Controlling Interest: Defining

Control is King: “Capital” in Public Utilities Means Voting Shares, Philippines SC Clarifies

TLDR: The Philippine Supreme Court, in Gamboa v. Teves, definitively ruled that the term “capital” in the context of foreign ownership restrictions for public utilities refers exclusively to shares with voting rights, ensuring Filipino control over these vital sectors. This landmark decision impacts how foreign investments are structured in Philippine public utilities.

G.R. No. 176579, June 28, 2011

INTRODUCTION

Imagine investing in a company only to realize you have no say in how it’s run. For foreign investors in Philippine public utilities, this was a looming concern until a landmark Supreme Court decision clarified a long-standing ambiguity. The Philippine Constitution limits foreign ownership in public utilities to 40% of their “capital.” But what exactly does “capital” mean? Does it encompass all shares, or just those that grant voting rights and control? This question was at the heart of Gamboa v. Teves, a case that redefined foreign investment rules in critical Philippine industries.

At its core, the case revolved around the sale of government-sequestered shares in the Philippine Telecommunications Investment Corporation (PTIC), a major stockholder of Philippine Long Distance Telephone Company (PLDT), to Metro Pacific Assets Holdings, Inc. (MPAH), a subsidiary of First Pacific, a Hong Kong-based firm. Petitioner Wilson Gamboa, a PLDT stockholder, argued that this sale would unconstitutionally increase foreign control over PLDT, a public utility, by pushing foreign common shareholdings beyond the 40% limit. The crucial legal question became: does “capital” in the Constitution refer to total shares or just voting shares?

LEGAL CONTEXT: THE CONSTITUTIONAL MANDATE AND ITS INTERPRETATIONS

The 1987 Philippine Constitution, echoing its predecessors, enshrined the principle of Filipino control over public utilities. Section 11, Article XII explicitly states:

“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…”

This provision is rooted in economic nationalism, aiming to ensure that vital sectors of the Philippine economy remain under Filipino control. However, the Constitution left the definition of “capital” open to interpretation, leading to decades of uncertainty. Corporations issue different classes of shares, primarily common and preferred. Common shares typically carry voting rights, granting shareholders the power to elect directors and influence corporate decisions. Preferred shares, on the other hand, often lack voting rights but may offer preferential treatment in dividends or asset distribution.

The Corporation Code of the Philippines further complicates the matter by using “capital,” “capital stock,” and “outstanding capital stock” somewhat interchangeably, without clearly delineating whether “capital” should include all classes of shares or just voting shares. Adding to the ambiguity, the Foreign Investments Act of 1991 defined “Philippine national” partly based on “capital stock outstanding and entitled to vote,” suggesting a focus on voting shares for nationality determination. Government agencies and corporations themselves held differing views, with some including both common and preferred shares in their interpretation of “capital” for constitutional compliance.

CASE BREAKDOWN: GAMBOA CHALLENGES FOREIGN CONTROL OVER PLDT

Wilson Gamboa, acting as a PLDT stockholder, initiated the legal battle by filing a petition directly with the Supreme Court. He sought to prohibit the sale of PTIC shares, arguing it violated the constitutional foreign ownership limit. Gamboa contended that “capital,” for purposes of the 40% restriction, should be understood as referring solely to common or voting shares. He pointed out that with the PTIC share sale, foreign holdings of PLDT common shares would exceed 60%, effectively giving foreigners control of the public utility, despite Filipinos holding a majority of the total outstanding capital stock when including non-voting preferred shares.

The respondents, including government officials and PLDT executives, countered by arguing procedural infirmities in Gamboa’s petition. They emphasized that previous government interpretations and industry practices considered “capital” to encompass all share types, not just voting shares. Crucially, they did not explicitly refute Gamboa’s claim that foreigners would hold a majority of PLDT’s common shares after the sale.

The Supreme Court, acknowledging the petition’s procedural issues, opted to treat Gamboa’s petition for declaratory relief as a petition for mandamus, recognizing the transcendental importance of the constitutional issue. The Court framed the central issue as:

“[W]hether 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.”

In a landmark decision penned by Justice Antonio Carpio, the Supreme Court sided with Gamboa. The Court declared that:

“[T]he 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).”

The Court reasoned that control over a corporation, particularly a public utility, is exercised through voting rights, which are predominantly attached to common shares. To include non-voting preferred shares in the definition of “capital” would allow foreigners to control public utilities while technically complying with the 40% limit based on total capital stock. The Court emphasized the intent of the Constitution’s framers to reserve control of public utilities to Filipinos, stating:

“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.’”

The Court directed the Securities and Exchange Commission (SEC) to apply this definition of “capital” in assessing PLDT’s foreign ownership and to impose sanctions if a violation of the constitutional limit was found.

PRACTICAL IMPLICATIONS: FILIPINO CONTROL REAFFIRMED

Gamboa v. Teves has far-reaching implications for foreign investments in Philippine public utilities and other nationalized industries. It provides a definitive interpretation of “capital” in the Constitution, focusing on control rather than sheer equity value. This ruling ensures that Filipino citizens maintain effective control over public utilities, aligning with the Constitution’s nationalistic economic policies.

For businesses, particularly public utilities, this decision necessitates a careful review of their capitalization structure to ensure compliance. Companies must now calculate foreign ownership based on voting shares alone, potentially requiring restructuring to meet the 60/40 Filipino-foreign ownership ratio in terms of control. Foreign investors need to be particularly mindful of this ruling when structuring their investments in Philippine public utilities, focusing on strategic partnerships that respect Filipino control.

Key Lessons from Gamboa v. Teves:

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