging its duty under Section 1, supra, to set right and undo any act of grave abuse of discretion amounting to lack or excess of jurisdiction by any branch or instrumentality of the Government, the Court is not at all precluded from making the inquiry provided the challenge was properly brought by interested or affected parties. The Court has been thereby entrusted expressly or by necessary implication with both the duty and the obligation of determining, in appropriate cases, the validity of any assailed legislative or executive action. This entrustment is consistent with the republican system of checks and balances.9
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.In the decision promulgated on June 28, 2011 in Gamboa v. Teves, the Court explicitly defined the term capital as referring only to shares of stock entitled to vote in the election of directors.11 In the case of Philippine Long Distance Telephone Company (PLDT), its capital - for purposes of complying with the constitutional requirement on nationality should include only its common shares, not its total outstanding capital stock comprising both common and non-voting preferred shares.12
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.In the June 28, 2011 decision, the Court disposed as follows:chanRoblesvirtualLawlibrary
This interpretation is consistent with the intent of the framers of the Constitution to place in the hands of Filipino citizens the control and management of public utilities. As revealed in the deliberations of the Constitutional Commission, capital refers to the voting stock or controlling interest of a corporation, x x x:cralawlawlibrary
x x x x
Thus, 60 percent of the capital assumes, or should result in, controlling interest in the corporation. x x x
x x x x
Mere legal title is insufficient to meet the 60 percent Filipinoowned 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].13
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.Acting subsequently on the motion for reconsideration, the Court promulgated its resolution of October 9, 2012 affirming the foregoing pronouncement of June 28, 2011, holding and disposing:chanRoblesvirtualLawlibrary
SO ORDERED.14
Since the constitutional requirement of at least 60 percent Filipino ownership applies not only to voting control of the corporation but also to the beneficial ownership of the corporation, it is therefore imperative that such requirement apply uniformly and across the board to all classes of shares, regardless of nomenclature and category, comprising the capital of a corporation. Under the Corporation Code, capital stock consists of all classes of shares issued to stockholders, that is, common shares as well as preferred shares, which may have different rights, privileges or restrictions as stated in the articles of incorporation.The SEC issued MC No. 8 to conform with the Court's pronouncement in its decision of June 28, 2011. As stated, Section 2 of MC No. 8 declared that "[f]or purposes of determining compliance therewith, the required percentage of Filipino shall be applied to BOTH (a) the total number of outstanding shares of stock entitled to vote in the election of directors; AND (b) the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors."
x x x x
x x x Thus, if a corporation, engaged in a partially nationalized industry, issues a mixture of common and preferred non-voting shares, at least 60 percent of the common shares and at least 60 percent of the preferred non-voting shares must be owned by Filipinos. Of course, if a corporation issues only a single class of shares, at least 60 percent of such shares must necessarily be owned by Filipinos. In short, the 60-40 ownership requirement in favor of Filipino citizens must apply separately to each class of shares, whether common, preferred non-voting, preferred voting or any other class of shares. This uniform application of the 60-40 ownership requirement in favor of Filipino citizens clearly breathes life to the constitutional command that the ownership and operation of public utilities shall be reserved exclusively to corporations at least 60 percent of whose capital is Filipinoowned. Applying uniformly the 60-40 ownership requirement in favor of Filipino citizens to each class of shares, regardless of differences in voting rights, privileges and restrictions, guarantees effective Filipino control of public utilities, as mandated by the Constitution.
Moreover, such uniform application to each class of shares insures that the "controlling interest" in public utilities always lies in the hands of Filipino citizens. x x x
x x x x
WHEREFORE, we DENY the motions for reconsideration WITH FINALITY. No further pleadings shall be entertained.
SO ORDERED.15
x x x More to the point is another well-recognized doctrine, that the final judgment as rendered is the judgment of the court irrespective of all seemingly contrary statements in the decision. "A judgment must be distinguished from an opinion. The latter is the informal expression of the views of the court and cannot prevail against its final order or decision. While the two may be combined in one instrument, the opinion forms no part of the judgment. So, ... there is a distinction between the findings and conclusions of a court and its judgment. While they may constitute its decision and amount to the rendition of a judgment, they are not the judgment itself. They amount to nothing more than an order for judgment, which must, of course, be distinguished from the judgment." (1 Freeman on Judgments, p. 6) At the root of the doctrine that the premises must yield to the conclusion is perhaps, side by side with the needs of writing finis to litigations, the recognition of the truth that "the trained intuition of the judge continually leads him to right results for which he is puzzled to give [tmu] [un]impeachable legal reasons." "It is an everyday experience of those who study judicial decisions that the results are usually sound, whether the reasoning from which the results purport to flow is sound or not." (The Theory of Judicial Decision, Pound, 36 Harv. Law Review, pp. 9, 51.) It is not infrequent that the grounds of a decision fail to reflect the exact views of the court, especially those of concurring justices in a collegiate court. We often encounter in judicial decisions, lapses, findings, loose statements and generalities which do not bear on the issues or are apparently opposed to the otherwise sound and considered result reached by the court as expressed in the dispositive part, so called, of the decision.There is also no need to try to harmonize the seeming conflict between the fallo of the October 9, 2012 resolution and its body in order to favor Roy and the intervenors. The dispositive portion of the resolution of October 9, 2012, which tersely stated that "we DENY the motions for reconsideration WITH FINALITY," was clear and forthright enough, and should prevail. The only time when the body of the decision or resolution should be controlling is when one can unquestionably find a persuasive showing in the body of the decision or resolution that there was a clear mistake in the dispositive portion.24 Yet, no effort has been exerted herein to show that there was such an error or mistake in the dispositive portion or fallo of the October 9, 2012 resolution.
