1

Nationality of Corporations
EN BANC
[G.R. No. L-6055. June 12, 1953. ]
THE PEOPLE OF THE PHILIPPINES, Plaintiff-Appellee, v.
WILLIAM H. QUASHA, Defendant-Appellant.
Jose P. Laurel for appellant and William H. Quasha in his
own behalf.
Solicitor General Juan R. Liwag and Assistant Solicitor
General Francisco Carreon for Appellee.

SYLLABUS
1. CONSTITUTIONAL LAW; CORPORATIONS; PUBLIC UTILITIES;
MERE FORMATION OF PUBLIC UTILITY CORPORATION WITHOUT
THE REQUISITE FILIPINO CAPITAL NOT PROHIBITED. The
Constitution does not prohibit the mere formation of a public
utility corporation without the required proportion of Filipino
capital. What it does prohibit is the granting of a franchise or
other form of authorization for the operation of a public utility to a
corporation already in existence but without the requisite
proportion of Filipino capital (sec. 8, Art. XIV of the Constitution).
2. ID.; ID.; ID.; DUTY OF REVEALING THE OWNERSHIP OF THE
CAPITAL OF A CORPORATION. If the Constitution does not
prohibit the mere formation of a public utility corporation with
alien capital, then how could the accused be charged with having
wrongfully intended to circumvent that fundamental law by not
disclosing in the articles of incorporation that one of the
incorporators, a Filipino, was a mere trustee of his American coincorporators and that for that reason the subscribed capital stock
of the corporation was wholly American? For the mere formation
of the corporation such disclosure was not essential, and the
Corporation Law does not require it. The accused was, therefore,
under no obligation to make it. In the absence of such obligation
and of the alleged wrongful intent on the part of the accused, he
cannot legally be convicted of the crime of falsification for having
allegedly perverted the truth in a narration of facts.
3. FALSIFICATION; FALSE NARRATION FOR NOT REVEALING A
CERTAIN FACT, NOT PUNISHABLE IF THERE IS NO LEGAL
OBLIGATION TO DISCLOSE THE TRUTH. It is essential to the
commission of this crime that the perversion of truth in a
narration of facts must be made with the wrongful intent of
injuring a third person and even if such wrongful intent is proven,
still the untruthful statement will not constitute criminal
falsification if there is no legal obligation on the part of the
narrator to disclose the truth. (U. S. v. Reyes, 1 Phil., 341; U. S. v.
Lopez, 15 Phil., 515.) Wrongful intent to injure a third person and
obligation on the part of the narrator to disclose the truth are thus
essential to a conviction for the crime of falsification under
articles 171(4) and 172(1) of the Revised Penal Code.
DECISION
REYES, J.:
William H. Quasha, a member of the Philippine bar, was charged
in the Court of First Instance of Manila with the crime of
falsification of a public and commercial document in that, having
been entrusted with the preparation and registration of the
articles of incorporation of the Pacific Airways Corporation, a
domestic corporation organized for the purpose of engaging in
business as a common carrier, he caused it to appear in said
articles of incorporation that one Arsenio Baylon, a Filipino citizen,
had subscribed to and was the owner of 60.005 per cent of the
subscribed capital stock of the corporation when in reality, as the
accused well knew, such was not the ease, the truth being that
the owners of the portion of the capital stock subscribed to by
Baylon and the money paid thereon were American citizens whose
names did not appear in the articles of incorporation, and that the
purpose for making this false statement was to circumvent the
constitutional mandate that no corporation shall be authorized to
operate as a public utility in the Philippines unless 60 per cent of
its
capital
stock
is
owned
by
Filipinos.
Found guilty after trial and sentenced to a term of imprisonment
and a fine, the accused has appealed to this Court.
The essential facts are not in dispute. On November 4, 1946, the

Pacific Airways Corporation registered its articles of incorporation

with the Securities and Exchange Commission. The articles were
prepared and the registration was effected by the accused, who
was in fact the organizer of the corporation. The articles stated
that the primary purpose of the corporation was to carry on the
business of a common carrier by air, land or water; that its capital
stock was P1,000,000, represented by 9,000 preferred and
100,000 common shares, each preferred share being of the par
value of P100 and entitled to 1/3 vote and each common share, of
the par value of P1 and entitled to one vote; that the amount of
capital stock actually subscribed was P200,000, and the names of
the subscribers were Arsenio Baylon, Eruin E. Shannahan, Albert
W. Onstott, James OBannon, Denzel J. Cavin, and William H.
Quasha, the first being a Filipino and the other five all Americans;
that Baylons subscription was for 1,145 preferred shares, of the
total value of P114,500, and for 6,500 common shares, of the total
par value of P6,500, while the aggregate subscriptions of the
American subscribers were for 200 preferred shares, of the total
par value of P20,000, and 59,000 common shares, of the total par
value of P59,000; and that Baylon and the American subscribers
had already paid 25 per cent of their respective subscriptions.
Ostensibly the owner of, or subscriber to, 60.005 per cent of the
subscribed capital stock of the corporation, Baylon nevertheless
did not have the controlling vote because of the difference in
voting power between the preferred shares and the common
shares. Still, with the capital structure as it was, the articles of
incorporation were accepted for registration and a certificate of
incorporation was issued by the Securities and Exchange
Commission.
There is no question that Baylon actually subscribed to 60.005 per
cent of the subscribed capital stock of the corporation. But it is
admitted that the money paid on his subscription did not belong
to him but to the American subscribers to the corporate stock. In
explanation, the accused testified, without contradiction, that in
the process of organization Baylon was made a trustee for the
American incorporators, and that the reason for making Baylon
such
trustee
was
as
follows:jgc:chanrobles.com.ph
"Q. According to this articles of incorporation Arsenio Baylon
subscribed to 1,135 preferred shares with a total value of P1,135.
Do
you
know
how
that
came
to
be?
"A.

Yes.

The people who were desirous of forming the corporation, whose

names are listed on page 7 of this certified copy came to my
house, Messrs. Shannahan, Onstott, OBannon, Caven, Perry and
Anastasakas one evening. There was considerable difficulty to get
them all together at one time because they were pilots. They had
difficulty in deciding what their respective share holdings would
be. Onstott had invested a certain amount of money in airplane
surplus property and they had obtained a considerable amount of
money on those planes and as I recall they were desirous of
getting a corporation formed right away. And they wanted to have
their respective share holdings resolved at a later date. They
stated that they could get together but they feel that they had no
time to settle their respective share holdings. We discussed the
matter and finally it was decided that the best way to handle the
thing was not to put the shares in the name of anyone of the
interested parties and to have someone act as trustee for their
respective share holdings. So we looked around for a trustee. And
he said Is there anybody in particular whom you trust? And I said
There are a lot of people whom I trust. He said, Is there
someone around whom we could get right away? I said, There is
Arsenio. He was my boy during the liberation and he cared for me
when I was sick and I said I consider him my friend. So they said
Well make him our trustee. You can do that, I said. They all
knew Arsenio. He is a very kind man and that was what was done.
That is how it came about."cralaw virtua1aw library
Defendant is accused under article 172, paragraph 1, in
connection with article 171, paragraph 4, of the Revised Penal
Code,
which
read:jgc:chanrobles.com.ph
"ART. 171. Falsification by public officer, employee or notary or
ecclesiastic minister. The penalty of prision mayor and a fine
not to exceed 5,000 pesos shall be imposed upon any public
officer, employee, or notary who, taking advantage of his official

2
position, shall falsify a document by committing any of the
following acts:chanrob1es virtual 1aw library
x
x
x
"4. Making untruthful statements in a narration of facts."cralaw
virtua1aw
library
"ART. 172. Falsification by private individuals and use of falsified
documents. The penalty of prision correccional in its medium
and maximum periods and a fine of not more than 5,000 pesos
shall be imposed upon:chanrob1es virtual 1aw library
x
x
x
"1. Any private individual who shall commit any of the
falsifications enumerated in the next preceding article in any
public or official document or letter of exchange or any other kind
of
commercial
document."cralaw
virtua1aw
library
Commenting on the above provisions, Justice Albert, in his wellknown work on the Revised Penal Code (new edition, pp. 407408), observes, on the authority of U. S. v. Reyes, (1 Phil., 341),
that the perversion of truth in the narration of fact must be made
with the wrongful intent of injuring a third person; and on the
authority of U. S. v. Lopez (15 Phil., 515), the same author further
maintains that even if such wrongful intent is proven, still the
untruthful statement will not constitute the crime of falsification if
there is no legal obligation on the part of the narrator to disclose
the truth. Wrongful intent to injure a third person and obligation
on the part of the narrator to disclose the truth are thus essential
to a conviction for the crime of falsification under the above
articles
of
the
Revised
Penal
Code.
Now, as we see it, the falsification imputed to the accused in the
present case consists in not disclosing in the articles of
incorporation that Baylon was a mere trustee (or dummy as the
prosecution chooses to call him) of his American co-incorporators,
thus giving the impression that Baylon was the owner of the
shares subscribed to by him which, as above stated, amount to
60.005 per cent of the subscribed capital stock. This, in the
opinion of the trial court, is a malicious perversion of the truth
made with the wrongful intent of circumventing section 8, Article
XIV of the Constitution, which provides that "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 other entities organized under the
laws of the Philippines, sixty per centum of the capital of which is
owned by citizens of the Philippines . . ." Plausible though it may
appear at first glance, this opinion loses validity once it is noted
that it is predicated on the erroneous assumption that the
constitutional provision just quoted was meant to prohibit the
mere formation of a public utility corporation without 60 per cent
of its capital being owned by Filipinos, a mistaken belief which has
induced the lower court to conclude that the accused was under
obligation to disclose the whole truth about the nationality of the
subscribed capital stock of the corporation by revealing that
Baylon was a mere trustee or dummy of his American coincorporators, and that in not making such disclosure dependants
intention was to circumvent the Constitution to the detriment of
the public interests. Contrary to the lower courts assumption, the
Constitution does not prohibit the mere formation of a public
utility corporation without the required proportion of Filipino
capital. What it does prohibit is the granting of a franchise or
other form of authorization for the operation of a public utility to a
corporation already in existence but without the requisite
proportion of Filipino capital. This is obvious from the context, for
the constitutional provision in question qualifies the terms
"franchise", "certificate" or "any other form of authorization" with
the phrase "for the operation of a public utility," thereby making it
clear that the franchise meant is not the "primary franchise" that
invests a body of men with corporate existence but the
"secondary franchise" or the privilege to operate as a public utility
after the corporation has already come into being.
If the Constitution does not prohibit the mere formation of a public
utility corporation with alien capital, then how could the accused
be charged with having wrongfully intended to circumvent that
fundamental law by not revealing in the articles of incorporation
that Baylon was a mere trustee of his American co-incorporators
and that for that reason the subscribed capital stock of the

corporation was wholly American? For the mere formation of the

corporation such revelation was not essential, and the Corporation
Law does not require it. Defendant was, therefore, under no
obligation to make it. In the absence of such obligation and of the
alleged wrongful intent, defendant cannot be legally convicted of
the
crime
with
which
he
is
charged.
It is urged, however, that the formation of the corporation with 60
per cent of its subscribed capital stock appearing in the name of
Baylon was an indispensable preparatory step to the subversion of
the constitutional prohibition and the laws implementing the
policy expressed therein. This view is not correct. For a
corporation to be entitled to operate a public utility it is not
necessary that it be organized with 60 per cent of its capital
owned by Filipinos from the start. A corporation formed with
capital that is entirely alien may subsequently change the
nationality of its capital through transfer of shares to Filipino
citizens. Conversely, a corporation originally formed with Filipino
capital may subsequently change the national status of said
capital thru transfers of shares to foreigners. What need is there
then for a corporation that intends to operate a public utility to
have, at the time of its formation, 60 per cent of its capital owned
by Filipinos alone? That condition may at any time be attained
thru the necessary transfers of stocks. The moment for
determining whether a corporation is entitled to operate as a
public utility is when it applies for a franchise, certificate, or any
other form of authorization for that purpose. And that can only be
done after the corporation has already come into being and not
while it is still being formed. And at that moment, the corporation
must show that it has complied not only with the requirement of
the Constitution as to the nationality of its capital, but also with
the requirements of the Civil Aviation Law if it is a common carrier
by air, the Revised Administrative Code if it is a common carrier
by water, and the Public Service Law if it is a common carrier by
land
or
other
kind
of
public
service.
Equally untenable is the suggestion that defendant should at least
be held guilty of an "impossible crime" under article 59 of the
Revised Penal Code. It not being possible to suppose that
defendant had intended to commit a crime for the simple reason
that the alleged constitutional prohibition which he is charged
with having tried to circumvent does not exist, conviction under
that
article
is
out
of
the
question.
The foregoing considerations cannot but lead to the conclusion
that the defendant cannot be held guilty of the crime charged.
The majority of the court, however, are also of the opinion that,
even supposing that the act imputed to the defendant constituted
falsification at the time it was perpetrated, still with the approval
of the Parity Amendment to the Constitution in March, 1947,
which placed Americans on the same footing as Filipino citizens
with respect to the right to operate public utilities in the
Philippines, thus doing away with the prohibition in section 8,
Article XIV of the Constitution in so far as American citizens are
concerned, the said act has ceased to be an offense within the
meaning of the law, so that defendant can no longer be held
criminally
liable
therefor.
In view of the foregoing, the judgment appealed from is reversed
and the defendant William H. Quasha acquitted, with costs de
oficio.
Paras, C.J., Pablo, Bengzon, Padilla, Tuason, Jugo, Bautista Angelo
and Labrador, JJ., concur.

3
EN BANC
G.R. No. 176579

June 28, 2011

WILSON P. GAMBOA, Petitioner,

vs.
FINANCE SECRETARY MARGARITO B. TEVES, FINANCE
UNDERSECRETARY JOHN P. SEVILLA, AND COMMISSIONER
RICARDO ABCEDE OF THE PRESIDENTIAL COMMISSION ON
GOOD GOVERNMENT (PCGG) IN THEIR CAPACITIES AS
CHAIR AND MEMBERS, RESPECTIVELY, OF THE
PRIVATIZATION COUNCIL, CHAIRMAN ANTHONI SALIM OF
FIRST PACIFIC CO., LTD. IN HIS CAPACITY AS DIRECTOR OF
METRO PACIFIC ASSET HOLDINGS INC., CHAIRMAN MANUEL
V. PANGILINAN OF PHILIPPINE LONG DISTANCE TELEPHONE
COMPANY (PLDT) IN HIS CAPACITY AS MANAGING
DIRECTOR OF FIRST PACIFIC CO., LTD., PRESIDENT
NAPOLEON L. NAZARENO OF PHILIPPINE LONG DISTANCE
TELEPHONE COMPANY, CHAIR FE BARIN OF THE SECURITIES
EXCHANGE COMMISSION, and PRESIDENT FRANCIS LIM OF
THE PHILIPPINE STOCK EXCHANGE, Respondents.
PABLITO V. SANIDAD and ARNO V. SANIDAD, Petitioners-inIntervention.
DECISION
CARPIO, J.:
The Case
This is an original petition for prohibition, injunction, declaratory
relief and declaration of nullity of the sale of shares of stock of
Philippine Telecommunications Investment Corporation (PTIC) by
the government of the Republic of the Philippines to Metro Pacific
Assets Holdings, Inc. (MPAH), an affiliate of First Pacific Company
Limited (First Pacific).

failed to do so by the 1 February 2007 deadline set by IPC and

instead, yielded its right to PTIC itself which was then given by IPC
until 2 March 2007 to buy the PTIC shares. On 14 February 2007,
First Pacific, through its subsidiary, MPAH, entered into a
Conditional Sale and Purchase Agreement of the 111,415 PTIC
shares, or 46.125 percent of the outstanding capital stock of PTIC,
with the Philippine Government for the price of P25,217,556,000
or US$510,580,189. The sale was completed on 28 February 2007.
Since PTIC is a stockholder of PLDT, the sale by the Philippine
Government of 46.125 percent of PTIC shares is actually an
indirect sale of 12 million shares or about 6.3 percent of the
outstanding common shares of PLDT. With the sale, First
Pacifics common shareholdings in PLDT increased from
30.7 percent to 37 percent, thereby increasing the
common shareholdings of foreigners in PLDT to about
81.47 percent. This violates Section 11, Article XII of the 1987
Philippine Constitution which limits foreign ownership of the
capital of a public utility to not more than 40 percent. 3
On the other hand, public respondents Finance Secretary
Margarito B. Teves, Undersecretary John P. Sevilla, and PCGG
Commissioner Ricardo Abcede allege the following relevant facts:
On 9 November 1967, PTIC was incorporated and had since
engaged in the business of investment holdings. PTIC held
26,034,263 PLDT common shares, or 13.847 percent of the total
PLDT outstanding common shares. PHI, on the other hand, was
incorporated in 1977, and became the owner of 111,415 PTIC
shares or 46.125 percent of the outstanding capital stock of PTIC
by virtue of three Deeds of Assignment executed by Ramon
Cojuangco and Luis Tirso Rivilla. In 1986, the 111,415 PTIC shares
held by PHI were sequestered by the PCGG, and subsequently
declared by this Court as part of the ill-gotten wealth of former
President Ferdinand Marcos. The sequestered PTIC shares were
reconveyed to the Republic of the Philippines in accordance with
this Courts decision4 which became final and executory on 8
August 2006.

The Antecedents
The facts, according to petitioner Wilson P. Gamboa, a stockholder
of Philippine Long Distance Telephone Company (PLDT), are as
follows:1
On 28 November 1928, the Philippine Legislature enacted Act No.
3436 which granted PLDT a franchise and the right to engage in
telecommunications business. In 1969, General Telephone and
Electronics Corporation (GTE), an American company and a major
PLDT stockholder, sold 26 percent of the outstanding common
shares of PLDT to PTIC. In 1977, Prime Holdings, Inc. (PHI) was
incorporated by several persons, including Roland Gapud and Jose
Campos, Jr. Subsequently, PHI became the owner of 111,415
shares of stock of PTIC by virtue of three Deeds of Assignment
executed by PTIC stockholders Ramon Cojuangco and Luis Tirso
Rivilla. In 1986, the 111,415 shares of stock of PTIC held by PHI
were sequestered by the Presidential Commission on Good
Government (PCGG). The 111,415 PTIC shares, which represent
about 46.125 percent of the outstanding capital stock of PTIC,
were later declared by this Court to be owned by the Republic of
the Philippines.2
In 1999, First Pacific, a Bermuda-registered, Hong Kong-based
investment firm, acquired the remaining 54 percent of the
outstanding capital stock of PTIC. On 20 November 2006, the
Inter-Agency Privatization Council (IPC) of the Philippine
Government announced that it would sell the 111,415 PTIC
shares, or 46.125 percent of the outstanding capital stock of PTIC,
through a public bidding to be conducted on 4 December 2006.
Subsequently, the public bidding was reset to 8 December 2006,
and only two bidders, Parallax Venture Fund XXVII (Parallax) and
Pan-Asia Presidio Capital, submitted their bids. Parallax won with a
bid of P25.6 billion or US$510 million.
Thereafter, First Pacific announced that it would exercise its right
of first refusal as a PTIC stockholder and buy the 111,415 PTIC
shares by matching the bid price of Parallax. However, First Pacific

The Philippine Government decided to sell the 111,415 PTIC

shares, which represent 6.4 percent of the outstanding common
shares of stock of PLDT, and designated the Inter-Agency
Privatization Council (IPC), composed of the Department of
Finance and the PCGG, as the disposing entity. An invitation to bid
was published in seven different newspapers from 13 to 24
November 2006. On 20 November 2006, a pre-bid conference was
held, and the original deadline for bidding scheduled on 4
December 2006 was reset to 8 December 2006. The extension
was published in nine different newspapers.
During the 8 December 2006 bidding, Parallax Capital
Management LP emerged as the highest bidder with a bid
of P25,217,556,000. The government notified First Pacific, the
majority owner of PTIC shares, of the bidding results and gave
First Pacific until 1 February 2007 to exercise its right of first
refusal in accordance with PTICs Articles of Incorporation. First
Pacific announced its intention to match Parallaxs bid.
On 31 January 2007, the House of Representatives (HR)
Committee on Good Government conducted a public hearing on
the particulars of the then impending sale of the 111,415 PTIC
shares. Respondents Teves and Sevilla were among those who
attended the public hearing. The HR Committee Report No. 2270
concluded that: (a) the auction of the governments 111,415 PTIC
shares bore due diligence, transparency and conformity with
existing legal procedures; and (b) First Pacifics intended
acquisition of the governments 111,415 PTIC shares
resulting in First Pacifics 100% ownership of PTIC will not
violate the 40 percent constitutional limit on foreign
ownership of a public utility since PTIC holds only 13.847
percent of the total outstanding common shares of
PLDT.5 On 28 February 2007, First Pacific completed the
acquisition of the 111,415 shares of stock of PTIC.
Respondent Manuel V. Pangilinan admits the following facts: (a)
the IPC conducted a public bidding for the sale of 111,415 PTIC
shares or 46 percent of the outstanding capital stock of PTIC (the

4
remaining 54 percent of PTIC shares was already owned by First
Pacific and its affiliates); (b) Parallax offered the highest bid
amounting toP25,217,556,000; (c) pursuant to the right of first
refusal in favor of PTIC and its shareholders granted in PTICs
Articles of Incorporation, MPAH, a First Pacific affiliate, exercised
its right of first refusal by matching the highest bid offered for
PTIC shares on 13 February 2007; and (d) on 28 February 2007,
the sale was consummated when MPAH paid IPC P25,217,556,000
and the government delivered the certificates for the 111,415
PTIC shares. Respondent Pangilinan denies the other allegations of
facts of petitioner.
On 28 February 2007, petitioner filed the instant petition for
prohibition, injunction, declaratory relief, and declaration of nullity
of sale of the 111,415 PTIC shares. Petitioner claims, among
others, that the sale of the 111,415 PTIC shares would result in an
increase in First Pacifics common shareholdings in PLDT from 30.7
percent to 37 percent, and this, combined with Japanese NTT
DoCoMos common shareholdings in PLDT, would result to a total
foreign common shareholdings in PLDT of 51.56 percent which is
over the 40 percent constitutional limit.6 Petitioner asserts:
If and when the sale is completed, First Pacifics equity in PLDT will
go up from 30.7 percent to 37.0 percent of its common or
voting- stockholdings, x x x. Hence, the consummation of the sale
will put the two largest foreign investors in PLDT First Pacific and
Japans NTT DoCoMo, which is the worlds largest wireless
telecommunications firm, owning 51.56 percent of PLDT common
equity. x x x With the completion of the sale, data culled from the
official website of the New York Stock Exchange (www.nyse.com)
showed that those foreign entities, which own at least five percent
of common equity, will collectively own 81.47 percent of PLDTs
common equity. x x x
x x x as the annual disclosure reports, also referred to as Form 20K reports x x x which PLDT submitted to the New York Stock
Exchange for the period 2003-2005, revealed that First Pacific and
several other foreign entities breached the constitutional limit of
40 percent ownership as early as 2003. x x x"7
Petitioner raises the following issues: (1) whether the
consummation of the then impending sale of 111,415 PTIC shares
to First Pacific violates the constitutional limit on foreign
ownership of a public utility; (2) whether public respondents
committed grave abuse of discretion in allowing the sale of the
111,415 PTIC shares to First Pacific; and (3) whether the sale of
common shares to foreigners in excess of 40 percent of the entire
subscribed common capital stock violates the constitutional limit
on foreign ownership of a public utility.8
On 13 August 2007, Pablito V. Sanidad and Arno V. Sanidad filed a
Motion for Leave to Intervene and Admit Attached Petition-inIntervention. In the Resolution of 28 August 2007, the Court
granted the motion and noted the Petition-in-Intervention.
Petitioners-in-intervention "join petitioner Wilson Gamboa x x x in
seeking, among others, to enjoin and/or nullify the sale by
respondents of the 111,415 PTIC shares to First Pacific or
assignee." Petitioners-in-intervention claim that, as PLDT
subscribers, they have a "stake in the outcome of the controversy
x x x where the Philippine Government is completing the sale of
government owned assets in [PLDT], unquestionably a public
utility, in violation of the nationality restrictions of the Philippine
Constitution."
The Issue
This Court is not a trier of facts. Factual questions such as those
raised by petitioner,9 which indisputably demand a thorough
examination of the evidence of the parties, are generally beyond
this Courts jurisdiction. Adhering to this well-settled principle, the
Court shall confine the resolution of the instant controversy solely
on the threshold and purely legal issue of whether 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.

The Ruling of the Court

The petition is partly meritorious.
Petition for declaratory relief treated as petition for
mandamus
At the outset, petitioner is faced with a procedural barrier. Among
the remedies petitioner seeks, only the petition for prohibition is
within the original jurisdiction of this court, which however is not
exclusive but is concurrent with the Regional Trial Court and the
Court of Appeals. The actions for declaratory relief, 10 injunction,
and annulment of sale are not embraced within the original
jurisdiction of the Supreme Court. On this ground alone, the
petition could have been dismissed outright.
While direct resort to this Court may be justified in a petition for
prohibition,11 the Court shall nevertheless refrain from discussing
the grounds in support of the petition for prohibition since on 28
February 2007, the questioned sale was consummated when
MPAH paid IPC P25,217,556,000 and the government delivered
the certificates for the 111,415 PTIC shares.
However, since the threshold and purely legal issue on the
definition of the term "capital" in Section 11, Article XII of the
Constitution has far-reaching implications to the national
economy, the Court treats the petition for declaratory relief as one
for mandamus.12
In Salvacion v. Central Bank of the Philippines,13 the Court treated
the petition for declaratory relief as one for mandamus
considering the grave injustice that would result in the
interpretation of a banking law. In that case, which involved the
crime of rape committed by a foreign tourist against a Filipino
minor and the execution of the final judgment in the civil case for
damages on the tourists dollar deposit with a local bank, the
Court declared Section 113 of Central Bank Circular No. 960,
exempting foreign currency deposits from attachment,
garnishment or any other order or process of any court,
inapplicable due to the peculiar circumstances of the case. The
Court held that "injustice would result especially to a citizen
aggrieved by a foreign guest like accused x x x" that would
"negate Article 10 of the Civil Code which provides that in case of
doubt in the interpretation or application of laws, it is presumed
that the lawmaking body intended right and justice to prevail."
The Court therefore required respondents Central Bank of the
Philippines, the local bank, and the accused to comply with the
writ of execution issued in the civil case for damages and to
release the dollar deposit of the accused to satisfy the judgment.
In Alliance of Government Workers v. Minister of Labor,14 the Court
similarly brushed aside the procedural infirmity of the petition for
declaratory relief and treated the same as one for mandamus.
In Alliance, the issue was whether the government unlawfully
excluded petitioners, who were government employees, from the
enjoyment of rights to which they were entitled under the law.
Specifically, the question was: "Are the branches, agencies,
subdivisions, and instrumentalities of the Government, including
government owned or controlled corporations included among the
four employers under Presidential Decree No. 851 which are
required to pay their employees x x x a thirteenth (13th) month
pay x x x ?" The Constitutional principle involved therein affected
all government employees, clearly justifying a relaxation of the
technical rules of procedure, and certainly requiring the
interpretation of the assailed presidential decree.
In short, it is well-settled that this Court may treat a petition for
declaratory relief as one for mandamus if the issue involved has
far-reaching implications. As this Court held in Salvacion:

5
The Court has no original and exclusive jurisdiction over a petition
for declaratory relief. However, exceptions to this rule have
been recognized. Thus, where the petition has farreaching implications and raises questions that should be
resolved, it may be treated as one for
mandamus.15 (Emphasis supplied)

More importantly, there is no question that the instant petition

raises matters of transcendental importance to the public. The
fundamental and threshold legal issue in this case, involving the
national economy and the economic welfare of the Filipino people,
far outweighs any perceived impediment in the legal personality
of the petitioner to bring this action.

In the present case, petitioner seeks primarily the interpretation of

the term "capital" in Section 11, Article XII of the Constitution. He
prays that this Court declare that the term "capital" refers to
common shares only, and that such shares constitute "the sole
basis in determining foreign equity in a public utility." Petitioner
further asks this Court to declare any ruling inconsistent with such
interpretation unconstitutional.

In Chavez v. PCGG,24 the Court upheld the right of a citizen to

bring a suit on matters of transcendental importance to the
public, thus:

The interpretation of the term "capital" in Section 11, Article XII of

the Constitution has far-reaching implications to the national
economy. In fact, a resolution of this issue will determine whether
Filipinos are masters, or second class citizens, in their own
country. What is at stake here is whether Filipinos or foreigners
will have effective control of the national economy. Indeed, if
ever there is a legal issue that has far-reaching implications to the
entire nation, and to future generations of Filipinos, it is the
threshhold legal issue presented in this case.
The Court first encountered the issue on the definition of the term
"capital" in Section 11, Article XII of the Constitution in the case
of Fernandez v. Cojuangco, docketed as G.R. No. 157360.16 That
case involved the same public utility (PLDT) and substantially the
same private respondents. Despite the importance and novelty of
the constitutional issue raised therein and despite the fact that
the petition involved a purely legal question, the Court declined to
resolve the case on the merits, and instead denied the same for
disregarding the hierarchy of courts.17There, petitioner Fernandez
assailed on a pure question of law the Regional Trial Courts
Decision of 21 February 2003 via a petition for review under Rule
45. The Courts Resolution, denying the petition, became final on
21 December 2004.
The instant petition therefore presents the Court with another
opportunity to finally settle this purely legal issuewhich is of
transcendental importance to the national economy and a
fundamental requirement to a faithful adherence to our
Constitution. The Court must forthwith seize such opportunity, not
only for the benefit of the litigants, but more significantly for the
benefit of the entire Filipino people, to ensure, in the words of the
Constitution, "a self-reliant and independent national
economy effectively controlled by Filipinos."18 Besides, in the
light of vague and confusing positions taken by government
agencies on this purely legal issue, present and future foreign
investors in this country deserve, as a matter of basic fairness, a
categorical ruling from this Court on the extent of their
participation in the capital of public utilities and other nationalized
businesses.
Despite its far-reaching implications to the national economy, this
purely legal issue has remained unresolved for over 75 years
since the 1935 Constitution. There is no reason for this Court to
evade this ever recurring fundamental issue and delay again
defining the term "capital," which appears not only in Section 11,
Article XII of the Constitution, but also in Section 2, Article XII on
co-production and joint venture agreements for the development
of our natural resources,19 in Section 7, Article XII on ownership of
private lands,20 in Section 10, Article XII on the reservation of
certain investments to Filipino citizens,21 in Section 4(2), Article
XIV on the ownership of educational institutions, 22 and in Section
11(2), Article XVI on the ownership of advertising companies. 23
Petitioner has locus standi
There is no dispute that petitioner is a stockholder of PLDT. As
such, he 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. If the sale indeed violates the
Constitution, then there is a possibility that PLDTs franchise could
be revoked, a dire consequence directly affecting petitioners
interest as a stockholder.

