G.R. No. 176579 – 668 Phil. 1 / 696 Phil. 276 – 652 SCRA 690 / 682 SCRA 397 – Mercantile Law – Corporation Law – Capital – What “capital” means
In 1928, the Philippine Long Distance Telephone Company (PLDT) was granted a franchise to engage in the business of telecommunications. Telecommunications is a nationalized area of activity where a corporation engaged therein must have 60% of its capital be owned by Filipinos as provided for by Section 11, Article XII (National Economy and Patrimony) of the 1987 Constitution, to wit:
Section 11. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines, at least sixty per centum of whose capital is owned by such citizens; xxx
In 1999, First Pacific, a foreign corporation, acquired 37% of PLDT common shares. Wilson Gamboa opposed said acquisition because at that time, 44.47% of PLDT common shares already belong to various other foreign corporations. Hence, if First Pacific’s share is added, foreign shares will amount to 81.47% or more than the 40% threshold prescribed by the Constitution.
Margarito Teves, as Secretary of Finance, and the other respondents argued that this is okay because in totality, most of the capital stocks of PLDT is Filipino owned. It was explained that all PLDT subscribers, pursuant to a law passed by Marcos, are considered shareholders (they hold serial preferred shares). Broken down, preferred shares consist of 77.85% while common shares consist of 22.15%.
Gamboa argued that the term “capital” should only pertain to the common shares because that is the share which is entitled to vote and thus have effective control over the corporation.
ISSUE: What does the term “capital” pertain to? Does the term “capital” in Section 11, Article XII of the Constitution refer to common shares or to the total outstanding capital stock (combined total of common and non-voting preferred shares)?
HELD: Gamboa is correct. Capital only pertains to common shares. It will be absurd for capital to pertain as inclusive of non-voting shares. This is because a corporation consisting of 1,000,000 capital stocks, 100 of which are common shares which are foreign owned and the rest (999,900 shares) are preferred shares which are non-voting shares and are Filipino owned, would seem compliant to the constitutional requirement -here 99.999% is Filipino owned. But if scrutinized, the controlling stock – the voting stock – or that miniscule .001% is foreign owned. That is absurd.
In this case, it is true that at least 77.85% of the capital is owned by Filipinos (the PLDT subscribers). But these subscribers, who hold non-voting preferred shares, have no control over the corporation. Hence, capital should only pertain to common shares.
Thus, to be compliant with the constitution, 60% of the common shares of PLDT should be Filipino owned. That is not so in this case as it appears that 81.47% of the common shares are already foreign owned (split between First Pacific (37%) and a Japanese corporation).
When may preferred shares be considered part of the capital share?
If the preferred shares are allowed to vote like common shares.
Read full texts: 2011 Decision | 2012 En Banc Resolution on the MR (affirmed 2011 Decision)
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