WILSON P. GAMBOA, v. FINANCE SECRETARY MARGARITO B. TEVES, et al.

G.R. No. 176579, June 28, 2011, 625 SCRA 690, CARPIO, J.

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 only to common shares, and not to the total
outstanding capital stock comprising both common and non-voting preferred shares. The 40% foreign
ownership limitation should be interpreted to apply to both the beneficial ownership and the
controlling interest.

Facts:
General Telephone and Electronics Corporation (GTE), an American company and a major
PLDT stockholder, sold 26% of the outstanding common shares of PLDT to Philippine
Telecommunications Investment Corporation (PTIC). Subsequently, First Pacific, a Bermuda-
registered, Hong Kong-based investment firm, acquired the remaining 54% of the outstanding
capital stock of PTIC. Aside from that, Inter-Agency Privatization Council (IPC) of the Philippine
Government announced that it would sell the 111,415 PTIC shares, or 46.125% of the outstanding
capital stock of PTIC, through a public bidding. First Pacific, through its subsidiary, Metro Pacific
Assets Holding, Inc. (MPAH), entered into a Conditional Sale and Purchase Agreement of the
111,415 PTIC shares, or 46.125% of the outstanding capital stock of PTIC, with the Philippine
Government. With the sale, First Pacifics common shareholdings in PLDT increased from 30.7% to
3%, thereby increasing the common shareholdings of foreigners in PLDT to about 81.47%. This
allegedly 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%.

Gamboa submits that the 40% foreign equity limitation in domestic public utilities refers
only to common shares because such shares are entitled to vote and it is through voting that control
over a corporation is exercised. Gamboa posits that the term capital in Section 11, Article XII of
the Constitution refers to the ownership of common capital stock subscribed and outstanding,
which class of shares alone, under the corporate set-up of PLDT, can vote and elect members of the
board of directors. It is undisputed that PLDTs non-voting preferred shares are held mostly by
Filipino citizens. This arose from Presidential Decree No. 217, issued on 16 June 1973 by then
President Ferdinand Marcos, requiring every applicant of a PLDT telephone line to subscribe to
non-voting preferred shares to pay for the investment cost of installing the telephone line.
Secretary Teves, on the other hand, do not offer any definition of the term capital in Section 11,
Article XII of the Constitution. More importantly, private respondents Nazareno and Pangilinan of
PLDT do not dispute that more than 40 % of the common shares of PLDT are held by foreigners.

Issue:

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.

Ruling:

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.
 Section 6 of the Corporation Code of the Philippines classifies shares as common or
preferred. 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.

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.

Holders of PLDT preferred shares are explicitly denied of the right to vote in the election of
directors. PLDTs 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. PLDTs 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."

In short, only holders of common shares can vote in the election of directors, meaning only
common shareholders exercise control over PLDT. Conversely, holders of preferred shares, who
have no voting rights in the election of directors, do not have any control over PLDT. In fact, under
PLDTs Articles of Incorporation, holders of common shares have voting rights for all purposes,
while holders of preferred shares have no voting right for any purpose whatsoever.

Mere legal title is insufficient to meet the 60 percent Filipino-owned "capital" required in
the Constitution. Full beneficial ownership of 60 percent of the outstanding capital stock, coupled
with 60 percent of the voting rights, is required. The legal and beneficial ownership of 60 percent
of the outstanding capital stock must rest in the hands of Filipino nationals in accordance with the
constitutional mandate. Otherwise, the corporation is "considered as non-Philippine national[s]."
The undisputed fact that the PLDT preferred shares, 99.44% owned by Filipinos, are non-voting
and earn only 1/70 of the dividends that PLDT common shares earn, grossly violates the
constitutional requirement of 60 percent Filipino control and Filipino beneficial ownership of a
public utility.
 In short, Filipinos hold less than 60 percent of the voting stock, and earn less than 60
percent of the dividends, of PLDT. This directly contravenes the express command in Section 11,
Article XII of the Constitution that "[n]o franchise, certificate, or any other form of authorization for
the operation of a public utility shall be granted except to x x x corporations x x x organized under
the laws of the Philippines, at least sixty per centum of whose capital is owned by such citizens
x x x."

Indisputably, construing the term "capital" in Section 11, Article XII of the Constitution to
include both voting and non-voting shares will result in the abject surrender of our
telecommunications industry to foreigners, amounting to a clear abdication of the States
constitutional duty to limit control of public utilities to Filipino citizens. Such an interpretation
certainly runs counter to the constitutional provision reserving certain areas of investment to
Filipino citizens, such as the exploitation of natural resources as well as the ownership of land,
educational institutions and advertising businesses. The Court should never open to foreign control
what the Constitution has expressly reserved to Filipinos for that would be a betrayal of the
Constitution and of the national interest. The Court must perform its solemn duty to defend and
uphold the intent and letter of the Constitution to ensure, in the words of the Constitution, "a self-
reliant and independent national economy effectively controlled by Filipinos."