D E C I S I O N
CARPIO, J.:
I. THE FACTS
This is a petition to
nullify the sale of shares of stock of Philippine Telecommunications Investment
Corporation (PTIC) by the government of the Republic of the Philippines, acting
through the Inter-Agency Privatization Council (IPC), to Metro Pacific Assets
Holdings, Inc. (MPAH), an affiliate of First Pacific Company Limited (First
Pacific), a Hong Kong-based investment
management and holding company and a shareholder of the Philippine
Long Distance Telephone Company (PLDT).
The petitioner
questioned the sale on the ground that it also involved an indirect sale of 12
million shares (or about 6.3 percent of the outstanding common shares) of PLDT
owned by PTIC to First Pacific. With the this sale, First Pacific’s
common shareholdings in PLDT increased from 30.7 percent to 37 percent, thereby
increasing the total common shareholdings of foreigners in PLDT to about
81.47%. This, according to the petitioner,
violates Section 11, Article XII of the 1987 Philippine Constitution which
limits foreign ownership of the capital of a public utility to not more than
40%, thus:
Section 11. No
franchise, certificate, or any other form of authorization for the operation of
a public utility shall be granted except to citizens of the Philippines or to
corporations or associations organized under the laws of the Philippines, at
least sixty per centum of whose capital is owned by such citizens; nor
shall such franchise, certificate, or authorization be exclusive in character
or for a longer period than fifty years. Neither shall any such franchise or
right be granted except under the condition that it shall be subject to
amendment, alteration, or repeal by the Congress when the common good so
requires. The State shall encourage equity participation in public utilities by
the general public. The participation of foreign investors in the governing
body of any public utility enterprise shall be limited to their proportionate
share in its capital, and all the executive and managing officers of such
corporation or association must be citizens of the Philippines. (Emphasis
supplied)
II. THE ISSUE
Does the term
“capital” in Section 11, Article XII of the Constitution refer to the total
common shares only, or to the total outstanding capital stock (combined total
of common and non-voting preferred shares) of PLDT, a public utility?
III. THE RULING
[The Court partly granted the petition and held that the term “capital” in Section 11, Article XII of the
Constitution refers only to shares of stock entitled to vote in the election of
directors of a public utility, i.e., to the total common shares in PLDT.]
Considering that
common shares have voting rights which translate to control, as opposed to
preferred shares which usually have no voting rights, the term “capital” in Section 11, Article XII of
the Constitution refers only to common shares. However, if the preferred shares also
have the right to vote in the election of directors, then the term “capital”
shall include such preferred shares because the right to participate in
the control or management of the corporation is exercised through the right to
vote in the election of directors. In short, the term “capital” in Section 11, Article XII of the Constitution
refers only to shares of stock that can vote in the election of directors.
To construe broadly
the term “capital” as the total outstanding capital stock, including both
common and non-voting preferred shares, grossly contravenes the intent and letter of the
Constitution that the “State shall develop a self-reliant and independent
national economy effectively controlled by Filipinos.” A broad definition unjustifiably disregards who owns the
all-important voting stock, which necessarily equates to control of the public
utility.
Holders of PLDT
preferred shares are explicitly denied of the right to vote in the election of
directors. PLDT’s Articles of Incorporation expressly state that “the
holders of Serial Preferred Stock shall not be entitled to vote at any meeting
of the stockholders for the election of directors or for any other purpose or otherwise participate in any action taken by the corporation or its
stockholders, or to receive notice of any meeting of stockholders.” On the other hand, holders of common shares are
granted the exclusive right to vote in the election of directors. PLDT’s
Articles of Incorporation state that “each holder of Common Capital Stock shall have one vote in
respect of each share of such stock held by him on all matters voted upon by
the stockholders, and the holders of Common Capital Stock
shall have the exclusive right to vote for the election of directors and for
all other purposes.”
It must be stressed,
and respondents do not dispute, that
foreigners hold a majority of the common shares of PLDT. In fact, based on
PLDT’s 2010 General Information Sheet (GIS), which is a document required to be submitted annually to the Securities
and Exchange Commission, foreigners hold 120,046,690 common shares of PLDT whereas Filipinos hold
only 66,750,622 common shares. In other words, foreigners hold 64.27% of the total number of PLDT’s
common shares, while Filipinos hold only 35.73%. Since holding a majority of
the common shares equates to control, it is clear that foreigners exercise
control over PLDT. Such amount of control unmistakably exceeds the allowable 40
percent limit on foreign ownership of public utilities expressly mandated in
Section 11, Article XII of the Constitution.
As shown in PLDT’s
2010 GIS, as submitted to the
SEC, the par value of PLDT common shares is P5.00 per share,
whereas the par value of preferred shares is P10.00 per share. In
other words, preferred shares have twice the par value of common shares but
cannot elect directors and have only 1/70 of the dividends of common shares.
Moreover, 99.44% of the preferred shares are owned by Filipinos while
foreigners own only a minuscule 0.56% of the preferred shares. Worse, preferred shares constitute
77.85% of the authorized capital stock of PLDT while common shares constitute
only 22.15%. This undeniably shows
that beneficial interest in PLDT is not with the non-voting preferred shares
but with the common shares, blatantly violating the constitutional requirement
of 60 percent Filipino control and Filipino beneficial ownership in a public
utility.
In short, Filipinos
hold less than 60 percent of the voting stock, and earn less than 60 percent of
the dividends, of PLDT. This directly contravenes the express
command in Section 11, Article XII of the Constitution that “[n]o franchise,
certificate, or any other form of authorization for the operation of a public
utility shall be granted except to x x x corporations x x x organized under the
laws of the Philippines, at least sixty per centum of whose
capital is owned by such citizens x x x.”
To repeat, (1)
foreigners own 64.27% of the common shares of PLDT, which class of shares
exercises the sole right to vote in the
election of directors, and thus exercise control over PLDT; (2) Filipinos own
only 35.73% of PLDT’s common shares, constituting a minority of the voting
stock, and thus do not exercise control over PLDT; (3) preferred shares, 99.44%
owned by Filipinos, have no voting rights; (4) preferred shares earn only 1/70
of the dividends that common shares earn; (5) preferred shares have twice the par value of common shares; and (6)
preferred shares constitute 77.85% of the authorized capital stock of PLDT and
common shares only 22.15%. This kind of ownership and control of a public
utility is a mockery of the Constitution.
[Thus, the Respondent Chairperson of the Securities and Exchange Commission was DIRECTED by the Court to apply the
foregoing definition of the term “capital” in determining the extent of
allowable foreign ownership in respondent Philippine Long Distance Telephone
Company, and if there is a violation of Section 11, Article XII of the
Constitution, to impose the appropriate sanctions under the law.]
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