Section 3 Second motion for reconsideration. The Court shall not entertain a second motion for reconsideration, and any exception to this rule can only be granted in the higher interest of justice by the Court en bane upon a vote of at least two-thirds of its actual membership. There is reconsideration "in the higher interest of justice" when the assailed decision is not only legally erroneous, but is likewise patently unjust and potentially capable of causing unwarranted and irremediable injury or damage to the parties. A second motion for reconsideration can only be entertained before the ruling sought to be reconsidered becomes final by operation of law or by the Court's declaration.Had the intervenors genuinely desired to correct the perceived omission in the resolution of October 9, 2012 in Gamboa v. Teves, their proper recourse was not for Roy to bring the petition herein, but to file by themselves a motion for clarification in Gamboa v. Teves itself. As the Court observed in Mahusay v. B.E. San Diego, Inc.:25chanroblesvirtuallawlibrary
x x x x
It is a settled rule is that a judgment which has acquired finality becomes immutable and unalterable; hence, it may no longer be modified in any respect except only to correct clerical errors or mistakes. Clarification after final judgment is, however, allowed when what is involved is a clerical error, not a correction of an erroneous judgment, or dispositive portion of the Decision. Where there is an ambiguity caused by an omission or mistake in the dispositive portion, the court may clarify such ambiguity, mistake, or omission by an amendment; and in so doing, it may resort to the pleadings filed by the parties, the court's findings of facts and conclusions of law as expressed in the body of the decision. (Bold emphasis supplied.)The statement in the dispositive portion or fallo of the resolution of October 9, 2012 to the effect that "[n]o further pleadings shall be entertained" would not have been a hindrance to the filing of the motion for clarification because such statement referred only to motions that would have sought the reversal or modification of the decision on its merits, or to motions ill-disguised as requests for clarification.26 Indeed, the intervenors as the petitioners in Gamboa v. Teves would not have been precluded from filing such motion that would have presented an unadulterated mqwry arising upon an ambiguity in the decision.27
Endnotes:
1 G.R. No 176579, June 28, 2011, 652 SCRA 690; October 9, 2012 (resolution), 682 SCRA 397.chanrobleslaw
2De los Santos v. Metropolitan Bank and Trust Corporation, G.R. No. 153852, October 24, 2012, 684 SCRA 410, 422-423.
3 Section 1. Petition for certiorari. - When any tribunal, board or officer exercising judicial or quasijudicial functions has acted without or in excess of its or his jurisdiction, or with grave abuse of discretion amounting to lack or excess of jurisdiction, and there is no appeal, or any plain, speedy, and adequate remedy in the ordinary course of law, a person aggrieved thereby may file a verified petition in the proper court, alleging the facts with certainty and praying that judgment be rendered annulling or modifying the proceedings of such tribunal, board or officer, and granting such incidental reliefs as law and justice may require.
The petition shall be accompanied by a certified true copy of the judgment, order or resolution subject thereof, copies of all pleadings and documents relevant and pertinent thereto, and a sworn ceJtification of non-forum shopping as provided in the third paragraph of section 3, Rule 46. (1a)
4 Section 2. Petition for prohibition. - When the proceedings of any tribunal, corporation, board, officer or person, whether exercising judicial, quasi-judicial or ministerial functions, are without or in excess of its or his jurisdiction, or with grave abuse of discretion amounting to lack or excess of jurisdiction, and there is no appeal or any other plain, speedy, and adequate remedy in the ordinary course of law, a person aggrieved thereby may file a verified petition in the proper court, alleging the facts with certainty and praying that judgment be rendered commanding the respondent to desist from further proceedings in the action or matter specified therein, or otherwise granting such incidental reliefs as law and justice may require.
The petition shall likewise be accompanied by a certified true copy of the judgment, order or resolution subject thereof, copies of all pleadings and documents relevant and pertinent thereto, and a sworn ce11ification of non-forum shopping as provided in the third paragraph of section 3, Rule 46. (2a)
5 See Securities and Exchange Commission v. Court of Appeals, G.R. No. 106425 & 106431-32, July 21, 1995, 246 SCRA 738, 740-741.
6Securities and Exchange Commission v. Universal Rightfield Property Holdings, Inc., G.R. No. 181381, July 20, 2015.
7 Section 1. x x x x
Judicial power includes the duty of the courts of justice to settle actual controversies involving rights which are legally demandable and enforceable, and to determine whether or not there has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or instrumentality of the Government.
8 G.R. No. 209287, July I, 2014, 728 SCRA 1, 68-69.
9 Id. at 71-75.
10 Section 1. Executive Order No. 37 dated April 19, 2011.
11 652 SCRA, at 723.
12 Id.
13 Id. at 726-730.
14 Id. at 744.
15 682 SCRA at 443-470.
16 Id. at 445, where the Court said:cralawlawlibrary
x x x [T]he 60-40 ownership requirement in favor of Filipino citizens must apply separately to each class of shares, whether common, preferred non-voting, preferred voting or any other class of shares.
17Apo Fruits Corporation v. Court of Appeals, G.R. No. 164195, December 4, 2009, 607 SCRA 200, 212-213.
18FGU Insurance Corporation v. Regional Trial Court of Makati City, Branch 66, G.R. No. 161282, February 23, 2011, 644 SCRA 50, 56.
19Apo Fruits Corporation v. Court of Appeals, supra, at 213-214.
20FGU Insurance Corporation v. Regional Trial Court of Makati City, Br. 66, supra, at 56.
21Light Rail Transit Authority v. Court of Appeals, G.R. Nos. 139275-76 and 140949, November 25, 2004, 444 SCRA 125, 136.