In Taada v. Tuvera, the Court asserted that when the issue

concerns a public right and the object of mandamus is to
obtain the enforcement of a public duty, the people are
regarded as the real parties in interest; and because it is
sufficient that petitioner is a citizen and as such is
interested in the execution of the laws, he need not show
that he has any legal or special interest in the result of the
action. In the aforesaid case, the petitioners sought to enforce
their right to be informed on matters of public concern, a right
then recognized in Section 6, Article IV of the 1973 Constitution, in
connection with the rule that laws in order to be valid and
enforceable must be published in the Official Gazette or otherwise
effectively promulgated. In ruling for the petitioners legal
standing, the Court declared that the right they sought to be
enforced is a public right recognized by no less than the
fundamental law of the land.
Legaspi v. Civil Service Commission, while reiterating Taada,
further declared that when a mandamus proceeding involves
the assertion of a public right, the requirement of personal
interest is satisfied by the mere fact that petitioner is a
citizen and, therefore, part of the general public which
possesses the right.
Further, in Albano v. Reyes, we said that while expenditure of
public funds may not have been involved under the questioned
contract for the development, management and operation of the
Manila International Container Terminal, public interest [was]
definitely involved considering the important role [of the
subject contract] . . . in the economic development of the
country and the magnitude of the financial consideration
involved. We concluded that, as a consequence, the disclosure
provision in the Constitution would constitute sufficient authority
for upholding the petitioners standing. (Emphasis supplied)
Clearly, since the instant petition, brought by a citizen, involves
matters of transcendental public importance, the petitioner has
the requisite locus standi.
Definition of the Term "Capital" in
Section 11, Article XII of the 1987 Constitution
Section 11, Article XII (National Economy and Patrimony) of the
1987 Constitution mandates the Filipinization of public utilities, 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; 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)

6
The above provision substantially reiterates Section 5, Article XIV
of the 1973 Constitution, thus:
Section 5. 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 the capital of
which 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 National Assembly
when the public interest 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 the capital thereof. (Emphasis supplied)
The foregoing provision in the 1973 Constitution reproduced
Section 8, Article XIV of the 1935 Constitution, viz:
Section 8. 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 other entities organized under the laws of
the Philippines sixty per centum of the capital of which is
owned by citizens of the Philippines, nor shall such franchise,
certificate, or authorization be exclusive in character or for a
longer period than fifty years. No franchise or right shall be
granted to any individual, firm, or corporation, except under the
condition that it shall be subject to amendment, alteration, or
repeal by the Congress when the public interest so requires.
(Emphasis supplied)
Father Joaquin G. Bernas, S.J., a leading member of the 1986
Constitutional Commission, reminds us that the Filipinization
provision in the 1987 Constitution is one of the products of the
spirit of nationalism which gripped the 1935 Constitutional
Convention.25 The 1987 Constitution "provides for the Filipinization
of public utilities by requiring that any form of authorization for
the operation of public utilities should be granted only 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. The provision is [an
express] recognition of the sensitive and vital position of
public utilities both in the national economy and for
national security."26 The evident purpose of the citizenship
requirement is to prevent aliens from assuming control of public
utilities, which may be inimical to the national interest. 27 This
specific provision explicitly reserves to Filipino citizens control of
public utilities, pursuant to an overriding economic goal of the
1987 Constitution: to "conserve and develop our patrimony" 28 and
ensure "a self-reliant and independent national
economy effectively controlled by Filipinos."29
Any citizen or juridical entity desiring to operate a public utility
must therefore meet the minimum nationality requirement
prescribed in Section 11, Article XII of the Constitution. Hence, for
a corporation to be granted authority to operate a public utility, at
least 60 percent of its "capital" must be owned by Filipino citizens.
The crux of the controversy is the definition of the term "capital."
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)?
Petitioner submits that the 40 percent foreign equity limitation in
domestic public utilities refers only to common shares because
such shares are entitled to vote and it is through voting that
control over a corporation is exercised. Petitioner posits that the
term "capital" in Section 11, Article XII of the Constitution refers to
"the ownership of common capital stock subscribed and
outstanding, which class of shares alone, under the corporate setup of PLDT, can vote and elect members of the board of
directors." It is undisputed that PLDTs non-voting preferred shares

are held mostly by Filipino citizens.30 This arose from Presidential

Decree No. 217,31 issued on 16 June 1973 by then President
Ferdinand Marcos, requiring every applicant of a PLDT telephone
line to subscribe to non-voting preferred shares to pay for the
investment cost of installing the telephone line. 32
Petitioners-in-intervention basically reiterate petitioners
arguments and adopt petitioners definition of the term
"capital."33 Petitioners-in-intervention allege that "the approximate
foreign ownership of common capital stock of PLDT x x x already
amounts to at least 63.54% of the total outstanding common
stock," which means that foreigners exercise significant control
over PLDT, patently violating the 40 percent foreign equity
limitation in public utilities prescribed by the Constitution.
Respondents, on the other hand, do not offer any definition of the
term "capital" in Section 11, Article XII of the Constitution. More
importantly, private respondents Nazareno and Pangilinan of PLDT
do not dispute that more than 40 percent of the common shares
of PLDT are held by foreigners.
In particular, respondent Nazarenos Memorandum, consisting of
73 pages, harps mainly on the procedural infirmities of the
petition and the supposed violation of the due process rights of
the "affected foreign common shareholders." Respondent
Nazareno does not deny petitioners allegation of foreigners
dominating the common shareholdings of PLDT. Nazareno
stressed mainly that the petition "seeks to divest foreign
common shareholders purportedly exceeding 40% of the
total common shareholdings in PLDT of their ownership
over their shares." Thus, "the foreign natural and juridical PLDT
shareholders must be impleaded in this suit so that they can be
heard."34 Essentially, Nazareno invokes denial of due process on
behalf of the foreign common shareholders.
While Nazareno does not introduce any definition of the term
"capital," he states that "among the factual assertions that
need to be established to counter petitioners allegations
is the uniform interpretation by government agencies
(such as the SEC), institutions and corporations (such as
the Philippine National Oil Company-Energy Development
Corporation or PNOC-EDC) of including both preferred
shares and common shares in "controlling interest" in view
of testing compliance with the 40% constitutional
limitation on foreign ownership in public utilities."35
Similarly, respondent Manuel V. Pangilinan does not define the
term "capital" in Section 11, Article XII of the Constitution. Neither
does he refute petitioners claim of foreigners holding more than
40 percent of PLDTs common shares. Instead, respondent
Pangilinan focuses on the procedural flaws of the petition and the
alleged violation of the due process rights of foreigners.
Respondent Pangilinan emphasizes in his Memorandum (1) the
absence of this Courts jurisdiction over the petition; (2)
petitioners lack of standing; (3) mootness of the petition; (4) nonavailability of declaratory relief; and (5) the denial of due process
rights. Moreover, respondent Pangilinan alleges that the issue
should be whether "owners of shares in PLDT as well as owners of
shares in companies holding shares in PLDT may be required to
relinquish their shares in PLDT and in those companies without
any law requiring them to surrender their shares and also without
notice and trial."
Respondent Pangilinan further asserts that "Section 11, [Article
XII of the Constitution] imposes no nationality
requirement on the shareholders of the utility company as
a condition for keeping their shares in the utility
company." According to him, "Section 11 does not authorize
taking one persons property (the shareholders stock in the utility
company) on the basis of another partys alleged failure to satisfy
a requirement that is a condition only for that other partys
retention of another piece of property (the utility company being
at least 60% Filipino-owned to keep its franchise)."36
The OSG, representing public respondents Secretary Margarito
Teves, Undersecretary John P. Sevilla, Commissioner Ricardo
Abcede, and Chairman Fe Barin, is likewise silent on the definition

7
of the term "capital." In its Memorandum37 dated 24 September
2007, the OSG also limits its discussion on the supposed
procedural defects of the petition, i.e. lack of standing, lack of
jurisdiction, non-inclusion of interested parties, and lack of basis
for injunction. The OSG does not present any definition or
interpretation of the term "capital" in Section 11, Article XII of the
Constitution. The OSG contends that "the petition actually
partakes of a collateral attack on PLDTs franchise as a public
utility," which in effect requires a "full-blown trial where all the
parties in interest are given their day in court." 38
Respondent Francisco Ed Lim, impleaded as President and Chief
Executive Officer of the Philippine Stock Exchange (PSE), does not
also define the term "capital" and seeks the dismissal of the
petition on the following grounds: (1) failure to state a cause of
action against Lim; (2) the PSE allegedly implemented its rules
and required all listed companies, including PLDT, to make proper
and timely disclosures; and (3) the reliefs prayed for in the
petition would adversely impact the stock market.
In the earlier case of Fernandez v. Cojuangco, petitioner
Fernandez who claimed to be a stockholder of record of PLDT,
contended that the term "capital" in the 1987 Constitution refers
to shares entitled to vote or the common shares. Fernandez
explained thus:
The forty percent (40%) foreign equity limitation in public utilities
prescribed by the Constitution refers to ownership of shares of
stock entitled to vote, i.e., common shares, considering that it is
through voting that control is being exercised. x x x
Obviously, the intent of the framers of the Constitution in
imposing limitations and restrictions on fully nationalized and
partially nationalized activities is for Filipino nationals to be always
in control of the corporation undertaking said activities.
Otherwise, if the Trial Courts ruling upholding respondents
arguments were to be given credence, it would be possible for the
ownership structure of a public utility corporation to be divided
into one percent (1%) common stocks and ninety-nine percent
(99%) preferred stocks. Following the Trial Courts ruling adopting
respondents arguments, the common shares can be owned
entirely by foreigners thus creating an absurd situation wherein
foreigners, who are supposed to be minority shareholders, control
the public utility corporation.
xxxx
Thus, the 40% foreign ownership limitation should be interpreted
to apply to both the beneficial ownership and the controlling
interest.
xxxx
Clearly, therefore, the forty percent (40%) foreign equity limitation
in public utilities prescribed by the Constitution refers to
ownership of shares of stock entitled to vote, i.e., common shares.
Furthermore, ownership of record of shares will not suffice but it
must be shown that the legal and beneficial ownership rests in the
hands of Filipino citizens. Consequently, in the case of petitioner
PLDT, since it is already admitted that the voting interests of
foreigners which would gain entry to petitioner PLDT by the
acquisition of SMART shares through the Questioned Transactions
is equivalent to 82.99%, and the nominee arrangements between
the foreign principals and the Filipino owners is likewise admitted,
there is, therefore, a violation of Section 11, Article XII of the
Constitution.
Parenthetically, the Opinions dated February 15, 1988 and April
14, 1987 cited by the Trial Court to support the proposition that
the meaning of the word "capital" as used in Section 11, Article XII
of the Constitution allegedly refers to the sum total of the shares
subscribed and paid-in by the shareholder and it allegedly is
immaterial how the stock is classified, whether as common or
preferred, cannot stand in the face of a clear legislative policy as
stated in the FIA which took effect in 1991 or way after said
opinions were rendered, and as clarified by the above-quoted

Amendments. In this regard, suffice it to state that as between the

law and an opinion rendered by an administrative agency, the law
indubitably prevails. Moreover, said Opinions are merely advisory
and cannot prevail over the clear intent of the framers of the
Constitution.
In the same vein, the SECs construction of Section 11, Article XII
of the Constitution is at best merely advisory for it is the courts
that finally determine what a law means.39
On the other hand, respondents therein, Antonio O. Cojuangco,
Manuel V. Pangilinan, Carlos A. Arellano, Helen Y. Dee, Magdangal
B. Elma, Mariles Cacho-Romulo, Fr. Bienvenido F. Nebres, Ray C.
Espinosa, Napoleon L. Nazareno, Albert F. Del Rosario, and
Orlando B. Vea, argued that the term "capital" in Section 11,
Article XII of the Constitution includes preferred shares since the
Constitution does not distinguish among classes of stock, thus:
16. The Constitution applies its foreign ownership limitation on the
corporations "capital," without distinction as to classes of shares.
xxx
In this connection, the Corporation Code which was already in
force at the time the present (1987) Constitution was drafted
defined outstanding capital stock as follows:
Section 137. Outstanding capital stock defined. The term
"outstanding capital stock", as used in this Code, means the total
shares of stock issued under binding subscription agreements to
subscribers or stockholders, whether or not fully or partially paid,
except treasury shares.
Section 137 of the Corporation Code also does not distinguish
between common and preferred shares, nor exclude either class
of shares, in determining the outstanding capital stock (the
"capital") of a corporation. Consequently, petitioners suggestion
to reckon PLDTs foreign equity only on the basis of PLDTs
outstanding common shares is without legal basis. The language
of the Constitution should be understood in the sense it has in
common use.
xxxx
17. But even assuming that resort to the proceedings of the
Constitutional Commission is necessary, there is nothing in the
Record of the Constitutional Commission (Vol. III) which
petitioner misleadingly cited in the Petition x x x which supports
petitioners view that only common shares should form the basis
for computing a public utilitys foreign equity.
xxxx
18. In addition, the SEC the government agency primarily
responsible for implementing the Corporation Code, and which
also has the responsibility of ensuring compliance with the
Constitutions foreign equity restrictions as regards nationalized
activities x x x has categorically ruled that both common and
preferred shares are properly considered in determining
outstanding capital stock and the nationality composition
thereof.40
We agree with petitioner and petitioners-in-intervention. 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, 41 and not to the
total outstanding capital stock comprising both common and nonvoting preferred shares.
The Corporation Code of the Philippines42 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

8
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;

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.45 In fact, under the Corporation Code only
preferred or redeemable shares can be deprived of the right to
vote.46 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.47
Considering that common shares have voting rights which
translate to control, as opposed to preferred shares which usually
have no voting rights, the term "capital" in Section 11, Article XII
of the Constitution refers only to common shares. However, if the
preferred shares also have the right to vote in the election of
directors, then the term "capital" shall include such preferred
shares because the right to participate in the control or
management of the corporation is exercised through the right to
vote in the election of directors. In short, the term "capital" in
Section 11, Article XII of the Constitution refers only to
shares of stock that can vote in the election of directors.
This interpretation is consistent with the intent of the framers of
the Constitution to place in the hands of Filipino citizens the
control and management of public utilities. As revealed in the
deliberations of the Constitutional Commission, "capital" refers to
the voting stock or controlling interest of a corporation, to wit:
MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local
or Filipino equity and foreign equity; namely, 60-40 in Section 3,
60-40 in Section 9 and 2/3-1/3 in Section 15.
MR. VILLEGAS. That is right.
MR. NOLLEDO. In teaching law, we are always faced with this
question: "Where do we base the equity requirement, is it on the
authorized capital stock, on the subscribed capital stock, or on the
paid-up capital stock of a corporation"? Will the Committee please
enlighten me on this?
MR. VILLEGAS. We have just had a long discussion with the
members of the team from the UP Law Center who provided us a
draft. The phrase that is contained here which we adopted
from the UP draft is "60 percent of voting stock."

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;

MR. NOLLEDO. That must be based on the subscribed capital

stock, because unless declared delinquent, unpaid capital stock
shall be entitled to vote.

4. Incurring, creating or increasing bonded indebtedness;

MR. VILLEGAS. That is right.

5. Increase or decrease of capital stock;

MR. NOLLEDO. Thank you.

6. Merger or consolidation of the corporation with another

corporation or other corporations;

With respect to an investment by one corporation in another

corporation, say, a corporation with 60-40 percent equity invests
in another corporation which is permitted by the Corporation
Code, does the Committee adopt the grandfather rule?

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. 43 This
is exercised through his vote in the election of directors because it
is the board of directors that controls or manages the
corporation.44 In the absence of provisions in the articles of

MR. VILLEGAS. Yes, that is the understanding of the Committee.

MR. NOLLEDO. Therefore, we need additional Filipino capital?
MR. VILLEGAS. Yes.48
xxxx
MR. AZCUNA. May I be clarified as to that portion that was
accepted by the Committee.
MR. VILLEGAS. The portion accepted by the Committee is the
deletion of the phrase "voting stock or controlling interest."

9
MR. AZCUNA. Hence, without the Davide amendment, the
committee report would read: "corporations or associations at
least sixty percent of whose CAPITAL is owned by such citizens."
MR. VILLEGAS. Yes.
MR. AZCUNA. So if the Davide amendment is lost, we are stuck
with 60 percent of the capital to be owned by citizens.
MR. VILLEGAS. That is right.
MR. AZCUNA. But the control can be with the foreigners
even if they are the minority. Let us say 40 percent of the
capital is owned by them, but it is the voting capital,
whereas, the Filipinos own the nonvoting shares. So we
can have a situation where the corporation is controlled by
foreigners despite being the minority because they have
the voting capital. That is the anomaly that would result
here.
MR. BENGZON. No, the reason we eliminated the word
"stock" as stated in the 1973 and 1935 Constitutions is
that according to Commissioner Rodrigo, there are
associations that do not have stocks. That is why we say
"CAPITAL."
MR. AZCUNA. We should not eliminate the phrase
"controlling interest."
MR. BENGZON. In the case of stock corporations, it is
assumed.49 (Emphasis supplied)
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, 50 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 nonFilipino 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 nonPhilippine nationals. (Emphasis supplied)
Mere legal title is insufficient to meet the 60 percent Filipinoowned "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-votingpreferred
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,

10
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 economyeffectively 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.
Holders of PLDT preferred shares are explicitly denied of the right
to vote in the election of directors. PLDTs Articles of Incorporation
expressly state that "the holders of Serial Preferred Stock
shall not be entitled to vote at any meeting of the
stockholders for the election of directors or for any other
purpose or otherwise participate in any action taken by the
corporation or its stockholders, or to receive notice of any
meeting of stockholders."51
On the other hand, holders of common shares are granted the
exclusive right to vote in the election of directors. PLDTs Articles
of Incorporation52 state that "each holder of Common Capital
Stock shall have one vote in respect of each share of such stock
held by him on all matters voted upon by the stockholders,
and the holders of Common Capital Stock shall have the
exclusive right to vote for the election of directors and for
all other purposes."53
In short, only holders of common shares can vote in the election
of directors, meaning only common shareholders exercise control
over PLDT. Conversely, holders of preferred shares, who have no
voting rights in the election of directors, do not have any control
over PLDT. In fact, under PLDTs Articles of Incorporation, holders
of common shares have voting rights for all purposes, while
holders of preferred shares have no voting right for any purpose
whatsoever.
It must be stressed, and respondents do not dispute, that
foreigners hold a majority of the common shares of PLDT. In fact,
based on PLDTs 2010 General Information Sheet (GIS), 54 which is
a document required to be submitted annually to the Securities
and Exchange Commission,55 foreigners hold 120,046,690
common shares of PLDT whereas Filipinos hold only 66,750,622
common shares.56 In other words, foreigners hold 64.27% of the
total number of PLDTs common shares, while Filipinos hold only
35.73%. Since holding a majority of the common shares equates
to control, it is clear that foreigners exercise control over PLDT.
Such amount of control unmistakably exceeds the allowable 40
percent limit on foreign ownership of public utilities expressly
mandated in Section 11, Article XII of the Constitution.
Moreover, the Dividend Declarations of PLDT for 2009, 57 as
submitted to the SEC, shows that per share the SIP58preferred
shares earn a pittance in dividends compared to the common
shares. PLDT declared dividends for the common shares at P70.00
per share, while the declared dividends for the preferred shares
amounted to a measlyP1.00 per share.59 So the preferred shares
not only cannot vote in the election of directors, they also have
very little and obviously negligible dividend earning capacity
compared to common shares.
As shown in PLDTs 2010 GIS,60 as submitted to the SEC, the par
value of PLDT common shares is P5.00 per share, whereas the par
value of preferred shares is P10.00 per share. In other words,
preferred shares have twice the par value of common shares but
cannot elect directors and have only 1/70 of the dividends of
common shares. Moreover, 99.44% of the preferred shares are

owned by Filipinos while foreigners own only a minuscule 0.56% of

the preferred shares.61 Worse, preferred shares constitute 77.85%
of the authorized capital stock of PLDT while common shares
constitute only 22.15%.62 This undeniably shows that beneficial
interest in PLDT is not with the non-voting preferred shares but
with the common shares, blatantly violating the constitutional
requirement of 60 percent Filipino control and Filipino beneficial
ownership in a public utility.
The legal and beneficial ownership of 60 percent of the
outstanding capital stock must rest in the hands of Filipinos in
accordance with the constitutional mandate. Full beneficial
ownership of 60 percent of the outstanding capital stock, coupled
with 60 percent of the voting rights, is constitutionally required for
the States grant of authority to operate a public utility. The
undisputed fact that the PLDT preferred shares, 99.44% owned by
Filipinos, are non-voting and earn only 1/70 of the dividends that
PLDT common shares earn, grossly violates the constitutional
requirement of 60 percent Filipino control and Filipino beneficial
ownership of a public utility.
In short, Filipinos hold less than 60 percent of the voting
stock, and earn less than 60 percent of the dividends, of
PLDT. This directly contravenes the express command in Section
11, Article XII of the Constitution that "[n]o franchise, certificate,
or any other form of authorization for the operation of a public
utility shall be granted except to x x x corporations x x x
organized under the laws of the Philippines, at least sixty per
centum of whose capital is owned by such citizens x x x."
To repeat, (1) foreigners own 64.27% of the common shares of
PLDT, which class of shares exercises the soleright to vote in the
election of directors, and thus exercise control over PLDT; (2)
Filipinos own only 35.73% of PLDTs common shares, constituting
a minority of the voting stock, and thus do not exercise control
over PLDT; (3) preferred shares, 99.44% owned by Filipinos, have
no voting rights; (4) preferred shares earn only 1/70 of the
dividends that common shares earn;63 (5) preferred shares have
twice the par value of common shares; and (6) preferred shares
constitute 77.85% of the authorized capital stock of PLDT and
common shares only 22.15%. This kind of ownership and control
of a public utility is a mockery of the Constitution.
Incidentally, the fact that PLDT common shares with a par value
of P5.00 have a current stock market value ofP2,328.00 per
share,64 while PLDT preferred shares with a par value of P10.00
per share have a current stock market value ranging from
only P10.92 to P11.06 per share,65 is a glaring confirmation by the
market that control and beneficial ownership of PLDT rest with the
common shares, not with the preferred shares.
Indisputably, construing the term "capital" in Section 11, Article
XII of the Constitution to include both voting and non-voting
shares will result in the abject surrender of our
telecommunications industry to foreigners, amounting to a clear
abdication of the States constitutional duty to limit control of
public utilities to Filipino citizens. Such an interpretation certainly
runs counter to the constitutional provision reserving certain
areas of investment to Filipino citizens, such as the exploitation of
natural resources as well as the ownership of land, educational
institutions and advertising businesses. The Court should never
open to foreign control what the Constitution has expressly
reserved to Filipinos for that would be a betrayal of the
Constitution and of the national interest. The Court must perform
its solemn duty to defend and uphold the intent and letter of the
Constitution to ensure, in the words of the Constitution, "a selfreliant and independent national economy effectively
controlled by Filipinos."
Section 11, Article XII of the Constitution, like other provisions of
the Constitution expressly reserving to Filipinosspecific areas of
investment, such as the development of natural resources and
ownership of land, educational institutions and advertising
business, is self-executing. There is no need for legislation to
implement these self-executing provisions of the Constitution. The
rationale why these constitutional provisions are self-executing
was explained in Manila Prince Hotel v. GSIS,66 thus:

11
x x x Hence, unless it is expressly provided that a legislative act is
necessary to enforce a constitutional mandate, the presumption
now is that all provisions of the constitution are self-executing. If
the constitutional provisions are treated as requiring legislation
instead of self-executing, the legislature would have the power to
ignore and practically nullify the mandate of the fundamental law.
This can be cataclysmic. That is why the prevailing view is, as it
has always been, that
. . . in case of doubt, the Constitution should be considered selfexecuting rather than non-self-executing. . . .Unless the
contrary is clearly intended, the provisions of the
Constitution should be considered self-executing, as a
contrary rule would give the legislature discretion to
determine when, or whether, they shall be effective. These
provisions would be subordinated to the will of the lawmaking
body, which could make them entirely meaningless by simply
refusing to pass the needed implementing statute. (Emphasis
supplied)
In Manila Prince Hotel, even the Dissenting Opinion of then
Associate Justice Reynato S. Puno, later Chief Justice, agreed that
constitutional provisions are presumed to be self-executing.
Justice Puno stated:
Courts as a rule consider the provisions of the Constitution as selfexecuting, rather than as requiring future legislation for their
enforcement. The reason is not difficult to discern. For if they
are not treated as self-executing, the mandate of the
fundamental law ratified by the sovereign people can be
easily ignored and nullified by Congress. Suffused with
wisdom of the ages is the unyielding rule that legislative
actions may give breath to constitutional rights but
congressional inaction should not suffocate them.
Thus, we have treated as self-executing the provisions in the Bill
of Rights on arrests, searches and seizures, the rights of a person
under custodial investigation, the rights of an accused, and the
privilege against self-incrimination. It is recognized that legislation
is unnecessary to enable courts to effectuate constitutional
provisions guaranteeing the fundamental rights of life, liberty and
the protection of property. The same treatment is accorded to
constitutional provisions forbidding the taking or damaging of
property for public use without just compensation. (Emphasis
supplied)
Thus, in numerous cases,67 this Court, even in the absence of
implementing legislation, applied directly the provisions of the
1935, 1973 and 1987 Constitutions limiting land ownership to
Filipinos. In Soriano v. Ong Hoo,68this Court ruled:
x x x As the Constitution is silent as to the effects or
consequences of a sale by a citizen of his land to an alien, and as
both the citizen and the alien have violated the law, none of them
should have a recourse against the other, and it should only be
the State that should be allowed to intervene and determine what
is to be done with the property subject of the violation. We have
said that what the State should do or could do in such matters is a
matter of public policy, entirely beyond the scope of judicial
authority. (Dinglasan, et al. vs. Lee Bun Ting, et al., 6 G. R. No. L5996, June 27, 1956.) While the legislature has not definitely
decided what policy should be followed in cases of
violations against the constitutional prohibition, courts of
justice cannot go beyond by declaring the disposition to
be null and void as violative of the Constitution. x x x
(Emphasis supplied)
To treat Section 11, Article XII of the Constitution as not selfexecuting would mean that since the 1935 Constitution, or over
the last 75 years, not one of the constitutional provisions
expressly reserving specific areas of investments to corporations,
at least 60 percent of the "capital" of which is owned by Filipinos,
was enforceable. In short, the framers of the 1935, 1973 and 1987
Constitutions miserably failed to effectively reserve to Filipinos
specific areas of investment, like the operation by corporations of
public utilities, the exploitation by corporations of mineral
resources, the ownership by corporations of real estate, and the

ownership of educational institutions. All the legislatures that

convened since 1935 also miserably failed to enact legislations to
implement these vital constitutional provisions that determine
who will effectively control the national economy, Filipinos or
foreigners. This Court cannot allow such an absurd interpretation
of the Constitution.
This Court has held that the SEC "has both regulatory and
adjudicative functions."69 Under its regulatory functions, the SEC
can be compelled by mandamus to perform its statutory duty
when it unlawfully neglects to perform the same. Under its
adjudicative or quasi-judicial functions, the SEC can be also be
compelled by mandamus to hear and decide a possible violation
of any law it administers or enforces when it is mandated by law
to investigate such violation.1awphi1
Under Section 17(4)70 of the Corporation Code, the SEC has the
regulatory function to reject or disapprove the Articles of
Incorporation of any corporation where "the required
percentage of ownership of the capital stock to be owned
by citizens of the Philippines has not been complied with
as required by existing laws or the Constitution." Thus, the
SEC is the government agency tasked with the statutory duty to
enforce the nationality requirement prescribed in Section 11,
Article XII of the Constitution on the ownership of public utilities.
This Court, in a petition for declaratory relief that is treated as a
petition for mandamus as in the present case, can direct the SEC
to perform its statutory duty under the law, a duty that the SEC
has apparently unlawfully neglected to do based on the 2010 GIS
that respondent PLDT submitted to the SEC.
Under Section 5(m) of the Securities Regulation Code,71 the SEC is vested with the "power
and function" to "suspend or revoke, after proper notice and hearing, the franchise or
certificate of registration of corporations, partnerships or associations, upon any of
the grounds provided by law." The SEC is mandated under Section 5(d) of the same
Code with the "power and function" to "investigate x x x the activities of persons to
ensure compliance" with the laws and regulations that SEC administers or enforces. The
GIS that all corporations are required to submit to SEC annually should put the SEC on
guard against violations of the nationality requirement prescribed in the Constitution and
existing laws. This Court can compel the SEC, in a petition for declaratory relief that is
treated as a petition for mandamus as in the present case, to hear and decide a possible
violation of Section 11, Article XII of the Constitution in view of the ownership structure of
PLDTs voting shares, as admitted by respondents and as stated in PLDTs 2010 GIS that
PLDT submitted to SEC.
WHEREFORE, we PARTLY GRANT the petition and rule that the 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). Respondent
Chairperson of the Securities and Exchange Commission is DIRECTED to apply this
definition of the term "capital" in determining the extent of allowable foreign ownership in
respondent Philippine Long Distance Telephone Company, and if there is a violation of
Section 11, Article XII of the Constitution, to impose the appropriate sanctions under the law.
SO ORDERED.
ANTONIO T. CARPIO
Associate Justice

12
G.R. No. 176579

October 9, 2012

HEIRS OF WILSON P. GAMBOA,* Petitioners,

vs.
FINANCE SECRETARYMARGARITO B. TEVES, FINANCE
UNDERSECRETARYJOHN P. SEVILLA, AND COMMISSIONER
RICARDO ABCEDE OF THE PRESIDENTIAL COMMISSION ON
GOOD GOVERNMENT(PCGG) IN THEIR CAPACITIES AS CHAIR
AND MEMBERS, RESPECTIVELY, OF THE PRIVATIZATION
COUNCIL, CHAIRMAN ANTHONI SALIM OF FIRST PACIFIC
CO., LTD. IN HIS CAPACITY AS DIRECTOR OF METRO PACIFIC
ASSET HOLDINGS INC., CHAIRMAN MANUEL V. PANGILINAN
OF PHILIPPINE LONG DISTANCE TELEPHONE COMPANY
(PLDT) IN HIS CAPACITY AS MANAGING DIRECTOR OF FIRST
PACIFIC CO., LTD., PRESIDENT NAPOLEON L. NAZARENO OF
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, CHAIR
FE BARIN OF THE SECURITIES AND EXCHANGE
COMMISSION, and PRESIDENT FRANCIS LIM OF THE
PHILIPPINE STOCK EXCHANGE, Respondents.
PABLITO V. SANIDAD and ARNO V. SANIDAD, Petitioner-inIntervention.
RESOLUTION
CARPIO, J.:
This resolves the motions for reconsideration of the 28 June 2011
Decision filed by (1) the Philippine Stock Exchange's (PSE)
President, 1 (2) Manuel V. Pangilinan (Pangilinan),2 (3) Napoleon L.
Nazareno (Nazareno ),3and ( 4) the Securities and Exchange
Commission (SEC)4 (collectively, movants ).
The Office of the Solicitor General (OSG) initially filed a motion for
reconsideration on behalfofthe SEC,5 assailing the 28 June 2011
Decision. However, it subsequently filed a Consolidated Comment
on behalf of the State,6declaring 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.
We deny the motions for reconsideration.
I.
Far-reaching implications of the legal issue justify
treatment of petition for declaratory relief as one for
mandamus.
As we emphatically stated in the 28 June 2011 Decision, the
interpretation of the term "capital" in Section 11, Article XII of the
Constitution has far-reaching implications to the national
economy. In fact, a resolution of this issue will determine whether
Filipinos are masters, or second-class citizens, in their own
country. What is at stake here is whether Filipinos or foreigners
will have effective control of the Philippine national economy.
Indeed, if ever there is a legal issue that has far-reaching
implications to the entire nation, and to future generations of
Filipinos, it is the threshold legal issue presented in this case.
Contrary to Pangilinans narrow view, the serious economic
consequences resulting in the interpretation of the term "capital"
in Section 11, Article XII of the Constitution undoubtedly demand
an immediate adjudication of this issue. Simply put, the farreaching implications of this issue justify the treatment of
the petition as one for mandamus.7
In Luzon Stevedoring Corp. v. Anti-Dummy Board,8 the Court
deemed it wise and expedient to resolve the case although the
petition for declaratory relief could be outrightly dismissed for
being procedurally defective. There, appellant admittedly had
already committed a breach of the Public Service Act in relation to
the Anti-Dummy Law since it had been employing non- American
aliens long before the decision in a prior similar case. However,

the main issue in Luzon Stevedoring was of transcendental

importance, involving the exercise or enjoyment of rights,
franchises, privileges, properties and businesses which only
Filipinos and qualified corporations could exercise or enjoy under
the Constitution and the statutes. Moreover, the same issue could
be raised by appellant in an appropriate action. Thus, in Luzon
Stevedoring the Court deemed it necessary to finally dispose of
the case for the guidance of all concerned, despite the apparent
procedural flaw in the petition.
The circumstances surrounding the present case, such as the
supposed procedural defect of the petition and the pivotal legal
issue involved, resemble those in Luzon
Stevedoring. Consequently, in the interest of substantial justice
and faithful adherence to the Constitution, we opted to resolve
this case for the guidance of the public and all concerned parties.
II.
No change of any long-standing rule;
thus, no redefinition of the term "capital."
Movants contend that the term "capital" in Section 11, Article XII
of the Constitution has long been settled and defined to refer to
the total outstanding shares of stock, whether voting or nonvoting. In fact, movants claim that the SEC, which is the
administrative agency tasked to enforce the 60-40 ownership
requirement in favor of Filipino citizens in the Constitution and
various statutes, has consistently adopted this particular
definition in its numerous opinions. Movants point out that with
the 28 June 2011 Decision, the Court in effect introduced a "new"
definition or "midstream redefinition"9 of the term "capital" in
Section 11, Article XII of the Constitution.
This is egregious error.
For more than 75 years since the 1935 Constitution, the Court
has not interpreted or defined the term "capital" found in various
economic provisions of the 1935, 1973 and 1987 Constitutions.
There has never been a judicial precedent interpreting the term
"capital" in the 1935, 1973 and 1987 Constitutions, until now.
Hence, it is patently wrong and utterly baseless to claim that the
Court in defining the term "capital" in its 28 June 2011 Decision
modified, reversed, or set aside the purported long-standing
definition of the term "capital," which supposedly refers to the
total outstanding shares of stock, whether voting or non-voting. To
repeat, until the present case there has never been a Court ruling
categorically defining the term "capital" found in the various
economic provisions of the 1935, 1973 and 1987 Philippine
Constitutions.
The opinions of the SEC, as well as of the Department of Justice
(DOJ), on the definition of the term "capital" as referring to both
voting and non-voting shares (combined total of common and
preferred shares) are, in the first place, conflicting and
inconsistent. There is no basis whatsoever to the claim that the
SEC and the DOJ have consistently and uniformly adopted a
definition of the term "capital" contrary to the definition that this
Court adopted in its 28 June 2011 Decision.
In DOJ Opinion No. 130, s. 1985,10 dated 7 October 1985, the
scope of the term "capital" in Section 9, Article XIV of the 1973
Constitution was raised, that is, whether the term "capital"
includes "both preferred and common stocks." The issue was
raised in relation to a stock-swap transaction between a Filipino
and a Japanese corporation, both stockholders of a domestic
corporation that owned lands in the Philippines. Then Minister of
Justice Estelito P. Mendoza ruled that the resulting ownership
structure of the corporation would beunconstitutional because
60% of the voting stock would be owned by Japanese while
Filipinos would own only 40% of the voting stock, although when
the non-voting stock is added, Filipinos would own 60% of the
combined voting and non-voting stock. This ownership
structure is remarkably similar to the current ownership
structure of PLDT. Minister Mendoza ruled:

13
xxxx
Thus, the Filipino group still owns sixty (60%) of the entire
subscribed capital stock (common and preferred) while the
Japanese investors control sixty percent (60%) of the common
(voting) shares.
It is your position that x x x since Section 9, Article XIV of
the Constitution uses the word "capital," which is
construed "to include both preferred and common shares"
and "that where the law does not distinguish, the courts
shall not distinguish."
xxxx
In light of the foregoing jurisprudence, it is my opinion that the
stock-swap transaction in question may not be
constitutionally upheld. While it may be ordinary corporate
practice to classify corporate shares into common voting shares
and preferred non-voting shares, any arrangement which attempts
to defeat the constitutional purpose should be eschewed. Thus,
the resultant equity arrangement which would place
ownership of 60%11 of the common (voting) shares in the
Japanese group, while retaining 60% of the total
percentage of common and preferred shares in Filipino
hands would amount to circumvention of the principle of
control by Philippine stockholders that is implicit in the
60% Philippine nationality requirement in the Constitution.
(Emphasis supplied)
In short, Minister Mendoza categorically rejected the theory
that the term "capital" in Section 9, Article XIV of the 1973
Constitution includes "both preferred and common stocks" treated
as the same class of shares regardless of differences in voting
rights and privileges. Minister Mendoza stressed that the 60-40
ownership requirement in favor of Filipino citizens in the
Constitution is not complied with unless the corporation "satisfies
the criterion of beneficial ownership" and that in applying the
same "the primordial consideration is situs of control."
On the other hand, in Opinion No. 23-10 dated 18 August 2010,
addressed to Castillo Laman Tan Pantaleon & San Jose, then SEC
General Counsel Vernette G. Umali-Paco applied the Voting
Control Test, that is, using only the voting stock to determine
whether a corporation is a Philippine national. The Opinion states:
Applying the foregoing, particularly the Control Test, MLRC is
deemed as a Philippine national because: (1) sixty percent (60%)
of its outstanding capital stock entitled to vote is owned by
a Philippine national, the Trustee; and (2) at least sixty percent
(60%) of the ERF will accrue to the benefit of Philippine
nationals. Still pursuant to the Control Test, MLRCs
investment in 60% of BFDCs outstanding capital
stock entitled to vote shall be deemed as of Philippine
nationality, thereby qualifying BFDC to own private land.
Further, under, and for purposes of, the FIA, MLRC and BFDC are
both Philippine nationals, considering that: (1) sixty percent (60%)
of their respective outstanding capital stock entitled to
voteis owned by a Philippine national (i.e., by the Trustee, in the
case of MLRC; and by MLRC, in the case of BFDC); and (2) at least
60% of their respective board of directors are Filipino citizens.
(Boldfacing and italicization supplied)

delegate to any of its individual Commissioner or staff the power

to adopt any rule or regulation. Further, under Section 5.1 of
the same Code, it is the SEC as a collegial body, and not
any of its legal officers, that is empowered to
issue opinions and approve rules and regulations. Thus:
4.6. The Commission may, for purposes of efficiency, delegate any
of its functions to any department or office of the Commission, an
individual Commissioner or staff member of the
Commission exceptits review or appellate authority and its
power to adopt, alter and supplement any rule or
regulation.
The Commission may review upon its own initiative or upon the
petition of any interested party any action of any department or
office, individual Commissioner, or staff member of the
Commission.
SEC. 5. Powers and Functions of the Commission.- 5.1. The
Commission shall act with transparency and shall have the powers
and functions provided by this Code, Presidential Decree No. 902A, the Corporation Code, the Investment Houses Law, the
Financing Company Act and other existing laws. Pursuant thereto
the Commission shall have, among others, the following powers
and functions:
xxxx
(g) Prepare, approve, amend or repeal rules, regulations
and orders, and issue opinions and provide guidance on
and supervise compliance with such rules, regulations and
orders;
x x x x (Emphasis supplied)
Thus, the act of the individual Commissioners or legal officers of
the SEC in issuing opinions that have the effect of SEC rules or
regulations is ultra vires. Under Sections 4.6 and 5.1(g) of the
Code, only the SEC en banc can "issue opinions" that have the
force and effect of rules or regulations. Section 4.6 of the Code
bars the SEC en banc from delegating to any individual
Commissioner or staff the power to adopt rules or regulations. In
short, any opinion of individual Commissioners or SEC
legal officers does not constitute a rule or regulation of
the SEC.
The SEC admits during the Oral Arguments that only the SEC en
banc, and not any of its individual commissioners or legal staff, is
empowered to issue opinions which have the same binding effect
as SEC rules and regulations, thus:
JUSTICE CARPIO:
So, under the law, it is the Commission En Banc
that can issue an
SEC Opinion, correct?
COMMISSIONER GAITE:13
Thats correct, Your Honor.
JUSTICE CARPIO:

Clearly, these DOJ and SEC opinions are compatible with the
Courts interpretation of the 60-40 ownership requirement in favor
of Filipino citizens mandated by the Constitution for certain
economic activities. At the same time, these opinions highlight the
conflicting, contradictory, and inconsistent positions taken by the
DOJ and the SEC on the definition of the term "capital" found in
the economic provisions of the Constitution.
The opinions issued by SEC legal officers do not have the force
and effect of SEC rules and regulations because only the SEC en
banc can adopt rules and regulations. As expressly provided in
Section 4.6 of the Securities Regulation Code,12 the SEC cannot

Can the Commission En Banc delegate this function to an

SEC officer?
COMMISSIONER GAITE:
Yes, Your Honor, we have delegated it to the General
Counsel.
JUSTICE CARPIO:

14
It can be delegated. What cannot be delegated by the
Commission En Banc to a commissioner or an individual
employee of the Commission?

