Heirs of Gamboa v. Tevez (G.R. No.

176579, October 9, 2012)

(Resolution)

FATCS:
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 Pacifics 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 tocommon 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.

AFFIRMED 2011 Decision.