Art. XII, 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; 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.
(Emphasis supplied)
- The term "capital" in Section 11, Article XII of the
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 comprising both common and
non-voting preferred shares.
The Corporation Code
of the Philippines classifies shares as common or preferred, thus:
Sec. 6. Classification
of shares. - The shares of stock of stock corporations may be divided
into classes or series of shares, or both, any of which classes or series of
shares may have such rights, privileges or restrictions as may be stated in the
articles of incorporation: Provided, That no share may be deprived of
voting rights except those classified and issued as "preferred" or
"redeemable" shares, unless otherwise provided in this Code:
Provided, further, That there shall always be a class or series of shares which
have complete voting rights. Any or all of the shares or series of shares may
have a par value or have no par value as may be provided for in the articles of
incorporation: Provided, however, That banks, trust companies, insurance
companies, public utilities, and building and loan associations shall not be
permitted to issue no-par value shares of stock.
Preferred shares of
stock issued by any corporation may be given preference in the distribution of
the assets of the corporation in case of liquidation and in the distribution of
dividends, or such other preferences as may be stated in the articles of
incorporation which are not violative of the provisions of this Code: Provided,
That preferred shares of stock may be issued only with a stated par value. The
Board of Directors, where authorized in the articles of incorporation, may fix
the terms and conditions of preferred shares of stock or any series thereof:
Provided, That such terms and conditions shall be effective upon the filing of
a certificate thereof with the Securities and Exchange Commission.
Shares of capital
stock issued without par value shall be deemed fully paid and non-assessable
and the holder of such shares shall not be liable to the corporation or to its
creditors in respect thereto: Provided; That shares without par value may not
be issued for a consideration less than the value of five (P5.00) pesos per
share: Provided, further, That the entire consideration received by the
corporation for its no-par value shares shall be treated as capital and shall
not be available for distribution as dividends.
A corporation may,
furthermore, classify its shares for the purpose of insuring compliance with
constitutional or legal requirements.
Except as otherwise
provided in the articles of incorporation and stated in the certificate of
stock, each share shall be equal in all respects to every other share.
Where the articles of
incorporation provide for non-voting shares in the cases allowed by this Code,
the holders of such shares shall nevertheless be entitled to vote on the
following matters:
1. Amendment of the
articles of incorporation;
2. Adoption and
amendment of by-laws;
3. Sale, lease,
exchange, mortgage, pledge or other disposition of all or substantially all of
the corporate property;
4. Incurring,
creating or increasing bonded indebtedness;
5. Increase or
decrease of capital stock;
6. Merger or
consolidation of the corporation with another corporation or other
corporations;
7. Investment of
corporate funds in another corporation or business in accordance with this
Code; and
8. Dissolution of the
corporation.
Except as provided in
the immediately preceding paragraph, the vote necessary to approve a particular
corporate act as provided in this Code shall be deemed to refer only to stocks
with voting rights.
Indisputably, one of
the rights of a stockholder is the right to participate in the control or
management of the corporation. This is exercised through his vote in
the election of directors because it is the board of directors that controls or
manages the corporation. In the absence of provisions in the
articles of incorporation denying voting rights to preferred shares, preferred
shares have the same voting rights as common shares. However, preferred
shareholders are often excluded from any control, that is, deprived of the right
to vote in the election of directors and on other matters, on the theory that
the preferred shareholders are merely investors in the corporation for income
in the same manner as bondholders. In fact, under the Corporation
Code only preferred or redeemable shares can be deprived of the right to vote.
Common shares cannot be deprived of the right to vote in any corporate
meeting, and any provision in the articles of incorporation restricting the
right of common shareholders to vote is invalid.