22PH Credit Corporation v. Court of Appeals, G.R. No. 109648, November 22, 2001, 370 SCRA 155, 166.
23 78 Phil. 570, 577-578 (1947).
24Cobarrubias v. People, G.R. No. 160610, August 14, 2009, 596 SCRA 77, 89-90.
25 G.R. No. 179675, June 8, 2011, 651 SCRA 539-540.
26 See Republic v. Unimex Micro Electronics GmBH, G.R. Nos. 166309-10, November 25, 2008, 571 SCRA 537, 540.
27 See Commissioner on Higher Education v. Mercado, G.R. No. 157877, March 10, 2006, 484 SCRA 424, 430-431.
MENDOZA, J.:
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.4Thereafter, motions for reconsideration were filed. In its Resolution5 dated October 9, 2012 (Gamboa Resolution), the Court stressed that the 60-40 ownership requirement in favor of Filipino citizens in the Constitution to engage in certain economic activities applied not only to voting control, but also to the beneficial ownership of the corporation. The Court wrote that the same limits must apply uniformly and separately to each class of shares, without regard to their restrictions or privileges. Specifically, the Court explained:chanRoblesvirtualLawlibrary
Since a specific class of shares may have rights and privileges or restrictions different from the rest of the shares in a corporation, the 60-40 ownership requirement in favor of Filipino citizens in Section 11, Article XII of the Constitution must apply not only to shares with voting rights but also to shares without voting rights. Preferred shares, denied the right to vote in the election of directors, are anyway still entitled to vote on the eight specific corporate matters mentioned above. Thus, if a corporation, engaged in a partially nationalized industry, issues a mixture of common and preferred non-voting shares, at least 60 percent of the common shares and at least 60 percent of the preferred non-voting shares must be owned by Filipinos. Of course, if a corporation issues only a single class of shares, at least 60 percent of such shares must necessarily be owned by Filipinos. In short, the 60-40 ownership requirement in favor of Filipino citizens must apply separately to each class of shares, whether common, preferred non-voting, preferred voting or any other class of shares. This uniform application of the 60-40 ownership requirement in favor of Filipino citizens clearly breathes life to the constitutional command that the ownership and operation of public utilities shall be reserved exclusively to corporations at least 6o percent of whose capital is Filipino-owned. Applying uniformly the 60-40 ownership requirement in favor of Filipino citizens to each class of shares, regardless of differences in voting rights, privileges and restrictions, guarantees effective Filipino control of public utilities, as mandated by the Constitution. [Emphases supplied]Hence, the Court finally decreed:chanRoblesvirtualLawlibrary
WHEREFORE, we DENY the motions for reconsideration WITH FINALITY. No further pleadings shall be entertained.Eventually, the definition of "capital," as finally amplified and elucidated by the Court in the Gamboa Resolution, became final and executory.
SO ORDERED.6
Section 2. All covered corporations shall, at all times, observe the constitutional or statutory ownership requirement. For purposes of determining compliance therewith, the required percentage of Filipino shall be applied to BOTH (a) the total number of outstanding shares of stock entitled to vote in the election of directors; AND (b) the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors.8 [Emphasis supplied]The Subject Petition
WHETHER RECOURSE TO THIS HONORABLE COURT IS JUSTIFIED BY THE TRANSCENDENTAL IMPORTANCE OF THE ISSUE RAISED BY THE PETITIONER.21ISSUES
- WHETHER OR NOT SEC MEMORANDUM CIRCULAR NO. 8, SERIES OF 2013 CONFORMS TO THE LETTER AND SPIRIT OF THE DECISION AND RESOLUTION OF THIS HONORABLE COURT DATED 28 JUNE 2011 AND 9 OCTOBER 2012 IN G.R. NO. 176579 ENTITLED HEIRS OF WILSON GAMBOA v. FINANCE SECRETARY MARGARITO B. TEVES, ET AL.
- WHETHER THE SEC GRAVELY ABUSED ITS DISCRETION IN RULING THAT PLDT IS COMPLIANT WITH THE CONSTITUTIONAL RULE ON FOREIGN OWNERSHIP.
- THE PLDT BENEFICIAL TRUST FUND DOES NOT SATISFY THE EFFECTIVE CONTROL TEST FOR PURPOSES OF INCORPORATING BTF HOLDINGS WHICH ACQUIRED THE 150 MILLION PREFERRED VOTING SHARES OF PLDT.
- WHETHER PLDT, THROUGH ITS ALTER-EGOS MEDIAQUEST AND BTF HOLDINGS, INC., IS CIRCUMVENTING THE FOREIGN OWNERSHIP RESTRICTIONS PROVIDED FOR IN THE 1987 CONSTITUTION.
Since the constitutional requirement of at least 60 percent Filipino ownership applies not only to voting control of the corporation but also to the beneficial ownership of the corporation, it is therefore imperative that such requirement apply uniformly and across the board to all classes of shares, regardless of nomenclature and category, comprising the capital of a corporation. Under the Corporation Code, capital stock consists of all classes of shares issued to stockholders, that is, common shares as well as preferred shares, which may have different rights, privileges or restrictions as stated in the articles of incorporation.44 [Emphases supplied]The Court then went on to explain that "[f]ull beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60% of the voting rights, is also required." In other words, not only should the 60% of the total outstanding capital stock and the shares with the right to elect the directors be registered in the names of Filipinos, but also the beneficial or equitable title to such shares must be reasonably45 traced to Filipinos.
