Gamboa vs.

Teves (2011)

ORIGINAL ACTION in the Supreme Court. Prohibition, Injunction, Declaratory Relief and Declaration of
Nullity of Sale of Shares of Stock *treated as petition for mandamus since the issue has far-reaching
implications in national economy

- 1969 – American company General Telephone and Electronics Corporation (GTE) sold 26% of the
outstanding common shares of PLDT to PTIC
- 1977 – Prime Holdings Inc. (PHI) became the owner of 111, 415 shares of stock of PTIC by virtue
of three Deeds of Assignment
- 1986 – The 111, 415 shares of stock (around 46% of the outstanding capital stock) of PTIC held
by PHI were sequestered by the Presidential Commission on Good Governance (PCGG)
- 1999 – First Pacific, a Hong Kong-based investment firm, acquired the remaining 54% of the
outstanding capital stock of PTIC.
- 2006 – Inter-Agency Privatization Council (IPC) of Philippine Government announced public
bidding of PTIC shares of stock
- 2007 – First Pacific through its subsidiary, purchased the 111,415 PTIC shares of stock (46%)
o >Given these sales, First Pacific’s common shareholdings in PLDT increased from 30.7
percent to 37 percent, increasing the common shareholdings of foreigners in PLDT to
about 81.47 percent

1. WON the term “capital” in Section 11, Article XII of the Constitution refers only to shares of
stock;
o YES.

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 association organized
under the laws of the Philippines, at least sixty per centum of whose capital is owned by such
citizens; nor shall such franchise, certificate, or authorization be exclusive in character or for a
longer period than fifty years.
- Neither shall any such franchise or right be granted except under the condition that it shall be
subject to amendment, alteration, or repeal by the Congress when the common good so
requires.
- The State shall encourage equity participation in public utilities by the general public. The
participation of foreign investors in the governing body of any public utility enterprise shall be
limited to their proportionate share in its capital, and all the executive and managing officers of
such corporation or association must be citizens of the Philippines
 - The Court ruled that the term “capital” in Section 11, Article XII of the 1987 Constitution refers
only to common shares, NOT the total outstanding capital stock (common and non-voting
preferred shares).
o Only common shareholders have the right to vote in the election of directors, and thus,
exercise and participate in the control or management of the corporation. (Preferred
shareholders are often excluded from any control and deprived of the right to vote).
Since the intent of the framers of the Constitution regarding the provision is for Filipino
nationals to be always in effective control of the corporation, the term “capital” should
be defined as such.

WON the 111,415 PTIC shares to First Pacific violates the constitutional limit on foreign
ownership of a public utility;
o YES.

- Since the 40% foreign equity limit was exceeded, the voting interests of foreigners would be
substantial enough. Moreover, Filipinos hold less than 60 percent of the voting stock and earn
less than 60 percent of the dividends of PLDT.
- By virtue of the intent of the provision, there is a violation of Section 11, Article XII of the
Constitution

WON petitioner has locus standi

o YES

- Petitioner Wilson Gamboa, a stockholder of PLDT, has the right to question the subject sale,
which he claims to violate the nationality requirement prescribed in Section 11, Article XII of the
Constitution.

- NOTE  (Dissenting J. Velasco, Jr.: petitioner has no locus standi because he is neither a
shareholder of PTIC nor of First Pacific)

SC PARTLY GRANTED the petition. Respondent Chairperson of the Securities and Exchange Commission
(SEC) is DIRECTED to apply the definition of the term “capital” in determining the extent of allowable
foreign ownership in respondent PLDT, and if there is a violation, to impose the appropriate sanctions
under the law.
 Heirs of Gamboa vs. Teves (2012 Resolution)

This resolves the motions for reconsideration of the 28 June 2011 Decision filed by (1) the
Philippine Stock Exchange's (PSE) President, (2) Manuel V. Pangilinan (3) Napoleon L. Nazareno
and ( 4) the Securities and Exchange Commission (SEC)
The Office of the Solicitor General (OSG) initially filed a motion for reconsideration on behalf of
the SEC, assailing the 28 June 2011 Decision.
o However, it subsequently filed a Consolidated Comment on behalf of the State,
declaring expressly that it agrees with the Court's definition of the term "capital" in
Section 11, Article XII of the Constitution. During the Oral Arguments on 26 June 2012,
the OSG reiterated its position consistent with the Court's 28 June 2011 Decision

- 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.
o Section 11, Article XII (National Economy and Patrimony) of the 1987 Constitution:
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
- 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.
o 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).
o 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)
 - 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.
o 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.
o 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.
o 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).

Petition Denied, motions for reconsideration with finality. No further pleadings shall be entertained.