Thus, 60 percent of the "capital" assumes, or should result
in, "controlling interest" in the corporation. Reinforcing
this interpretation of the term "capital," as referring to
controlling interest or shares entitled to vote, is the definition of a
"Philippine national" in the Foreign Investments Act of 1991, to
wit:
SEC. 3. Definitions. -
As used in this Act:
a. The term "Philippine
national" shall mean a citizen of the Philippines; or a domestic
partnership or association wholly owned by citizens of the Philippines;
or a corporation organized under the laws of the Philippines of which
at least sixty percent (60%) of the capital stock outstanding and entitled
to vote is owned and held by citizens of the Philippines; or a corporation
organized abroad and registered as doing business in the Philippines under the
Corporation Code of which one hundred percent (100%) of the capital stock
outstanding and entitled to vote is wholly owned by Filipinos or a trustee of
funds for pension or other employee retirement or separation benefits, where
the trustee is a Philippine national and at least sixty percent (60%) of the
fund will accrue to the benefit of Philippine nationals: Provided,
That where a corporation and its non-Filipino stockholders own stocks in a
Securities and Exchange Commission (SEC) registered enterprise, at least sixty
percent (60%) of the capital stock outstanding and entitled to vote of each of
both corporations must be owned and held by citizens of the Philippines and at
least sixty percent (60%) of the members of the Board of Directors of each of
both corporations must be citizens of the Philippines, in order that the
corporation, shall be considered a "Philippine national." (Emphasis
supplied)
In explaining the
definition of a "Philippine national," the Implementing Rules and
Regulations of the Foreign Investments Act of 1991 provide:
b. "Philippine
national" shall mean a citizen of the Philippines or a domestic
partnership or association wholly owned by the citizens of the Philippines;
or a corporation organized under the laws of the Philippines of which
at least sixty percent [60%] of the capital stock outstanding and entitled to
vote is owned and held by citizens of the Philippines; or a trustee of
funds for pension or other employee retirement or separation benefits, where
the trustee is a Philippine national and at least sixty percent [60%] of the
fund will accrue to the benefit of the Philippine nationals; Provided, that
where a corporation its non-Filipino stockholders own stocks in a Securities
and Exchange Commission [SEC] registered enterprise, at least sixty percent
[60%] of the capital stock outstanding and entitled to vote of both
corporations must be owned and held by citizens of the Philippines and at least
sixty percent [60%] of the members of the Board of Directors of each of both
corporation must be citizens of the Philippines, in order that the corporation
shall be considered a Philippine national. The control test shall be applied
for this purpose.
Compliance with the
required Filipino ownership of a corporation shall be determined on the basis
of outstanding capital stock whether fully paid or not, but only such stocks
which are generally entitled to vote are considered.
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.
Individuals or
juridical entities not meeting the aforementioned qualifications are considered
as non-Philippine nationals. (Emphasis
supplied)
Mere legal title is
insufficient to meet the 60 percent Filipino-owned "capital" required
in the Constitution. Full beneficial ownership of 60 percent of the outstanding
capital stock, coupled with 60 percent of the voting rights, is required. The
legal and beneficial ownership of 60 percent of the outstanding capital stock
must rest in the hands of Filipino nationals in accordance with the
constitutional mandate. Otherwise, the corporation is "considered as
non-Philippine national[s]."
Under Section 10,
Article XII of the Constitution, Congress may "reserve to citizens of the
Philippines or to corporations or associations at least sixty per
centum of whose capital is owned by such citizens, or such higher
percentage as Congress may prescribe, certain areas of investments." Thus,
in numerous laws Congress has reserved certain areas of investments to Filipino
citizens or to corporations at least sixty percent of the "capital"
of which is owned by Filipino citizens. Some of these laws are: (1) Regulation
of Award of Government Contracts or R.A. No. 5183; (2) Philippine Inventors
Incentives Act or R.A. No. 3850; (3) Magna Carta for Micro, Small and Medium
Enterprises or R.A. No. 6977; (4) Philippine Overseas Shipping Development Act
or R.A. No. 7471; (5) Domestic Shipping Development Act of 2004 or R.A. No.
9295; (6) Philippine Technology Transfer Act of 2009 or R.A. No. 10055; and (7)
Ship Mortgage Decree or P.D. No. 1521. Hence, the term "capital"
in Section 11, Article XII of the Constitution is also used in the same
context in numerous laws reserving certain areas of
investments to Filipino citizens.
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." A broad definition unjustifiably
disregards who owns the all-important voting stock, which necessarily equates
to control of the public utility.
We shall illustrate
the glaring anomaly in giving a broad definition to the term
"capital." Let us assume that a corporation has 100 common shares
owned by foreigners and 1,000,000 non-voting preferred shares owned by
Filipinos, with both classes of share having a par value of one peso (P1.00)
per share. Under the broad definition of the term "capital," such
corporation would be considered compliant with the 40 percent constitutional
limit on foreign equity of public utilities since the overwhelming majority, or
more than 99.999 percent, of the total outstanding capital stock is Filipino
owned. This is obviously absurd.
In the example given,
only the foreigners holding the common shares have voting rights in the
election of directors, even if they hold only 100 shares. The foreigners, with
a minuscule equity of less than 0.001 percent, exercise control over the public
utility. On the other hand, the Filipinos, holding more than 99.999 percent of
the equity, cannot vote in the election of directors and hence, have no control
over the public utility. This starkly circumvents the intent of the framers of
the Constitution, as well as the clear language of the Constitution, to place
the control of public utilities in the hands of Filipinos. It also renders
illusory the State policy of an independent national economy effectively
controlled by Filipinos.
The example given is not theoretical but can be found in the real
world, and in fact exists in the present case. (Gamboa vs. Teves, et.
al., G.R. No. 176579, June 28, 2011, [Carpio, J.])
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