Section 2. All covered corporations shall, at all times, observe the constitutional or statutory ownership requirement. For purposes of determining compliance therewith, the required percentage of Filipino shall be applied to BOTH (a) the total number of outstanding shares of stock entitled to vote in the election of directors; AND (b) the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors.Roy points out that the SEC did not include in the assailed circular the requirement of applying the 60-40 rule to each and every class of shares. He fears that although Filipinos will have voting rights, they may remain deprived of the full economic benefits if the rule is not applied to all classes of shares.
Endnotes:
1 Under the doctrine of finality of judgment or immutability of judgment, a decision that has acquired finality becomes immutable and unalterable, and may no longer be modified in any respect, even if the modification is meant to correct erroneous conclusions of fact and law, and whether it be made by the court that rendered it or by the Highest Court of the land. (Gomeco Metal Corp. v. Court of Appeals, G.R. No. 202531, August 17, 2016.chanrobleslaw
2 668 Phil. 1 (2011) (Decision)
3Section 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.
4 Decision, supra note 2.
5 Resolution, G.R. No. 176579, October 9, 2012. (http://sc.judiciary.gov.ph/ jurisprudence/2012/october2012/176579.pdf) (Last visited, April 21, 2015).
6 Resolution, G.R. No. 176579, October 9, 2012. (http://sc.judiciary.gov.ph/ jurisprudence/2012/ctober2012/176579.pdf) (Last visited, April 21, 2015).
7Rollo, pp. 270-272.
8
(Last visited, April 21, 2015).
9Rollo, pp. 231-263.
10 Id. at 11.
11 Id. at 544-584.
12 Id. at 466-524.
13 Id. at 633-653.
14 Id. at 723-756.
15 Id. at 839-847.
16Section 1. Who may intervene. - A person who has a legal interest in the matter in litigation, or in the success of either of the parties, or an interest against both, or is so situated as to be adversely affected by a distribution or other disposition of property in the custody of the court or of an officer thereof may, with leave of court, be allowed to intervene in the action. The court shall consider whether or not the intervention will unduly delay or prejudice the adjudication of the rights of the original parties, and whether or not the intervenor's rights may be fully protected in a separate proceeding. (2[a], [b]a, R12)
Section 2. Time to intervene. - The motion to intervene may be filed at any time before rendition of judgment by the trial court. A copy of the pleading-in-intervention shall be attached to the motion and served on the original parties. (n)
Section 3. Pleadings-in-intervention. - The intervenor shall file a complaint-in-intervention if he asserts a claim against either or all of the original parties, or an answer-in-intervention if he unites with the defending party in resisting a claim against the latter. (2[c]a, R12)
Section 4. Answer to complaint-in-intervention. - The answer to the complaint-in-intervention shall be filed within fifteen (15) days from notice of the order admitting the same, unless a different period is fixed by the court.
17Galicto v. Aquino, 683 Phil. 141 (2012).
18 Resolution, 696 Phil. 276 (2012).
19 Decision, 668 Phil. 1 (2011).
20Rollo
21Rollo, Volume I, pp. 10-11.
22 646 Phil. 452 (2010).
23Rollo, Volume II. pp. 564-566.
24People v. Sandiganbayan, G.R. No. 1881 December 11, 2013, 712 SCRA 359.
25 G.R. No. 209287, July 1, 2014, 728 SCRA 1.
26 Id.
27Malana v. Tappa, 616 Phil. 177 (2009).
28Dy v. Judge Bibat-Palamos, G.R. No. 196200, September 11, 2013, 705 SCRA 613.
29Hollingsworth v. Perry, 133 S. Ct. 2652 (U.S. 2013).
30Southern Hemisphere Engagement Network. Inc. v. Anti-Terrorism Council, 646 Phil. 452, 479 (2010) [Per J. Carpio Morales, En Banc], citing Republic Telecommunications Holding, Inc. v. Santiago, 556 Phil. 83, 91-92 (2007).
31Abdul v. Sandiganbayan, G.R. No. 184496, December 2, 2013, 711 SCRA 246 citing Mattel, Inc. v. Francisco, 582 Phil. 492, 501 (2008).
32Lozano v. Nograles, 607 Phil. 334 (2009), citing Angara v. Electoral Commission, 63 Phil. 139 (1936).
33Imbong v. Ochoa, G.R. No. 204819, April 8, 2014, 721 SCRA 146.
34 G.R. No. 204819, April 8, 2014, 721 SCRA 146.
35 G.R. No. 204819, April 8, 2014, 721 SCRA 146.
36Galicto v. Aquino III, G.R. No. 193978, February 28, 2012, 667 SCRA 150, citing Lozano v. Nograles, 607 Phil. 334 (2009).
37Anak Mindanao Party-List Group v. Exec. Sec. Ermita, 558 Phil. 338, 351 (2007).
38 392 Phil. 618 (2000).
39 G.R. No. 204819, April 8, 2014, 721 SCRA 146.
40Araullo v. Aquino III, G.R. No. 209287, July 1, 2014, 728 SCRA 1.
41 As embodied in Sec. 3 of R.A. No. 7042 or the Foreign Investments Act of 1991.
42 The Corporation Code, Section 6. "Classification of shares. The shares of stock of stock corporations may be divided into classes or series of shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of incorporation: Provided, That no share may be deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares, unless otherwise provided in this Code: Provided, further, that there shall always be a class or series of shares which have complete voting rights.chanroblesvirtuallawlibraryxxx xxx xxx "Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such shares shall nevertheless be entitled to vote on the following matters:43 Black's Law Dictionary (2nd Pocket ed. 2001 p. 508)."Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights."