COMMISSIONER GAITE:
Novel opinions that [have] to be decided by the
En Banc...
JUSTICE CARPIO:
What cannot be delegated, among others, is the
power to adopt or amend rules and regulations,
correct?
COMMISSIONER GAITE:

Compliance with the constitutional limitation(s) on engaging in

nationalized activities must be determined by ascertaining if 60%
of the investing corporations outstanding capital stock is owned
by "Filipino citizens", or as interpreted, by natural or individual
Filipino citizens. If such investing corporation is in turn owned to
some extent by another investing corporation, the same process
must be observed. One must not stop until the citizenships of the
individual or natural stockholders of layer after layer of investing
corporations have been established, the very essence of the
Grandfather Rule.
Lastly, it was the intent of the framers of the 1987
Constitution to adopt the Grandfather Rule. In one of the
discussions on what is now Article XII of the present Constitution,
the framers made the following exchange:
MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local
or Filipino equity and foreign equity; namely, 60-40 in Section 3,
60-40 in Section 9, and 2/3-1/3 in Section 15.

Thats correct, Your Honor.

JUSTICE CARPIO:
So, you combine the two (2), the SEC
officer, if delegated that power, can issue
an opinion but that opinion does not
constitute a rule or regulation, correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
So, all of these opinions that you
mentioned they are not rules and
regulations, correct?
COMMISSIONER GAITE:
They are not rules and regulations.
JUSTICE CARPIO:
If they are not rules and regulations, they apply
only to that particular situation and will not
constitute a precedent, correct?
COMMISSIONER GAITE:
Yes, Your Honor.14 (Emphasis supplied)
Significantly, the SEC en banc, which is the collegial body
statutorily empowered to issue rules and opinions on behalf of the
SEC, has adopted even the Grandfather Rule in determining
compliance with the 60-40 ownership requirement in favor of
Filipino citizens mandated by the Constitution for certain
economic activities. This prevailing SEC ruling, which the SEC
correctly adopted to thwart any circumvention of the required
Filipino "ownership and control," is laid down in the 25 March
2010 SEC en banc ruling in Redmont Consolidated Mines, Corp. v.
McArthur Mining, Inc., et al.,15 to wit:
The avowed purpose of the Constitution is to place in the hands of
Filipinos the exploitation of our natural resources. Necessarily,
therefore, the Rule interpreting the constitutional
provision should not diminish that right through the legal
fiction of corporate ownership and control. But the
constitutional provision, as interpreted and practiced via the 1967
SEC Rules, has favored foreigners contrary to the command of the
Constitution. Hence, the Grandfather Rule must be applied
to accurately determine the actual participation, both
direct and indirect, of foreigners in a corporation engaged
in a nationalized activity or business.

MR. VILLEGAS. That is right.

MR. NOLLEDO. In teaching law, we are always faced with the
question: Where do we base the equity requirement, is it on the
authorized capital stock, on the subscribed capital stock, or on the
paid-up capital stock of a corporation? Will the Committee please
enlighten me on this?
MR. VILLEGAS. We have just had a long discussion with the
members of the team from the UP Law Center who provided us a
draft. The phrase that is contained here which we adopted from
the UP draft is 60 percent of voting stock.
MR. NOLLEDO. That must be based on the subscribed capital
stock, because unless declared delinquent, unpaid capital stock
shall be entitled to vote.
MR. VILLEGAS. That is right.
MR. NOLLEDO. Thank you. With respect to an investment by one
corporation in another corporation, say, a corporation with 60-40
percent equity invests in another corporation which is permitted
by the Corporation Code, does the Committee adopt the
grandfather rule?
MR. VILLEGAS. Yes, that is the understanding of the Committee.
MR. NOLLEDO. Therefore, we need additional Filipino capital?
MR. VILLEGAS. Yes. (Boldfacing and underscoring supplied;
italicization in the original)
This SEC en banc ruling conforms to our 28 June 2011 Decision
that the 60-40 ownership requirement in favor of Filipino citizens
in the Constitution to engage in certain economic activities
applies not only to voting control of the corporation, but also to
the beneficial ownership of the corporation. Thus, in our 28
June 2011 Decision we stated:
Mere legal title is insufficient to meet the 60 percent Filipinoowned
"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]." (Emphasis supplied)
Both the Voting Control Test and the Beneficial Ownership Test
must be applied to determine whether a corporation is a
"Philippine national."
The interpretation by legal officers of the SEC of the term
"capital," embodied in various opinions which respondents relied

15
upon, is merely preliminary and an opinion only of such officers.
To repeat, any such opinion does not constitute an SEC rule or
regulation. In fact, many of these opinions contain a disclaimer
which expressly states: "x x x the foregoing opinion is based
solely on facts disclosed in your query and relevant only to the
particular issue raised therein and shall not be used in the
nature of a standing rule binding upon the Commission in
other cases whether of similar or dissimilar
circumstances."16 Thus, the opinions clearly make a caveat that
they do not constitute binding precedents on any one, not even
on the SEC itself.
Likewise, the opinions of the SEC en banc, as well as of the DOJ,
interpreting the law are neither conclusive nor controlling and
thus, do not bind the Court. It is hornbook doctrine that any
interpretation of the law that administrative or quasi-judicial
agencies make is only preliminary, never conclusive on the Court.
The power to make a final interpretation of the law, in this case
the term "capital" in Section 11, Article XII of the 1987
Constitution, lies with this Court, not with any other government
entity.
In his motion for reconsideration, the PSE President cites the cases
of National Telecommunications Commission v. Court of
Appeals17 and Philippine Long Distance Telephone Company v.
National Telecommunications Commission18 in arguing that the
Court has already defined the term "capital" in Section 11, Article
XII of the 1987 Constitution.19
The PSE President is grossly mistaken. In both cases of National
Telecommunications v. Court of Appeals20 andPhilippine Long
Distance Telephone Company v. National Telecommunications
Commission,21 the Court did not define the term "capital" as found
in Section 11, Article XII of the 1987 Constitution. In fact, these
two cases never mentioned, discussed or cited Section 11,
Article XII of the Constitution or any of its economic
provisions,and thus cannot serve as precedent in the
interpretation of Section 11, Article XII of the Constitution.
These two cases dealt solely with the determination of the correct
regulatory fees under Section 40(e) and (f) of the Public Service
Act, to wit:
(e) For annual reimbursement of the expenses incurred by the
Commission in the supervision of other public services and/or in
the regulation or fixing of their rates, twenty centavos for each
one hundred pesos or fraction thereof, of the capital stock
subscribed or paid, or if no shares have been issued, of the
capital invested, or of the property and equipment whichever is
higher.
(f) For the issue or increase of capital stock, twenty centavos for
each one hundred pesos or fraction thereof, of the increased
capital. (Emphasis supplied)
The Courts interpretation in these two cases of the terms "capital
stock subscribed or paid," "capital stock" and "capital" does not
pertain to, and cannot control, the definition of the term "capital"
as used in Section 11, Article XII of the Constitution, or any of the
economic provisions of the Constitution where the term "capital"
is found. The definition of the term "capital" found in the
Constitution must not be taken out of context. A careful reading of
these two cases reveals that the terms "capital stock subscribed
or paid," "capital stock" and "capital" were defined solely to
determine the basis for computing the supervision and regulation
fees under Section 40(e) and (f) of the Public Service Act.
III.
Filipinization of Public Utilities
The Preamble of the 1987 Constitution, as the prologue of the
supreme law of the land, embodies the ideals that the
Constitution intends to achieve.22 The Preamble reads:
We, the sovereign Filipino people, imploring the aid of Almighty
God, in order to build a just and humane society, and establish a
Government that shall embody our ideals and aspirations,

promote the common good, conserve and develop our

patrimony, and secure to ourselves and our posterity, the
blessings of independence and democracy under the rule of law
and a regime of truth, justice, freedom, love, equality, and peace,
do ordain and promulgate this Constitution. (Emphasis supplied)
Consistent with these ideals, Section 19, Article II of the 1987
Constitution declares as State policy the development of a
national economy "effectively controlled" by Filipinos:
Section 19. The State shall develop a self-reliant and independent
national economy effectively controlled by Filipinos.
Fortifying the State policy of a Filipino-controlled economy, the
Constitution decrees:
Section 10. The Congress shall, upon recommendation of the
economic and planning agency, when the national interest
dictates, 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. The Congress shall enact
measures that will encourage the formation and operation of
enterprises whose capital is wholly owned by Filipinos.
In the grant of rights, privileges, and concessions covering the
national economy and patrimony, the State shall give preference
to qualified Filipinos.
The State shall regulate and exercise authority over foreign
investments within its national jurisdiction and in accordance with
its national goals and priorities.23
Under Section 10, Article XII of the 1987 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.
With respect to public utilities, the 1987 Constitution specifically
ordains:
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)
This provision, which mandates the Filipinization of public utilities,
requires that any form of authorization for the operation of public
utilities shall be granted only 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." "The provision is [an express] recognition of

16
the sensitive and vital position of public utilities both in
the national economy and for national security." 24

the corporation shall be considered a Philippine national.

(Boldfacing, italicization and underscoring supplied)

The 1987 Constitution reserves the ownership and operation of

public utilities exclusively to (1) Filipino citizens, or (2)
corporations or associations at least 60 percent of whose "capital"
is owned by Filipino citizens. Hence, in the case of individuals,
only Filipino citizens can validly own and operate a public utility. In
the case of corporations or associations, at least 60 percent of
their "capital" must be owned by Filipino citizens. In other
words, under Section 11, Article XII of the 1987
Constitution, to own and operate a public utility a
corporations capital must at least be 60 percent owned
by Philippine nationals.

Under Article 48(3)26 of the Omnibus Investments Code of 1987,

"no corporation x x x which is not a Philippine national x x x shall
do business

IV.
Definition of "Philippine National"

In turn, the definition of a "Philippine national" under Article 15 of

the Omnibus Investments Code of 1987 was a reiteration of the
meaning of such term as provided in Article 14 of the Omnibus
Investments Code of 1981,28 to wit:

Pursuant to the express mandate of Section 11, Article XII of the

1987 Constitution, Congress enacted Republic Act No. 7042 or
the Foreign Investments Act of 1991 (FIA), as amended, which
defined a "Philippine national" as follows:
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." (Boldfacing, italicization and underscoring
supplied)

x x x in the Philippines x x x without first securing from the Board

of Investments a written certificate to the effect that such
business or economic activity x x x would not conflict with the
Constitution or laws of the Philippines."27Thus, a "non-Philippine
national" cannot own and operate a reserved economic activity
like a public utility. This means, of course, that only a "Philippine
national" can own and operate a public utility.

Article 14. "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 per cent
(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 per cent (60%) of the fund will accrue to the benefit
of Philippine nationals: Provided, That where a corporation and its
non-Filipino stockholders own stock in a registered enterprise, at
least sixty per cent (60%) of the capital stock outstanding and
entitled to vote of both corporations must be owned and held by
the citizens of the Philippines and at least sixty per cent (60%) of
the members of the Board of Directors of both corporations must
be citizens of the Philippines in order that the corporation shall be
considered a Philippine national. (Boldfacing, italicization and
underscoring supplied)
Under Article 69(3) of the Omnibus Investments Code of 1981, "no
corporation x x x which is not a Philippine national x x x shall do
business x x x in the Philippines x x x without first securing a
written certificate from the Board of Investments to the effect that
such business or economic activity x x x would not conflict with
the Constitution or laws of the Philippines." 29 Thus, a "nonPhilippine national" cannot own and operate a reserved economic
activity like a public utility. Again, this means that only a
"Philippine national" can own and operate a public utility.

Thus, the FIA clearly and unequivocally defines a "Philippine

national" as a Philippine citizen, or a domestic corporation at
least "60% of the capital stock outstanding and entitled to
vote" is owned by Philippine citizens.

Prior to the Omnibus Investments Code of 1981, Republic Act No.

518630 or the Investment Incentives Act, which took effect on 16
September 1967, contained a similar definition of a "Philippine
national," to wit:

The definition of a "Philippine national" in the FIA reiterated the

meaning of such term as provided in its predecessor statute,
Executive Order No. 226 or the Omnibus Investments Code of
1987,25 which was issued by then President Corazon C. Aquino.
Article 15 of this Code states:

(f) "Philippine National" shall mean a citizen of the Philippines; or

a 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 per cent 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 per cent of the
fund will accrue to the benefit of Philippine Nationals: Provided,
That where a corporation and its non-Filipino stockholders own
stock in a registered enterprise, at least sixty per cent of the
capital stock outstanding and entitled to vote of both corporations
must be owned and held by the citizens of the Philippines and at
least sixty per cent of the members of the Board of Directors of
both corporations must be citizens of the Philippines in order that
the corporation shall be considered a Philippine National.
(Boldfacing, italicization and underscoring supplied)

Article 15. "Philippine national" shall mean a citizen of the

Philippines or a diplomatic partnership or association whollyowned by citizens of the Philippines; or a corporation organized
under the laws of the Philippines of which at least sixty
per cent (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 per cent (60%) of the fund will accrue
to the benefit of Philippine nationals: Provided, That where a
corporation and its non-Filipino stockholders own stock in a
registered enterprise, at least sixty per cent (60%) of the capital
stock outstanding and entitled to vote of both corporations must
be owned and held by the citizens of the Philippines and at least
sixty per cent (60%) of the members of the Board of Directors of
both corporations must be citizens of the Philippines in order that

Under Section 3 of Republic Act No. 5455 or the Foreign Business

Regulations Act, which took effect on 30 September 1968, if the
investment in a domestic enterprise by non-Philippine nationals
exceeds 30% of its outstanding capital stock, such enterprise

17
must obtain prior approval from the Board of Investments before
accepting such investment. Such approval shall not be granted if
the investment "would conflict with existing constitutional
provisions and laws regulating the degree of required ownership
by Philippine nationals in the enterprise."31 A "non-Philippine
national" cannot own and operate a reserved economic activity
like a public utility. Again, this means that only a "Philippine
national" can own and operate a public utility.
The FIA, like all its predecessor statutes, clearly defines a
"Philippine national" as a Filipino citizen, or adomestic
corporation "at least sixty percent (60%) of the capital
stock outstanding and entitled to vote" is owned by Filipino
citizens. A domestic corporation is a "Philippine national" only if at
least 60% of its voting stock is owned by Filipino citizens. This
definition of a "Philippine national" is crucial in the present case
because the FIA reiterates and clarifies Section 11, Article XII of
the 1987 Constitution, which limits the ownership and operation of
public utilities to Filipino citizens or to corporations or associations
at least 60% Filipino-owned.
The FIA is the basic law governing foreign investments in the
Philippines, irrespective of the nature of business and area of
investment. The FIA spells out the procedures by which nonPhilippine nationals can invest in the Philippines. Among the key
features of this law is the concept of a negative list or the Foreign
Investments Negative List.32 Section 8 of the law states:
SEC. 8. List of Investment Areas Reserved to Philippine
Nationals [Foreign Investment Negative List]. - The Foreign
Investment Negative List shall have two 2 component
lists: A and B:
a. List A shall enumerate the areas of activities reserved
to Philippine nationals by mandate of the Constitution and
specific laws.
b. List B shall contain the areas of activities and enterprises
regulated pursuant to law:
1. which are defense-related activities, requiring prior clearance
and authorization from the Department of National Defense [DND]
to engage in such activity, such as the manufacture, repair,
storage and/or distribution of firearms, ammunition, lethal
weapons, military ordinance, explosives, pyrotechnics and similar
materials; unless such manufacturing or repair activity is
specifically authorized, with a substantial export component, to a
non-Philippine national by the Secretary of National Defense; or
2. which have implications on public health and morals, such as
the manufacture and distribution of dangerous drugs; all forms of
gambling; nightclubs, bars, beer houses, dance halls, sauna and
steam bathhouses and massage clinics. (Boldfacing, underscoring
and italicization supplied)
Section 8 of the FIA enumerates the investment areas "reserved
to Philippine nationals." Foreign Investment Negative List A
consists of "areas of activities reserved to Philippine
nationals by mandate of the Constitution and specific
laws," where foreign equity participation in any enterprise
shall be limited to the maximum percentage expressly
prescribed by the Constitution and other specific laws. In
short, to own and operate a public utility in the Philippines
one must be a "Philippine national" as defined in the FIA.
The FIA is abundant notice to foreign investors to what
extent they can invest in public utilities in the Philippines.
To repeat, among the areas of investment covered by the Foreign
Investment Negative List A is the ownership and operation of
public utilities, which the Constitution expressly reserves to
Filipino citizens and to corporations at least 60% owned by Filipino
citizens. In other words, Negative List A of the FIA reserves
the ownership and operation of public utilities only to
"Philippine nationals," defined in Section 3(a) of the FIA
as "(1) a citizen of the Philippines; x x x or (3) 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 (4) 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."
Clearly, from the effectivity of the Investment Incentives Act of
1967 to the adoption of the Omnibus Investments Code of 1981,
to the enactment of the Omnibus Investments Code of 1987, and
to the passage of the present Foreign Investments Act of 1991,
or for more than four decades, the statutory definition of
the term "Philippine national" has been uniform and
consistent: it means a Filipino citizen, or a domestic
corporation at least 60% of the voting stock is owned by
Filipinos. Likewise, these same statutes have uniformly
and consistently required that only "Philippine nationals"
could own and operate public utilities in the
Philippines. The following exchange during the Oral Arguments
is revealing:
JUSTICE CARPIO:
Counsel, I have some questions. You are aware of the
Foreign Investments Act of 1991, x x x? And the FIA of
1991 took effect in 1991, correct? Thats over twenty
(20) years ago, correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
And Section 8 of the Foreign Investments Act of 1991
states that []only Philippine nationals can own and
operate public utilities[], correct?
COMMISSIONER GAITE:
Yes, Your Honor.
JUSTICE CARPIO:
And the same Foreign Investments Act of 1991 defines a
"Philippine national" either as a citizen of the Philippines,
or if it is a corporation at least sixty percent (60%) of the
voting stock is owned by citizens of the Philippines,
correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
And, you are also aware that under the predecessor law
of the Foreign Investments Act of 1991, the Omnibus
Investments Act of 1987, the same provisions apply: x x x
only Philippine nationals can own and operate a public
utility and the Philippine national, if it is a corporation, x
x x sixty percent (60%) of the capital stock of that
corporation must be owned by citizens of the Philippines,
correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
And even prior to the Omnibus Investments Act of 1987,
under the Omnibus Investments Act of 1981, the same
rules apply: x x x only a Philippine national can own and
operate a public utility and a Philippine national, if it is a
corporation, sixty percent (60%) of its x x x voting stock,
must be owned by citizens of the Philippines, correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
And even prior to that, under [the]1967 Investments
Incentives Act and the Foreign Company Act of 1968, the
same rules applied, correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
So, for the last four (4) decades, x x x, the law has
been very consistent only a Philippine national
can own and operate a public utility, and a
Philippine national, if it is a corporation, x x x at

18
least sixty percent (60%) of the voting stock must
be owned by citizens of the Philippines, correct?
COMMISSIONER GAITE:
Correct, Your Honor.33 (Emphasis supplied)
Government agencies like the SEC cannot simply ignore Sections
3(a) and 8 of the FIA which categorically prescribe that certain
economic activities, like the ownership and operation of public
utilities, are reserved to corporations "at least sixty percent (60%)
of the capital stock outstanding and entitled to vote is owned
and held by citizens of the Philippines." Foreign Investment
Negative List A refers to "activities reserved to Philippine nationals
by mandate of the Constitution and specific laws." The FIA is the
basic statute regulating foreign investments in the
Philippines. Government agencies tasked with regulating or
monitoring foreign investments, as well as counsels of foreign
investors, should start with the FIA in determining to what extent
a particular foreign investment is allowed in the Philippines.
Foreign investors and their counsels who ignore the FIA do so at
their own peril. Foreign investors and their counsels who rely on
opinions of SEC legal officers that obviously contradict the FIA do
so also at their own peril.
Occasional opinions of SEC legal officers that obviously contradict
the FIA should immediately raise a red flag. There are already
numerous opinions of SEC legal officers that cite the definition of a
"Philippine national" in Section 3(a) of the FIA in determining
whether a particular corporation is qualified to own and operate a
nationalized or partially nationalized business in the Philippines.
This shows that SEC legal officers are not only aware of, but also
rely on and invoke, the provisions of the FIA in ascertaining the
eligibility of a corporation to engage in partially nationalized
industries. The following are some of such opinions:
1. Opinion of 23 March 1993, addressed to Mr. Francis F.
How;
2. Opinion of 14 April 1993, addressed to Director
Angeles T. Wong of the Philippine Overseas Employment
Administration;
3. Opinion of 23 November 1993, addressed to Messrs.
Dominador Almeda and Renato S. Calma;
4. Opinion of 7 December 1993, addressed to Roco
Bunag Kapunan Migallos & Jardeleza;
5. SEC Opinion No. 49-04, addressed to Romulo Mabanta
Buenaventura Sayoc & De Los Angeles;
6. SEC-OGC Opinion No. 17-07, addressed to Mr.
Reynaldo G. David; and
7. SEC-OGC Opinion No. 03-08, addressed to Attys. Ruby
Rose J. Yusi and Rudyard S. Arbolado.
The SEC legal officers occasional but blatant disregard of the
definition of the term "Philippine national" in the FIA signifies their
lack of integrity and competence in resolving issues on the 60-40
ownership requirement in favor of Filipino citizens in Section 11,
Article XII of the Constitution.
The PSE President argues that the term "Philippine national"
defined in the FIA should be limited and interpreted to refer to
corporations seeking to avail of tax and fiscal incentives under
investment incentives laws and cannot be equated with the term
"capital" in Section 11, Article XII of the 1987 Constitution.
Pangilinan similarly contends that the FIA and its predecessor
statutes do not apply to "companies which have not registered
and obtained special incentives under the schemes established by
those laws."
Both are desperately grasping at straws. The FIA does not grant
tax or fiscal incentives to any enterprise. Tax and fiscal incentives
to investments are granted separately under the Omnibus
Investments Code of 1987, not under the FIA. In fact, the FIA
expressly repealed Articles 44 to 56 of Book II of the Omnibus
Investments Code of 1987, which articles previously regulated
foreign investments in nationalized or partially nationalized
industries.
The FIA is the applicable law regulating foreign investments in
nationalized or partially nationalized industries. There is nothing in

the FIA, or even in the Omnibus Investments Code of 1987 or its

predecessor statutes, that states, expressly or impliedly, that the
FIA or its predecessor statutes do not apply to enterprises not
availing of tax and fiscal incentives under the Code. The FIA and
its predecessor statutes apply to investments in all domestic
enterprises, whether or not such enterprises enjoy tax and fiscal
incentives under the Omnibus Investments Code of 1987 or its
predecessor statutes. The reason is quite obvious mere
non-availment of tax and fiscal incentives by a nonPhilippine national cannot exempt it from Section 11,
Article XII of the Constitution regulating foreign
investments in public utilities. In fact, the Board of
Investments Primer on Investment Policies in the
Philippines,34 which is given out to foreign investors, provides:
PART III. FOREIGN INVESTMENTS WITHOUT INCENTIVES
Investors who do not seek incentives and/or whose chosen
activities do not qualify for incentives, (i.e., the activity is not
listed in the IPP, and they are not exporting at least 70% of their
production) may go ahead and make the investments without
seeking incentives. They only have to be guided by the
Foreign Investments Negative List (FINL).
The FINL clearly defines investment areas requiring at least 60%
Filipino ownership. All other areas outside of this list are fully open
to foreign investors. (Emphasis supplied)
V.
Right to elect directors, coupled with beneficial
ownership,
translates to effective control.
The 28 June 2011 Decision declares that the 60 percent Filipino
ownership required by the Constitution to engage in certain
economic activities applies not only to voting control of the
corporation, but also to the beneficial ownership of the
corporation. To repeat, we held:
Mere legal title is insufficient to meet the 60 percent Filipinoowned "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]." (Emphasis supplied)
This is consistent with Section 3 of the FIA which provides that
where 100% of the capital stock is held by "a trustee of funds for
pension or other employee retirement or separation benefits," the
trustee is a Philippine national if "at least sixty percent (60%) of
the fund will accrue to the benefit of Philippine nationals."
Likewise, Section 1(b) of the Implementing Rules of the FIA
provides that "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."
Since the constitutional requirement of at least 60 percent Filipino
ownership applies not only to voting control of the corporation but
also to the beneficial ownership of the corporation, it is therefore
imperative that such requirement apply uniformly and across the
board to all classes of shares, regardless of nomenclature and
category, comprising the capital of a corporation. Under the
Corporation Code, capital stock35 consists of all classes of shares
issued to stockholders, that is, common shares as well as
preferred shares, which may have different rights, privileges or
restrictions as stated in the articles of incorporation.36
The Corporation Code allows denial of the right to vote to
preferred and redeemable shares, but disallows denial of the right
to vote in specific corporate matters. Thus, common shares have
the right to vote in the election of directors, while preferred shares

19
may be denied such right. Nonetheless, preferred shares, even if
denied the right to vote in the election of directors, are entitled to
vote on the following corporate matters: (1) amendment of
articles of incorporation; (2) increase and decrease of capital
stock; (3) incurring, creating or increasing bonded indebtedness;
(4) sale, lease, mortgage or other disposition of substantially all
corporate assets; (5) investment of funds in another business or
corporation or for a purpose other than the primary purpose for
which the corporation was organized; (6) adoption, amendment
and repeal of by-laws; (7) merger and consolidation; and (8)
dissolution of corporation.37
Since a specific class of shares may have rights and privileges or
restrictions different from the rest of the shares in a corporation,
the 60-40 ownership requirement in favor of Filipino citizens in
Section 11, Article XII of the Constitution must apply not only to
shares with voting rights but also to shares without voting rights.
Preferred shares, denied the right to vote in the election of
directors, are anyway still entitled to vote on the eight specific
corporate matters mentioned above. Thus, if a corporation,
engaged in a partially nationalized industry, issues a
mixture of common and preferred non-voting shares, at
least 60 percent of the common shares and at least 60
percent of the preferred non-voting shares must be owned
by Filipinos. Of course, if a corporation issues only a single class
of shares, at least 60 percent of such shares must necessarily be
owned by Filipinos. In short, the 60-40 ownership
requirement in favor of Filipino citizens must apply
separately to each class of shares, whether common,
preferred non-voting, preferred voting or any other class
of shares. This uniform application of the 60-40 ownership
requirement in favor of Filipino citizens clearly breathes life to the
constitutional command that the ownership and operation of
public utilities shall be reserved exclusively to corporations at
least 60 percent of whose capital is Filipino-owned. Applying
uniformly the 60-40 ownership requirement in favor of Filipino
citizens to each class of shares, regardless of differences in voting
rights, privileges and restrictions, guarantees effective Filipino
control of public utilities, as mandated by the Constitution.
Moreover, such uniform application to each class of shares insures
that the "controlling interest" in public utilities always lies in the
hands of Filipino citizens. This addresses and extinguishes
Pangilinans worry that foreigners, owning most of the non-voting
shares, will exercise greater control over fundamental corporate
matters requiring two-thirds or majority vote of all shareholders.
VI.
Intent of the framers of the Constitution
While Justice Velasco quoted in his Dissenting Opinion 38 a portion
of the deliberations of the Constitutional Commission to support
his claim that the term "capital" refers to the total outstanding
shares of stock, whether voting or non-voting, the following
excerpts of the deliberations reveal otherwise. It is clear from the
following exchange that the term "capital" refers to controlling
interest of a corporation, thus:
MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local
or Filipino equity and foreign equity; namely, 60-40 in Section 3,
60-40 in Section 9 and 2/3-1/3 in Section 15.
MR. VILLEGAS. That is right.
MR. NOLLEDO. In teaching law, we are always faced with this
question: "Where do we base the equity requirement, is it on the
authorized capital stock, on the subscribed capital stock, or on the
paid-up capital stock of a corporation"? Will the Committee please
enlighten me on this?
MR. VILLEGAS. We have just had a long discussion with the
members of the team from the UP Law Center who provided us a
draft. The phrase that is contained here which we adopted
from the UP draft is "60 percent of voting stock."

MR. NOLLEDO. That must be based on the subscribed capital

stock, because unless declared delinquent, unpaid capital stock
shall be entitled to vote.
MR. VILLEGAS. That is right.
MR. NOLLEDO. Thank you.
With respect to an investment by one corporation in another
corporation, say, a corporation with 60-40 percent equity invests
in another corporation which is permitted by the Corporation
Code, does the Committee adopt the grandfather rule?
MR. VILLEGAS. Yes, that is the understanding of the Committee.
MR. NOLLEDO. Therefore, we need additional Filipino capital?
MR. VILLEGAS. Yes.39
xxxx
MR. AZCUNA. May I be clarified as to that portion that was
accepted by the Committee.
MR. VILLEGAS. The portion accepted by the Committee is the
deletion of the phrase "voting stock or controlling interest."
MR. AZCUNA. Hence, without the Davide amendment, the
committee report would read: "corporations or associations at
least sixty percent of whose CAPITAL is owned by such citizens."
MR. VILLEGAS. Yes.
MR. AZCUNA. So if the Davide amendment is lost, we are stuck
with 60 percent of the capital to be owned by citizens.
MR. VILLEGAS. That is right.
MR. AZCUNA. But the control can be with the foreigners
even if they are the minority. Let us say 40 percent of the
capital is owned by them, but it is the voting capital,
whereas, the Filipinos own the nonvoting shares. So we
can have a situation where the corporation is controlled by
foreigners despite being the minority because they have
the voting capital. That is the anomaly that would result
here.
MR. BENGZON. No, the reason we eliminated the word
"stock" as stated in the 1973 and 1935 Constitutions is
that according to Commissioner Rodrigo, there are
associations that do not have stocks. That is why we say
"CAPITAL."
MR. AZCUNA. We should not eliminate the phrase
"controlling interest."
MR. BENGZON. In the case of stock corporations, it is
assumed.40 (Boldfacing and underscoring supplied)
Thus, 60 percent of the "capital" assumes, or should result in, a
"controlling interest" in the corporation.
The use of the term "capital" was intended to replace the word
"stock" because associations without stocks can operate public
utilities as long as they meet the 60-40 ownership requirement in
favor of Filipino citizens prescribed in Section 11, Article XII of the
Constitution. However, this did not change the intent of the
framers of the Constitution to reserve exclusively to Philippine
nationals the "controlling interest" in public utilities.
During the drafting of the 1935 Constitution, economic
protectionism was "the battle-cry of the nationalists in the
Convention."41 The same battle-cry resulted in the nationalization
of the public utilities.42 This is also the same intent of the framers
of the 1987 Constitution who adopted the exact formulation
embodied in the 1935 and 1973 Constitutions on foreign equity
limitations in partially nationalized industries.
The OSG, in its own behalf and as counsel for the State, 43 agrees
fully with the Courts interpretation of the term "capital." In its
Consolidated Comment, the OSG explains that the deletion of the
phrase "controlling interest" and replacement of the word "stock"
with the term "capital" were intended specifically to extend the
scope of the entities qualified to operate public utilities to include
associations without stocks. The framers omission of the phrase
"controlling interest" did not mean the inclusion of all shares of
stock, whether voting or non-voting. The OSG reiterated
essentially the Courts declaration that the Constitution reserved
exclusively to Philippine nationals the ownership and operation of

20
public utilities consistent with the States policy to "develop a selfreliant and independent national economy effectively
controlled by Filipinos."
As we held in our 28 June 2011 Decision, to construe broadly the
term "capital" as the total outstanding capital stock, treated as
a single class regardless of the actual classification of 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." We illustrated the
glaring anomaly which would result in defining the term "capital"
as the total outstanding capital stock of a corporation, treated as
a single class of shares regardless of the actual classification of
shares, to wit:
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 (P 1.00) 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. x x x
Further, even if foreigners who own more than forty percent of the
voting shares elect an all-Filipino board of directors, this situation
does not guarantee Filipino control and does not in any way cure
the violation of the Constitution. The independence of the Filipino
board members so elected by such foreign shareholders is highly
doubtful. As the OSG pointed out, quoting Justice George
Sutherlands words in Humphreys Executor v. US,44 "x x x it is
quite evident that one who holds his office only during the
pleasure of another cannot be depended upon to maintain an
attitude of independence against the latters will." Allowing
foreign shareholders to elect a controlling majority of the board,
even if all the directors are Filipinos, grossly circumvents the letter
and intent of the Constitution and defeats the very purpose of our
nationalization laws.
VII.
Last sentence of Section 11, Article XII of the Constitution
The last sentence of Section 11, Article XII of the 1987
Constitution reads:

THE PRESIDENT. Commissioner Jamir is recognized.

