Key Takeaway: Public Utilities Can Redeem Shares if Not Prohibited by Law

De Leon v. Philippine Long Distance Telephone Company, Inc., G.R. No. 211389, October 06, 2021

Imagine investing in a public utility, expecting long-term dividends, only to find your shares redeemed without your consent. This scenario played out in the Supreme Court case of De Leon v. PLDT, raising crucial questions about shareholder rights and corporate governance in the Philippines. The case centered on whether PLDT could legally redeem its preferred shares, impacting thousands of investors and setting a precedent for other public utilities.

Edgardo C. De Leon, a shareholder of PLDT, challenged the company’s decision to redeem its preferred shares, arguing that it violated both his rights as a shareholder and the nationality requirements for public utilities under the Philippine Constitution. This dispute not only highlighted the tension between corporate actions and shareholder expectations but also brought to light the legal framework governing share redemption in public utilities.

Legal Context: Share Redemption and Public Utilities in the Philippines

In the Philippines, the legal landscape surrounding share redemption in public utilities is shaped by several key pieces of legislation and judicial precedents. Presidential Decree No. 217, enacted during the Marcos era, established policies for the telephone industry, including the concept of “telephone subscriber self-financing.” This decree required that subscribers be guaranteed a fixed annual income and the option to convert preferred shares into common shares.

The term “public utility” is defined under the Philippine Constitution, which mandates that at least 60% of the capital of such entities must be owned by Filipino citizens. This requirement aims to ensure national control over critical infrastructure like telecommunications. The Supreme Court’s ruling in Gamboa v. Teves further clarified that “capital” in this context refers to shares with voting rights, impacting how companies like PLDT structure their shares.

Redeemable shares, as defined in corporate law, are shares that a corporation can buy back from shareholders at a predetermined time or event. The legality of such redemption hinges on the company’s articles of incorporation and any applicable laws or regulations, such as those set forth in Presidential Decree No. 217.

For example, if a telecommunications company issues preferred shares to finance its expansion, it must ensure that these shares are not only redeemable under certain conditions but also that the redemption does not violate any statutory provisions or shareholder rights.

Case Breakdown: The Journey of De Leon v. PLDT

Edgardo C. De Leon’s journey began when he purchased 180 shares of PLDT’s 10% Cumulative Convertible Preferred Stock under the Subscriber Investment Plan in 1993. He believed these shares would provide him with a steady income and the potential to convert them into common shares.

In 2011, following the Supreme Court’s decision in Gamboa v. Teves, PLDT moved to amend its Articles of Incorporation to create additional voting preferred shares. This move was seen as a response to the ruling, which required a reevaluation of the company’s ownership structure to comply with the 60% Filipino ownership mandate.

Subsequently, PLDT’s Board of Directors authorized the redemption of all outstanding Subscriber Investment Plan preferred shares, effective January 19, 2012. De Leon and another shareholder, Perfecto R. Yasay, Jr., objected to this redemption, arguing that it violated their rights under Presidential Decree No. 217 and the Constitution.

De Leon filed a complaint in the Regional Trial Court (RTC) of Makati, seeking to enjoin the redemption and the planned Special Stockholders Meeting. However, the RTC dismissed the complaint as a nuisance and harassment suit, a decision later affirmed by the Court of Appeals.

The Supreme Court, in its decision, upheld the lower courts’ rulings, stating:

“From the text of Presidential Decree No. 217, nothing prohibited respondent from redeeming the preferred shares of stock it had issued under its subscriber self-financing plan.”

The Court also noted that De Leon was informed of the redemption terms when he acquired his shares and that the redemption was conducted in accordance with PLDT’s Articles of Incorporation and the law.

The procedural journey involved:

• De Leon and Yasay filing a complaint in the RTC to challenge the redemption and the Special Stockholders Meeting.
• The RTC dismissing the complaint as a nuisance suit due to the minimal shareholding and lack of legal basis.
• The Court of Appeals affirming the RTC’s decision, highlighting the legality of the redemption under Presidential Decree No. 217.
• The Supreme Court reviewing the case and ultimately denying De Leon’s petition, affirming the lower courts’ rulings.

Practical Implications: Navigating Share Redemption in Public Utilities

The Supreme Court’s ruling in De Leon v. PLDT sets a clear precedent that public utilities can redeem shares if not expressly prohibited by law. This decision impacts how shareholders and companies approach share redemption agreements and corporate governance.

For businesses operating as public utilities, this ruling underscores the importance of ensuring that share redemption policies are transparent and compliant with existing laws. Companies must communicate redemption terms clearly to shareholders and ensure that any such actions align with their Articles of Incorporation and regulatory requirements.

Individuals investing in public utilities should thoroughly review the terms of their share purchases, particularly regarding redemption rights and conversion options. Understanding these terms can help investors make informed decisions and protect their interests.

Key Lessons:

• Shareholders must be aware of the terms and conditions of their investments, including any provisions for redemption.
• Public utilities must ensure compliance with legal and constitutional requirements when redeeming shares.
• Challenging corporate actions requires a substantial interest and a strong legal basis to avoid being dismissed as a nuisance suit.

Frequently Asked Questions

What is share redemption, and how does it affect shareholders?
Share redemption is when a company buys back its shares from shareholders. It can impact shareholders by ending their investment prematurely, affecting their expected income and voting rights.

Can a public utility redeem shares without shareholder consent?
Yes, if the terms of redemption are clearly stated in the company’s Articles of Incorporation and not prohibited by law, as seen in the De Leon v. PLDT case.

What are the rights of preferred shareholders in public utilities?
Preferred shareholders typically have rights to a fixed dividend and may have the option to convert their shares into common shares, subject to the terms set by the company and applicable laws.

How does the 60% Filipino ownership requirement affect public utilities?
This constitutional requirement ensures that public utilities remain under national control, influencing how companies structure their share ownership and governance.

What should investors do if they disagree with a company’s redemption of shares?
Investors should review the terms of their investment and seek legal advice to understand their rights and potential courses of action, ensuring they have a substantial basis for any legal challenge.

ASG Law specializes in corporate governance and shareholder rights. Contact us or email hello@asglawpartners.com to schedule a consultation.