- Amendment of the articles of incorporation;ChanRoblesVirtualawlibrary
- Adoption and amendment of by-laws;ChanRoblesVirtualawlibrary
- Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporation property;ChanRoblesVirtualawlibrary
- Incurring, creating or increasing bonded indebtedness;ChanRoblesVirtualawlibrary
- Increase or decrease of capital stock;ChanRoblesVirtualawlibrary
- Merger or consolidation of the corporation with another corporation or other corporations;ChanRoblesVirtualawlibrary
- Investment of corporate funds in another corporation or business in accordance with this Code; and
- Dissolution of the corporation.
44 Resolution, Gamboa v. Teves, G.R. No. 176579, October 9, 2012, <http://sc.judiciary.gov.ph/jurisprudence/2012/october2012/176579.pdf> (Last visited, April 21, 2015).
45 Resolution, Narra Nickel Mining and Development Corp. v. Tesoro Mining and Development Inc., et. al., G.R. No. 195580, January 28, 2015, <http://sc.judiciary.gov.ph/jurisprudence/2012october2012/176579.pdf> (Last visited, April 21, 2015). Parenthetically, it is advanced that the application of the Grandfather Rule is impractical as tracing the shareholdings to the point when natural persons hold rights to the stocks may very well lead to an investigation ad infinitum. Suffice it to say in this regard that, while the Grandfather Rule was originally intended to trace the shareholdings to the point where natural persons hold the shares, the SEC had already set up a limit as to the number of corporate layers the attribution of the nationality of the corporate shareholders may be applied.
46 Resolution, G.R. No. 195580, January 28, 2015, <http://sc.judiciary.gov.ph/jurisprudence/2012/october2012/176579.pdf> (Last visited, April 21, 2015).
47 Resolution, Narra Nickel Mining and Development Corp. v. Tesoro Mining and Development Inc., et. al.. G.R. No. 195580, January 28, 2015, <http://sc.judiciary.gov.ph/jurisprudence/2012/october2012/176579.pdf> (Last visited, April 21, 2015).
48 To illustrate:cralawlawlibrary
Suppose that X corporation seeks to engage as a public utility company. It divided its total outstanding capital stock of 1000 into three classes of shares 300 common shares, 200 preferred shares with the right to vote in the election of directors (Class A preferred), and 500 preferred without such right to elect the directors (Class B preferred). Another Corporation, Y, an entity considered as a Philippine national under the FIA on the assumption that 60% of its capital is owned by Filipinos, owns all common and class 8 preferred shares.
Three Hundred (300) common shares in the hands of Y, a Philippine national represents sixty percent (60% )control over all shares with the right to vote in the election of directors (sum of 200 Cass A preferred shares and 300 common shares). Coupled with another 500 preferred Class 8 shares, Y can be considered in control of eighty-percent (80%) of the total outstanding capital stock of X.
Applying the control test leads to the conclusion that a Philippine national in the person of Y controls X both with respect to the total outstanding capital stock and the sum of all shares with the right to elect the directors. However, after applying beneficial ownership test, which means looking into each stockholders of Y through the grandfather rule, it would show insufficient Filipino equity of at least sixty-percent (60%) in X as required under the Constitution, Foreign Investments Act and the Court's ruling in Gamboa.
Since Y is only sixty-percent (60%) controlled by Filipinos, the Filipino Equity in X through Y would be as follows:chanRoblesvirtualLawlibrarySixty-percent (60%) of 300 common shares = 180 shares or 36% beneficial equity in all shares with the rights to vote in the election of directors (sum of 300 common shares and 200 Class A Preferred shares).In effect, the equity of Filipinos in X, after applying the grandfather rule, has been diluted to forty eight percent (48%) of the total outstanding capital stock and thirty-six percent (36%) of all shares with the rights to vote in the election of directors. Clearly, it violates the constitutional limitation on foreign equity participation.
Sixty percent (60%) of 500 Class B preferred shares = 300 shares with the right to elect directors.
To compute total Filipino beneficial equity in the total outstanding capital stock, 300 shares plus the 180 shares as calculated above must be added. Thus, 300 shares + 180 shares = 480 shares or forty eight (48%) of the total outstanding capital stock of X.
49Empty Voting and Hidden Ownership: Taxonomy, Implications, and Reforms, Henry T.C. Hu, <www.law.yale.edu/documents/pdf/cbl/PM-6-Bus-Law-Hu-Black.pdf> (Last visited, April 23, 2015).
50 Implementing Rules and Regulations of the Securities and Regulation Code, Rule III, Sec. 1.d. Beneficial owner or beneficial ownership means any person who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise has or shares: voting power, which includes the power to vote, or to direct the voting ot:such security; and/or investment returns or power, which includes the power to dispose of, or to direct, the disposition of such security; xxx xxx xxx.
51 The Corporation Code, Section 6. Classification of shares. - The shares of stock of stock corporations may be divided into classes or series of shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of incorporation: Provided, That no share may be deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares, unless otherwise provided in this Code. xxx xxx xxx.
52 The Anti-Dummy Law, Section 2. "In all cases in which a constitutional or legal provision requires that, in order that a corporation or association may exercise or enjoy a right, franchise or privilege, not less than a certain per centum of its capital must be owned by citizens of the Philippines or of any other specific country, it shall be unlawful to falsely simulate the existence of such minimum stock or capital as owned by such citizens, for the purpose of evading said provision. The president or managers and directors or trustees of corporations or associations convicted of a violation of this section shall be punished by imprisonment of not less than five nor more than fifteen years, and by a fine not less than the value of the right, franchise or privilege, enjoyed or acquired in violation of the provisions hereof but in no case less than five thousand pesos."