MR. JAMIR. Madam President, my proposed amendment on lines
20 and 21 is to delete the phrase "two thirds of whose voting
stock or controlling interest," and instead substitute the words
"SIXTY PERCENT OF WHOSE CAPITAL" so that the sentence will
read: "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
PERCENT OF WHOSE CAPITAL is owned by such citizens."
xxxx
THE PRESIDENT: Will Commissioner Jamir first explain?
MR. JAMIR. Yes, in this Article on National Economy and Patrimony,
there were two previous sections in which we fixed the Filipino
equity to 60 percent as against 40 percent for foreigners. It is only
in this Section 15 with respect to public utilities that the
committee proposal was increased to two-thirds. I think it would
be better to harmonize this provision by providing that even in the
case of public utilities, the minimum equity for Filipino citizens
should be 60 percent.
MR. ROMULO. Madam President.
THE PRESIDENT. Commissioner Romulo is recognized.
MR. ROMULO. My reason for supporting the amendment is based
on the discussions I have had with representatives of the Filipino
majority owners of the international record carriers, and the
subsequent memoranda they submitted to me. x x x
Their second point is that under the Corporation Code, the
management and control of a corporation is vested in the board of
directors, not in the officers but in the board of directors. The
officers are only agents of the board. And they believe that with
60 percent of the equity, the Filipino majority stockholders
undeniably control the board. Only on important corporate acts
can the 40-percent foreign equity exercise a veto, x x x.
x x x x45
MS. ROSARIO BRAID. Madam President.
THE PRESIDENT. Commissioner Rosario Braid is recognized.
MS. ROSARIO BRAID. Yes, in the interest of equal time, may I also
read from a memorandum by the spokesman of the Philippine
Chamber of Communications on why they would like to maintain
the present equity, I am referring to the 66 2/3. They would prefer
to have a 75-25 ratio but would settle for 66 2/3. x x x
xxxx

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.
During the Oral Arguments, the OSG emphasized that there was
never a question on the intent of the framers of the Constitution
to limit foreign ownership, and assure majority Filipino ownership
and control of public utilities. The OSG argued, "while the
delegates disagreed as to the percentage threshold to adopt, x x x
the records show they clearly understood that Filipino control of
the public utility corporation can only be and is obtained only
through the election of a majority of the members of the board."
Indeed, the only point of contention during the deliberations of
the Constitutional Commission on 23 August 1986 was the extent
of majority Filipino control of public utilities. This is evident from
the following exchange:

THE PRESIDENT. Just to clarify, would Commissioner Rosario Braid

support the proposal of two-thirds rather than the 60 percent?
MS. ROSARIO BRAID. I have added a clause that will put
management in the hands of Filipino citizens.
x x x x46
While they had differing views on the percentage of Filipino
ownership of capital, it is clear that the framers of the Constitution
intended public utilities to be majority Filipino-owned and
controlled. To ensure that Filipinos control public utilities, the
framers of the Constitution approved, as additional safeguard, the
inclusion of the last sentence of Section 11, Article XII of the
Constitution commanding that "[t]he 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

21
the executive and managing officers of such corporation or
association must be citizens of the Philippines." In other words,
the last sentence of Section 11, Article XII of the Constitution
mandates that (1) the participation of foreign investors in the
governing body of the corporation or association shall be limited
to their proportionate share in the capital of such entity; and (2)
all officers of the corporation or association must be Filipino
citizens.
Commissioner Rosario Braid proposed the inclusion of the phrase
requiring the managing officers of the corporation or association
to be Filipino citizens specifically to prevent management
contracts, which were designed primarily to circumvent the
Filipinization of public utilities, and to assure Filipino control of
public utilities, thus:
MS. ROSARIO BRAID. x x x They also like to suggest that we
amend this provision by adding a phrase which states: "THE
MANAGEMENT BODY OF EVERY CORPORATION OR ASSOCIATION
SHALL IN ALL CASES BE CONTROLLED BY CITIZENS OF THE
PHILIPPINES." I have with me their position paper.
THE PRESIDENT. The Commissioner may proceed.
MS. ROSARIO BRAID. The three major international record carriers
in the Philippines, which Commissioner Romulo mentioned
Philippine Global Communications, Eastern Telecommunications,
Globe Mackay Cable are 40-percent owned by foreign
multinational companies and 60-percent owned by their
respective Filipino partners. All three, however, also have
management contracts with these foreign companies Philcom
with RCA, ETPI with Cable and Wireless PLC, and GMCR with ITT.
Up to the present time, the general managers of these carriers are
foreigners. While the foreigners in these common carriers are only
minority owners, the foreign multinationals are the ones
managing and controlling their operations by virtue of their
management contracts and by virtue of their strength in the
governing bodies of these carriers.47

MR. BENGZON. Will Commissioner Bernas read the whole thing

again?
FR. BERNAS. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE
GOVERNING BODY OF ANY PUBLIC UTILITY ENTERPRISE SHALL BE
LIMITED TO THEIR PROPORTIONATE SHARE IN THE CAPITAL
THEREOF..." I do not have the rest of the copy.
MR. BENGZON. "AND ALL THE EXECUTIVE AND MANAGING
OFFICERS OF SUCH CORPORATIONS OR ASSOCIATIONS MUST BE
CITIZENS OF THE PHILIPPINES." Is that correct?
MR. VILLEGAS. Yes.
MR. BENGZON. Madam President, I think that was said in a more
elegant language. We accept the amendment. Is that all right with
Commissioner Rosario Braid?
MS. ROSARIO BRAID. Yes.
xxxx
MR. DE LOS REYES. The governing body refers to the board of
directors and trustees.
MR. VILLEGAS. That is right.
MR. BENGZON. Yes, the governing body refers to the board of
directors.
MR. REGALADO. It is accepted.
MR. RAMA. The body is now ready to vote, Madam President.
VOTING
xxxx
The results show 29 votes in favor and none against; so the
proposed amendment is approved.
xxxx
THE PRESIDENT. All right. Can we proceed now to vote on Section
15?
MR. RAMA. Yes, Madam President.
THE PRESIDENT. Will the chairman of the committee please read
Section 15?
MR. VILLEGAS. The entire Section 15, as amended, reads: "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 60 PERCENT OF WHOSE
CAPITAL is owned by such citizens." May I request Commissioner
Bengzon to please continue reading.

xxxx
MR. OPLE. I think a number of us have agreed to ask
Commissioner Rosario Braid to propose an amendment with
respect to the operating management of public utilities, and in
this amendment, we are associated with Fr. Bernas,
Commissioners Nieva and Rodrigo. Commissioner Rosario Braid
will state this amendment now.
Thank you.
MS. ROSARIO BRAID. Madam President.
THE PRESIDENT. This is still on Section 15.
MS. ROSARIO BRAID. Yes.
MR. VILLEGAS. Yes, Madam President.
xxxx
MS. ROSARIO BRAID. Madam President, I propose a new section to
read: THE MANAGEMENT BODY OF EVERY CORPORATION OR
ASSOCIATION SHALL IN ALL CASES BE CONTROLLED BY CITIZENS
OF THE PHILIPPINES."
This will prevent management contracts and assure
control by Filipino citizens. Will the committee assure us that
this amendment will insure that past activities such as
management contracts will no longer be possible under this
amendment?
xxxx
FR. BERNAS. Madam President.
THE PRESIDENT. Commissioner Bernas is recognized.
FR. BERNAS. Will the committee accept a reformulation of the first
part?
MR. BENGZON. Let us hear it.
FR. BERNAS. The reformulation will be essentially the formula of
the 1973 Constitution which reads: "THE PARTICIPATION OF
FOREIGN INVESTORS IN THE GOVERNING BODY OF ANY PUBLIC
UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE
SHARE IN THE CAPITAL THEREOF AND..."
MR. VILLEGAS. "ALL THE EXECUTIVE AND MANAGING OFFICERS OF
SUCH CORPORATIONS AND ASSOCIATIONS MUST BE CITIZENS OF
THE PHILIPPINES."

MR. BENGZON. "THE PARTICIPATION OF FOREIGN INVESTORS IN

THE GOVERNING BODY OF ANY PUBLIC UTILITY ENTERPRISE SHALL
BE LIMITED TO THEIR PROPORTIONATE SHARE IN THE CAPITAL
THEREOF AND ALL THE EXECUTIVE AND MANAGING OFFICERS OF
SUCH CORPORATIONS OR ASSOCIATIONS MUST BE CITIZENS OF
THE PHILIPPINES."
MR. VILLEGAS. "NOR SHALL SUCH FRANCHISE, CERTIFICATE OR
AUTHORIZATION BE EXCLUSIVE IN CHARACTER OR FOR A PERIOD
LONGER THAN TWENTY-FIVE YEARS RENEWABLE FOR NOT MORE
THAN TWENTY-FIVE 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 Congress when the
common good so requires. The State shall encourage equity
participation in public utilities by the general public."
VOTING
xxxx
The results show 29 votes in favor and 4 against; Section 15, as
amended, is approved.48 (Emphasis supplied)
The last sentence of Section 11, Article XII of the 1987
Constitution, particularly the provision on the limited participation
of foreign investors in the governing body of public utilities, is a
reiteration of the last sentence of Section 5, Article XIV of the
1973 Constitution,49 signifying its importance in reserving
ownership and control of public utilities to Filipino citizens.
VIII.
The undisputed facts
There is no dispute, and respondents do not claim the contrary,
that (1) foreigners own 64.27% of the common shares of PLDT,

22
which class of shares exercises the sole right to vote in the
election of directors, and thus foreigners control PLDT; (2) Filipinos
own only 35.73% of PLDTs common shares, constituting a
minority of the voting stock, and thus Filipinos do not control
PLDT; (3) preferred shares, 99.44% owned by Filipinos, have no
voting rights; (4) preferred shares earn only 1/70 of the dividends
that common shares earn;50 (5) preferred shares have twice the
par value of common shares; and (6) preferred shares constitute
77.85% of the authorized capital stock of PLDT and common
shares only 22.15%.
Despite the foregoing facts, the Court did not decide, and in fact
refrained from ruling on the question of whether PLDT violated the
60-40 ownership requirement in favor of Filipino citizens in Section
11, Article XII of the 1987 Constitution. Such question indisputably
calls for a presentation and determination of evidence through a
hearing, which is generally outside the province of the Courts
jurisdiction, but well within the SECs statutory powers. Thus, for
obvious reasons, the Court limited its decision on the purely legal
and threshold issue on the definition of the term "capital" in
Section 11, Article XII of the Constitution and directed the SEC to
apply such definition in determining the exact percentage of
foreign ownership in PLDT.
IX.
PLDT is not an indispensable party;
SEC is impleaded in this case.
In his petition, Gamboa prays, among others:
xxxx
5. For the Honorable Court to issue a declaratory relief that
ownership of common or voting shares is the sole basis in
determining foreign equity in a public utility and that any other
government rulings, opinions, and regulations inconsistent with
this declaratory relief be declared unconstitutional and a violation
of the intent and spirit of the 1987 Constitution;
6. For the Honorable Court to declare null and void all sales of
common stocks to foreigners in excess of 40 percent of the total
subscribed common shareholdings; and
7. For the Honorable Court to direct the Securities and
Exchange Commission and Philippine Stock Exchange to
require PLDT to make a public disclosure of all of its
foreign shareholdings and their actual and real beneficial
owners.
Other relief(s) just and equitable are likewise prayed for.
(Emphasis supplied)
As can be gleaned from his prayer, Gamboa clearly asks this Court
to compel the SEC to perform its statutory duty to investigate
whether "the required percentage of ownership of the capital
stock to be owned by citizens of the Philippines has been
complied with [by PLDT] as required by x x x the
Constitution."51 Such plea clearly negates SECs argument that it
was not impleaded.
Granting that only the SEC Chairman was impleaded in this case,
the Court has ample powers to order the SECs compliance with
its directive contained in the 28 June 2011 Decision in view of the
far-reaching implications of this case. In Domingo v. Scheer,52 the
Court dispensed with the amendment of the pleadings to implead
the Bureau of Customs considering (1) the unique backdrop of the
case; (2) the utmost need to avoid further delays; and (3) the
issue of public interest involved. The Court held:
The Court may be curing the defect in this case by adding the
BOC as party-petitioner. The petition should not be dismissed
because the second action would only be a repetition of the first.
InSalvador, et al., v. Court of Appeals, et al., we held that this
Court has full powers, apart from that power and authority which
is inherent, to amend the processes, pleadings, proceedings and

decisions by substituting as party-plaintiff the real party-ininterest. The Court has the power to avoid delay in the
disposition of this case, to order its amendment as to
implead the BOC as party-respondent. Indeed, it may no
longer be necessary to do so taking into account the
unique backdrop in this case, involving as it does an issue
of public interest. After all, the Office of the Solicitor General
has represented the petitioner in the instant proceedings, as well
as in the appellate court, and maintained the validity of the
deportation order and of the BOCs Omnibus Resolution. It cannot,
thus, be claimed by the State that the BOC was not afforded its
day in court, simply because only the petitioner, the Chairperson
of the BOC, was the respondent in the CA, and the petitioner in
the instant recourse. In Alonso v. Villamor, we had the occasion to
state:
There is nothing sacred about processes or pleadings,
their forms or contents. Their sole purpose is to facilitate
the application of justice to the rival claims of contending
parties. They were created, not to hinder and delay, but to
facilitate and promote, the administration of justice. They do not
constitute the thing itself, which courts are always striving to
secure to litigants. They are designed as the means best adapted
to obtain that thing. In other words, they are a means to an end.
When they lose the character of the one and become the other,
the administration of justice is at fault and courts are
correspondingly remiss in the performance of their obvious
duty.53 (Emphasis supplied)
In any event, the SEC has expressly manifested 54 that it
will abide by the Courts decision and defer to the Courts
definition of the term "capital" in Section 11, Article XII of
the Constitution. Further, the SEC entered its special
appearance in this case and argued during the Oral
Arguments, indicating its submission to the Courts
jurisdiction. It is clear, therefore, that there exists no legal
impediment against the proper and immediate
implementation of the Courts directive to the SEC.
PLDT is an indispensable party only insofar as the other issues,
particularly the factual questions, are concerned. In other words,
PLDT must be impleaded in order to fully resolve the issues on (1)
whether the sale of 111,415 PTIC shares to First Pacific violates
the constitutional limit on foreign ownership of PLDT; (2) whether
the sale of common shares to foreigners exceeded the 40 percent
limit on foreign equity in PLDT; and (3) whether the total
percentage of the PLDT common shares with voting rights
complies with the 60-40 ownership requirement in favor of Filipino
citizens under the Constitution for the ownership and operation of
PLDT. These issues indisputably call for an examination of the
parties respective evidence, and thus are clearly within the
jurisdiction of the SEC. In short, PLDT must be impleaded, and
must necessarily be heard, in the proceedings before the SEC
where the factual issues will be thoroughly threshed out and
resolved.
Notably, the foregoing issues were left untouched by the
Court. The Court did not rule on the factual issues raised by
Gamboa, except the single and purely legal issue on the definition
of the term "capital" in Section 11, Article XII of the Constitution.
The Court confined the resolution of the instant case to this
threshold legal issue in deference to the fact-finding power of the
SEC.
Needless to state, the Court can validly, properly, and fully
dispose of the fundamental legal issue in this case even without
the participation of PLDT since defining the term "capital" in
Section 11, Article XII of the Constitution does not, in any way,
depend on whether PLDT was impleaded. Simply put, PLDT is not
indispensable for a complete resolution of the purely legal
question in this case.55 In fact, the Court, by treating the petition
as one for mandamus,56 merely directed the SEC to apply the
Courts definition of the term "capital" in Section 11, Article XII of
the Constitution in determining whether PLDT committed any
violation of the said constitutional provision. The dispositive
portion of the Courts ruling is addressed not to PLDT but
solely to the SEC, which is the administrative agency

23
tasked to enforce the 60-40 ownership requirement in
favor of Filipino citizens in Section 11, Article XII of the
Constitution.
Since the Court limited its resolution on the purely legal issue on
the definition of the term "capital" in Section 11, Article XII of the
1987 Constitution, and directed the SEC to investigate any
violation by PLDT of the 60-40 ownership requirement in favor of
Filipino citizens under the Constitution,57 there is no deprivation of
PLDTs property or denial of PLDTs right to due process, contrary
to Pangilinan and Nazarenos misimpression. Due process will be
afforded to PLDT when it presents proof to the SEC that it
complies, as it claims here, with Section 11, Article XII of the
Constitution.
X.
Foreign Investments in the Philippines
Movants fear that the 28 June 2011 Decision would spell disaster
to our economy, as it may result in a sudden flight of existing
foreign investors to "friendlier" countries and simultaneously
deterring new foreign investors to our country. In particular, the
PSE claims that the 28 June 2011 Decision may result in the
following: (1) loss of more than P 630 billion in foreign
investments in PSE-listed shares; (2) massive decrease in foreign
trading transactions; (3) lower PSE Composite Index; and (4) local
investors not investing in PSE-listed shares.58
Dr. Bernardo M. Villegas, one of the amici curiae in the Oral
Arguments, shared movants apprehension. Without providing
specific details, he pointed out the depressing state of the
Philippine economy compared to our neighboring countries which
boast of growing economies. Further, Dr. Villegas explained that
the solution to our economic woes is for the government to "takeover" strategic industries, such as the public utilities sector, thus:
JUSTICE CARPIO:
I would like also to get from you Dr. Villegas if you have additional
information on whether this high FDI59 countries in East Asia have
allowed foreigners x x x control [of] their public utilities, so that
we can compare apples with apples.
DR. VILLEGAS:
Correct, but let me just make a comment. When these neighbors
of ours find an industry strategic, their solution is not to
"Filipinize" or "Vietnamize" or "Singaporize." Their solution is to
make sure that those industries are in the hands of state
enterprises. So, in these countries, nationalization means
the government takes over. And because their
governments are competent and honest enough to the
public, that is the solution. x x x 60 (Emphasis supplied)
If government ownership of public utilities is the solution, then
foreign investments in our public utilities serve no purpose.
Obviously, there can never be foreign investments in public
utilities if, as Dr. Villegas claims, the "solution is to make sure that
those industries are in the hands of state enterprises." Dr.
Villegass argument that foreign investments in
telecommunication companies like PLDT are badly needed to save
our ailing economy contradicts his own theory that the solution is
for government to take over these companies. Dr. Villegas is
barking up the wrong tree since State ownership of public utilities
and foreign investments in such industries are diametrically
opposed concepts, which cannot possibly be reconciled.
In any event, the experience of our neighboring countries cannot
be used as argument to decide the present case differently for
two reasons. First, the governments of our neighboring countries
have, as claimed by Dr. Villegas, taken over ownership and control
of their strategic public utilities like the telecommunications
industry. Second, our Constitution has specific provisions limiting
foreign ownership in public utilities which the Court is sworn to
uphold regardless of the experience of our neighboring countries.

In our jurisdiction, the Constitution expressly reserves the

ownership and operation of public utilities to Filipino citizens, or
corporations or associations at least 60 percent of whose capital
belongs to Filipinos. Following Dr. Villegass claim, the Philippines
appears to be more liberal in allowing foreign investors to own 40
percent of public utilities, unlike in other Asian countries whose
governments own and operate such industries.
XI.
Prospective Application of Sanctions
In its Motion for Partial Reconsideration, the SEC sought to clarify
the reckoning period of the application and imposition of
appropriate sanctions against PLDT if found violating Section 11,
Article XII of the Constitution.1avvphi1
As discussed, the Court has directed the SEC to investigate and
determine whether PLDT violated Section 11, Article XII of the
Constitution. Thus, there is no dispute that it is only after the SEC
has determined PLDTs violation, if any exists at the time of the
commencement of the administrative case or investigation, that
the SEC may impose the statutory sanctions against PLDT. In
other words, once the 28 June 2011 Decision becomes final, the
SEC shall impose the appropriate sanctions only if it finds after
due hearing that, at the start of the administrative case or
investigation, there is an existing violation of Section 11, Article
XII of the Constitution. Under prevailing jurisprudence, public
utilities that fail to comply with the nationality requirement under
Section 11, Article XII and the FIA can cure their deficiencies prior
to the start of the administrative case or investigation.61
XII.
Final Word
The Constitution expressly declares as State policy the
development of an economy "effectively controlled" by
Filipinos. Consistent with such State policy, the Constitution
explicitly reserves the ownership and operation of public utilities
to Philippine nationals, who are defined in the Foreign Investments
Act of 1991 as Filipino citizens, or corporations or associations at
least 60 percent of whose capital with voting rights belongs to
Filipinos. The FIAs implementing rules explain that "[f]or 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." In
effect, the FIA clarifies, reiterates and confirms the interpretation
that the term "capital" in Section 11, Article XII of the 1987
Constitution refers to shares with voting rights, as well as
with full beneficial ownership. This is precisely because the
right to vote in the election of directors, coupled with full
beneficial ownership of stocks, translates to effective control of a
corporation.
Any other construction of the term "capital" in Section 11, Article
XII of the Constitution contravenes the letter and intent of the
Constitution. Any other meaning of the term "capital" openly
invites alien domination of economic activities reserved
exclusively to Philippine nationals. Therefore, respondents
interpretation will ultimately result in handing over effective
control of our national economy to foreigners in patent violation of
the Constitution, making Filipinos second-class citizens in their
own country.
Filipinos have only to remind themselves of how this country was
exploited under the Parity Amendment, which gave Americans the
same rights as Filipinos in the exploitation of natural resources,
and in the ownership and control of public utilities, in the
Philippines. To do this the 1935 Constitution, which contained the
same 60 percent Filipino ownership and control requirement as
the present 1987 Constitution, had to be amended to give
Americans parity rights with Filipinos. There was bitter opposition
to the Parity Amendment62 and many Filipinos eagerly awaited its
expiration. In late 1968, PLDT was one of the American-controlled
public utilities that became Filipino-controlled when the controlling
American stockholders divested in anticipation of the expiration of
the Parity Amendment on 3 July 1974.63 No economic suicide

24
happened when control of public utilities and mining corporations
passed to Filipinos hands upon expiration of the Parity
Amendment.
Movants interpretation of the term "capital" would bring us back
to the same evils spawned by the Parity Amendment, effectively
giving foreigners parity rights with Filipinos, but this time
even without any amendment to the present Constitution.
Worse, movants interpretation opens up our national economy
toeffective control not only by Americans but also by all
foreigners, be they Indonesians, Malaysians or Chinese,
even in the absence of reciprocal treaty arrangements. At
least the Parity Amendment, as implemented by the LaurelLangley Agreement, gave the capital-starved Filipinos theoretical
parity the same rights as Americans to exploit natural resources,
and to own and control public utilities, in the United States of
America. Here, movants interpretation would effectively mean
a unilateral opening up of our national economy to all
foreigners, without any reciprocal arrangements. That would
mean that Indonesians, Malaysians and Chinese nationals could
effectively control our mining companies and public utilities while
Filipinos, even if they have the capital, could not control similar
corporations in these countries.
The 1935, 1973 and 1987 Constitutions have the same 60 percent
Filipino ownership and control requirement for public utilities like
PLOT. Any deviation from this requirement necessitates an
amendment to the Constitution as exemplified by the Parity
Amendment. This Court has no power to amend the Constitution
for its power and duty is only to faithfully apply and interpret the
Constitution.
WHEREFORE, we DENY the motions for reconsideration WITH
FINALITY. No further pleadings shall be entertained.
SO ORDERED.
ANTONIO T. CARPIO
Associate Justice
DISSENTING OPINION

To the foregoing motions, the main petitioner, now deceased, filed

his Comment and/or Opposition to Motions for Reconsideration.
Acting on the various motions and comment, the Court conducted
and heard the parties in oral arguments on April 17 and June 26,
2012.
After considering the parties positions as articulated during the
oral arguments and in their pleadings and respective memoranda,
I vote to grant reconsideration. This disposition is consistent with
my dissent, on procedural and substantive grounds, to the June
28, 2011 majority Decision.

Conspectus
The core issue is the meaning of the word "capital" in the opening
sentence of Sec. 11, Art. XII of the 1987 Constitution which reads:
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.)
For an easier comprehension of the two contrasting positions on
the contentious meaning of the word "capital," as found in the
first sentence of the aforequoted provision, allow me to present a
brief comparative analysis showing the dissimilarities.

VELASCO, JR., J.:

Before Us are separate motions for recon~ideration of the Court's
June 28, 2011 Decision, 1 which partially granted the petition for
prohibition, injunction and declaratory relief interposed by Wilson
P. Gamboa (petitioner or Gamboa). Very simply, the Court held
that the term "capital" appearing in Section 11, Article XII of the
1987 Constitution refers only to common shares or shares of stock
entitled to vote in the election of the members of the board of
directors of a public utility, and not to the total outstanding capital
stock.
Respondents Manuel V. Pangilinan (Pangilinan) and Napoleon
L.Nazare no (Nazareno) separately moved for reconsideration on
procedural and substantive grounds, but reserved their main
arguments against the majority's holding on the meaning of
"capital." The Office of the Solicitor General (OSG), which initially
representL:d the Securities and Exchange Commission (SEC), also
requested recon~itkratiun even as it manifested agreement with
the majority's construal ct' the \Vord "capital." Unable to join the
OSG's stand on the determinative issue of capital, the SEC sought
leave to join the fray on its mvn. fn its Jtdotion to Admit
A1anifestation and Omnibus Motion, the SEC stated that the
OSGs position on said issue does not reflect its own and in fact
diverges from what the Commission has consistently adopted
prior to this case. And because the decision in question has a
penalty component which it is tasked to impose, SEC requested
clarification as to when the reckoning period of application
of the appropriate sanctions may be imposed on Philippine
Long Distance Telephone Company (PLDT) in case the SEC
determines that it has violated Sec. 11, Art. XII of the
Constitution.

The majority, in the June 28, 2011 Decision, as reiterated in the

draft resolution, is of the view that the word "capital" in the first
sentence of Sec. 11, Art. XII refers to common shares or voting
shares only; thus limiting foreign ownership of such shares to
40%. The rationale, as stated in the basic ponencia, is that this
interpretation ensures that control of the Board of Directors stays
in the hands of Filipinos, since foreigners can only own a
maximum of 40% of said shares and, accordingly, can only elect
the equivalent percentage of directors. As a necessary corollary,
Filipino stockholders can always elect 60% of the Board of
Directors which, to the majority, translates to control over the
corporation.
The opposite view is that the word "capital" in the first sentence
refers to the entire capital stock of the corporation or both voting
and non-voting shares and NOT solely to common shares. From
this standpoint, 60% control over the capital stock or the
stockholders owning both voting and non-voting shares is assured
to Filipinos and, as a consequence, over corporate matters voted
upon and decisions reached during stockholders meetings. On
the other hand, the last sentence of Sec. 11, Art. XII, with the
word "capital" embedded in it, is the provision that ensures
Filipino control over the Board of Directors and its decisions.
To resolve the conflicting interpretations of the word "capital," the
first sentence of Sec. 11, Art. XII must be read and considered in
conjunction with the last sentence of said Sec. 11 which
prescribes that "the participation of foreign investors in the
governing body of any public utility enterprise shall be limited to
their proportionate share in its capital." After all, it is an
established principle in constitutional construction that provisions
in the Constitution must be harmonized.

25
It has been made very clear during the oral arguments and even
by the parties written submissions that control by Filipinos over
the public utility enterprise exists on three (3) levels, namely:
1. Sixty percent (60%) control of Filipinos over the capital stock
which covers both voting and non-voting shares and inevitably
over the stockholders. This level of control is embodied in the first
sentence of Sec. 11, Art. XII which reads:
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 x x x.
The word "capital" in the above provision refers to capital stock or
both voting and non-voting shares. Sixty percent (60%) control
over the capital stock translates to control by Filipinos over almost
all decisions by the stockholders during stockholders meetings
including ratification of the decisions and acts of the Board of
Directors. During said meetings, voting and even non-voting
shares are entitled to vote. The exercise by non-voting shares of
voting rights over major corporate decisions is expressly provided
in Sec. 6 of the Corporation Code which reads:
Sec. 6. x x x x
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.
Construing the word "capital" in the first sentence of Sec. 11, Art.
XII of the Constitution as capital stock would ensure Filipino
control over the public utility with respect to major corporate
decisions. If we adopt the view espoused by Justice Carpio that
the word "capital" means only common shares or voting shares,
then foreigners can own even up to 100% of the non-voting
shares. In such a situation, foreigners may very well exercise
control over all major corporate decisions as their ownership of
the nonvoting shares remains unfettered by the 40% cap laid
down in the first sentence of Sec. 11, Art. XII. This will spawn an
even greater anomaly because it would give the foreigners the
opportunity to acquire ownership of the net assets of the
corporation upon its dissolution to include what the Constitution
enjoinsland ownership possibly through dummy corporations.
With the view of Justice Carpio, Filipinos will definitely lose control
over major corporate decisions which are decided by stockholders
owning the majority of the non-voting shares.
2. Sixty percent (60%) control by Filipinos over the common
shares or voting shares and necessarily over the Board of
Directors of the public utility. Control on this level is guaranteed
by the last sentence of Sec. 11, Art. XII which reads:
The participation of foreign investors in the governing
body of any public utility enterprise shall be limited to
their proportionate share in its "capital" x x x.
In its ordinary signification, "participation" connotes "the action or
state of taking part with others in an activity."2This participation in
its decision-making function can only be the right to elect board
directors. Hence, the last sentence of Sec. 11, Art. XII of the

Constitution effectively restricts the right of foreigners to

elect directors to the board in proportion to the limit on
their total shareholdings. Since the first part of Sec. 11, Art. XII
of the Constitution specifies a 40% limit of foreign ownership in
the total capital of the public utility corporation, then the rights of
foreigners to be elected to the board of directors, is likewise
limited to 40 percent. If the foreign ownership of common shares
is lower than 40%, the participation of foreigners is limited to their
proportionate share in the capital stock.
In the highly hypothetical public utility corporation with 100
common shares and 1,000,000 preferred non-voting shares, or a
total of 1,000,100 shares cited in the June 28, 2011 Decision,
foreigners can thus only own up to 400,040 shares of the
corporation, consisting of the maximum 40 (out of the 100)
voting shares and 400,000 non-voting shares. And, assuming a
10- member board, the foreigners can elect only 4 members of
the boardusing the 40 voting shares they are allowed to
own.
Following, in fine, the dictates of Sec. 11, Art. XII, as
couched, the foreign shareholders right to elect members
of the governing board of a given public utility corporation
is proportional only to their right to hold a part of the total
shareholdings of that entity. Since foreigners can only own, in
the maximum, up to 40% of the total shareholdings of the
company, then their voting entitlement as to the numerical
composition of the board would depend on the level of
their shareholding in relation to the capital stock, but in
no case shall it exceed the 40% threshold.
Contrary to the view of Justice Carpio that the objective behind
the first sentence of Sec. 11, Art. XII is to ensure control of
Filipinos over the Board of Directors by limiting foreign ownership
of the common shares or voting shares up to 40%, it is actually
the first part of the aforequoted last sentence of Sec. 11,
Art. XII that limits the rights of foreigners to elect not
more than 40% of the board seats thus ensuring a clear
majority in the Board of Directors to Filipinos. If we follow the line
of reasoning of Justice Carpio on the meaning of the word "capital"
in the first sentence, then there is no need for the framers of the
Constitution to incorporate the last sentence in Sec. 11, Art. XII on
the 40% maximum participation of the foreigners in the Board of
Directors. The last sentence would be a useless redundancy, a
situation doubtless unintended by the framers of the Constitution.
A construction that renders a part of the law or Constitution being
construed superfluous is an aberration,3 for it is at all times
presumed that each word used in the law is intentional and has a
particular and special role in the approximation of the policy
sought to be attained, ut magis valeat quam pereat.
3. The third level of control proceeds from the requirement tucked
in the second part of the ultimate sentence that "all the
executive and managing officers of the corporation must
be citizens of the Philippines." This assures full Filipino control,
at all times, over the management of the public utility.
To summarize, the Constitution, as enacted, establishes not just
one but a three-tiered control-enhancing-and-locking mechanism
in Sec. 11, Article XII to ensure that Filipinos will always have full
beneficial ownership and control of public utility corporations:
1. 40% ceiling on foreign ownership in the capital stock that
ensures sixty percent (60%) Filipino control over the capital stock
which covers both voting and non-voting shares. As a
consequence, Filipino control over the stockholders is assured.
(First sentence of Sec. 11, Art. XII). Thus, foreigners can own only
up to 40% of the capital stock.
2. 40% ceiling on the right of foreigners to elect board directors
that guarantees sixty percent (60%) Filipino control over the
Board of Directors. (First part of last sentence of Sec. 11, Art. XII).
3. Reservation to Filipino citizens of the executive and managing
officers, regardless of the level of alien equity ownership to secure
total Filipino control over the management of the public utility

26
enterprise (Second part of last sentence of Sec. 11, Art. XII). Thus,
all executive and managing officers must be Filipinos.
Discussion
Undoubtedly there is a clash of conflicting opinions as to what
"capital" in the first sentence of Sec. 11, Art. XII means. The
majority says it refers only to common or voting shares. The
minority says it includes both voting and non-voting shares. A
resort to constitutional construction is unavoidable.
It is settled though that the "primary source from which to
ascertain constitutional intent or purpose is the language of the
constitution itself."4 To this end, the words used by the
Constitution should as much as possible be understood in
their ordinary meaning as the Constitution is not a lawyers
document.5 This approach, otherwise known as the verba
legis rule, should be applied save where technical terms
are employed.6
The plain meaning of "capital" in the first
sentence of Sec. 11, Art. XII of the Constitution
includes both voting and non-voting shares
J.M. Tuason & Co., Inc. v. Land Tenure Administration illustrates
the verba legis rule. There, the Court cautions against departing
from the commonly understood meaning of ordinary words used
in the Constitution, viz.:
We look to the language of the document itself in our search for
its meaning. We do not of course stop there, but that is where we
begin. It is to be assumed that the words in which
constitutional provisions are couched express the
objective sought to be attained. They are to be given their
ordinary meaning except where technical terms are employed in
which case the significance thus attached to them prevails. As the
Constitution is not primarily a lawyer's document, it being
essential for the rule of law to obtain that it should ever be
present in the people's consciousness, its language as much as
possible should be understood in the sense they have in
common use. What it says according to the text of the provision
to be construed compels acceptance and negates the power of
the courts to alter it, based on the postulate that the framers and
the people mean what they say. Thus, there are cases where the
need for construction is reduced to a minimum.7 (Emphasis
supplied.)
The primary reason for the verba legis approach, as pointed out
by Fr. Joaquin Bernas during the June 26, 2012 arguments, is that
the people who ratified the Constitution voted on their
understanding of the word capital in its everyday meaning. Fr.
Bernas elucidated thus:
x x x Over the years, from the 1935 to the 1973 and finally even
under the 1987 Constitution, the prevailing practice has been to
base the 60-40 proportion on total outstanding capital stock, that
is, the combined total of common and non-voting preferred
shares. This is what occasioned the case under consideration.
What is the constitutional relevance of this continuing practice? I
suggest that it is relevant for determining what the people in the
street voted for when they ratified the Constitution. When the
draft of a Constitution is presented to the people for
ratification, what the people vote on is not the debates in
the constituent body but the text of the draft. Concretely,
what the electorate voted on was their understanding of
the word capital in its everyday meaning they encounter in
daily life.We cannot attribute to the voters a jurists
sophisticated meaning of capital and its breakdown into common
and preferred. What they vote on is what they see. Nor do they
vote on what the drafters saw as assumed meaning, to use
Bengzons explanation. In the language of the sophisticates,
whatvoters in a plebiscite vote on is verba legis and
not anima legis about which trained jurists debate.

What then does it make of the contemporary understanding by

SEC etc. Is the contemporary understanding unconstitutional or
constitutional? I hesitate to characterize it as constitutional or
unconstitutional. I would merely characterize it as popular. What I
mean is it reflects the common understanding of the
ordinary populi, common but incomplete.8 (Emphasis supplied.)
"Capital" in the first sentence of Sec. 11, Art. XII must then be
accorded a meaning accepted, understood, and used by an
ordinary person not versed in the technicalities of law. As defined
in a non-legal dictionary, capital stock or capital is ordinarily taken
to mean "the outstanding shares of a joint stock company
considered as an aggregate"9 or "the ownership element of a
corporation divided into shares and represented by certificates." 10
The term "capital" includes all the outstanding shares of a
company that represent "the proprietary claim in a business." 11 It
does not distinguish based on the voting feature of the
stocks but refers to all shares, be they voting or nonvoting. Neither is the term limited to the management aspect of
the corporation but clearly refers to the separate aspect
of ownership of the corporate shares thereby encompassing all
shares representing the equity of the corporation.
This plain meaning, as understood, accepted, and used in ordinary
parlance, hews with the definition given by Black who equates
capital to capital stock12 and defines it as "the total number of
shares of stock that a corporation may issue under its charter or
articles of incorporation, including both common stock and
preferred stock."13 This meaning is also reflected in legal
commentaries on the Corporation Code. The respected
commentator Ruben E. Agpalo defines "capital" as the "money,
property or means contributed by stockholders for the business or
enterprise for which the corporation was formed and generally
implies that such money or property or means have been
contributed in payment for stock issued to the
contributors."14 Meanwhile, "capital stock" is "the aggregate of
the shares actually subscribed [or] the amount subscribed and
paid-in and upon which the corporation is to conduct its
operations, or the amount paid-in by its stockholders in money,
property or services with which it is to conduct its business." 15
This definition has been echoed by numerous other experts in the
field of corporation law. Dean Villanueva wrote, thus:
In defining the relationship between the corporation and its
stockholders, the capital stock represents the proportional
standing of the stockholders with respect to the corporation and
corporate matters, such as their rights to vote and to receive
dividends.
In financial terms, the capital stock of the corporation as
reflected in the financial statement of the corporation
represents the financial or proprietary claims of the
stockholders to the net assets of the corporation upon
dissolution. In addition, the capital stock represents the totality
of the portion of the corporations assets and receivables which
are covered by the trust fund doctrine and provide for the amount
of assets and receivables of the corporation which are deemed
protected for the benefit of the corporate creditors and from which
the corporation cannot declare any dividends. 16(Emphasis
supplied.)
Similarly, renowned author Hector S. de Leon defines "capital" and
"capital stock" in the following manner:
Capital is used broadly to indicate the entire property or assets of
the corporation. It includes the amount invested by the
stockholders plus the undistributed earnings less losses and
expenses. In the strict sense, the term refers to that portion of the
net assets paid by the stockholders as consideration for the
shares issued to them, which is utilized for the prosecution of the
business of the corporation. It includes all balances or instalments
due the corporation for shares of stock sold by it and all unpaid
subscription for shares.

