G.R. No.

207246

JOSE M. ROY III, petitioner, vs. CHAIRPERSON TERESITA HERBOSA,

THE SECURITIES AND EXCHANGE COMMISSION, and PHILIPPINE
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.

November 22, 2016

Facts:
The Supreme Court's Decision and Resolution in Gamboa v. Finance Secretary Teves,
jurisprudentially established the proper interpretation of capital in Section 11, Article XII of the
Constitution.

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.

The SEC, through Chairperson Herbosa, issued SEC-MC No. 8 which provided for the
guidelines on compliance with the Filipino-Foreign ownership requirements prescribed in the
constitution and/or existing laws by corporations engaged in nationalized and partly nationalized
activities. Section 2 of which provides:

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, Roy, as a lawyer and taxpayer, assailed 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. Roy seeks to apply the 60-40 Filipino
ownership requirement separately to each class of shares of a public utility corporation,
whether common, preferred non-voting, preferred voting or any other class of shares. Petitioner
Roy also questions the ruling of the SEC that PLDT is compliant with the constitutional rule on
foreign ownership.

Respondents Chairperson Teresita Herbosa and SEC sought the dismissal of the petitions on
the grounds that the petitioner did not have a locus standi, SEC did not abuse its discretion and
the challenge on PLDT's compliance with the capital requirement is premature considering that
the SEC has not yet issued a definitive ruling thereon.

PLDT filed an intervention adopting a similar stance with the SEC. Thereafter, the Philippine
Stock Exchange, Inc. ("PSE") also intervened.

Issue: WON SEC-MC No. 8 SEC gravely abused its discretion in issuing SEC-MC No. 8 in light
of the Gamboa Decision and Gamboa Resolution.

Held:
NO. SEC did not commit grave abuse of discretion when it issued SEC-MC No. 8. To the
contrary, the Court finds SEC-MC No. 8 to have been issued in fealty to the Gamboa Decision
and Resolution.

Gamboa Case

In Gamboa the Court consistently defined the term "capital" as follows:

."capital" in Section 11, Article XII of the Constitution refers
only to shares of stock entitled to vote in the election of directors.

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.

If Filipinos own at least 60% of the outstanding shares of stock entitled to vote directors,
which is what the Constitution precisely requires, then the Filipino stockholders control the
corporation, i.e., they dictate corporate actions and decisions, and they have all the rights of
ownership including, but not limited to, offering certain preferred shares that may have
greater economic interest to foreign investors — as the need for capital for corporate
pursuits (such as expansion), may be good for the corporation that they own.

As owners of the corporation, the economic benefits will necessarily accrue to them. It is illogical
to speculate that they will create shares which have features that will give greater economic
interests or benefits than they are holding and not benefit from such offering, or that they will
allow foreigners to profit more than them from their own corporation — unless they are
dummies. Commonwealth Act No. 108, the Anti-Dummy Law deals with that possibility.
Notably, even if the shares of a particular public utility were owned 100% Filipino, that does not
discount the possibility of a dummy situation from arising. Hence, even if the 60-40 ownership in
favor of Filipinos rule is applied separately to each class of shares of a public utility corporation,
as the petitioners insist, the rule can easily be side-stepped by a dummy relationship.

The Implementing Rules and Regulations of the Foreign Investments Act of 1991 ("FIA-IRR")
provides:
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.

Voting Control Test and the Beneficial Ownership Test must be applied to determine
whether a corporation is a "Philippine national" and that a "Philippine national," as defined
in the FIA and all its predecessor statutes, is "a Filipino citizen, or a domestic corporation "at
least sixty percent (60%) of the capital stock outstanding and entitled to vote, " is owned by
Filipino citizens. A domestic corporation is a "Philippine national" only if at least 60% of its
voting stock is owned by Filipino citizens."

These FIA-IRR’s provisions were echoed in the Gamboa Decision.

The assailed SEC-MC No. 8.

Section 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." Clearly, SEC-MC No. 8 cannot be said to have been issued with grave abuse
of discretion.

While SEC-MC No. 8 does not expressly mention the Beneficial Ownership Test or full
beneficial ownership of stocks requirement in the FIA, this will not, render it invalid — meaning,
it does not follow that the SEC will not apply this test in determining whether the shares claimed
to be owned by Philippine nationals are Filipino. SEC takes its guiding lights also from the FIA
and its implementing rules, as well as the Securities Regulation Code (Republic Act No. 8799;
"SRC") and its implementing rules. As defined in the SRC-IRR, "[b]eneficial 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 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) . . . ."

The term "full beneficial ownership" found in the FIA-IRR is to be understood in the context of
the entire paragraph defining the term "Philippine national." Mere legal title is not enough to
meet the required Filipino equity, which means that it is not sufficient that a share is
registered in the name of a Filipino citizen or national, i.e., he should also have full
beneficial ownership of the share. If the voting right of a share held in the name of a
Filipino citizen or national is assigned or transferred to an alien, that share is not to be
counted in the determination of the required Filipino equity. In the same vein, if the
dividends and other fruits and accessions of the share do not accrue to a Filipino citizen
or national, then that share is also to be excluded or not counted. 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.

Petitioners' insistence that the 60% Filipino equity requirement must be applied to each class of
shares is simply beyond the literal text and contemplation of Section 11, Article XII of the 1987
Constitution.

Given the innumerable permutations that the types and classes of stocks may take, requiring
the SEC and other government agencies to keep track of the ever-changing capital classes of
corporations will be impracticable, if not downright impossible. And the law does not require the
impossible. (Lex non cogit ad impossibilia.)

Moreover, the restrictive interpretation of the term "capital" would have a tremendous impact on
the country as a whole — and to all Filipinos. 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 (Php159,638,845,206.89). This 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.

Court rules that SEC-MC No. 8 is not contrary to the Court's definition and interpretation of the
term "capital." Accordingly, the petitions must be denied for failing to show grave abuse of
discretion in the issuance of SEC-MC No. 8.