53La Campana Development Corp. v. Development Bank of the Phils., 598 Phil. 612-634 (2009).
54 49 C.J.S. 436, cited in Republic v. De los Angeles, 150-A Phil. 25-85 (1972).
LEONEN, J.:
The Solicitor General argues that there is no justiciable controversy that is ripe for judicial review in the present petitions, reasoning thatThe Court, here, is called to examine an official enactment that supposedly runs afoul of the Constitution's injunction to "conserve and develop our patrimony,"12 and to "develop a self-reliant and independent national economy effectively controlled by Filipinos."13 This allegation of a serious infringement of the Constitution compels us to exercise our power of judicial review.The unsigned MOA-AD is simply a list of consensus points subject to further negotiations and legislative enactments as well as constitutional processes aimed at attaining a final peaceful agreement. Simply put, the MOA-AD remains to be a proposal that does not automatically create legally demandable rights and obligations until the list of operative acts required have been duly complied with. xxx....
xxx xxx xxx
In the cases at bar, it is respectfully submitted that this Honorable Court has no authority to pass upon issues based on hypothetical or feigned constitutional problems or interests with no concrete bases. Considering the preliminary character of the MOA-AD, there are no concrete acts that could possibly violate petitioners' and intervenors' rights since the acts complained of are mere contemplated steps toward the formulation of a final peace agreement. Plainly, petitioners and intervenors' perceived injury, if at all, is merely imaginary and illusory apart from being unfounded and based on mere conjectures....
The Solicitor General's arguments fail to persuade.
Concrete acts under the MOA-AD are not necessary to render the present controversy ripe. In Pimentel, Jr. v. Aguirre, this Court held:chanRoblesvirtualLawlibraryx x x [B]y the mere enactment of the questioned law or the approval of the challenged action, the dispute is said to have ripened into a judicial controversy even without any other overt act. Indeed, even a singular violation of the Constitution and/or the law is enough to awaken judicial duty.In Santa Independent School District v. Doe, the United States Supreme Court held that the challenge to the constitutionality of the school's policy allowing student-led prayers and speeches before games was ripe for adjudication, even if no public prayer had yet been led under the policy, because the policy was being challenged as unconstitutional on its face.
xxx xxx xxx
By the same token, when an act of the President, who in our constitutional scheme is a coequal of Congress, is seriously alleged to have infringed the Constitution and the laws x x x settling the dispute becomes the duty and the responsibility of the courts.
That the law or act in question is not yet effective does not negate ripeness. For example, in New York v. United States, decided in 1992, the United States Supreme Court held that the action by the State of New York challenging the provisions of the Low-Level Radioactive Waste Policy Act was ripe for adjudication even if the questioned provision was not to take effect until January 1, 1996, because the parties agreed that New York had to take immediate action to avoid the provision's consequences.11 (Underscoring and citations omitted)
In the most crucial corporate actions - those that go into the very constitution of the corporation - even so-called non-voting shares may vote. Not only can they vote; they can be pivotal in deciding the most basic issues confronting a corporation. Certainly, the ability to decide a corporation's framework of governance (i.e., its articles of incorporation and by-laws), viability (through the encumbrance or disposition of all or substantially all of its assets, engagement in another enterprise, or subjection to indebtedness), or even its very existence (through its merger or consolidation with another corporate entity, or even through its outright dissolution) demonstrates not only a measure of control, but even possibly overruling control. "Nonvoting" preferred and redeemable shares are hardly irrelevant in controlling a corporation.
- Amendment of the articles of incorporation;ChanRoblesVirtualawlibrary
- Adoption and amendment of by-laws;ChanRoblesVirtualawlibrary
- Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property;ChanRoblesVirtualawlibrary
- Incurring, creating or increasing bonded indebtedness;ChanRoblesVirtualawlibrary
- Increase or decrease of capital stock;ChanRoblesVirtualawlibrary
- Merger or consolidation of the corporation with another corporation or other corporations;ChanRoblesVirtualawlibrary
- Investment of corporate funds in another corporation or business in accordance with this Code; and
- Dissolution of the corporation.
This is a definition that is consistent with the first part of paragraph 7 of the 1967 SEC Rules, which [originally articulated] the Control Test: "[s]hares belonging to corporations or partnerships at least 60 per cent of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality."26The Control Test serves the purposes of ensuring effective control and full beneficial ownership of corporations by Filipinos, even as several corporations may be involved in the equity structure of another. As I explained in my Dissent from the April 21, 2014 Decision in Narra Nickel:chanRoblesvirtualLawlibrary
It is a matter of transitivity that if Filipino stockholders control a corporation which, in turn, controls another corporation, then the Filipino stockholders control the latter corporation, albeit indirectly or through the former corporation.Full beneficial ownership is addressed both with respect to voting power and investment returns or power.
An illustration is apt.
Suppose that a corporation, "C", is engaged in a nationalized activity requiring that 60% of its capital be owned by Filipinos and that this 60% is owned by another corporation, "B", while the remaining 40% is owned by stockholders, collectively referred to as "Y". Y is composed entirely of foreign nationals. As for B, 60% of its capital is owned by stockholders collectively referred to as "A", while the remaining 40% is owned by stockholders collectively referred to as "X". The collective A, is composed entirely of Philippine nationals, while the collective X is composed entirely of foreign nationals. (N.b., in this illustration, capital is understood to mean "shares of stock entitled to vote in the election of directors," per the definition in Gamboa). Thus:cralawlawlibrary
(see image page 9)
By owning 60% of B's capital, A controls B. Likewise, by owning 60% of C's capital, B controls C. From this, it follows, as a matter of transitivity, that A controls C; albeit indirectly, that is, through B.