27
xxxx
The term is also used synonymously with the words "capital
stock," as meaning the amount subscribed and paid-in and upon
which the corporation is to conduct its operation (11 Fletcher Cyc.
Corp., p. 15 [1986 ed.]) and it is immaterial how the stock is
classified, whether as common or preferred.17 (Emphasis and
underscoring supplied.)
Hence, following the verba legis approach, I see no reason to stray
away from what appears to be a common and settled acceptation
of the word "capital," given that, as used in the constitutional
provision in question, it stands unqualified by any restrictive or
expansive word as to reasonably justify a distinction or a
delimitation of the meaning of the word. Ubi lex non distinguit nos
distinguere debemus, when the law does not distinguish, we must
not distinguish.18 Using this plain meaning of "capital" within the
context of Sec. 11, Art. XII, foreigners are entitled to own not
more than 40% of the outstanding capital stock, which
would include both voting and non-voting shares.
Extraneous aids to ferret out constitutional intent
When the seeming ambiguity on the meaning of "capital" cannot
be threshed out by looking at the language of the Constitution,
then resort to extraneous aids has become imperative. The Court
can utilize the following extraneous aids, to wit: (1) proceedings of
the convention; (2) changes in phraseology; (3) history or realities
existing at the time of the adoption of the Constitution; (4) prior
laws and judicial decisions; (5) contemporaneous construction;
and (6) consequences of alternative interpretations.19 I submit
that all these aids of constitutional construction affirm that the
only acceptable construction of "capital" in the first sentence of
Sec. 11, Art. XII of the 1987 Constitution is that it refers
to all shares of a corporation, both voting and non-voting.
Deliberations of the Constitutional Commission
of 1986 demonstrate that capital means both
voting and non-voting shares (1st extrinsic aid)
The proceedings of the 1986 Constitutional Commission that
drafted the 1987 Constitution were accurately recorded in the
Records of the Constitutional Commission.

associations at least sixty percent of whose voting stock

or controlling interest is owned by such citizens. x x x
xxxx
SEC. 9. The Congress shall reserve to citizens of the Philippines or
to corporations or associations at least sixty per cent of whose
voting stock or controlling interest is owned by such citizens
or such higher percentage as Congress may prescribe, certain
areas of investments when the national interest so dictates.
xxxx
SEC. 15. 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
two-thirds of whose voting stock or controlling interest is
owned by such citizens. Neither shall any such franchise or
right be granted except under the condition that it shall be subject
to amendment, alteration, or repeal by Congress when the
common good so requires. The State shall encourage equity
participation in public utilities by the general public. (Origin of
Sec. 11, Article XII)
xxxx
MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local
or Filipino equity and foreign equity; namely, 60-40 in Section 3,
60-40 in Section 9, and 2/3-1/3 in Section 15.
MR. VILLEGAS. That is right.
MR. NOLLEDO. In teaching law, we are always faced with this
question: "Where do we base the equity requirement, is it on the
authorized capital stock, on the subscribed capital stock, or on the
paid-up capital stock of a corporation?" Will the Committee please
enlighten me on this?
MR. VILLEGAS. We have just had a long discussion with the
members of the team from the UP Law Center who provided us a
draft. The phrase that is contained here which we adopted from
the UP draft is "60 percent of voting stock."

To bring to light the true meaning of the word "capital" in the first
line of Sec. 11, Art. XII, one must peruse, dissect and analyze the
entire deliberations of the Constitutional Commission pertinent to
the article on national economy and patrimony, as quoted below:

MR. NOLLEDO. That must be based on the subscribed capital

stock, because unless declared delinquent, unpaid capital stock
shall be entitled to vote.

August 13, 1986, Wednesday

MR. VILLEGAS. That is right.

PROPOSED RESOLUTION NO. 496

MR. NOLLEDO. Thank you.

RESOLUTION TO INCORPORATE IN THE NEW CONSTITUTION AN

ARTICLE ON NATIONAL ECONOMY AND PATRIMONY

With respect to an investment by one corporation in another

corporation, say, a corporation with 60-40 percent equity invests
in another corporation which is permitted by the Corporation
Code, does the Committee adopt the grandfather rule?

Be it resolved as it is hereby resolved by the Constitutional

Commission in session assembled, To incorporate the National
Economy and Patrimony of the new Constitution, the following
provisions:

MR. VILLEGAS. Yes, that is the understanding of the Committee.

MR. NOLLEDO. Therefore, we need additional Filipino capital?

ARTICLE____
NATIONAL ECONOMY AND PATRIMONY
SECTION 1. The State shall develop a self-reliant and independent
national economy. x x x
xxxx
SEC. 3. x x x The exploration, development, and utilization of
natural resources shall be under the full control and supervision of
the State. Such activities may be directly undertaken by the State,
or it may enter into co-production, joint venture, productionsharing agreements with Filipino citizens orcorporations or

MR. VILLEGAS. Yes.20

August 14, 1986, Thursday
MR. FOZ. Mr. Vice-President, in Sections 3 and 9, the provision on
equity is both 60 percent, but I notice that this is now different
from the provision in the 1973 Constitution in that the basis for
the equity provision is voting stock or controlling interest instead
of the usual capital percentage as provided for in the 1973
Constitution. We would like to know what the difference would be
between the previous and the proposed provisions regarding
equity interest.

28
MR. VILLEGAS. Commissioner Suarez will answer that.
MR. SUAREZ. Thank you.
As a matter of fact, this particular portion is still being reviewed
by this Committee. In Section 1, Article XIII of the 1935
Constitution, the wording is that the percentage should be based
on the capital which is owned by such citizens. In the proposed
draft, this phrase was proposed: "voting stock or controlling
interest." This was a plan submitted by the UP Law Center.
Three days ago, we had an early morning breakfast conference
with the members of the UP Law Center and precisely, we were
seeking clarification regarding the difference. We would have
three criteria to go by: One would be based on capital, which is
capital stock of the corporation, authorized, subscribed or paid up,
as employed under the 1935 and the 1973 Constitution. The idea
behind the introduction of the phrase "voting stock or controlling
interest" was precisely to avoid the perpetration of dummies,
Filipino dummies of multinationals. It is theoretically possible that
a situation may develop where these multinational interests would
not really be only 40 percent but will extend beyond that in the
matter of voting because they could enter into what is known as a
voting trust or voting agreement with the rest of the stockholders
and, therefore, notwithstanding the fact that on record their
capital extent is only up to 40-percent interest in the corporation,
actually, they would be managing and controlling the entire
company. That is why the UP Law Center members suggested that
we utilize the words "voting interest" which would preclude
multinational control in the matter of voting, independent of the
capital structure of the corporation. And then they also added the
phrase "controlling interest" which up to now they have not been
able to successfully define the exact meaning of. But they
mentioned the situation where theoretically the board would be
controlled by these multinationals, such that instead of, say, three
Filipino directors out of five, there would be three foreign directors
and, therefore, they would be controlling the management of the
company with foreign interest. That is why they volunteered to
flesh out this particular portion which was submitted by them, but
up to now, they have not come up with a constructive rephrasing
of this portion. And as far as I am concerned, I am not speaking in
behalf of the Committee, I would feel more comfortable if we
go back to the wording of the 1935 and the 1973
Constitution, that is to say, the 60-40 percentage could be
based on the capital stock of the corporation.
MR. FOZ. I understand that that was the same view of Dean
Carale who does not agree with the others on this panel at the UP
Law Center regarding the percentage of the ratio.
MR. SUAREZ. That is right. Dean Carale shares my sentiment
about this matter.
MR. BENGZON. I also share the sentiment of Commissioner Suarez
in that respect. So there are already two in the Committee who
want to go back to the wording of the 1935 and the 1973
Constitution.21
August 15, 1986, Friday
MR. MAAMBONG. I ask that Commissioner Treas be recognized
for an amendment on line 14.
THE PRESIDENT. Commissioner Treas is recognized.
MR. TREAS. Madam President, may I propose an amendment on
line 14 of Section 3 by deleting therefrom "whose voting stock and
controlling interest." And in lieu thereof, insert the CAPITAL
so the line should read: "associations at least sixty
percent of the CAPITAL is owned by such citizens.
MR. VILLEGAS. We accept the amendment.
MR. TREAS. Thank you.
THE PRESIDENT. The amendment of Commissioner Treas
on line 14 has been accepted by the Committee.
Is there any objection? (Silence) The Chair hears none; the
amendment is approved.
xxxx
THE PRESIDENT. Commissioner Suarez is recognized.
MR. SUAREZ. Thank you, Madam President.
Two points actually are being raised by Commissioner Davides
proposed amendment. One has reference to the percentage of
holdings and the other one is the basis for that percentage. Would
the body have any objection if we split it into two portions

because there may be several Commissioners who would be

willing to accept the Commissioners proposal on capital stock in
contradistinction to a voting stock for controlling interest?
MR. VILLEGAS. The proposal has been accepted already.
MR. DAVIDE. Yes, but it was 60 percent.
MR. VILLEGAS. That is right.
MR. SUAREZ. So, it is now 60 percent as against wholly owned?
MR. DAVIDE. Yes.
MR. SUAREZ. Is the Commissioner not insisting on the voting
capital stock because that was already accepted by the
Committee?
MR. DAVIDE. Would it mean that it would be 100-percent voting
capital stock?
MR. SUAREZ. No, under the Commissioners proposal it is just
"CAPITAL" not "stock."
MR. DAVIDE. No, I want it to be very clear. What is the
alternative proposal of the Committee? How shall it read?
MR. SUAREZ. It will only read something like: "the CAPITAL
OF WHICH IS FULLY owned."
MR. VILLEGAS. Let me read lines 12 to 14 which state:
enter into co-production, joint venture, production
sharing agreements with Filipino citizens or corporations
or associations at least 60 percent of whose CAPITAL is
owned by such citizens.
We are going back to the 1935 and 1973 formulations.
MR. DAVIDE. I cannot accept the proposal because the
word CAPITAL should not really be the guiding principle. It
is the ownership of the corporation. It may be voting or
not voting, but that is not the guiding principle.
MR. SUAREZ. So, the Commissioner is insisting on the use
of the term "CAPITAL STOCK"?
MR. DAVIDE. Yes, to be followed by the phrase "WHOLLY
owned."
MR. SUAREZ. Yes, but we are only concentrating on the
first point "CAPITAL STOCK" or merely "CAPITAL."
MR. DAVIDE. CAPITAL STOCK?
MR. SUAREZ. Yes, it is "CAPITAL STOCK."
SUSPENSION OF SESSION
At 4:42 p.m., the session was resumed.
THE PRESIDENT. The session is resumed.
Commissioner Davide is to clarify his point.
MR. VILLEGAS. Yes, Commissioner Davide has accepted the
word "CAPITAL" in place of "voting stock or controlling
interest." This is an amendment already accepted by the
Committee.
We would like to call for a vote on 100-percent Filipino versus 60percent Filipino.
MR. ALONTO. Is it 60 percent?
MR. VILLEGAS. Sixty percent, yes.
MR. GASCON. Madam President, shall we vote on the proposed
amendment of Commissioner Davide of "ONE HUNDRED
PERCENT?"
MR. VILLEGAS. Yes.
MR. GASCON. Assuming that it is lost, that does not prejudice any
other Commissioner to make any recommendations on other
percentages?
MR. VILLEGAS. I would suggest that we vote on "sixty," which is
indicated in the committee report.
MR. GASCON. It is the amendment of Commissioner Davide that
we should vote on, not the committee report.
MR. VILLEGAS. Yes, it is all right.
MR. AZCUNA. Madam President.
THE PRESIDENT. Commissioner Azcuna is recognized.
MR. AZCUNA. May I be clarified as to that portion that was
accepted by the Committee?
MR. VILLEGAS. The portion accepted by the Committee is
the deletion of the phrase "voting stock or controlling
interest."
MR. AZCUNA. Hence, without the Davide amendment, the
committee report would read: "corporations or
associations at least sixty percent of whose CAPITAL is
owned by such citizens."
MR. VILLEGAS. Yes.
MR. AZCUNA. So if the Davide amendment is lost, we are
stuck with 60 percent of the capital to be owned by
citizens?
MR. VILLEGAS. That is right.
MR. AZCUNA. But the control can be with the foreigners even if
they are the minority. Let us say 40 percent of the capital is

29
owned by them, but it is the voting capital, whereas, the Filipinos
own the nonvoting shares. So we can have a situation where the
corporation is controlled by foreigners despite being the minority
because they have the voting capital. That is the anomaly that
would result there.
MR. BENGZON. No, the reason we eliminated the word "stock" as
stated in the 1973 and 1935 Constitutions is that according to
Commissioner Rodrigo, there are associations that do not have
stocks. That is why we say "CAPITAL."
MR. AZCUNA. We should not eliminate the phrase "controlling
interest."
MR. BENGZON. In the case of stock corporations, it is assumed.
MR. AZCUNA. Yes, but what I mean is that the control should be
with the Filipinos.
MR. BENGZON. Yes, that is understood.
MR. AZCUNA. Yes, because if we just say "sixty percent of whose
capital is owned by the Filipinos," the capital may be voting or
nonvoting.
MR. BENGZON. That is correct.
MR. AZCUNA. My concern is the situation where there is a voting
stock. It is a stock corporation. What the Committee requires is
that 60 percent of the capital should be owned by Filipinos. But
that would not assure control because that 60 percent may be
non-voting.
MS. AQUINO. Madam President.
MR. ROMULO. May we vote on the percentage first?
THE PRESIDENT. Before we vote on this, we want to be clarified
first.
MS. AQUINO. Madam President.
THE PRESIDENT. Commissioner Aquino is recognized.
MS. AQUINO. I would suggest that we vote on the Davide
amendment which is 100-percent capital, and if it is voted down,
then we refer to the original draft which is "capital stock" not just
"capital."
MR. AZCUNA. The phrase "controlling interest" is an important
consideration.
THE PRESIDENT. Let us proceed to vote then.
MR. PADILLA. Madam President.
THE PRESIDENT. The Vice-President, Commissioner Padilla,
is recognized.
MR. PADILLA. The Treas amendment has already been
approved. The only one left is the Davide amendment
which is substituting the "sixty percent" to "WHOLLY
owned by Filipinos." (The Treas amendment deleted the
phrase "whose voting stocks and controlling interest" and inserted
the word "capital." It approved the phrase "associations at least
sixty percent of the CAPITAL is owned by such citizens.)(see page
16)
Madam President, I am against the proposed amendment of
Commissioner Davide because that is an ideal situation where
domestic capital is available for the exploration, development and
utilization of these natural resources, especially minerals,
petroleum and other mineral oils. These are not only risky
business but they also involve substantial capital. Obviously, it is
an ideal situation but it is not practical. And if we adopt the 100percent capital of Filipino citizens, I am afraid that these natural
resources, particularly these minerals and oil, et cetera, may
remain hidden in our lands, or in other offshore places without
anyone being able to explore, develop or utilize them. If it were
possible to have a 100-percent Filipino capital, I would prefer that
rather than the 60 percent, but if we adopt the 100 percent, my
fear is that we will never be able to explore, develop and utilize
our natural resources because we do not have the domestic
resources for that.
MR. DAVIDE. Madam President, may I be allowed to react?
THE PRESIDENT. Commissioner Davide is recognized.
MR. DAVIDE. I am very glad that Commissioner Padilla emphasized
minerals, petroleum and mineral oils. The Commission has just
approved the possible foreign entry into the development,
exploration and utilization of these minerals, petroleum and other
mineral oils by virtue of the Jamir amendment. I voted in favour of
the Jamir amendment because it will eventually give way to
vesting in exclusively Filipino citizens and corporations wholly
owned by Filipino citizens the right to utilize the other natural
resources. This means that as a matter of policy, natural
resources should be utilized and exploited only by Filipino citizens
or corporations wholly owned by such citizens. But by virtue of the
Jamir amendment, since we feel that Filipino capital may not be
enough for the development and utilization of minerals, petroleum

and other mineral oils, the President can enter into service
contracts with foreign corporations precisely for the development
and utilization of such resources. And so, there is nothing to fear
that we will stagnate in the development of minerals, petroleum,
and mineral oils because we now allow service contracts. It is,
therefore, with more reason that at this time we must provide for
a 100-percent Filipinization generally to all natural resources.
MR. VILLEGAS. I think we are ready to vote, Madam President.
THE PRESIDENT. The Acting Floor Leader is recognized.
MR. MAAMBONG. Madam President, we ask that the matter be put
to a vote.
THE PRESIDENT. Will Commissioner Davide please read lines 14
and 15 with his amendment.
MR. DAVIDE. Lines 14 and 15, Section 3, as amended, will read:
"associations whose CAPITAL stock is WHOLLY owned by such
citizens."
VOTING
THE PRESIDENT. As many as are in favour of this proposed
amendment of Commissioner Davide on lines 14 and 15 of
Section 3, please raise their hand. (Few Members raised their
hand.)
As many as are against the amendment, please raise their hand.
(Several Members raised their hand.)
The results show 16 votes in favour and 22 against; the
amendment is lost.
MR. MAAMBONG. Madam President, I ask that Commissioner
Davide be recognized once more for further amendments.
THE PRESIDENT. Commissioner Davide is recognized.
MR. DAVIDE. Thank you, Madam President.
This is just an insertion of a new paragraph between lines 24 and
25 of Section 3 of the same page. It will read as follows: THE
GOVERNING AND MANAGING BOARDS OF SUCH CORPORATIONS
SHALL BE VESTED EXCLUSIVELY IN CITIZENS OF THE PHILIPPINES.
MR. VILLEGAS. Which corporations is the Commissioner referring
to?
MR. DAVIDE. This refers to corporations 60 percent of whose
capital is owned by such citizens.
MR. VILLEGAS. Again the amendment will read
MR. DAVIDE. "THE GOVERNING AND MANAGING BODIES OF SUCH
CORPORATIONS SHALL BE VESTED EXCLUSIVELY IN CITIZENS OF
THE PHILIPPINES."
REV. RIGOS. Madam President.
THE PRESIDENT. Commissioner Rigos is recognized.
REV. RIGOS. I wonder if Commissioner Davide would agree to put
that sentence immediately after "citizens" on line 15.
MR. ROMULO. May I ask a question. Presumably, it is 60-40?
MR. DAVIDE. Yes.
MR. ROMULO. What about the 40 percent? Would they not be
entitled to a proportionate seat in the board?
MR. DAVIDE. Under my proposal, they should not be allowed to sit
in the board.
MR. ROMULO. Then the Commissioner is really proposing 100
percent which is the opposite way?
MR. DAVIDE. Not necessarily, because if 40 percent of the capital
stock will be owned by aliens who may sit in the board, they can
still exercise their right as ordinary stockholders and can submit
the necessary proposal for, say, a policy to be undertaken by the
board.
MR. ROMULO. But that is part of the stockholders right to sit in
the board of directors.
MR. DAVIDE. That may be allowed but this is a very unusual and
abnormal situation so the Constitution itself can prohibit them to
sit in the board.
MR. ROMULO. But it would be pointless to allow them 40 percent
when they cannot sit in the board nor have a say in the
management of the company. Likewise, that would be
extraordinary because both the 1935 and the 1973 Constitutions
allowed not only the 40 percent but commensurately they were
represented in the board and management only to the extent of
their equity interest, which is 40 percent. The management of a
company is lodged in the board; so if the 60 percent, which is
composed of Filipinos, controls the board, then the Filipino part
has control of the company.
I think it is rather unfair to say: "You may have 40 percent of the
company, but that is all. You cannot manage, you cannot sit in the
board." That would discourage investments. Then it is like having

30
a one hundredpercent ownership; I mean, either we allow a 60-40
with full rights to the 40 percent, limited as it is as to a minority,
or we do not allow them at all. This means if it is allowed; we
cannot have it both ways.
MR. DAVIDE. The aliens cannot also have everything. While they
may be given entry into subscriptions of the capital stock of the
corporation, it does not necessarily follow that they cannot be
deprived of the right of membership in the managing or in the
governing board of a particular corporation. But it will not totally
deprive them of a say because they can still exercise the ordinary
rights of stockholders. They can submit their proposal and they
can be heard.
MR. ROMULO. Yes, but they have no vote. That is like being
represented in the Congress but not being allowed to vote like our
old resident Commissioners in the United States. They can be
heard; they can be seen but they cannot vote.
MR. DAVIDE. If that was allowed under that situation, why can we
not do it now in respect to our natural resources? This is a very
critical and delicate issue.
MR. ROMULO. Precisely, we used to complain how unfair that was.
One can be seen and heard but he cannot vote.
MR. DAVIDE. We know that under the corporation law, we have the
rights of the minority stockholders. They can be heard. As a
matter of fact, they can probably allow a proxy to vote for them
and, therefore, they still retain that specific prerogative to
participate just like what we did in the Article on Social Justice.
MR. ROMULO. That would encourage dummies if we give them
proxies.
MR. DAVIDE. As a matter of fact, when it comes to encouraging
dummies, by allowing 40-percent ownership to come in we will
expect the proliferation of corporations actually owned by aliens
using dummies.
MR. ROMULO. No, because 40 percent is a substantial and fair
share and, therefore, the bona fide foreign investor is satisfied
with that proportion. He does not have to look for dummies. In
fact, that is what assures a genuine investment if we give a
foreign investor the 40 percent and all the rights that go with it.
Otherwise, we are either discouraging the investment altogether
or we are encouraging circumvention. Let us be fair. If it is 60-40,
then we give him the right, limited as to his minority position.
MR. MAAMBONG. Madam President, the body would like to know
the position of the Committee so that we can put the matter to a
vote.
MR. VILLEGAS. The Committee does not accept the amendment.
THE PRESIDENT. The Committee does not accept.
Will Commissioner Davide insist on his amendment?
MR. DAVIDE. We request a vote.
THE PRESIDENT. Will Commissioner Davide state his proposed
amendment again?
MR. DAVIDE. The proposed amendment would be the insertion of a
new paragraph to Section 3, between lines 24 and 25, page 2,
which reads: "THE GOVERNING AND MANAGING BODIES OF SUCH
CORPORATIONS SHALL BE VESTED EXCLUSIVELY IN CITIZENS OF
THE PHILIPPINES."
MR. PADILLA. Madam President.
THE PRESIDENT. Commissioner Padilla is recognized.

MR. PADILLA. Madam President, may I just say that this Section 3
speaks of "co-production, joint venture, production sharing
agreements with Filipino citizens." If the foreign share of, say, 40
percent will not be represented in the board or in management, I
wonder if there would be any foreign investor who will accept
putting capital but without any voice in management. I think that
might make the provision on "coproduction, joint venture and
production sharing" illusory.
VOTING
THE PRESIDENT. If the Chair is not mistaken, that was the same
point expressed by Commissioner Romulo, a member of the
Committee.
As many as are in favour of the Davide amendment, please raise
their hand. (Few Members raised their hand.)
As many as are against, please raise their hand. (Several
Members raised their hand.)
As many as are abstaining, please raise their hand. (One Member
raised his hand.)
xxxx
THE PRESIDENT. Commissioner Garcia is recognized.
MR. GARCIA. My amendment is on Section 3, the same
item which Commissioner Davide tried to amend. It is
basically on the share of 60 percent. I would like to
propose that we raise the 60 percent to SEVENTY-FIVE
PERCENT so the line would read: "SEVENTY-FIVE PERCENT
of whose CAPITAL is owned by such citizens."
THE PRESIDENT. What does the Committee say?
SUSPENSION OF SESSION
MR. VILLEGAS. The Committee insists on staying with the 60
percent 60-40.
Madam President, may we ask for a suspension of the session.
THE PRESIDENT. The session is suspended.
It was 5:07 p.m.
RESUMPTION OF SESSION
At 5:31 p.m., the session was resumed.
THE PRESIDENT. The session is resumed.
MR. SARMIENTO. Madam President.
THE PRESIDENT. The Acting Floor Leader, Commissioner
Sarmiento, is recognized.
MR. SARMIENTO: Commissioner Garcia still has the floor. May I ask
that he be recognized.
THE PRESIDENT. Commissioner Garcia is recognized.
MR. GARCIA. Thank you very much, Madam President.
I would like to propose the following amendment on
Section 3, line 14 on page 2. I propose to change the word
"sixty" to SEVENTY-FIVE. So, this will read: "or it may enter
into co-production, joint venture, production sharing
agreements with Filipino citizens or corporations or
associations at least SEVENTY-FIVE percent of whose
CAPITAL stock or controlling interest is owned by such
citizens."
MR. VILLEGAS. This is just a correction. I think
Commissioner Azcuna is not insisting on the retention of
the phrase "controlling interest," so we will retain
"CAPITAL" to go back really to the 1935 and 1973
formulations.
MR. BENNAGEN. May I suggest that we retain the phrase
"controlling interest"?

31
MR. VILLEGAS. Yes, we will retain it. (The statement of
Commissioner Villegas is possibly erroneous considering his
consistent statement, especially during the oral arguments, that
the Constitutional Commission rejected the UP Proposal to use the
phrase "controlling interest.")

MR. VILLEGAS. The Committee does not accept the

Commissioners amendment. This has been discussed fully and,
with only one-third of the vote, it is like having nothing at all in
decision-making. It can be completely vetoed.
MR. RODRIGO. Madam President.

THE PRESIDENT. Are we now ready to vote?

THE PRESIDENT. Commissioner Rodrigo is recognized.
MR. SARMIENTO. Yes, Madam President.
VOTING
THE PRESIDENT. As many as are in favour of the proposed
amendment of Commissioner Garcia for "SEVENTY-FIVE" percent,
please raise their hand. (Few Members raised their hand.)
As many as are against the amendment, please raise their hand.
(Several Members raised their hand.)
As many as are abstaining, please raise their hand. (One Member
raised his hand.)
The results show 16 votes in favour, 18 against and 1
abstention; the Garcia amendment is lost.
MR. SARMIENTO. Madam President, may I ask that Commissioner
Foz be recognized.
THE PRESIDENT. Commissioner Foz is recognized.
MR. FOZ. After losing by only two votes, I suppose that this next
proposal will finally get the vote of the majority. The amendment
is to provide for at least TWO-THIRDS.
MR. SUAREZ. It is equivalent to 66 2/3.
THE PRESIDENT. Will the Commissioner repeat?
MR. FOZ. I propose "TWO-THIRDS of whose CAPITAL is
owned by such citizens." Madam President, we are
referring to the same provision to which the previous
amendments have been suggested. First, we called for a
100-percent ownership; and then, second, we called for a
75-percent ownership by Filipino citizens.
So my proposal is to provide for at least TWO-THIRDS of the
capital to be owned by Filipino citizens. I would like to call the
attention of the body that the same ratio or equity requirement is
provided in the case of public utilities. And if we are willing to
provide such equity requirements in the case of public utilities, we
should at least likewise provide the same equity ratio in the case
of natural resources.
MR. VILLEGAS. Commissioner Romulo will respond.
MR. ROMULO. I just want to point out that there is an amendment
here filed to also reduce the ratio in Section 15 to 60-40.
MR. PADILLA. Madam President.
THE PRESIDENT. Commissioner Padilla is recognized.
MR. PADILLA. The 60 percent which appears in the committee
report has been repeatedly upheld in various votings. One
proposal was whole 100 percent; another one was 75 percent
and now it is 66 2/3 percent. Is not the decision of this
Commission in voting to uphold the percentage in the committee
report already a decision on this issue?
MR. FOZ. Our amendment has been previously brought to the
attention of the body.

MR. RODRIGO. This is an extraordinary suggestion. But

considering the circumstances that the proposals from the 100
percent to 75 percent lost, and now it went down to 66 2/3
percent, we might go down to 65 percent next time. So I suggest
that we vote between 66 2/3 and 60 percent. Which does the
body want? Then that should be the end of it; otherwise, this is
ridiculous. After this, if the 66 2/3 percent will lose, then
somebody can say: "Well, how about 65 percent?"
THE PRESIDENT. The Chair was made to understand that
Commissioner Foz proposal is the last proposal on this particular
line. Will Commissioner Foz restate his proposal?
MR. FOZ. My proposal is "TWO-THIRDS of whose CAPITAL or
controlling interest is owned by such citizens."
VOTING
THE PRESIDENT. We now put Commissioner Foz
amendment to a vote.
As many as are in favour of the amendment of Commissioner Foz,
please raise their hand. (Few Members raised their hand.)
As many as are against, please raise their hand. (Several
Members raised their hand.)
The results show 17 votes in favour, 20 against, and not
abstention; the amendment is lost.22
xxxx
August 22, 1986, Friday
THE PRESIDENT. Commissioner Nolledo is recognized.
MR. NOLLEDO. Thank you, Madam President.
I would like to propound some questions to the chairman
and members of the committee. I have here a copy of the
approved provisions on Article on the National Economy
and Patrimony. On page 2, the first two lines are with
respect to the Filipino and foreign equity and I said: "At
least sixty percent of whose capital or controlling interest
is owned by such citizens."
I notice that this provision was amended by Commissioner
Davide by changing "voting stocks" to "CAPITAL," but I still
notice that there appears the term "controlling interest"
which seems to refer to assocaitions other than
corporations and it is merely 50 percent plus one percent
which is less than 60 percent. Besides, the wordings may
indicate that the 60 percent may be based not only on
capital but also on controlling interest; it could mean 60
percent or 51 percent.
Before I propound the final question, I would like to make
a comment in relation to Section 15 since they are related
to each other. I notice that in Section 15, there still
appears the phrase "voting stock or controlling interest."
The term "voting stocks" as the basis of the Filipino equity
means that if 60 percent of the voting stocks belong to
Filipinos, foreigners may now own more than 40 percent of
the capital as long as the 40 percent or the excess thereof

32
will cover nonvoting stock. This is aside from the fact that
under the Corporation Code, even nonvoting shares can
vote on certain instances. Control over investments may
cover aspects of management and participation in the
fruits of production or exploitation.
So, I hope the committee will consider favorably my
recommendation that instead of using "controlling
interests," we just use "CAPITAL" uniformly in cases where
foreign equity is permitted by law, because the purpose is
really to help the Filipinos in the exploitation of natural
resources and in the operation of public utilities. I know
the committee, at its own instance, can make the
amendment.
What does the committee say?
MR. VILLEGAS. We completely agree with the
Commissioners views. Actually, it was really an oversight.
We did decide on the word "CAPITAL." I think it was the
opinion of the majority that the phrase "controlling
interest" is ambiguous.
So, we do accept the Commissioners proposal to eliminate
the phrase "or controlling interest" in all the provisions
that talk about foreign participation.
MR. NOLLEDO. Not only in Section 3, but also with respect
to Section 15.
Thank you very much.
MR. MAAMBONG. Madam President.

the basis for the percentage of foreign investments in appropriate

instances and the interpretation attributed to the word is that it
should be based on the paidup capital. We eliminated the use the
phrase "voting stock or controlling interest" because that is only
used in connection with the matter of voting. As a matter of fact,
in the declaration of dividends for private corporations, it is
usually based on the paid-up capitalization.
So, what is really the dominant factor to be considered in matters
of determining the 60-40 percentage should really be the paid-up
capital of the corporation.
MR. MAAMBONG. I would like to get clarification on this. If I
remember my corporation law correctly, we usually use a
determinant in order to find out what the ratio of ownership is, not
really on the paid-up capital stock but on the subscribed capital
stock.
For example, if the whole authorized capital stock of the
corporation is P 1 million, if the subscription is 60 percent of P 1
million which is P 600,000, then that is supposed to be the
determinant whether there is a sharing of 60 percent of Filipinos
or not. It is not really on the paid-up capital because once a
person subscribes to a capital stock then whether that capital
stock is paid up or not, does not really matter, as far as the books
of the corporation are concerned. The subscribed capital stock is
supposed to be owned by the person who makes the subscription.
There are so many laws on how to collect the delinquency and so
on.
I view of the Commissioners answer, I would like to know whether
he is determined to put on the record that in order to determine
the 60-40 percent sharing, we have to determine whether we will
use a determinant which is the subscribed capital stock or the
paid-up capital stock.

THE PRESIDENT. Commissioner Maambong is recognized.

MR. MAAMBONG. In view of the manifestation of the committee, I
would like to be clarified on the use of the word "CAPITAL."

MR SUAREZ. We are principally concerned about the interpretation

which would be attached to it; that is, it should be limited to
authorized capital stock, not to subscribed capital stock.

MR. VILLEGAS. Yes, that was the word used in the 1973 and 1935
Constitutions.

I will give the Commissioner an illustration of what he is

explaining to the Commission.

MR. MAAMBONG. Let us delimit ourselves to that word

"CAPITAL". In the Corporation Law, if I remember correctly,
we have three types of capital: the authorized capital
stock, the subscribed capital stock and the paid-up capital
stock.

MR. MAAMBONG. Yes, thank you.

The authorized capital stock could be interpreted as the

capital of the corporation itself because that is the totality
of the investment of the corporation as stated in the
articles of incorporation. When we refer to 60 percent, are
we referring to the authorized capital stock or the paid-up
capital stock since the determinant as to who owns the
corporation, as far as equity is concerned, is the
subscription of the person?
I think we should delimit ourselves also to what we mean
by 60 percent. Are we referring to the authorized capital
stock or to the subscribed capital stock, because the
determination, as I said, on the controlling interest of a
corporation is based on the subscribed capital stock? I
would like a reply on that.
MR. VILLEGAS. Commissioner Suarez, a member of the
committee, would like to answer that.
THE PRESIDENT. Commissioner Suarez is recognized.
MR. SUAREZ. Thank you, Madam President.
We stated this because there might be a misunderstanding
regarding the interpretation of the term "CAPITAL" as now used as

MR. SUAREZ. Let us say the authorized capital stock is P 1 million.

Under the present rules in the Securities and Exchange
Commission, at least 25 percent of that amount must be
subscribed and at least 25 percent of this subscribed capital must
be paid up.
Now, let us discuss the basis of 60-40. To illustrate the matter
further, let us say that 60 percent of the subscriptions would be
allocated to Filipinos and 40 percent of the subscribed capital
would be held by foreigners. Then we come to the paid-up
capitalization. Under the present rules in the Securities and
Exchange Commission, a foreign corporation is supposed to
subscribe to a 40-percent share which must be fully paid up.
On the other hand, the 60 percent allocated to Filipinos need not
be paid up. However, at least 25 percent of the subscription must
be paid up for purposes of complying with the Corporation Law.
We can illustrate the matter further by saying that the compliance
of 25 percent paid-up of the subscribed capital would be fulfilled
by the full payment of the 40 percent by the foreigners.
So, we have a situation where the Filipino percentage of 60 may
not even comply with the 25-percent requirement because of the
totality due to the fully payment of the 40-percent of the foreign
investors, the payment of 25 percent paid-up on the subscription
would have been considered fulfilled. That is exactly what we are
trying to avoid.
MR. MAAMBONG I appreciate very much the explanation but I
wonder if the committee would subscribe to that view because I

33
will stick to my thinking that in the computation of the 60-40 ratio,
the basis should be on the subscription. If the subscription is
being done by 60 percent Filipinos, whether it is paid-up or not
and the subscription is accepted by the corporation, I think that is
the proper determinant. If we base the 60-40 on the paid-up
capital stock, we have a problem here where the 40 percent is
fully paid up and the 60 percent is not fully paid up this may be
contrary to the provisions of the Constitution. So I would like to
ask for the proper advisement from the Committee as to what
should be the proper interpretation because this will cause havoc
on the interpretation of our Corporation Law.
MR. ROMULO. Madam President.
THE PRESIDENT. Commissioner Romulo is recognized.
MR. ROMULO. We go by the established rule which I believe is
uniformly held. It is based on the subscribed capital. I know only
of one possible exception and that is where the bylaws prohibit
the subscriber from voting. But that is a very rare provision in
bylaws. Otherwise, my information and belief is that it is based on
the subscribed capital.
MR. MAAMBONG. It is, therefore, the understanding of this
Member that the Commissioner is somewhat revising the answer
of Commissioner Suarez to that extent?
MR. ROMULO. No, I do not think we contradict each other. He is
talking really of the instance where the subscriber is a nonresident and, therefore, must fully pay. That is how I understand
his position.
MR. MAAMBONG. My understanding is that in the computation of
the 60-40 sharing under the present formulation, the determinant
is the paid-up capital stock to which I disagree.
MR. ROMULO. At least, from my point of view, it is the
subscribed capital stock.
MR. MAAMBONG. Then that is clarified.23
xxxx
August 23, 1986, Saturday
MS. ROSARIO BRAID. Madam President, I propose a new section to
read: "THE MANAGEMENT BODY OF EVERY CORPORATION OR
ASSOCIATION SHALL IN ALL CASES BE CONTROLLED BY CITIZENS
OF THE PHILIPPINES."
This will prevent management contracts and assure control by
Filipino citizens. Will the committee assure us that this
amendment will insure that past activities such as management
contracts will no longer be possible under this amendment?
MR. ROMULO. Madam President, if I may reply.
THE PRESIDENT. Commissioner Romulo is recognized.
MR. ROMULO. May I ask the proponent to read the amendment
again.
MS. ROSARIO BRAID. The amendment reads: "THE MANAGEMENT
BODY OF EVERY CORPORATION OR ASSOCIATION SHALL IN ALL
CASES BE CONTROLLED BY CITIZENS OF THE PHILIPPINES."
MR. DE LOS REYES. Madam President, will Commissioner Rosario
Braid agree to a reformulation of her amendment for it to be more
comprehensive and all-embracing?
THE PRESIDENT. Commissioner de los Reyes is recognized.