This "control" holds true regardless of the aggregate foreign capital in B and C. As explained in Gamboa, control by stockholders is a matter resting on the ability to vote in the election of directors:chanRoblesvirtualLawlibraryIndisputably, 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.B will not be outvoted by Y in matters relating to C, while A will not be outvoted by X in matters relating to B. Since all actions taken by B must necessarily be in conformity with the will of A, anything that B does in relation to C is, in effect, in conformity with the will of A. No amount of aggregating the foreign capital in B and C will enable X to outvote A, nor Y to outvote B.
In effect, A controls C, through B. Stated otherwise, the collective Filipinos in A, effectively control C, through their control of B.27 (Emphasis in the original)
Voting power, as discussed previously, ultimately rests on the controlling stockholders of the controlling investor corporation. To go back to the previous illustration, voting power ultimately rests on A, it having the voting power in B which, in tum, has the voting power in C.28As I also explained, on investment returns or power:chanRoblesvirtualLawlibrary
As to investment returns or power, it is ultimately A which enjoys investment power. It controls B's investment decisions including the disposition of securities held by B and (again, through B) controls C's investment decisions.Nevertheless, ostensible equity ownership does not preclude unscrupulous parties' resort to devices that undermine the constitutional objective of full beneficial ownership of and effective control by Filipinos. It is at this juncture that the Grandfather Rule finds application:chanRoblesvirtualLawlibrary
Similarly, it is ultimately A which benefits from investment returns generated through C. Any income generated by C redounds to B's benefit, that is, through income obtained from C, B gains funds or assets which it can use either to finance itself in respect of capital and/or operations. This is a direct benefit to B, itself a Philippine national. This is also an indirect benefit to A, a collectivity of Philippine nationals, as then, its business B - not only becomes more viable as a going concern but also becomes equipped to funnel income to A.
Moreover, beneficial ownership need not be direct. A controlling shareholder is deemed the indirect beneficial owner of securities (e.g., shares) held by a corporation of which he or she is a controlling shareholder. Thus, in the previous illustration, A, the controlling shareholder of B, is the indirect beneficial owner of the shares in C to the extent that they are held by B.29
Bare ownership of 60% of a corporation's shares would not suffice. What is necessary is such ownership as will ensure control of a corporation.It is opportune that the present Petition has enabled this Court to clarify both the conception of capital, for purposes of compliance with the 1987 Constitution, and the mechanisms primarily the Control Test, and suppletorily, the Grandfather Rule through which such compliance may be assessed.
... [T]he Grandfather Rule may be used as a supplement to the Control Test, that is, as a further check to ensure that control and beneficial ownership of a corporation is in fact lodged in Filipinos.
For instance, Department of Justice Opinion No. 165, series of 1984, identified the following "significant indicators" or badges of "dummy status":chanRoblesvirtualLawlibraryIn instances where methods are employed to disable Filipinos from exercising control and reaping the economic benefits of an enterprise, the ostensible control vested by ownership of 60% of a corporation's capital may be pierced. Then, the Grandfather Rule allows for a further, more exacting examination of who actually controls and benefits from holding such capital.30
- That the foreign investor provides practically all the funds for the joint investment undertaken by Filipino businessmen and their foreign partner[;]
- That the foreign investors undertake to provide practically all the technological support for the joint venture[; and]
- That the foreign investors, while being minority stockholders, manage the company and prepare all economic viability studies.
Endnotes:
1Gamboa v. Finance Secretary Teves, et al., 668 Phil. 1 (2011) [Per J. Carpio, En Banc].
2Heirs of Wilson P. Gamboa v. Finance Secretary Teves, et al., 696 Phil. 276 (2012) [Per J. Carpio, En Banc].
3 CONST., art. XII, secs. 2, 10, 11, and art. XIV, sec. 4(2) provide:cralawlawlibrary
ARTICLE XII. National Economy and Patrimony
....
SECTION 2. All lands of the public domain, waters, minerals, coal, petroleum, and other mineral oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural resources are owned by the State. With the exception of agricultural lands, all other natural resources shall not be alienated. The exploration, development, and utilization of natural resources shall be under the full control and supervision of the State. The State may directly undertake such activities, or it may enter into co-production, joint venture, or production-sharing agreements with Filipino citizens, or corporations or associations at least sixty per centum of whose capital is owned by such citizens. Such agreements may be for a period not exceeding twenty-five years, renewable for not more than twenty-five years, and under such terms and conditions as may be provided by law. In cases of water rights for irrigation, water supply, fisheries, or industrial uses other than the development of water power, beneficial use may be the measure and limit of the grant.
....
SECTION 10. The Congress shall, upon recommendation of the economic and planning agency, when the national interest dictates, reserve to citizens of the Philippines or to corporations or associations at least sixty per centum of whose capital is owned by such citizens, or such higher percentage as Congress may prescribe, certain areas of investments. The Congress shall enact measures that will encourage the formation and operation of enterprises whose capital is wholly owned by Filipinos.
In the grant of rights, privileges, and concessions covering the national economy and patrimony, the State shall give preference to qualified Filipinos.
The State shall regulate and exercise authority over foreign investments within its national jurisdiction and in accordance with its national goals and priorities.
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.
....
ARTICLE XIV. Education, Science and Technology, Arts, Culture, and Sports
....
SECTION 4....
(2) Educational institutions, other than those established by religious groups and mission boards, shall be owned solely by citizens of the Philippines or corporations or associations at least sixty per centum of the capital of which is owned by such citizens. The Congress may, however, require increased Filipino equity participation in all educational institutions[.] (Emphasis supplied)
4Heirs of Wilson P. Gamboa v. Finance Secretary Teves, et al., 696 Phil. 776, 341 (2012) [Per J. Carpio, En Banc].