MR. DE LOS REYES. This is an amendment I submitted to the

committee which reads: "MAJORITY OF THE DIRECTORS OR
TRUSTEES AND ALL THE EXECUTIVE AND MANAGING OFFICERS OF
SUCH CORPORATION OR ASSOCIATION MUST BE CITIZENS OF THE
PHILIPPINES."
This amendment is more direct because it refers to particular
officers to be all-Filipino citizens.
MR. BENGZON. Madam President.
THE PRESIDENT. Commissioner Bengzon is recognized.
MR. BENGZON. The committee sitting out here accepts the
amendment of Commissioner de los Reyes which subsumes the
amendment of Commissioner Rosario Braid.
THE PRESIDENT. So this will be a joint amendment now of
Commissioners Rosario Braid, de los Reyes and others.
MR. REGALADO. Madam President, I join in that amendment with
the request that it will be the last sentence of Section 15 because
we intend to put an anterior amendment. However, that particular
sentence which subsumes also the proposal of Commissioner
Rosario Braid can just be placed as the last sentence of the
article.
THE PRESIDENT. Is that acceptable to the committee?
MR. VILLEGAS. Yes, Madam President.
MS. ROSARIO BRAID. Thank you.
MR. RAMA, The body is now ready to vote on the amendment.
FR. BERNAS. Madam President.
THE PRESIDENT. Commissioner Bernas is recognized.
FR. BERNAS. Will the committee accept a reformulation of the first
part?
MR. BENGZON. Let us hear it.
FR. BERNAS. The reformulation will be essentially the
formula of the 1973 Constitution which reads: "THE
PARTICIPATION OF FOREIGN INVESTORS IN THE
GOVERNING BODY OF ANY PUBLIC UTILITY ENTERPRISE
SHALL BE LIMITED TO THEIR PROPORTIONATE SHARE IN
THE CAPITAL THEREOF AND"
MR. VILLEGAS. "ALL THE EXECUTIVE AND MANAGING
OFFICERS OF SUCH CORPORATIONS AND ASSOCIATIONS
MUST BE CITIZENS OF THE PHILIPPINES."
MR. BENGZON. Will Commissioner Bernas read the whole
thing again?
FR. BERNAS. "THE PARTICIPATION OF FOREIGN INVESTORS
IN THE GOVERNING BODY OF ANY PUBLIC UTILITY
ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE
SHARE IN THE CAPITAL THEREOF" I do not have the rest
of the copy.
MR. BENGZON. "AND ALL THE EXECUTIVE AND MANAGING
OFFICERS OF SUCH CORPORATIONS OR ASSOCIATIONS
MUST BE CITIZENS OF THE PHILIPPINES." Is that correct?
MR. VILLEGAS. Yes.
MR. BENGZON. Madam President, I think that was said in a
more elegant language. We accept the amendment. Is that
all right with Commissioner Rosario Braid?
MS. ROSARIO BRAID. Yes.
THE PRESIDENT. The original authors of this amendment
are Commissioners Rosario Braid, de los Reyes, Regalado,
Natividad, Guingona and Fr. Bernas.

34
MR. DE LOS REYES. The governing body refers to the
board of directors and trustees.
MR. VILLEGAS. That is right.

the basis for the percentage of ownership allowed to

foreigners. The following exchanges among Commissioners Foz,
Suarez and Bengzon reflect this decision, but the majority opinion
in the June 28, 2011 Decision left their statements out:

MR. RAMA. The body is now ready to vote, Madam

President.

MR. FOZ. Mr. Vice-President, in Sections 3 and 9,26 the provision

on equity is both 60 percent, but I notice that this is now
different from the provision in the 1973 Constitution in that
the basis for the equity provision is voting stock or
controlling interest instead of the usual capital percentage
as provided for in the 1973 Constitution. We would like to know
what the difference would be between the previous and
the proposed provisions regarding equity interest.

VOTING

xxxx

THE PRESIDENT. As many as are in favour of this proposed

amendment which should be the last sentence of Section 15 and
has been accepted by the committee, pleas raise their hand. (All
Members raised their hand.)

MR. SUAREZ. x x x As a matter of fact, this particular portion is

still being reviewed x x x. In Section 1, Article XIII of the 1935
Constitution, the wording is that the percentage should be
based on the capital which is owned by such citizens. In
the proposed draft, this phrase was proposed: "voting
stock or controlling interest." This was a plan submitted by
the UP Law Center.

MR. BENGZON. Yes, the governing body refers to the board

of directors.
MR. REGALADO. It is accepted.

As many as are against, please raise their hand. (No Member

raised his hand.)
The results show 29 votes in favour and none against; so
the proposed amendment is approved.24
It can be concluded that the view advanced by Justice Carpio is
incorrect as the deliberations easily reveal thatthe intent of the
framers was not to limit the definition of the word
"capital" as meaning voting shares/stocks.
The majority in the original decision reproduced the CONCOM
deliberations held on August 13 and August 15, 1986, but
neglected to quote the other pertinent portions of the
deliberations that would have shed light on the true intent of the
framers of the Constitution.
It is conceded that Proposed Resolution No. 496 on the language
of what would be Art. XII of the Constitution contained the phrase
"voting stock or controlling interest," viz:
PROPOSED RESOLUTION NO. 496
RESOLUTION TO INCORPORATE IN THE NEW CONSTITUTION AN
ARTICLE ON NATIONAL ECONOMY AND PATRIMONY
Be it resolved as it is hereby resolved by the Constitutional
Commission in session assembled, To incorporate the National
Economy and Patrimony of the new Constitution, the following
provisions:
ARTICLE____
NATIONAL ECONOMY AND PATRIMONY
xxxx
SEC. 15. 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
two-thirds of whose voting stock or controlling interest is
owned by such citizens. Neither shall any such franchise or
right be granted except under the condition that it shall be subject
to amendment, alteration, or repeal by Congress when the
common good so requires. The State shall encourage equity
participation in public utilities by the general public. 25 (This
became Sec. 11, Art. XII)(Emphasis supplied.)
The aforequoted deliberations disclose that the Commission
eventually and unequivocally decided to use "capital,"
which refers to the capital stock of the corporation, "as
was employed in the 1935 and 1973 Constitution," instead
of the proposed "voting stock or controlling interest" as

x x x We would have three criteria to go by: One would be

based on capital, which is capital stock of the corporation,
authorized, subscribed or paid up, as employed under the
1935 and the 1973 Constitution. The idea behind the
introduction of the phrase "voting stock or controlling interest"
was precisely to avoid the perpetration of dummies, Filipino
dummies of multinationals. It is theoretically possible that a
situation may develop where these multinational interests would
not really be only 40 percent but will extend beyond that in the
matter of voting because they could enter into what is known as a
voting trust or voting agreement with the rest of the stockholders
and, therefore, notwithstanding the fact that on record their
capital extent is only up to 40- percent interest in the corporation,
actually, they would be managing and controlling the entire
company. That is why the UP Law Center members suggested that
we utilize the words "voting interest" which would preclude
multinational control in the matter of voting, independent of the
capital structure of the corporation. And then they also added
the phrase "controlling interest" which up to now they have
not been able to successfully define the exact meaning of. x x x
And as far as I am concerned, I am not speaking in behalf of the
Committee, I would feel more comfortable if we go back to the
wording ofthe 1935 and the 1973 Constitution, that is to
say, the 60-40 percentage could be based on the capital
stock of the corporation.
xxxx
MR. BENGZON. I also share the sentiment of Commissioner Suarez
in that respect. So there are already two in the Committee who
want to go back to the wording of the 1935 and the 1973
Constitution.27
In fact, in another portion of the CONCOM deliberations
conveniently glossed over by the June 28, 2011 Decision, then
Commissioner Davide strongly resisted the retention of the term
"capital" as used in the 1935 and 1973 Constitution on the ground
that the term refers to both voting and nonvoting. Eventually,
however, he came around to accept the use of "CAPITAL" along
with the majority of the members of the Committee on Natural
Economy and Patrimony in the afternoon session held on August
15, 1986:
MR. TREAS. x x x may I propose an amendment on line 14
of Section 3 by deleting therefrom "whose voting stock and
controlling interest." And in lieu thereof, insert the
CAPITAL so the line should read: "associations at least
sixty percent of the CAPITAL is owned by such citizens.
MR. VILLEGAS. We accept the amendment.
MR. TREAS. Thank you.

35
THE PRESIDENT. The amendment of Commissioner Treas
on line 14 has been accepted by the Committee.
Is there any objection? (Silence) The Chair hears none; the
amendment is approved.28
xxxx
MR. SUAREZ. x x x Two points are being raised by Commissioner
Davides proposed amendment. One has reference to the
percentage of holdings and the other one is the basis for the
percentage x x x x Is the Commissioner not insisting on the
voting capital stock because that was already accepted by
the Committee?

MR. VILLEGAS. That is right.

MR. AZCUNA. But the control can be with the foreigners even if
they are the minority. Let us say 40 percent of the capital is
owned by them, but it is the voting capital, whereas, the Filipinos
own the nonvoting shares. So we can have a situation where the
corporation is controlled by foreigners despite being the minority
because they have the voting capital. That is the anomaly that
would result here.
MR. BENGZON. No, the reason we eliminated the word "stock" as
stated in the 1973 and 1935 Constitutions is that xxx there are
associations that do not have stocks. That is why we say
"CAPITAL."

MR. DAVIDE. Would it mean that it would be 100-percent voting

capital stock?

MR. AZCUNA. We should not eliminate the phrase "controlling

interest."

MR. SUAREZ. No, under the Commissioners proposal it is just

"CAPITAL" not "stock."

MR. BENGZON. In the case of stock corporation, it is assumed.

MR. DAVIDE. No, I want it to be very clear. What is the alternative

proposal of the Committee? How shall it read?

MR. AZCUNA. Yes, but what I mean is that the control should be
with the Filipinos.
MR. BENGZON. Yes, that is understood.

MR. SUAREZ. It will only read something like: "the CAPITAL OF

WHICH IS FULLY owned."
MR. VILLEGAS. Let me read lines 12 to 14 which state:
enter into co-production, joint venture, production sharing
agreements with Filipino citizens or corporations or associations at
least 60 percent of whose CAPITAL is owned by such citizens.
We are going back to the 1935 and 1973 formulations.
MR. DAVIDE. I cannot accept the proposal because the
word CAPITAL should not really be the guiding principle. It
is the ownership of the corporation. It may be voting or
not voting, but that is not the guiding principle.
xxxx
THE PRESIDENT. Commissioner Davide is to clarify his point.
MR. VILLEGAS. Yes, Commissioner Davide has accepted the
word "CAPITAL" in place of "voting stock or controlling
interest." This is an amendment already accepted by the
Committee.29
The above exchange precedes the clarifications made by then
Commissioner Azcuna, which were cited in the June 28, 2011
Decision. Moreover, the statements made subsequent to the
portion quoted in the June 28, 2011 Decision emphasize the
CONCOMs awareness of the plain meaning of the term "capital"
without the qualification espoused in the majoritys decision:
MR. AZCUNA. May I be clarified as to [what] was accepted x x x.
MR. VILLEGAS. The portion accepted by the Committee is
the deletion of the phrase "voting stock or controlling
interest."
MR. AZCUNA. Hence, without the Davide amendment, the
committee report would read: "corporations or associations at
least sixty percent of whose CAPITAL is owned by such citizens."
MR. VILLEGAS. Yes.
MR. AZCUNA. So if the Davide amendment is lost, we are
stuck with 60 percent of the capital to be owned by
citizens?

MR. AZCUNA. Yes, because if we just say "sixty percent of

whose capital is owned by the Filipinos," the capital may
be voting or non-voting.
MR. BENGZON. That is correct.30
More importantly, on the very same August 15, 1986 session,
Commissioner Azcuna no longer insisted on retaining the
delimiting phrase "controlling interest":
MR. GARCIA. Thank you very much, Madam President.
I would like to propose the following amendment on Section 3, line
14 on page 2. I propose to change the word "sixty" to SEVENTYFIVE. So, this will read: "or it may enter into co-production, joint
venture, production sharing agreements with Filipino citizens or
corporations or associations at least SEVENTY-FIVE percent of
whose CAPITAL stock or controlling interest is owned by such
citizens."
MR. VILLEGAS. This is just a correction. I think Commissioner
Azcuna is not insisting on the retention of the phrase
"controlling interest," so we will retain "CAPITAL" to go
back really to the 1935 and 1973 formulations.31 (Emphasis
supplied.)
The later deliberations held on August 22, 1986 further
underscore the framers true intent to include both voting and
non-voting shares as coming within the pale of the word "capital."
The UP Law Center attempted to limit the scope of the word along
the line then and now adopted by the majority, but, as can be
gleaned from the following discussion, the framers opted not
to adopt the proposal of the UP Law Center to add the
more protectionist phrase "voting stock or controlling
interest":
MR. NOLLEDO. x x x I would like to propound some questions xxx.
I have here a copy of the approved provisions on Article on the
National Economy and Patrimony. x x x
I notice that this provision was amended by Commissioner Davide
by changing "voting stocks" to "CAPITAL," but I still notice that
there appears the term "controlling interest" x x x. Besides, the
wordings may indicate that the 60 percent may be based not only
on capital but also on controlling interest; it could mean 60
percent or 51 percent.
Before I propound the final question, I would like to make a
comment in relation to Section 15 since they are related to each

36
other. I notice that in Section 15, there still appears the phrase
"voting stock or controlling interest." The term "voting stocks" as
the basis of the Filipino equity means that if 60 percent of the
voting stocks belong to Filipinos, foreigners may now own more
than 40 percent of the capital as long as the 40 percent or the
excess thereof will cover nonvoting stock. This is aside from the
fact that under the Corporation Code, even nonvoting shares can
vote on certain instances.Control over investments may cover
aspects of management and participation in the fruits of
production or exploitation.
So, I hope the committee will consider favorably my
recommendation that instead of using "controlling
interests," we just use "CAPITAL" uniformly in cases where
foreign equity is permitted by law, because the purpose is
really to help the Filipinos in the exploitation of natural
resources and in the operation of public utilities. x x x
What does the committee say?
MR. VILLEGAS. We completely agree with the Commissioners
views. Actually, it was really an oversight. We did decide on the
word "CAPITAL." I think it was the opinion of the majority
that the phrase "controlling interest" is ambiguous.
So, we do accept the Commissioners proposal to eliminate
the phrase "or controlling interest" in all the provisions
that talk about foreign participation.
MR. NOLLEDO. Not only in Section 3, but also with respect to
Section 15.32 (Emphasis supplied.)
In fact, on the very same day of deliberations, the Commissioners
clarified that the proper and more specific "interpretation" that
should be attached to the word "capital" is that it refers to the
"subscribed capital," a corporate concept defined as "that portion
of the authorized capital stock that is covered by subscription
agreements whether fully paid or not"33 and refers to both voting
and non-voting shares:

xxxx
Let us say authorized capital stock is P 1 million. Under the
present rules in the [SEC], at least 25 percent of that amount
must be subscribed and at least 25 percent of this subscribed
capital must be paid up.
Now, let us discuss the basis of 60-40. To illustrate the matter
further, let us say that 60 percent of the subscriptions would be
allocated to Filipinos and 40 percent of the subscribed capital
stock would be held by foreigners. Then we come to the paid-up
capitalization. Under the present rules in the [SEC], a foreign
corporation is supposed to subscribe to 40-percent share which
must be fully paid up.
On the other hand, the 60 percent allocated to Filipinos need not
be paid up. However, at least 25 percent of the subscription must
be paid up for purposes of complying with the Corporation Law.
We can illustrate the matter further by saying that the compliance
of 25 percent paid-up of the subscribed capital would be fulfilled
by the full payment of the 40 percent by the foreigners.
So, we have a situation where the Filipino percentage of 60 may
not even comply with the 25-percent requirement because of the
totality due to the full payment of the 40-percent of the foreign
investors, the payment of 25 percent paid-up on the subscription
would have been considered fulfilled. That is exactly what we are
trying to avoid.
MR. MAAMBONG. I appreciate very much the explanation but I
wonder if the committee would subscribe to that view because I
will stick to my thinking that in the computation of the 60-40 ratio,
the basis should be on the subscription. x x x
xxxx
MR. ROMULO. We go by the established rule which I believe
is uniformly held. It is based on the subscribed capital. x x
x

MR. MAAMBONG. x x x I would like to be clarified on the

use of the word "CAPITAL."

xxxx

MR. VILLEGAS. Yes, that was the word used in the 1973
and the 1935 Constitutions.

I do not think that we contradict each other. (Commisioner Suarez)

is talking really of the instance where the subscriber is a nonresident and, therefore, must fully pay. That is how I understand
his position.

MR. MAAMBONG. Let us delimit ourselves to that word "CAPITAL."

In the Corporation Law, if I remember correctly, we have three
types of capital: the authorized capital stock, the subscribed
capital stock and the paid-up capital stock.
xxxx
I would like to get clarification on this. If I remember my
corporation law correctly, we usually use a determinant in
order to find out what the ratio of ownership is, not really
on the paid-up capital stock but on the subscribe capital
stock.
xxxx
x x x I would like to know whether (Commissioner Suarez) is
determined to put on the record that in order to determine the 6040 percent sharing, we have to determine whether we will use a
determinant which is the subscribed capital stock or the paid-up
capital stock.
MR. SUAREZ. We are principally concerned about the
interpretation which would be attached to it, that is, it
should be limited to authorized capital stock, not to
subscribed capital stock.
I will give the Commissioner an illustration of what he is
explaining to the Commission.

MR. MAAMBONG. My understanding is that in the computation of

the 60-40 sharing under the present formulation, the determinant
is the paid-up capital stock to which I disagree.
MR . ROMULO. At least, from my point of view, it is the
subscribed capital stock."34
Clearly, while the concept of voting capital as the norm to
determine the 60-40 Filipino-alien ratio was initially debated upon
as a result of the proposal to use "at least two-thirds of whose
voting stock or controlling interest is owned by such citizens,"35 in
what would eventually be Sec. 11, Art. XII of the Constitution, that
proposal was eventually discarded. And nowhere in the records
of the CONCOM can it be deduced that the idea of full ownership
of voting stocks presently parlayed by the majority was earnestly,
if at all, considered. In fact, the framers decided that the term
"capital," as used in the 1935 and 1973 Constitutions, should be
properly interpreted as the "subscribed capital," which, again,
does not distinguish stocks based on their board-membership
voting features.
Indeed, the phrase "voting stock or controlling interest" was
suggested for and in fact deliberated, but was similarly dropped in
the approved draft provisions on National Economy and
Patrimony, particularly in what would become Sections 2 36 and
10,37 Article XII of the 1987 Constitution. However, the framers
expressed preference to the formulation of the provision in
question in the 1935 and 1973 Constitutions, both of which

37
employed the word "capital" alone. This was very apparent in the
aforementioned deliberations and affirmed by amicus curiae Dr.
Bernardo Villegas, Chair of the Committee on the National
Economy and Patrimony in charge of drafting Section 11 and the
rest of Article XII of the Constitution. During the June 26, 2012 oral
arguments, Dr. Villegas manifested that:
x x x Justice Abad was right. [If i]t was not in the minds of the
Commissioners to define capital broadly, these additional
provisions would be meaningless. And it would have been really
more or less expressing some kind of a contradiction in terms. So,
that is why I was pleasantly surprised that one of the most proFilipino members of the Commission, Atty. Jose Suarez, who
actually voted "NO" to the entire Constitution has only said, was
one of the first to insist, during one of the plenary sessions that
we should reject the UP Law Center recommendation. In his
words, I quote "I would feel more comfortable if we go
back to the wording of the 1935 and 1970 Constitutions
that is to say the 60-40 percentage could be based on the
capital stock of the corporation." The final motion was made
by Commissioner Efren Treas, in the same plenary session when
he moved, "Madam President, may I propose an amendment on
line 14 of Section 3 by deleting therefrom whose voting stock and
controlling interest and in lieu thereof, insert capital, so the line
should read: "associations of at least sixty percent (60%) of the
capital is owned by such citizens." After I accepted the
amendment since I was the chairman of the National
Economy Committee, in the name of the Committee, the
President of the Commission asked for any objection.
When no one objected, the President solemnly announced
that the amendment had been approved by the Plenary. It
is clear, therefore, that in the minds of the Commissioners
the word "capital" in Section 11 of Article XII refers, not to
voting stock, but to total subscribed capital, both common
and preferred.38(Emphasis supplied.)
There was no change in phraseology from the 1935 and
1973 Constitutions, or a transitory provision that signals
such change, with respect to foreign ownership in public
utility corporations (2nd extrinsic aid)
If the framers wanted the word "capital" to mean voting capital
stock, their terminology would have certainly been unmistakably
limiting as to leave no doubt about their intention. But the
framers consciously and purposely excluded restrictive
phrases, such as "voting stocks" or "controlling interest," in the
approved final draft, the proposal of the UP Law Center,
Commissioner Davide and Commissioner Azcuna notwithstanding.
Instead, they retained "capital" as "used in the 1935 and 1973
Constitutions."39 There was, therefore, a conscious design to avoid
stringent words that would limit the meaning of "capital" in a
sense insisted upon by the majority. Cassus omissus pro omisso
habendus esta person, object, or thing omitted must have been
omitted intentionally. More importantly, by using the word
"capital," the intent of the framers of the Constitution was to
include all types of shares, whether voting or nonvoting, within
the ambit of the word.
History or realities or circumstances prevailing during the
drafting of the Constitution validate the adoption of the
plain
meaning of "Capital" (3rd extrinsic aid)
This plain, non-exclusive interpretation of "capital" also comes to
light considering the economic backdrop of the 1986 CONCOM
when the country was still starting to rebuild the financial markets
and regain the foreign investors confidence following the changes
caused by the toppling of the Martial Law regime. As previously
pointed out, the Court, in construing the Constitution, must take
into consideration the aims of its framers and the evils they
wished to avoid and address. In Civil Liberties Union v.
Executive Secretary,40 We held:
A foolproof yardstick in constitutional construction is the intention
underlying the provision under consideration. Thus, it has been
held that the Court in construing a Constitution should bear
in mind the object sought to be accomplished by its

adoption, and the evils, if any, sought to be prevented or

remedied. A doubtful provision will be examined in the light of
the history of the times, and the condition and circumstances
under which the Constitution was framed. The object is to
ascertain the reason which induced the framers of the
Constitution to enact the particular provision and the
purpose sought to be accomplished thereby, in order to
construe the whole as to make the words consonant to
that reason and calculated to effect that purpose.
(Emphasis supplied.)
It is, thus, proper to revisit the circumstances prevailing during the
drafting period. In an astute observation of the economic realities
in 1986, quoted by respondent Pangilinan, University of the
Philippines School of Economics Professor Dr. Emmanuel S. de
Dios examined the nations dire need for foreign investments and
foreign exchange during the time when the framers deliberated
on what would eventually be the National Economy and Patrimony
provisions of the Constitution:
The period immediately after the 1986 EDSA Revolution is
well known to have witnessed the countrys deepest
economic crisis since the Second World War. Official data
readily show this period was characterised by the highest
unemployment, highest interest rates, and largest contractions in
output the Philippine economy experienced in the postwar period.
At the start of the Aquino administration in 1986, total output had
already contracted by more than seven percent annually for two
consecutive years (1984 and 1985), inflation was running at an
average of 35 percent, unemployment more than 11 percent, and
the currency devalued by 35 percent.
The proximate reason for this was the moratorium on
foreigndebt payments the country had called in late 1983,
effectively cutting off the countrys access to international
credit markets (for a deeper contemporary analysis of what led
to the debt crisis, see de Dios 1984). The country therefore had
to subsist only on its current earnings from exports, which
meant there was a critical shortage of foreign exchange.
Imports especially of capital goods and intermediate
goods therefore had to be drastically curtailed x x x.
For the same reasons, obviously, new foreign investments were
unlikely to be forthcoming. This is recorded by Bautista 2003:158, who
writes:
Long-term capital inflows have been rising at double-digit rates
since 1980, except during 1986-1990, a time of great
political and economic uncertainty following the period of
martial law under President Marcos.
The foreign-exchange controls then effectively in place will have
made importing inputs difficult for new enterprises, particularly
foreign investors (especially Japanese) interested in relocating
some of theirexport-oriented but import-dependent operations to
the Philippines. x x x The same foreign-exchange restrictions
would have made the freedom to remit profits a dicey affairs.
Finally, however, the period was also characterised by extreme
political uncertainty, which did not cease even after the Marcos
regime was toppled.41 x x x
Surely, it was far from the minds of the framers to alienate and
disenfranchise foreign investors by imposing an indirect restriction
that only exacerbates the dichotomy between management and
ownership without the actual guarantee of giving control and
protection to the Filipino investors. Instead, it can be fairly
assumed that the framers intended to avoid further economic
meltdown and so chose to attract foreign investors by allowing
them to 40% equity ownership of the entirety of the corporate
shareholdings but, wisely, imposing limits on their participation in
the governing body to ensure that the effective control and
ultimate economic benefits still remained with the Filipino
shareholders.
Judicial decisions and prior laws use and/or treat
"capital" as "capital stock" (4th extrinsic aid)

38
That the term "capital" in Sec. 11, Art. XII is equivalent to "capital
stock," which encompasses all classes of shares regardless of
their nomenclature or voting capacity, is easily determined by a
review of various laws passed prior to the ratification of the 1987
Constitution. In 1936, for instance, the Public Service
Act42 established the nationality requirement for corporations that
may be granted the authority to operate a "public
service,"43 which include most of the present-day public utilities,
by referring to the paid-up "capital stock" of a corporation, viz:
Sec. 16. Proceedings of the Commission, upon notice and hearing.
The Commission shall have power, upon proper notice and
hearing in accordance with the rules and provisions of this Act,
subject to the limitations and exceptions mentioned and saving
provisions to the contrary:
(a) To issue certificates which shall be known as
certificates of public convenience, authorizing the
operation of public service within the Philippines
whenever the Commission finds that the operation of the
public service proposed and the authorization to do
business will promote the public interest in a proper and
suitable manner. Provided, That thereafter, certificates
of public convenience and certificates of public
convenience and necessity will be granted only
tocitizens of the Philippines or of the United States or
to corporations, co-partnerships, associations or
joint-stock companies constituted and organized
under the laws of the Philippines; Provided, That
sixty per centum of the stock or paid-up capital of
any such corporations, co-partnership, association
or joint-stock company must belong entirely to
citizens of the Philippines or of the United States:
Provided, further, That no such certificates shall be
issued for a period of more than fifty years. (Emphasis
supplied.)
The heading of Sec. 2 of Commonwealth Act No. (CA) 108, or the
Anti-Dummy Law, which was approved on October 30, 1936,
similarly conveys the idea that the term "capital" is equivalent to
"capital stock"44:
Section 2. Simulation of minimum capital stock In all
cases in which a constitutional or legal provision requires
that, in order that a corporation or association may
exercise or enjoy a right, franchise or privilege, not less
than a certain per centum of its capital must be owned by
citizens of the Philippines or of any other specific country, it
shall be unlawful to falsely simulate the existence of
such minimum stock or capital as owned by such citizens, for
the purpose of evading said provision. The president or managers
and directors or trustees of corporations or associations convicted
of a violation of this section shall be punished by imprisonment of
not less than five nor more than fifteen years, and by a fine not
less than the value of the right, franchise or privilege, enjoyed or
acquired in violation of the provisions hereof but in no case less
than five thousand pesos.45 (Emphasis and underscoring
supplied.)
Pursuant to these legislative acts and under the aegis of the
Constitutional nationality requirement of public utilities then in
force, Congress granted various franchises upon the
understanding that the "capital stock" of the grantee is at least
60% Filipino. In 1964, Congress, via Republic Act No. (RA)
4147,46 granted Filipinas Orient Airway, Inc. a legislative franchise
to operate an air carrier upon the understanding that its "capital
stock" was 60% percent Filipino-owned. Section 14 of RA 4147,
provided:
Sec. 14. This franchise is granted with the understanding that the
grantee is a corporation sixty per cent of the capital stock
of which is the bona fide property of citizens of the
Philippines and that the interest of such citizens in its capital
stock or in the capital of the Company with which it may merge
shall at no time be allowed to fall below such percentage, under
the penalty of the cancellation of this franchise. (Emphasis and
underscoring supplied.)

The grant of a public utility franchise to Air Manila. Inc. to

establish and maintain air transport in the country a year later
pursuant to RA 450147 contained exactly the same Filipino
capitalization requirement imposed in RA 4147:
Sec. 14. This franchise is granted with the understanding that the
grantee is a corporation, sixty per cent of the capital stock of
which is owned or the bona fide property of citizens of the
Philippinesand that the interest of such citizens in its capital
stock or in the capital of the company with which it may merge
shall at no time be allowed to fall below such percentage, under
the penalty of the cancellation of this franchise. (Emphasis and
underscoring supplied.)
In like manner, RA 5514,48 which granted a franchise to the
Philippine Communications Satellite Corporation in 1969, required
of the grantee to execute management contracts only with
corporations whose "capital or capital stock" are at least 60%
Filipino:
Sec. 9. The grantee shall not lease, transfer, grant the usufruct of,
sell or assign this franchise to any person or entity, except any
branch or instrumentality of the Government, without the previous
approval of the Congress of the Philippines: Provided, That the
grantee may enter into management contract with any person or
entity, with the approval of the President of the Philippines:
Provided, further, That such person or entity with whom the
grantee may enter into management contract shall be a citizen of
the Philippines and in case of an entity or a corporation, at
least sixty per centum of the capital or capital stock of
which is owned by citizens of the Philippines. (Emphasis
supplied.)
In 1968, RA 5207,49 otherwise known as the "Atomic Energy
Regulatory Act of 1968," considered a corporation sixty percent of
whose capital stock as domestic:
Sec. 9. Citizenship Requirement. No license to acquire, own, or
operate any atomic energy facility shall be issued to an alien, or
any corporation or other entity which is owned or controlled by an
alien, a foreign corporation, or a foreign government.
For purposes of this Act, a corporation or entity is not owned or
controlled by an alien, a foreign corporation of a foreign
government if at least sixty percent (60%) of its capital
stock is owned by Filipino citizens. (Emphasis supplied.)
Anent pertinent judicial decisions, this Court has used the very
same definition of capital as equivalent to the entire capital
stockholdings in a corporation in resolving various other issues.
In National Telecommunications Commission v. Court of
Appeals,50 this Court, thus, held:

39
The term "capital" and other terms used to describe the
capital structure of a corporation are of universal
acceptance, and their usages have long been established
in jurisprudence. Briefly,capital refers to the value of the
property or assets of a corporation. The capital subscribed
is the total amount of the capital that persons (subscribers
or shareholders) have agreed to take and pay for, which
need not necessarily be, and can be more than, the par
value of the shares. In fine, it is the amount that the
corporation receives, inclusive of the premiums if any, in
consideration of the original issuance of the shares. In the
case of stock dividends, it is the amount that the corporation
transfers from its surplus profit account to its capital account. It is
the same amount that can loosely be termed as the "trust fund" of
the corporation. The "Trust Fund" doctrine considers this
subscribed capital as a trust fund for the payment of the debts of
the corporation, to which the creditors may look for satisfaction.
Until the liquidation of the corporation, no part of the subscribed
capital may be returned or released to the stockholder (except in
the redemption of redeemable shares) without violating this
principle. Thus, dividends must never impair the subscribed
capital; subscription commitments cannot be condoned or
remitted; nor can the corporation buy its own shares using the
subscribed capital as the consideration therefor. 51
This is similar to the holding in Banco Filipino v. Monetary
Board52 where the Court treated the term "capital" as including
both common and preferred stock, which are usually deprived of
voting rights:
It is clear from the law that a solvent bank is one in which its
assets exceed its liabilities. It is a basic accounting principle that
assets are composed of liabilities and capital. The term "assets"
includes capital and surplus" (Exley v. Harris, 267 p. 970, 973, 126
Kan., 302). On the other hand, the term "capital" includes
common and preferred stock, surplus reserves, surplus
and undivided profits. (Manual of Examination Procedures,
Report of Examination on Department of Commercial and Savings
Banks, p. 3-C). If valuation reserves would be deducted from these
items, the result would merely be the networth or the unimpaired
capital and surplus of the bank applying Sec. 5 of RA 337 but not
the total financial condition of the bank.
In Commissioner of Internal Revenue v. Court of
Appeals,53 the Court alluded to the doctrine of equality of shares
in resolving the issue therein and held that all shares comprise the
capital stock of a corporation:
A common stock represents the residual ownership interest in the
corporation. It is a basic class of stock ordinarily and usually
issued without extraordinary rights or privileges and entitles the
shareholder to a pro rata division of profits. Preferred stocks are
those which entitle the shareholder to some priority on dividends
and asset distribution. Both shares are part of the
corporations capital stock. Both stockholders are no
different from ordinary investors who take on the same
investment risks. Preferred and common shareholders
participate in the same venture, willing to share in the
profit and losses of the enterprise. Moreover, under the
doctrine of equality of shares --- all stocks issued by the
corporation are presumed equal with the same privileges
and liabilities, provided that the Articles of Incorporation is silent
on such differences.54 (Emphasis supplied.)
The SEC has reflected the popular contemporaneous
construction of capital in computing the nationality
requirement based on the total capital stock, not only
the voting stock, of a corporation (5th extrinsic aid)
The SEC has confirmed that, as an institution, it has always
interpreted and applied the 40% maximum
foreignownership limit for public utilities to the total capital
stock, and not just its total voting stock.
In its July 29, 2011 Manifestation and Omnibus Motion, the SEC
reaffirmed its longstanding practice and history of enforcement of
the 40% maximum foreign ownership limit for public utilities, viz:

5. The Commission respectfully submits that it has always

performed its duty under Section 17(4) of the Corporation Code to
enforce the foreign equity restrictions under Section 11, Article XII
of the Constitution on the ownership of public utilities.
xxxx
8. Thus, in determining compliance with the Constitutional
restrictions on foreign equity, the Commission consistently
construed and applied the term "capital" in its commonly
accepted usage, that is the sum total of the shares
subscribed irrespective of their nomenclature and whether
or not they are voting or non-voting (Emphasis supplied).
9. This commonly accepted usage of the term capital is based on
persuasive authorities such as the widely esteemed Fletcher
Cyclopedia of the Law of Private Corporations, and doctrines from
American Jurisprudence. To illustrate, in its Opinion dated
February 15, 1988 addresses to Gozon, Fernandez, Defensor and
Associates, the Commission discussed how the term capital is
commonly used:
"Anent thereto, please be informed that the term capital as
applied to corporations, refers to the money, property or means
contributed by stockholders as the form or basis for the business
or enterprise for which the corporation was formed and generally
implies that such money or property or means have been
contributed in payment for stock issued to the contributors.
(United Grocers, Ltd. v. United States F. Supp. 834, cited in 11
Fletcher, Cyc. Corp., 1986, rev. vol., sec. 5080 at 18). As further
ruled by the court, capital of a corporation is the fund or other
property, actually or potentially in its possession, derived
or to be derived from the sale by it of shares of its stock or
his exchange by it for property other than money. This fund
includes not only money or other property received by the
corporation for shares of stock but all balances of purchase
money, or instalments, due the corporation for shares of stock
sold by it, and all unpaid subscriptions for shares." (Williams v.
Brownstein, 1F. 2d 470, cited in 11 Fletcher, Cyc. Corp., 1058 rev.
vol., sec. 5080, p. 21).
The term capital is also used synonymously with the words
capital stock, as meaning the amount subscribed and paidin and
upon which the corporation is to conduct its operation. (11
Fletcher, Cyc. Corp. 1986, rev. vol., sec. 5080 at 15). And, as held
by the court in Haggard v. Lexington Utilities Co., (260 Ky 251, 84
SW 2d 84, cited in 11 Fletcher, Cyc. Corp., 1958 rev. vol., sec.
5079 at 17), The capital stock of a corporation is the amount
paidin by its stockholders in money, property or services with
which it is to conduct its business, and it is immaterial how the
stock is classified, whether as common or preferred.
The Commission, in a previous opinion, ruled that the term
capital denotes the sum total of the shares subscribed and paid
by the shareholders or served to be paid, irrespective of their
nomenclature. (Letter to Supreme Technotronics Corporation,
dated April 14, 1987)." (Emphasis ours)
10. Further, in adopting this common usage of the term capital,
the Commission believed in good faith and with sound reasons
that it was consistent with the intent and purpose of the
Constitution. In an Opinion dated 27 December 1995 addressed to
Joaquin Cunanan & Co. the Commission observed that:
"To construe the 60-40% equity requirement as merely based on
the voting shares, disregarding the preferred non-voting share,
not on the total outstanding subscribed capital stock, would give
rise to a situation where the actual foreign interest would not
really be only 40% but may extend beyond that because they
could also own even the entire preferred non-voting shares. In this
situation, Filipinos may have the control in the operation of the
corporation by way of voting rights, but have no effective
ownership of the corporate assets which includes lands, because
the actual Filipino equity constitutes only a minority of the entire
outstanding capital stock. Therefore, in essence, the
company, although controlled by Filipinos, is beneficially

40
owned by foreigners since the actual ownership of at least
60% of the entire outstanding capital stocks would be in
the hands of foreigners. Allowing this situation would
open the floodgates to circumvention of the intent of the
law to make the Filipinos the principal beneficiaries in the
ownership of alienable lands." (Emphasis ours)

The Commission, in a previous opinion, ruled that the term

capital denotes the sum total of the shares subscribed
and paid by the shareholders or served to be paid,
irrespective of their nomenclature. (Letter to Supreme
Technotronics Corporation, dated April 14, 1987). Hence, your
query is answered in the affirmative.59 (Emphasis supplied.)