5Gamboa v. Finance Secretary Teves, et al., 668 Phil. 1, 69-70 (2011) [Per J. Carpio, En Banc]. This definition, stated in a fallo, was noted in my April 21, 2014 Dissent in Narra Nickel Mining and Development Corp., et al. v. Redmont Consolidated Mines Corp., 733 Phil. 365, 420 (2014) [Per J. Velasco, Jr., Third Division]. This, however, was not the pivotal point in that Opinion.
6Heirs of Wilson P Gamboa v. Finance Secretary Teves, et al., 696 Phil. 276, 341 (2012) [Per J. Carpio, En Banc]. The Court stated, "[s]ince a specific class of shares may have rights and privileges or restrictions different from the rest of the shares in a corporation, the 60-40 ownership requirement in favor of Filipino citizens in Section 11, Article XII of the Constitution must apply not only to shares with voting rights but also to shares without voting rights. Preferred shares, denied the right to vote in the election of directors, are anyway still entitled to vote on the eight specific corporate matters mentioned above. Thus, if a corporation, engaged in a partially nationalized industry, issues a mixture of common and preferred non-voting shares, at least 60 percent of the common shares and at least 60 percent of the preferred non-voting shares must be owned by Filipinos. Of course, if a corporation issues only a single class of shares, at least 60 percent of such shares must necessarily be owned by Filipinos. In short, the 60-40 ownership requirement in favor of Filipino citizens must apply separately to each class of shares, whether common, preferred non-voting, preferred voting or any other class of shares. This uniform application of the 60-40 ownership requirement in favor of Filipino citizens clearly breathes life to the constitutional command that the ownership and operation of public utilities shall be reserved exclusively to corporations at least 60 percent of whose capital is Filipino-owned. Applying uniformly the 60-40 ownership requirement in favor of Filipino citizens to each class of shares, regardless of differences in voting rights, privileges and restrictions, guarantees effective Filipino control of public utilities, as mandated by the Constitution."
7 Id. at 363.
8 589 Phil. 387 (2008) [Per J. Carpio Morales, En Banc].
9 G.R. No. 204819, April 8, 2014, 721 SCRA 146 [Per J. Mendoza, En Banc].
10 727 Phil. 28 (2014) [Per J. Abad, En Banc].
11Province of North Cotabato, et al. v. Government of the Republic of the Philippines Peace Panel on Ancestral Domain (GRP), et al., 589 Phil. 387 (2008) [Per J. Carpio Morales, En Banc].
12 CONST., preamble.
13 CONST., art. II, sec. 19.
14 J. Mendoza, Dissenting Opinion, p. 21.
15 Id.
16 CORP. CODE, sec. 6, par. 1 provides:cralawlawlibrary
Section 6. Classification of shares. - The shares of stock of stock corporations may be divided into classes or series of shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of incorporation: Provided, That no share may be deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares, unless otherwise provided in this Code: Provided, further, That there shall always be a class or series of shares which have complete voting rights. Any or all of the shares or series of shares may have a par value or have no par value as may he provided for in the articles of incorporation: Provided, however, That banks, trust companies, insurance companies, public utilities, and building and loan associations shall not be permitted to issue no-par value shares of stock. (Emphasis supplied)
17 J. Leonen, Dissenting Opinion in Narra Nickel Mining and Development Corp., et al. v. Redmont Consolidated Mines Corp., 733 Phil. 365, 420 (2014) [Per J. Velasco, Jr., Third Division].
18 J. Mendoza, Dissenting Opinion, p. 14.
19 Id. at 16.
20 J. Leonen, Dissenting Opinion in Narra Nickel Mining and Development Corp., et al. v. Redmont Consolidated Mines Corp., 733 Phil. 365, 475 (2014) [Per J. Velasco, Jr., Third Division].
21 SECURITIES CODE, Revised Implementing Rules and Regulations (2011), Rule 3(1)(A) provides:cralawlawlibrary
Rules 3 - Definition of Terms
1....22 J. Leonen, Dissenting Opinion in Narra Nickel Mining and Development Corp. v. Redmont Consolidated Mines Corp., G.R. No. 195580, January 28, 2015, 748 SCRA 455, 492 [Per J. Velasco, Jr., Special Third Division].
- Beneficial owner or beneficial ownership means any person who, directly or indirectly, through any contract, anangement, understanding, relationship or otherwise, has or shares voting power (which includes the power to vote or direct the voting of such security) and/or investment returns or power (which includes the power to dispose of, or direct the disposition of such security)[.]
23 J. Leonen, Dissenting Opinion in Narra Nickel Mining and Development Corp. et al. v. Redmont Consolidated Mines Corp., 733 Phil. 365, 468 (2014) [Per J. Velasco, Jr., Third Division].
24 Id. at 478.
25Heirs of Wilson P Gamboa v. Finance Secretary Teves, et al., 696 Phil. 276, 332 (2012) [Per J. Carpio, En Banc].
26 J. Leonen, Dissenting Opinion in Narra Nickel Mining and Development Corp., et al. v. Redmont Consolidated Mines Corp., 733 Phil. 365, 467 (2014) [Per J. Velasco, Jr., Third Division].
27 Id. at 469-471, citing Gamboa v. Finance Secretary Teves, et al., 668 Phil. 1, 51, 53, and 69-71 (2011) [Per J. Carpio, En Banc].
28 Id. at 475.
29 Id. at 475-476.
30 Id. at 478-479, citing DOJ Opinion No. 165, series of 1984, p. 5.