11. The foregoing settled principles and esteemed authorities

relied upon by the Commission show that its interpretation of the
term capital is reasonable.

As it were, the SEC has held on the same positive response long
before the 1987 Constitution came into effect, a matter of fact
which has received due acknowledgment from this Court.
In People v. Quasha,60 a case decided under the 1935
Constitution, this Court narrated that in 1946 the SEC approved
the incorporation of a common carrier, a public utility, where
Filipinos, while not holding the controlling vote, owned the
majority of the capital, viz:

12. And, it is well settled that courts must give due deference to
an administrative agencys reasonable interpretation of the
statute it enforces.55
It should be borne in mind that the SEC is the government agency
invested with the jurisdiction to determine at the first instance the
observance by a public utility of the constitutional nationality
requirement prescribed vis--vis the ownership of public
utilities56 and to interpret legislative acts, like the FIA. The
rationale behind the doctrine of primary jurisdiction lies on the
postulate that such administrative agency has the "special
knowledge, experience and tools to determine technical and
intricate matters of fact"57 Thus, the determination of the SEC is
afforded great respect by other executive agencies, like the
Department of Justice (DOJ),58 and by the courts.
Verily, when asked as early as 1988 "Would it be legal for
foreigners to own in a public utility entity more than 40% of the
common shares but not more than 40% of the total outstanding
capital stock which would include both common and non-voting
preferred shares?" the SEC, citing Fletcher, invariably answered
in the affirmative, whether the poser was made in light of the
present or previous Constitutions:
The pertinent provision of the Philippine Constitution under Article
XII, Section 7, reads in part thus:
"No franchise, certificate, or any 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. . ." x x x
The issue raised on your letter zeroes in on the meaning of
the word "capital" as used in the above constitutional
provision. Anent thereto, please be informed that the term
"capital" as applied to corporations, refers to the money, property
or means contributed by stockholders as the form or basis for the
business or enterprise for which the corporation was formed and
generally implies that such money or property or means have
been contributed in payment for stock issued to the contributors.
(United Grocers, Ltd. v. United States F. Supp. 834, cited in 11
Fletcher, Cyc. Corp., 1986, rev. vol., sec. 5080 at 18). As further
ruled by the court, "capital of a corporation is the fund or other
property, actually or potentially in its possession, derived or to be
derived from the sale by it of shares of its stock or his exchange
by it for property other than money. This fund includes not only
money or other property received by the corporation for shares of
stock but all balances of purchase money, or installments, due the
corporation for shares of stock sold by it, and all unpaid
subscriptions for shares." (Williams v. Brownstein, 1F. 2d 470,
cited in 11 Fletcher, Cyc. Corp., 1058 rev. vol., sec. 5080, p. 21).
The term "capital" is also used synonymously with the words
"capital stock", as meaning the amount subscribed and paid-in
and upon which the corporation is to conduct its operation. (11
Fletcher, Cyc. Corp. 1986, rev. vol., sec. 5080 at 15). And, as held
by the court in Haggard v. Lexington Utilities Co., (260 Ky 251, 84
SW 2d 84, cited in 11 Fletcher, Cyc. Corp., 1958 rev. vol., sec.
5079 at 17), "The capital stock of a corporation is the
amount paid-in by its stockholders in money, property or
services with which it is to conduct its business, and it is
immaterial how the stock is classified, whether as common
or preferred."

The essential facts are not in dispute. On November 4, 1946, the

Pacific Airways Corporation registered its articles of incorporation
with the [SEC]. The articles were prepared and the registration
was effected by the accused, who was in fact the organizer of the
corporation. The articles stated that the primary purpose of the
corporation was to carry on the business of a common carrier by
air, land, or water, that its capital stock was P 1,000,000,
represented by 9,000 preferred and 100,000 common
shares, each preferred share being of the par value
of P 100 and entitled to 1/3 vote and each common share,
of the par value of P 1 and entitled to one vote; that the
amount of capital stock actually subscribed was P 200,000, and
the names of the subscriber were Arsenio Baylon, Eruin E.
Shannahan, Albert W. Onstott, James Obannon, Denzel J. Cavin,
and William H. Quasha,the first being a Filipino and the other
five all Americans; that Baylons subscription was for 1,145
preferred shares, of the total value of P 114,500 and 6,500
common shares, of the total par value of P6,500, while the
aggregate subscriptions of the American subscribers were for 200
preferred shares, of the total par value of P 20,000 and 59,000
common shares, of the total par value of P 59,000; and that
Baylon and the American subscribers had already paid 25 percent
of their respective subscriptions. Ostensibly the owner of, or
subscriber to, 60.005 per cent of the subscribed capital
stock of the corporation, Baylon, did not have the
controlling vote because of the difference in voting power
between the preferred shares and the common shares.
Still, with the capital structure as it was, the articles of
incorporation were accepted for registration and a
certificate of incorporation was issued by the [SEC].
(Emphasis supplied.)
The SEC has, through the years, stood by this interpretation. In an
Opinion dated November 21, 1989, the SEC held that the basis of
the computation for the nationality requirement is the total
outstanding capital stock, to wit:
As to the basis of computation of the 60-40 percentage nationality
requirement under existing laws (whether it should be based on
the number of shares or the aggregate amount in pesos of the par
value of the shares), the following definitions of corporate terms
are worth mentioning.
"The term capital stock signifies the aggregate of the shares
actually subscribed". (11 Fletcher, Cyc. Corps. (1971 Rev. Vol.)
sec. 5082, citing Goodnow v. American Writing Paper Co., 73 NJ
Eq. 692, 69 A 1014 aff'g 72 NJ Eq. 645, 66 A, 607).
"Capital stock means the capital subscribed (the share capital)".
(Ibid., emphasis supplied).
"In its primary sense a share of stock is simply one of the
proportionate integers or units, the sum of which constitutes the
capital stock of corporation. (Fletcher, sec. 5083).
The equitable interest of the shareholder in the property of the
corporation is represented by the term stock, and the extent of his
interest is described by the term shares. The expression shares of
stock when qualified by words indicating number and ownership

41
expresses the extent of the owner's interest in the corporate
property (Ibid, Sec. 5083, emphasis supplied).
Likewise, in all provisions of the Corporation Code the
stockholders right to vote and receive dividends is always
determined and based on the "outstanding capital stock", defined
as follows:
"SECTION 137. Outstanding capital stock defined. The term
"outstanding capital stock" as used in this Code, means the total
shares of stock issued to subscribers or stockholders, whether or
not fully or partially paid (as long as there is a binding
subscription agreement, except treasury shares."
The computation, therefore, should be based on the total
outstanding capital stock, irrespective of the amount of the par
value of the shares.
Then came SEC-OGC Opinion No. 08-14 dated June 02, 2008:
The instant query now centers on whether both voting and
nonvoting shares are included in the computation of the required
percentage of Filipino equity, As a rule, the 1987 Constitution does
not distinguish between voting and non-voting shares with regard
to the computation of the percentage interest by Filipinos and
non-Filipinos in a company. In other words, non-voting shares
should be included in the computation of the foreign
ownership limit for domestic corporation. This was the rule
applied [in SEC Opinion No. 04-30 x x x It was opined therein that
the ownership of the shares of stock of a corporation is based on
the total outstanding or subscribed/issued capital stock regardless
of whether they are classified as common voting shares or
preferred shares without voting rights. This is in line with the
policy of the State to develop an independent national economy
effectively controlled by Filipinos. x x x (Emphasis added.)
The SEC again echoed the same interpretation in an Opinion
issued last April 19, 2011 wherein it stated, thus:
This is, thus, the general rule, such that when the provision
merely uses the term "capital" without qualification (as in Section
11, Article XII of the 1987 Constitution, which deals with equity
structure in a public utility company), the same should be
interpreted to refer to the sum total of the outstanding capital
stock, irrespective of the nomenclature or classification as
common, preferred, voting or non-voting.61
The above construal is in harmony with the letter and spirit of Sec.
11, Art. XII of the Constitution and its counterpart provisions in the
1935 and 1973 Constitution and, thus, is entitled to respectful
consideration. As the Court declared in Philippine Global
Communications, Inc. v. Relova:62
x x x As far back as In re Allen, (2 Phil. 630) a 1903 decision,
Justice McDonough, as ponente, cited this excerpt from the
leading American case of Pennoyer v. McConnaughy, decided in
1891: "The principle that the contemporaneous
construction of a statute by the executive officers of the
government, whose duty it is to execute it, is entitled to
great respect, and should ordinarily control the
construction of the statute by the courts, is so firmly
embedded in our jurisprudence that no authorities need be cited
to support it. x x x There was a paraphrase by Justice Malcolm of
such a pronouncement in Molina v. Rafferty, (37 Phil. 545) a 1918
decision:" Courts will and should respect the contemporaneous
construction placed upon a statute by the executive officers
whose duty it is to enforce it, and unless such interpretation is
clearly erroneous will ordinarily be controlled thereby. (Ibid, 555)
Since then, such a doctrine has been reiterated in numerous
decisions.63(Emphasis supplied.)
Laxamana v. Baltazar64 restates this long-standing dictum:
"[w]here a statute has received a contemporaneous and practical
interpretation and the statute as interpreted is re-enacted, the
practical interpretation is accorded greater weight than it
ordinarily receives, and is regarded as presumptively the correct

interpretation of the law. The rule here is based upon the theory
that the legislature is acquainted with the contemporaneous
interpretation of a statute, especially when made by an
administrative body or executive officers charged with the duty of
administering or enforcing the law, and therefore impliedly adopts
the interpretation upon re-enactment." 65 Hence, it can be safely
assumed that the framers, in the course of deliberating the 1987
Constitution, knew of the adverted SEC interpretation.
Parenthetically, it is immaterial whether the SEC opinion was
rendered by the banc or by the SEC-Office of the General Counsel
(OGC) considering that the latter has been given the authority to
issue opinions on the laws that the SEC implements under SECEXS. Res. No. 106, Series of 2002.66 The conferment does not
violate Sec. 4.667of the Securities and Regulation Code (SRC) that
proscribes the non-delegation of the legislative rule making power
of the SEC, which is in the nature of subordinate legislation. As
may be noted, the same Sec. 4.6 does not mention the SECs
power to issue interpretative "opinions and provide guidance on
and supervise compliance with such rules,"68 which is incidental to
the SECs enforcement functions. A legislative rule and an
interpretative rule are two different concepts and the distinction
between the two is established in administrative law.69 Hence, the
various opinions issued by the SEC-OGC deserve as much respect
as the opinions issued by the SEC en banc.
Nonetheless, the esteemed ponente posits that the SEC, contrary
to its claim, has been less than consistent in its construal of
"capital." During the oral arguments, he drew attention to various
SEC Opinions, nine (9) to be precise, that purportedly consider
"capital" as referring only to voting stocks.
Refuting this position, the SEC in its Memorandum dated July 25,
2012 explained in some detail that the Commission has been
consistent in applying the term "capital" to the total
outstanding capital stock, whether voting or non-voting.
The SEC Opinions referred to by Justice Carpio, which cited the
provisions of the FIA, is not, however, pertinent or decisive of the
issue on the meaning of "capital." The said SEC Memorandum
states:
During the oral arguments held on 26 June 2012, the SEC was
directed to explain nine (9) of its Opinions in relation to the
definition of "capital" as used in Section 11, Article XII of the
Constitution, namely: (1) Opinion dated 3 March 1993 for Mr.
Francis F. How; (2) Opinion dated 14 April 1993 for Director
Angeles T. Wong; (3) Opinion dated 23 November 1993 for Mssrs.
Dominador Almeda and Renato S. Calma; (4) Opinion dated 7
December 1993 for Roco Buag Kapunan Migallos & Jardeleza Law
Offices; (5) Opinion dated 22 December 2004 for Romulo Mabanta
Buenaventura Sayoc & De Los Angeles; (6) Opinion dated 27
September 2007 for Reynaldo G. David; (7) Opinion dated 28
November 2007 for Santiago & Santiago law Offices; (8) Opinion
dated 15 January 2008 for Attys. Ruby Rose J. Yusi and Rudyard S.
Arbolado; and (9) Opinion dated 18 August 2010 for Castillo
Laman Tan Pantaleon & San Jose.
xxxx
With due respect, the issue of whether "capital" refers to
outstanding capital stock or only voting stocks was never
raised in the requests for these opinions. In fact, the
definition of "capital" could not have been a relevant and/or a
material issue in some of these opinions because the common
and preferred shares involved have the same voting rights. Also,
some Opinions mentioned the FIA to emphasize that the said law
mandates the application of the Control Test. Moreover, these
Opinions state they are based solely on the facts disclosed and
relevant only to the issues raised therein.
For one, the Opinion dated 3 March 1993 for Mr. Francis F.
How does not discuss whether "capital" refers to total
outstanding capital stock or only voting stocks. Instead, it
talks about the application of the Control test in a mining
corporation by looking into the nationality of its investors. The
FIA is not mentioned to provide a definition of "capital,"

42
but to explain the nationality requirement pertinent to
investors of a mining corporation.
The Opinion dated 14 April 1993 for Dir. Angeles T. Wong
also does not define "capital" as referring to total
outstanding capital or only to voting shares, but talks
about the application of the Control Test x x x. The FIA is
again mentioned only to explain the nationality required of
investors of a corporation engaged in overseas recruitment.
The Opinion dated 23 November 1993 for Mssrs. Dominador
Almeda and Renato S. Calmadistinguishes between the
nationality of a corporation as an investing entity and the
nationality of a corporation as an investee corporation.
The FIA is mentioned only in the discussion of the
nationality of the investors of a corporation owning land in
the Philippines, composed of a trustee 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, and another domestic
corporation which is 100% foreign owned.
Unlike the Decision rendered by this Honorable Court on 28 June
2011, the Opinion dated 07 December 1993 for Roco Buag
Kapunan Migallos & Jardeleza does not parley on the issue of
the proper interpretation of "capital" because it is not a
relevant and/or a material issue in this opinion xxx. The FIA
is mentioned only to explain the application of the control
test. Note, however, that manufacturing fertilizer is neither a
nationalized or partly nationalized activity, which is another
reason why this Opinion has no relevance in this case.
The Opinion dated 22 December 2004 for Romulo Mabanta
Buenaventura Sayoc & De Los Angeles focuses on the nationality
of the investors of a corporation that will acquire land wherein one
of the investors is a foundation. It confirms the view that the
test for compliance with the nationality requirement is
based on the total outstanding capital stock irrespective
of the amount of the par value of shares. The FIA is used
merely to justify the application of the Control Test as adopted in
the Department of Justice Opinion, No. 18, Series of 1989, dated
19 January 1989m viz

"capital" could not have been relevant and/or material issue in

this Opinion because the common and preferred shares involved
have the same voting rights.
The Opinion dated 18 August 2010 for Castillo Laman Tan
Pantaleon & San Jose reiterates that the test for compliance
with the nationality requirement is based on the total
outstanding capital stock, irrespective of the amount of
the par value of the shares. The FIA is mentioned only to
explain the application of the Control Test and the
Grandfather Rule in a corporation owning land in the Philippines
by looking into the nationality of its investors. (Emphasis
supplied).70
In view of the foregoing, it is submitted that the long-established
interpretation and mode of computing by the SEC of the total
capital stock strongly recognize the intent of the framers of the
Constitution to allow access to much-needed foreign investments
confined to 40% of the capital stock of public utilities.
Consequences of alternative interpretation: mischievous
effects of the construction proposed in the petition and
sustained in the June 28, 2011 Decision. (6th extrinsic aid)
Filipino shareholders will not
control the fundamental corporate
matters nor own the majority
economic benefits of the public
utility corporation.
Indeed, if the Court persists in adhering to the rationale
underlying the majoritys original interpretation of "capital" found
in the first sentence of Section 11, Article XII, We may perhaps be
allowing Filipinos to direct and control the daily business of our
public utilities, but would irrevocably and injudiciously
deprive them of effective "control" over the major and
equally important corporate decisions and the eventual
beneficial ownership of the corporate assets that could
include, among others, claim over our soilour land. This
undermines the clear textual commitment under the Constitution
that reserves ownership of disposable lands to Filipino citizens.
The interplay of the ensuing provisions of Article XII is
unmistakable:

xxxx
The Opinion dated 27 September 2007 for Mr. Reynaldo G. David,
likewise, does not discuss whether "capital" refers to total
outstanding capital stock or only to voting stocks, but
rather whether the Control Test is applicable in
determining the nationality of the proposed corporate
bidder or buyer of PNOC-EDC shares. x x x The FIA was cited
only to emphasize that the said law mandates the application of
the Control Test.
The Opinion dated 28 November 2007 for Santiago & Santiago
Law Offices maintains and supports the position of the
Commission that Section 11, Article XII of the Constitution
makes no distinction between common and preferred
shares, thus, both shares should be included in the
computation of the foreign equity cap for domestic
corporations. Simply put, the total outstanding capital stock,
without regard to how the shares are classified, should be used as
the basis in determining the compliance by public utilities with the
nationality requirement as provided for in Section 11, Article XII of
the Constitution. Notably, all shares of the subject corporation,
Pilipinas First, have voting rights, whether common or preferred.
Hence, the issue on whether "capital" refers to total outstanding
capital stock or only to voting stocks has no relevance in this
Opinion.
In the same way, the Opinion dated 15 January 2008 for Attys.
Ruby Rose J. Yusi and Rudyard S. Arbolada never discussed
whether "capital" refers to outstanding capital stock or
only to voting stocks, but rather whether the Control Test
is applicable or not. The FIA was used merely to justify the
application of the Control Test. More importantly, the term

SECTION 2. All lands of the public domain x x x forests or timber,

wildlife, flora and fauna, and other natural resources are owned by
the State. With the exception of agricultural lands, all other
natural resources shall not be alienated. The exploration,
development, and utilization of natural resources shall be
under the full control and supervision of the State. x x x
xxxx
SECTION 3. Lands of the public domain are classified into
agricultural, forest or timber, mineral lands, and national parks.
Agricultural lands of the public domain may be further classified
by law according to the uses which they may be devoted.
Alienable lands of the public domain shall be limited to
agricultural lands. Private corporations or associations may not
hold such alienable lands except by lease, for a period not
exceeding twenty-five years, renewable for not more than twentyfive years, and not to exceed one thousand hectares in area.
Citizens of the Philippines may lease not more than five hundred
hectares, or acquire not more than twelve hectares thereof by
purchase, homestead or grant.
xxxx
SECTION 7. Save in cases of hereditary succession, no private
lands shall be transferred or conveyed except to
individuals, corporations or associations qualified to
acquire or hold lands of the public domain. (Emphasis
supplied.)
Consider the hypothetical case presented in the original ponencia:

43
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 (P 1.00) 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.
Albeit trying not to appear to, the majority actually finds fault in
the wisdom of, or motive behind, the provision in question through
"highly unlikely scenarios of clinical extremes," to borrow
from Veterans Federation Party v. COMELEC.71 It is submitted that
the flip side of the ponencias hypothetical illustration, which will
be exhaustively elucidated in this opinion, is more anomalous and
prejudicial to Filipino interests.
For instance, let us suppose that the authorized capital stock of a
public utility corporation is divided into 100 common shares and
1,000,000 non-voting preferred shares. Since, according to the
Courts June 28, 2011 Decision, the word "capital" in Sec. 11, Art.
XII refers only to the voting shares, then the 40% cap on foreign
ownership applies only to the 100 common shares. Foreigners
can, therefore, own 100% of the 1,000,000 nonvoting preferred
shares. But then again, the ponencia continues, at least, the
"control" rests with the Filipinos because the 60% Filipino-owned
common shares will necessarily ordain the majority in the
governing body of the public utility corporation, the board of
directors/trustees. Hence, Filipinos are assured of control over the
day-to-day activities of the public utility corporation.
Let us, however, take this corporate scenario a little bit farther
and consider the irresistible implications of changes and
circumstances that are inevitable and common in the business
world. Consider the simple matter of a possible investment of
corporate funds in another corporation or business, or a merger of
the public utility corporation, or a possible dissolution of the public
utility corporation. Who has the "control" over these vital
and important corporate matters? The last paragraph of Sec.
6 of the Corporation Code provides:
Where the articles of incorporation provide for non-voting shares
in the cases allowed by this Code,the holders of such (nonvoting) 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."(Emphasis and underscoring
supplied.)
In our hypothetical case, all 1,000,100 (voting and non-voting)
shares are entitled to vote in cases involving fundamental and
major changes in the corporate structure, such as those listed in
Sec. 6 of the Corporation Code. Hence, with only 60 out of the
1,000,100 shares in the hands of the Filipino shareholders, control
is definitely in the hands of the foreigners. The foreigners can opt
to invest in other businesses and corporations, increase its
bonded indebtedness, and even dissolve the public utility
corporation against the interest of the Filipino holders of the
majority voting shares. This cannot plausibly be the constitutional
intent.
Consider further a situation where the majority holders of the total
outstanding capital stock, both voting and non-voting, decide to
dissolve our hypothetical public utility corporation. Who will
eventually acquire the beneficial ownership of the

corporate assets upon dissolution and liquidation? Note

that Sec. 122 of the Corporation Code states:
Section 122. Corporate liquidation.Every corporation whose
charter expires by its own limitation or is annulled by forfeiture or
otherwise, or whose corporate existence for other purposes is
terminated in any other manner, shall nevertheless be continued
as a body corporate for three (3) years to dispose of and
convey its property and to distribute its assets, but not for
the purpose of continuing the business for which it was
established.
At any time during said three (3) years, the corporation is
authorized and empowered to convey all of its property to
trustees for the benefit of stockholders, members, creditors,
and other persons in interest. From and after any such
conveyance by the corporation of its property in trust for the
benefit of its stockholders, members, creditors and others in
interest, all interest which the corporation had in the
property terminates, the legal interest vests in the trustees,
and the beneficial interest in the stockholders, members ,
creditors or other persons in interest. (Emphasis and
underscoring supplied.)
Clearly then, the bulk of the assets of our imaginary public utility
corporation, which may include private lands, will go to the
beneficial ownership of the foreigners who can hold up to 40 out
of the 100 common shares and the entire 1,000,000 preferred
non-voting shares of the corporation. These foreign shareholders
will enjoy the bulk of the proceeds of the sale of the corporate
lands, or worse, exercise control over these lands behind the
faade of corporations nominally owned by Filipino shareholders.
Bluntly, while the Constitution expressly prohibits the transfer of
land to aliens, foreign stockholders may resort to schemes or
arrangements where such land will be conveyed to their dummies
or nominees. Is this not circumvention, if not an outright violation,
of the fundamental Constitutional tenet that only Filipinos can own
Philippine land?
A construction of "capital" as referring to the total shareholdings
of the company is an acknowledgment of the existence of
numerous corporate control-enhancing mechanisms, besides
ownership of voting rights, that limits the proportion between the
separate and distinct concepts of economic right to the cash
flow of the corporationand the right to corporate control (hence,
they are also referred to as proportionality-limiting measures).
This corporate reality is reflected in SRC Rule 3(E) of the Amended
Implementing Rules and Regulations (IRR) of the SRC and Sec.
3(g) of The Real Estate Investment Trust Act (REIT) of
2009,72 which both provide that control can exist regardless of
ownership of voting shares. The SRC IRR states:
Control is the power to govern the financial and operating
policies of an enterprise so as to obtain benefits from its
activities. Control is presumed to exist when the parent owns,
directly or indirectly through subsidiaries, more than one half of
the voting power of an enterprise unless, in exceptional
circumstances, it can be clearly demonstrated that such
ownership does not constitute control.Control also exists even
when the parent owns one half or less of the voting power
of an enterprise when there is:
i. Power over more than one half of the voting
rights by virtue of an agreement with other investors;
ii. Power to govern the financial and operating
policies of the enterprise under a statute or
anagreement;
iii. Power to appoint or remove the majority of the
members of the board of directors or equivalent
governing body;
iv. Power to cast the majority of votes at meetings of
the board of directors or equivalent governing body.
(Emphasis and underscoring supplied.)
As shown above, ownership of voting shares or power alone
without economic control of the company does not
necessarily equate to corporate control. A shareholders

44
agreement can effectively clip the voting power of a shareholder
holding voting shares. In the same way, a voting right ceiling,
which is "a restriction prohibiting shareholders to vote above a
certain threshold irrespective of the number of voting shares they
hold,"73 can limit the control that may be exerted by a person who
owns voting stocks but who does not have a substantial economic
interest over the company. So also does the use of financial
derivatives with attached conditions to ensure the acquisition of
corporate control separately from the ownership of voting shares,
or the use ofsupermajority provisions in the bylaws and articles of
incorporation or association. Indeed, there are innumerable ways
and means, both explicit and implicit, by which the control of a
corporation can be attained and retained even with very limited
voting shares, i.e.., there are a number of ways by which control
can be disproportionately increased compared to ownership 74 so
long as economic rights over the majority of the assets and equity
of the corporation are maintained.
Hence, if We follow the construction of "capital" in Sec. 11, Art. XII
stated in the ponencia of June 28, 2011 and turn a blind eye to
these realities of the business world, this Court may have
veritably put a limit on the foreign ownership of common
shares but have indirectly allowed foreigners to acquire
greater economic right to the cash flow of public utility
corporations, which is a leverage to bargain for far greater
control through the various enhancing mechanisms or
proportionality-limiting measures available in the business world.
In our extremely hypothetical public utility corporation with the
equity structure as thus described, since the majority recognized
only the 100 common shares as the "capital" referred to in the
Constitution, the entire economic right to the cash flow arising
from the 1,000,000 non-voting preferred shares can be acquired
by foreigners. With this economic power, the foreign holders of
the minority common shares will, as they easily can, bargain with
the holders of the majority common shares for more corporate
control in order to protect their economic interest and reduce their
economic risk in the public utility corporation. For instance, they
can easily demand the right to cast the majority of votes during
the meeting of the board of directors. After all, money commands
control.
The court cannot, and ought not, accept as correct a holding that
routinely disregards legal and practical considerations as
significant as above indicated. Committing an error is bad enough,
persisting in it is worse.
Foreigners can be owners of fully
nationalized industries
Lest it be overlooked, "capital" is an oft-used term in the
Constitution and various legislative acts that regulate corporate
entities. Hence, the meaning assigned to it within the context of a
constitutional provision limiting foreign ownership in corporations
can affect corporations whose ownership is reserved to Filipinos,
or whose foreign equity is limited by law pursuant to Sec. 10, Art.
XII of the Constitution which states:
SECTION 10. The Congress shall, upon recommendation of the
economic and planning agency, when the national interest
dictates, 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. The Congress shall enact measures that will
encourage the formation and operation of enterprises
whose capital is wholly owned by Filipinos. (Emphasis
supplied).
For instance, Republic Act No. 7042, also known as the Foreign
Investments Act of 199175 (FIA), provides for the formation of a
Regular Foreign Investment Negative List (RFINL) covering
investment areas/activities that are partially or entirely reserved
to Filipinos. The 8th RFINL76 provides that "No Foreign Equity" is
allowed in the following areas of investments/activities:

1. Mass Media except recording (Article XVI, Section 1 of the

Constitution and Presidential Memorandum dated May 4, 1994);
2. Practice of all professions (Article XII, Section 14 of the
Constitution and Section 1, RA 5181);77
3. Retail trade enterprises with paid-up capital of less than
$2,500,000 (Section 5, RA 8762);
4. Cooperatives (Chapter III, Article 26, RA 6938);
5. Private Security Agencies (Section 4, RA 5487);
6. Small-scale Mining (Section 3, RA 7076)
7. Utilization of Marine Resources in archipelagic waters, territorial
sea, and exclusive economic zone as well as small scale utilization
of natural resources in rivers, lakes, bays, and lagoons (Article XII,
Section 2 of the Constitution);
8. Ownership, operation and management of cockpits (Section 5,
PD 449);
9. Manufacture, repair, stockpiling and/or distribution of nuclear
weapons (Article II, Section 8 of the Constitution);
10. Manufacture, repair, stockpiling and/or distribution of
biological, chemical and radiological weapons and anti-personnel
mines (Various treaties to which the Philippines is a signatory and
conventions supported by the Philippines);
11. Manufacture of fire crackers and other pyrotechnic devices
(Section 5, RA 7183).
If the construction of "capital," as espoused by the June 28, 2011
Decision, were to be sustained, the reservation of the full
ownership of corporations in the foregoing industries to Filipinos
could easily be negated by the simple expedience of issuing and
making available non-voting shares to foreigners. After all, these
non-voting shares do not, following the June 28, 2011 Decision,
form part of the "capital" of these supposedly fully nationalized
industries. Consequently, while Filipinos can occupy all of the
seats in the board of directors of corporations in fully nationalized
industries, it is possible for foreigners to own the majority of the
equity of the corporations through "non-voting" shares, which are
nonetheless allowed to determine fundamental corporate matters
recognized in Sec. 6 of the Corporation Code. Filipinos may
therefore be unwittingly deprived of the "effective" ownership of
corporations supposedly reserved to them by the Constitution and
various laws.
The Foreign Investments Act of 1991 does
not qualify or restrict the meaning of "capital"
in Sec. 11, Art. XII of the Constitution.
Nonetheless, Justice Carpio parlays the thesis that the FIA, and its
predecessors, the Investments Incentives Act of 1967 ("1967
IIA"),78 Omnibus Investments Code of 1981 ("1981 OIC"),79 and the
Omnibus Incentives Code of 1987 ("1987 OIC"), 80 (collectively,
"Investment Incentives Laws") more particularly their definition of
the term "Philippine National," constitutes a good guide for
ascertaining the intent behind the use of the term "capital" in Sec.
11, Art. XIIthat it refers only to voting shares of public utility
corporations.
I cannot share this posture. The Constitution may only be
amended through the procedure outlined in the basic
document itself.81 An amendment cannot, therefore, be
made through the expedience of a legislative action that
diagonally opposes the clear provisions of the
Constitution.
Indeed, the constitutional intent on the equity prescribed by
Sec. 11, Art. XII cannot plausibly be fleshed out by a look
through the prism of economic statutes passed after the
adoption of the Constitution, such as the cited FIA, the Magna
Carta for Micro, Small and Medium Industries (Republic Act No.

45
6977) and other kindred laws envisaged to Filipinize certain areas
of investment. It should be the other way around. Surely, the
definition of a "Philippine National" in the FIA, or for that matter,
the 1987 OIC82 could not have influenced the minds of the 1986
CONCOM or the people when they ratified the Constitution. As
heretofore discussed, the primary source whence to ascertain
constitutional intent or purpose is the constitutional text, or, to be
more precise, the language of the provision itself,83 as inquiry on
any controversy arising out of a constitutional provision ought to
start and end as much as possible with the provision
itself.84 Legislative enactments on commerce, trade and
national economy must be so construed, when
appropriate, to determine whether the purpose underlying
them is in accord with the policies and objectives laid out
in the Constitution. Surely, a law cannot validly broaden or
restrict the thrust of a constitutional provision unless
expressly sanctioned by the Constitution itself. And the
Court may not read into the Constitution an intent or purpose that
is not there. Any attempt to enlarge the breadth of constitutional
limitations beyond what its provision dictates should be stricken
down.
In fact, it is obvious from the FIA itself that its framers deemed it
necessary to qualify the term "capital" with the phrase "stock
outstanding and entitled to vote" in defining a "Philippine
National" in Sec. 3(a). This only supports the construal that the
term "capital," standing alone as in Sec. 11, Art. XII of the
Constitution, applies to all shares, whether classified as voting or
non-voting, and this is the interpretation in harmony with
the Constitution.
In passing the FIA, the legislature could not have plausibly
intended to restrict the 40% foreign ownership limit imposed by
the Constitution on all capital stock to only voting stock. Precisely,
Congress enacted the FIA to liberalize the laws on foreign
investments. Such intent is at once apparent in the very title of
the statute, i.e., "An Act to Promote Foreign Investments," and the
policy: "attract, promote and welcome productive investments
from foreign individuals, partnerships, corporations, and
government,"85 expresses the same.
The Senate, through then Senator Vicente Paterno, categorically
stated that the FIA is aimed at "liberalizing foreign
investments"86 because "Filipino investment is not going to be
enough [and] we need the support and the assistance of foreign
investors x x x."87 The senator made clear that "the term
Philippine national" means either Filipino citizens or enterprises
of which the "total Filipino ownership" is 60 percent or greater,
thus:
Senator Paterno. May I first say that the term "Philippine
national" means either Filipino citizens or enterprises of
which the total Filipino ownership is 60 percent or
greater. In other words, we are not excluding foreign
participation in domestic market enterprises with total assets of
less than P 25 million. We are merely limiting foreign participation
to not more than 40 percent in this definition. 88
Even granting, arguendo, that the definition of a "Philippine
National" in the FIA was lifted from the Investment Incentives
Laws issued in 1967, 1981, and 1987 that defined "Philippine
National" as a corporation 60% of whose voting stocks is owned
by Filipino citizens, such definition does not limit or qualify the
nationality requirement prescribed for public utility corporations
by Sec. 11, Art. XII of the 1987 Constitution. The latter does not
refer to the definition of a "Philippine National." Instead, Sec. 11,
Art. XII reiterates the use of the unqualified term "capital" in
the 1935 and 1973 Constitutions. In fact, neither the 1973
Constitutional Convention nor the 1986 CONCOM alluded to the
Investment Incentives Laws in their deliberations on the
nationality requirement of public utility corporations. With the
unequivocal rejection of the UP Law Center proposal to use the
qualifying "voting stock or controlling interest," the nonconsideration of the Investment Incentives Laws means that these
laws are not pertinent to the issue of the Filipino-foreign capital
ratio in public utility corporations.

Besides, none of the Investment Incentives Laws defining a

"Philippine National" has sought to expand or modify the definition
of "capital," as used in the Constitutions then existing. The
definition of a "Philippine National" in these laws was, to stress,
only intended to identify the corporations qualified for registration
to avail of the incentives prescribed therein. The definition was
not meant to find context outside the scope of the various
Investment Incentives Laws, much less to modify a nationality
requirement set by the then existing Constitution. This much is
obvious in the very heading of the first of these Investment
Incentives Laws, 1967 IIA :
SECTION 3. Definition of Terms. - For purposes of this Act:
xxxx
(f) "Philippine National" shall mean a citizen of the Philippines; or
a partnership or association wholly owned by citizens of the
Philippines; or a corporation organized and existing under the laws
of the Philippines of which at least sixty per cent of the capital
stock outstanding and entitled to vote is owned and held by
citizens of the Philippines xxxx (Emphasis and underscoring
supplied.)
Indeed, the definition of a "Philippine National" in the FIA cannot
apply to the ownership structure of enterprises applying for, and
those granted, a franchise to operate as a public utility under Sec.
11, Art. XII of the Constitution. As aptly observed by the SEC, the
definition of a "Philippine National" provided in the FIA refers only
to a corporation that is permitted to invest in an enterprise as a
Philippine citizen (investorcorporation). The FIA does not
prescribe the equity ownership structure of the enterprise
granted the franchise or the power to operate in a fully or
partially nationalized industry (investee-corporation). This is
apparent from the FIA itself, which also defines the act of an
"investment" and "foreign investment":
Section 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 x x x
b) The term "investment" shall mean equity participation in
any enterprise organized or existing the laws of the Philippines;
c) The term "foreign investment" shall mean as equity
investment made by a non-Philippine national in the form of
foreign exchange and/or other assets actually transferred to the
Philippines and duly registered with the Central Bank which shall
assess and appraise the value of such assets other than foreign
exchange.
In fact, Sec. 7 of the FIA, as amended, allows aliens or nonPhilippine nationals to own an enterprise up to the extent
provided by the Constitution, existing laws or the FINL:
Sec. 7. Foreign investments in domestic market enterprises.
Non- Philippine nationals may own up to one hundred percent
[100%] of domestic market enterprises unless foreign ownership
therein is prohibited or limited by the Constitution and existing
laws or the Foreign Investment Negative List under Section 8
hereof. (Emphasis supplied.)
Hence, pursuant to the Eight Regular FINL, List A, the foreign
"equity" is up to 40% in enterprises engaged in the operation and
management of public utilities while the remaining 60% of the
"equity" is reserved to Filipino citizens and "Philippine Nationals"
as defined in Sec. 3(a) of the FIA. Notably, the term "equity" refers
to the "ownershipinterest in a business"89 or a "share in a
publicly traded company,"90 and not to the "controlling" or

46
"management" interest in a company. It necessarily includes all
and every share in a corporation, whether voting or non-voting.
Again, We must recognize the distinction of the separate concepts
of "ownership" and "control" in modern corporate governance in
order to realize the intent of the framers of our Constitution to
reserve for Filipinos the ultimate and all-encompassing control of
public utility entities from their daily administration to the acts of
ownership enumerated in Sec. 6 of the Corporation Code.91 As
elucidated, by equating the word "capital" in Sec. 11, Art. XII to
the limited aspect of the right to control the composition of the
board of directors, the Court could very well be depriving Filipinos
of the majority economic interest in the public utility corporation
and, thus, the effective control and ownership of such corporation.
The Court has no jurisdiction over PLDT and foreign
stockholders who are indispensable parties in interest
More importantly, this Court cannot apply a new doctrine adopted
in a precedent-setting decision to parties that have never been
given the chance to present their own views on the substantive
and factual issues involved in the precedent-setting case.
To recall, the instant controversy arose out of an original petition
filed in February 2007 for, among others,declaratory relief on
Sec. 11, Art. XII of the 1987 Constitution "to clarify the intent of
the Constitutional Commission that crafted the 1987 Constitution
to determine the very nature of such limitation on foreign
ownership."92
The petition impleaded the following personalities as the
respondents: (1) Margarito B. Teves, then Secretary of Finance and
Chair of the Privatization Council; (2) John P. Sevilla, then
undersecretary for privatization of the Department of Finance; (3)
Ricardo Abcede, commissioner of the Presidential Commission on
Good Government; (4) Anthoni Salim, chair of First Pacific Co. Ltd.
and director of Metro Pacific Asset Holdings, Inc. (MPAH); (5)
Manuel V. Pangilinan, chairman of the board of PLDT; (6) Napoleon
L. Nazareno, the president of PLDT; (7) Fe Barin (Barin), then chair
of the SEC; and (8) Francis Lim (Lim), then president of the PSE.
Notably, neither PLDT itself nor any of its stockholders were
named as respondents in the petition, albeit it sought from the
Court the following main reliefs:
5. x x x to issue a declaratory relief that ownership of common or
voting shares is the sole basis in determining foreign equity in a
public utility and that any other government rulings, opinions, and
regulations inconsistent with this declaratory relief be declared as
unconstitutional and a violation of the intent and spirit of the 1987
Constitution;
6. x x x to declare null and void all sales of common stocks to
foreigners in excess of 40 percent of the total subscribed common
shareholdings; and
7. x x x to direct the [SEC] and [PSE] to require PLDT to make a
public disclosure of all of its foreign shareholdings and their actual
and real beneficial owners."
Clearly, the petition seeks a judgment that can adversely affect
PLDT and its foreign shareholders. If this Court were to
accommodate the petitions prayer, as the majority did in the June
28, 2011 Decision and proposes to do presently, PLDT stands to
lose its franchise, while the foreign stockholders will be compelled
to divest their voting shares in excess of 40% of PLDTs voting
stock, if any, even at a loss. It cannot, therefore, be gainsaid that
PLDT and its foreign shareholders are indispensable parties to the
instant case under the terms of Secs. 2 and 7, Rule 3 of the Rules
of Civil Procedure, which read:
Section 2. Parties in interest.Every action must be prosecuted
and defended in the name of the real party in interest. All persons
having an interest in the subject of the action and in obtaining the
relief demanded shall be joined as plaintiffs. All persons who claim

an interest in the controversy or the subject thereof adverse to

the plaintiff, or who are necessary to a complete determination or
settlement of the questions involved therein, shall be joined as
defendants.
xxxx
Section 7. Compulsory joinder of indispensable parties. Parties in
interest without whom no final determination can be had of an
action shall be joined either as plaintiffs or defendants.
Yet, again, PLDT and its foreign shareholders have not been given
notice of this petition to appear before, much less heard by, this
Court. Nonetheless, the majority has allowed such irregularity in
contravention of the settled jurisprudence that an action cannot
proceed unless indispensable parties are joined93 since the nonjoinder of these indispensable parties deprives the court the
jurisdiction to issue a decision binding on the indispensable
parties that have not been joined or impleaded. In other words, if
an indispensable party is not impleaded, any personal judgment
would have no effectiveness94 as to them for the tribunals want of
jurisdiction.
In Arcelona v. Court of Appeals,95 We explained that the basic
notions of due process require the observance of this rule that
refuses the effectivity of a decision that was rendered despite the
non-joinder of indispensable parties:
Basic considerations of due process, however, impel a similar
holding in cases involving jurisdiction over the persons of
indispensable parties which a court must acquire before it can
validly pronounce judgments personal to said defendants. Courts
acquire jurisdiction over a party plaintiff upon the filing of the
complaint. On the other hand, jurisdiction over the person of a
party defendant is assured upon the service of summons in the
manner required by law or otherwise by his voluntary appearance.
As a rule, if a defendant has not been summoned, the court
acquires no jurisdiction over his person, and a personal judgment
rendered against such defendant is null and void. A decision
that is null and void for want of jurisdiction on the part of
the trial court is not a decision in the contemplation of law
and, hence, it can never become final and executory.
Rule 3, Section 7 of the Rules of Court, defines indispensable
parties as parties-in-interest without whom there can be no final
determination of an action. As such, they must be joined either as
plaintiffs or as defendants. The general rule with reference to
the making of parties in a civil action requires, of course,
the joinder of all necessary parties where possible, and
the joinder of all indispensable parties under any and all
conditions, their presence being a sine qua non for the
exercise of judicial power. It is precisely "when an
indispensable party is not before the court (that) the
action should be dismissed." The absence of an
indispensable party renders all subsequent actions of the
court null and void for want of authority to act, not only as
to the absent parties but even as to those present.96
Hence, the June 28, 2011 Decision having been rendered in a case
where the indispensable parties have not been impleaded, much
less summoned or heard, cannot be given any effect and is, thus,
null and void. Ergo, the assailed June 28, 2011 Decision is virtually
a useless judgment, at least insofar as it tends to penalize PLDT
and its foreign stockholders. It cannot bind and affect PLDT and
the foreign stockholders or be enforced and executed against
them. It is settled that courts of law "should not render
judgments which cannot be enforced by any process
known to the law,"97 hence, this Court should have refused to
give cognizance to the petition.
The ineffectivity caused by the non-joinder of the indispensable
parties, the deprivation of their day in court, and the denial of
their right to due process, cannot be cured by the sophistic
expedience of naming PLDT in the fallo of the decision as a
respondent. The dispositive portion of the June 28, 2011 Decision
all the more only highlights the unenforceability of the majoritys

47
disposition and serves as an implied admission of this Courts lack
of jurisdiction over the persons of PLDT and its foreign
stockholders when it did not directly order the latter to dispose
the common shares in excess of the 40% limit. Instead, it took the
circuitous route of ordering the SEC, in the fallo of the assailed
decision, "to apply this definition of the term capital in
determining the extent of allowable ownership in respondent PLDT
and, if there is a violation of Sec. 11, Art. XII of the Constitution, to
impose the appropriate sanctions under the law." 98
Clearly, since PLDT and the foreign stockholders were not
impleaded as indispensable parties to the case, the
majority would want to indirectly execute its decision
which it could not execute directly. The Court may be
criticized for violating the very rules it promulgated and
for trenching the provisions of Sec. 5, Art. VIII of the
Constitution, which defines the powers and jurisdiction of
this Court.
It is apropos to stress, as a reminder, that the Rules of Court is not
a mere body of technical rules that can be disregarded at will
whenever convenient. It forms an integral part of the basic notion
of fair play as expressed in this Constitutional caveat: "No person
shall be deprived of life, liberty or property without due process of
law,"99and obliges this Court, as well as other courts and tribunals,
to hear a person first before rendering a judgment for or against
him. As Daniel Webster explained, "due process of law is more
clearly intended the general law, a law which hears before it
condemns; which proceeds upon enquiry, and renders judgment
only after trial."100 The principle of due process of law
"contemplates notice and opportunity to be heard before
judgment is rendered, affecting ones person or property." 101 Thus,
this Court has stressed the strict observance of the following
requisites of procedural due process in judicial proceedings in
order to comply with this honored principle:
(1) There must be a court or tribunal clothed with judicial power to
hear and determine the matter before it;
(2) Jurisdiction must be lawfully acquired over the person of the
defendant or over the property which is the subject of the
proceedings;
(3) The defendant must be given an opportunity to be heard; and
(4) Judgment must be rendered upon lawful hearing. 102
Apparently, not one of these requisites has been complied with
before the June 28, 2011 Decision was rendered. Instead, PLDT
and its foreign stockholders were not given their day in court,
even when they stand to lose their properties, their shares, and
even the franchise to operate as a public utility. This stands
counter to our discussion in Agabon v. NLRC,103 where We
emphasized that the principle of due process comports with the
simplest notions of what is fair and just:
To be sure, the Due Process Clause in Article III, Section 1 of the
Constitution embodies a system of rights based on moral
principles so deeply imbedded in the traditions and feelings of our
people as to be deemed fundamental to a civilized society as
conceived by our entire history. Due process is that which
comports with the deepest notions of what is fair and right
and just. It is a constitutional restraint on the legislative as
well as on the executive and judicial powers of the
government provided by the Bill of Rights.104
Parenthetically, the present petition partakes of a collateral attack
on PLDTs franchise as a public utility. Giving due course to the
recourse is contrary to the Courts ruling in PLDT v. National
Telecommunications Commission,105 where We declared a
franchise to be a property right that can only be questioned in a
direct proceeding.106 Worse, the June 28, 2011
Decision facilitates and guarantees the success of that
unlawful attack by allowing it to be undertaken in the absence
of PLDT.

The Philippine Government is barred by estoppel from

ordering foreign investors to divest voting shares
in public utilities in excess of the 40 percent cap
The Philippine governments act of pushing for and approving the
sale of the PTIC shares, which is equivalent to 12 million PLDT
common shares, to foreign investors precludes it from asserting
that the purchase violates the Constitutional limit on foreign
ownership of public utilities so that the foreign investors must now
divest the common PLDT shares bought. The elementary principle
that a person is prevented from going back on his own act or
representation to the prejudice of another who relied
thereon107 finds application in the present case.
Art. 1431 of the Civil Code provides that an "admission or
representation is rendered conclusive upon the person making it,
and cannot be denied or disproved as against a person relying
thereon." This rule is supported by Section 2(a) of Rule 131 of the
Rules of Court on the burden of proof and presumptions, which
states:
Section 2. Conclusive presumptions. The following are instances
of conclusive presumptions:
(a) Whenever a party has, by his own declaration, act, or
omission, intentionally and deliberately led another to believe a
particular thing true, and to act upon such belief, he cannot, in
any litigation arising out of such declaration, act or omission, be
permitted to falsify it.
The government cannot plausibly hide behind the mantle of its
general immunity to resist the application of this equitable
principle for "the rule on non-estoppel of the government is not
designed to perpetrate an injustice." 108Hence, this Court has
allowed several exceptions to the rule on the governments nonestoppel. As succinctly explained in Republic of the Philippines
v. Court of Appeals:109
The general rule is that the State cannot be put in estoppel by the
mistakes or errors of its officials or agents. However, like all
general rules, this is also subject to exceptions, viz.:
"Estoppel against the public are little favored. They should not be
invoked except in rare and unusual circumstances and may not be
invoked where they would operate to defeat the effective
operation of a policy adopted to protect the public. They must be
applied with circumspection and should be applied only in those
special cases where the interests of justice clearly require it.
Nevertheless, the government must not be allowed to deal
dishonorably or capriciously with its citizens, and must not
play an ignoble part or do a shabby thing; and subject to
limitations . . ., the doctrine of equitable estoppel may be
invoked against public authorities as well as against private
individuals."
In Republic v. Sandiganbayan, the government, in its effort to
recover ill-gotten wealth, tried to skirt the application of estoppel
against it by invoking a specific constitutional provision. The Court
countered:
"We agree with the statement that the State is immune from
estoppel, but this concept is understood to refer to acts and
mistakes of its officials especially those which are irregular (Sharp
International Marketing vs. Court of Appeals, 201 SCRA 299;
306 1991; Republic v. Aquino, 120 SCRA 186 1983), which peculiar
circumstances are absent in the case at bar. Although the State's
right of action to recover ill-gotten wealth is not vulnerable to
estoppel[;] it is non sequitur to suggest that a contract, freely
and in good faith executed between the parties thereto is
susceptible to disturbance ad infinitum. A different
interpretation will lead to the absurd scenario of
permitting a party to unilaterally jettison a compromise
agreement which is supposed to have the authority of res
judicata (Article 2037, New Civil Code), and like any other
contract, has the force of law between parties
thereto (Article 1159, New Civil Code; Hernaez vs. Kao, 17 SCRA

48
296 1966; 6 Padilla, Civil Code Annotated, 7th ed., 1987, p. 711; 3
Aquino, Civil Code, 1990 ed., p. 463) . . ."
The Court further declared that "(t)he real office of the equitable
norm of estoppel is limited to supply[ing] deficiency in the law,
but it should not supplant positive law."110 (Emphasis supplied.)
Similarly, in Ramos v. Central Bank of the Philippines,111 this
Court berated the government for reneging on its representations
and urged it to keep its word, viz:
Even in the absence of contract, the record plainly shows that the
CB [Central Bank] made express representations to petitioners
herein that it would support the OBM [Overseas Bank of Manila],
and avoid its liquidation if the petitioners would execute (a) the
Voting Trust Agreement turning over the management of OBM to
the CB or its nominees, and (b) mortgage or assign their
properties to the Central Bank to cover the overdraft balance of
OBM. The petitioners having complied with these conditions and
parted with value to the profit of the CB (which thus acquired
additional security for its own advances), the CB may not now
renege on its representations and liquidate the OBM, to the
detriment of its stockholders, depositors and other creditors,
under the rule of promissory estoppel (19 Am. Jur., pages 657658; 28 Am. Jur. 2d, 656-657; Ed. Note, 115 ALR, 157).
"The broad general rule to the effect that a promise to do or not to
do something in the future does not work an estoppel must be
qualified, since there are numerous cases in which an estoppel
has been predicated on promises or assurances as to future
conduct. The doctrine of promissory estoppel is by no means
new, although the name has been adopted only in comparatively
recent years. According to that doctrine, an estoppel may arise
from the making of a promise even though without consideration,
if it was intended that the promise should be relied upon and in
fact it was relied upon, and if a refusal to enforce it would be
virtually to sanction the perpetration of fraud or would result in
other injustice. In this respect, the reliance by the promises is
generally evidenced by action or forbearance on his part, and the
idea has been expressed that such action or forbearance would
reasonably have been expected by the promisor. Mere omission
by the promisee to do whatever the promisor promised to do has
been held insufficient forbearance to give rise to a promissory
estoppel." (19 Am. Jur., loc. cit.)
The exception established in the foregoing cases is particularly
appropriate presently since the "indirect" sale of PLDT common
shares to foreign investors partook of a propriety business
transaction of the government which was not undertaken as an
incident to any of its governmental functions. Accordingly, the
government, by concluding the sale, has descended to the level of
an ordinary citizen and stripped itself of the vestiges of immunity
that is available in the performance of governmental acts. 112
Ergo, the government is vulnerable to, and cannot hold off, the
application of the principle of estoppel that the foreign investors
can very well invoke in case they are compelled to divest the
voting shares they have previously acquired through the
inducement of no less the government. In other words, the
government is precluded from penalizing these alien investors for
an act performed upon its guarantee, through its facilities, and
with its imprimatur.
Under the "fair and equitable treatment" clause of our
bilateral
investment treaties and fair trade agreements, foreign
investors
have the right to rely on the same legal framework
existing at the
time they made their investments
Not only is the government put in estoppel by its acts and
representations during the sale of the PTIC shares to MPAH, it is
likewise bound by its guarantees in the Bilateral Investment
Treaties (BITs) and Free Trade Agreements (FTAs) with other
countries.

To date, the Philippines has concluded numerous BITs and FTAs to

encourage and facilitate foreign direct investments in the country.
These BITs and FTAs invariably contain guarantees calculated to
ensure the safety and stability of these foreign investments.
Foremost of these is the commitment to give fair and equitable
treatment (FET) to the foreign investors and investments in the
country.
Take for instance the BIT concluded between the Philippines and
China,113 Article 3(1) thereof provides that "investments and
activities associated with such investments of investors of either
Contracting Party shall be accorded equitable treatment and
shall enjoy protection in the territory of the other Contracting
Party."114 The same assurance is in the Agreement on Investment
of the Framework Agreement on Comprehensive Economic
Cooperation Between the Association of Southeast Asian Nations
and the Peoples Republic of China (ASEAN-China Investment
Agreement)115 where the Philippines assured Chinese investors
that the country "shall accord to [them] fair and equitable
treatment and full protection and security." 116 In the same
manner, the Philippines agreed to "accord investments [made by
Japanese investors] treatment in accordance with international
law, including fair and equitable treatment and full protection
and security"117 in the Agreement between the Republic of the
Philippines and Japan for Economic Partnership (JPEPA). 118
Similar provisions are found in the ASEAN Comprehensive
Investment Agreement (ACIA)119 and the BITs concluded by the
Philippines with, among others, the Argentine
Republic,120 Australia,121 Austria,122Bangladesh,123 Belgium,124 Camb
odia,125 Canada,126 Chile,127 the Czech
Republic,128 Denmark,129 Finland,130France,131 Germany,132 India,133 I
ndonesia,134 Iran,135 Italy,136 Mongolia,137 Myanmar,138 Netherlands,1
39
Pakistan,140 Portuguese Republic,141 Romania,142 Russia,143 Saudi
Arabia,144 Spain,145 Sweden,146Switzerland,147 Thailand,148 Turkey,149
United Kingdom,150 and Vietnam.151
Explaining the FET as a standard concordant with the rule of law,
Professor Vandevelde wrote that it requires the host county to
treat foreign investments with consistency, security, nondiscrimination and reasonableness:
The thesis is that the awards issued to date implicitly have
interpreted the fair and equitable treatment standard as requiring
treatment in accordance with the concept of the rule of law. That
is, the concept of legality is the unifying theory behind the
fair and equitable treatment standard.
xxxx
Thus, international arbitral awards interpreting the fair and
equitable treatment standard have incorporated the substantive
and procedural principles of the rule of law into that
standard. The fair and equitable treatment standard in BITs
has been interpreted as requiring that covered investment
or investors receive treatment that is reasonable,
consistent, non-discriminatory, transparent, and in
accordance with due process. As will be seen, these principles
explain virtually all of the awards applying the fair and equitable
treatment standard. No award is inconsistent with this theory of
the standard.
Understanding fair and equitable treatment as legality is
consistent with the purposes of the BITs. BITs essentially are
instruments that impose legal restraints on the treatment of
covered investments and investors by host states. The very
essence of a BIT is a partial subordination of the sovereign's
power to the legal constraints of the treaty. Further, individual BIT
provisions are themselves a reflection of the principles of the rule
of law. (Emphasis and underscoring supplied.) 152
On the requirement of consistency, the International Centre for
the Settlement of Investment Disputes (ICSID) explained
in Tecnicas Medioambientales Tecmed S.A. v. The united
Mexican States153 that the host country must maintain a

49
stable and predictable legal and business environment to
accord a fair and equitable treatment to foreign investors.
153. The Arbitral Tribunal finds that the commitment of fair
and equitable treatment included in Article 4(1) of the
Agreement is an expression and part of the bona
fide principle recognized in international law, although bad
faith from the State is not required for its violation:

categorically represented that Japanese investors entry into the

Philippine telecommunications industry, specifically corporations
offering "voice telephone services," is subject to only the following
requirements and conditions:
A. Franchise from Congress of the Philippines
B. Certificate of Public Convenience and Necessity
(CPCN) from the National Telecommunications
Commission

To the modern eye, what is unfair or inequitable need not equate

with the outrageous or the egregious. In particular, a State may
treat foreign investment unfairly and inequitably without
necessarily acting in bad faith.
154. The Arbitral Tribunal considers that this provision of the
Agreement, in light of the good faith principle established by
international law, requires the Contracting Parties to provide
to international investments treatment that does not
affect the basic expectations that were taken into account
by the foreign investor to make the investment. The
foreign investor expects the host State to act in a
consistent manner, free from ambiguity and totally
transparently in its relations with the foreign investor, so
that it may know beforehand any and all rules and
regulations that will govern its investments, as well as the
goals of the relevant policies and administrative practices
or directives, to be able to plan its investment and comply
with such regulations. Any and all State actions conforming to
such criteria should relate not only to the guidelines, directives or
requirements issued, or the resolutions approved thereunder, but
also to the goals underlying such regulations. The foreign
investor also expects the host State to act consistently,
i.e. without arbitrarily revoking any preexisting decisions
or permits issued by the State that were relied upon by
the investor to assume its commitments as well as to plan
and launch its commercial and business activities. The
investor also expects the State to use the legal
instruments that govern the actions of the investor or the
investment in conformity with the function usually
assigned to such instruments, and not to deprive the
investor of its investment without the required
compensation. In fact, failure by the host State to comply with
such pattern of conduct with respect to the foreign investor or its
investments affects the investors ability to measure the
treatment and protection awarded by the host State and to
determine whether the actions of the host State conform to the
fair and equitable treatment principle. Therefore, compliance by
the host State with such pattern of conduct is closely
related to the above-mentioned principle, to the actual
chances of enforcing such principle, and to excluding the
possibility that state action be characterized as arbitrary;
i.e. as presenting insufficiencies that would be recognized "by
any reasonable and impartial man," or, although not in violation of
specific regulations, as being contrary to the law because:
...(it) shocks, or at least surprises, a sense of juridical propriety.
(Emphasis and underscoring supplied added.)
The Philippines, therefore, cannot, without so much as a
notice of policy shift, alter and change the legal and
business environment in which the foreign investments in
the country were made in the first place. These investors
obviously made the decision to come in after studying the
countrys legal framework-its restrictions and incentivesand so,
as a matter of fairness, they must be accorded the right to expect
that the same legal climate and the same substantive set of rules
will remain during the period of their investments.
The representation that foreigners can invest up to 40% of the
entirety of the total stockholdings, and not just the voting shares,
of a public utility corporation is an implied covenant that the
Philippines cannot renege without violating the FET guarantee.
Especially in this case where the Philippines made specific
commitments to countries like Japan and China that their
investing nationals can own up to 40% of the equity of a public
utility like a telecommunications corporation. In the table
contained in Schedule 1(B), Annex 6 of the JPEPA, the Philippines

C. Foreign equity is permitted up to 40 percent.

D. x x x154 (Emphasis supplied.)
The same representation is made in the Philippines Schedule of
Specific Commitments appended to the ASEAN-China Agreement
on Trade in Services.155
Further, as previously pointed out, it was the Philippine
government that pushed for and approved the sale of the 111,415
PTIC shares to MPAH, thereby indirectly transferring the ownership
of 6.3 percent of the outstanding common shares of PLDT, to a
foreign firm and so increasing the foreign voting shareholding in
PLDT. Hence, the presence of good faith may not be convincingly
argued in favour of the Philippine government in a suit for
violation of its FET guarantee.
In fact, it has been held that a bona fide change in policy by a
branch of government does not excuse compliance with the FET
obligations. In Occidental Exploration and Production
Company (OEPC) v. the Republic of Ecuador,156 the United
Nations Commission on International Trade Law (UNCITRAL) ruled
that Ecuador violated the US/Ecuador BIT by denying OEPC fair
and equitable treatment when it failed to provide a predictable
framework for its investment planning. Ruling thus, the tribunal
cited Ecuadors change in tax law and its tax authoritys
unsatisfactory and vague response to OEPCs consulta, viz:
183. x x x The stability of the legal and business framework is
thus an essential element of fair and equitable treatment.
184. The tribunal must note in this context that the
framework under which the investment was made and
operates has been changed in an important manner by
actions adopted by [the Ecuadorian tax authority]. The
clarifications that OEPC sought on the applicability of VAT by
means of "consulta" made to [the Ecuadorian tax authority]
received a wholly unsatisfactory and thoroughly vague
answer. The tax law was changed without providing any
clarity abut its meaning and extend and the practice and
regulations were also inconsistent with such changes.
185. Various arbitral tribunals have recently insisted on the need
for this stability. The tribunal inMetalcad held that the Respondent
"failed to ensure a transparent and predictable framework for
Metalcads business planning and investment. The totality of
these circumstances demonstrate a lack of orderly process and
timely disposition in relation to an investor of a Party acting in the
expectation that it would be treated fairly and justly" x x x
186. It is quite clear from the record of this case and from the
events discussed in this Final Award that such requirements were
not met by Ecuador. Moreover, this is an objective
requirement that does not depend on whether the
Respondent has proceeded in good faith or not.
187. The Tribunal accordingly holds that the Respondent has
breached its obligations to accord fair and equitable treatment
under Article II (3)
(a) of the Treaty. x x x
xxxx

50
191. The relevant question for international law in this discussion
is not whether there is an obligation to refund VAT, which is the
point on which the parties have argued most intensely, but
rather whether the legal and business framework meets
the requirements of stability and predictability under
international law. It was earlier concluded that there is not a
VAT refund obligation under international law, except in the
specific case of the Andean Community Law, which provides for
the option of either compensation or refund, but there is
certainly an obligation not to alter the legal and business
environment in which the investment has been made. In
this case it is the latter question that triggers a treatment
that is not fair and equitable. (Emphasis supplied.)
To maintain the FET guarantee contained in the various BITs and
FTAs concluded by the country and avert a deluge of investor suits
before the ICSID, the UNCITRAL or other fora, any decision of
this court that tends to drastically alter the foreign
investors basic expectations when they made their
investments, taking into account the consistent SEC Opinions
and the executive and legislative branches Specific
Commitments, must be applied prospectively.
This Court cannot turn oblivious to the fact that if We diverge from
the prospectivity rule and implement the resolution on the present
issue immediately and, without giving due deference to the
foreign investors rights to due process and the equal protection
of the laws, compel the foreign stockholders to divest their voting
shares against their wishes at prices lower than the acquisition
costs, these foreign investors may very well shy away from
Philippine stocks and avoid investing in the Philippines. Not to
mention, the validity of the franchise granted to PLDT and
similarly situated public utilities will be put under a cloud of doubt.
Such uncertainty and the unfair treatment of foreign investors
who merely relied in good faith on the policies, rules and
regulations of the PSE and the SEC will likely upset the volatile
capital market as it would have a negative impact on the value of
these companies that will discourage investors, both local and
foreign, from purchasing their shares. In which case, foreign direct
investments (FDIs) in the country (which already lags behind our
Asian neighbors) will take a nosedive. Indeed, it cannot be
gainsaid that a sudden and unexpected deviation from the
accepted and consistent construction of the term "capital" will
create a domino effect that may cripple our capital markets.
Therefore, in applying the new comprehensive interpretation of
Sec. 11, Art. XII of the Constitution, the current voting shares of
the foreign investors in public utilities in excess of the 40% capital
shall be maintained and honored. Otherwise the due process
guarantee under the Constitution and the long established
precepts of justice, equity and fair play would be impaired.
Prospective application of new laws or changes in
interpretation
The June 28, 2011 Decision construed "capital" in the first
sentence of Section 11, Article XII of the Constitution as "full
beneficial ownership of 60 percent of the outstanding capital
stocks coupled with 60 percent of the voting rights." In the
Resolution denying the motions for reconsideration, it further
amplified the scope of the word "capital" by clarifying that "the
60- 40 ownership requirement in favor of Filipino citizens must
apply separately to each class of shares whether common,
preferred, preferred voting or any other class of shares." This is a
radical departure from the clear intent of the framers of the 1987
Constitution and the long established interpretation ascribed to
said word by the Securities and Exchange Commissionthat
"capital" in the first sentence of Sec. 11, Art. XII means capital
stock or BOTH voting and non-voting shares. The recent
interpretation enunciated in the June 28, 2011 and in the
Resolution at hand can only be applied PROSPECTIVELY. It cannot
be applied retroactively to corporations such as PLDT and its
investors such as its shareholders who have all along relied on the
consistent reading of "capital" by SEC and the Philippine
government to apply it to a public utilitys total capital stock.

Lex prospicit, non respicit "laws have no retroactive effect unless

the contrary is provided."157 As a necessary corollary, judicial
rulings should not be accorded retroactive effect since "judicial
decisions applying or interpreting the laws or the Constitution
shall form part of the legal system of the Philippines." 158 It has
been the constant holding of the Court that a judicial decision
setting a new doctrine or principle ("precedent-setting decision")
shall not retroactively apply to parties who relied in good faith on
the principles and doctrines standing prior to the promulgation
thereof ("old principles/doctrines"), especially when a retroactive
application of the precedent-setting decision would impair the
rights and obligations of the parties. So it is that as early as 1940,
the Court has refused to apply the new doctrine of jus sanguinis to
persons who relied in good faith on the principle of jus
soli adopted inRoa v. Collector of Customs.159 Similarly, in Co
v. Court of Appeals,160 the Court sustained petitioner Cos bona
fide reliance on the Minister of Justices Opinion dated December
15, 1981 that the delivery of a "rubber" check as guarantee for an
obligation is not a punishable offense despite the Courts
pronouncement on September 21, 1987 in Que v.
People that Batas Pambansa Blg. (BP) 22 nonetheless covers a
check issued to guarantee the payment of an obligation. In so
ruling, the Court quoted various decisions applying precedentsetting decisions prospectively. We held:
Judicial decisions applying or interpreting the laws or the
Constitution shall form a part of the legal system of the
Philippines," according to Article 8 of the Civil Code. "Laws
shall have no retroactive effect, unless the contrary is
provided," declares Article 4 of the same Code, a declaration
that is echoed by Article 22 of the Revised Penal Code: "Penal laws
shall have a retroactive effect insofar as they favor the person
guilty of a felony, who is not a habitual criminal . . ."
xxxx
The principle of prospectivity has also been applied to
judicial decisions which, "although in themselves not laws,
are nevertheless evidence of what the laws mean, . . .
(this being) the reason why under Article 8 of the New
Civil Code, 'Judicial decisions applying or interpreting the
laws or the Constitution shall form a part of the legal
system . . .' "
So did this Court hold, for example, in Peo. v. Jabinal, 55 SCRA
607, 611:
xxxx
So, too, did the Court rule in Spouses Gauvain and Bernardita
Benzonan v. Court of Appeals, et al.(G.R. No. 97973)
and Development Bank of the Philippines v. Court of Appeals, et
al. (G.R. No 97998), Jan. 27, 1992, 205 SCRA 515, 527-528:
xxxx
A compelling rationalization of the prospectivity principle of
judicial decisions is well set forth in the oft-cited case of Chicot
County Drainage Dist. v. Baxter States Bank, 308 US 371, 374 1940.
The Chicot doctrine advocates the imperative necessity to
take account of the actual existence of a statute prior to
its nullification, as an operative fact negating acceptance
of "a principle of absolute retroactive invalidity."
xxxx
Much earlier, in De Agbayani v. PNB, 38 SCRA 429 xxx the Court
made substantially the same observations
xxxx
Again, treating of the effect that should be given to its decision
in Olaguer v. Military Commission No 34, declaring invalid
criminal proceedings conducted during the martial law regime
against civilians, which had resulted in the conviction and

51
incarceration of numerous persons this Court, in Tan vs. Barrios,
190 SCRA 686, at p. 700, ruled as follows:
"In the interest of justice and consistency, we hold that
Olaguer should, in principle, be applied prospectively only
to future cases and cases still ongoing or not yet final
when that decision was promulgated. x x x"
It would seem, then, that the weight of authority is decidedly in
favor of the proposition that the Courts decision of
September 21, 1987 in Que v. People, 154 SCRA 160 (1987)
i.e., that a check issued merely to guarantee the performance of
an obligation is nevertheless covered by B.P. Blg. 22 should
not be given retrospective effect to the prejudice of the
petitioner and other persons similarly situated, who relied
on the official opinion of the Minister of Justice that such a
check did not fall within the scope of B.P. Blg. 22. (Emphasis
supplied).
Indeed, pursuant to the doctrine of prospectivity, new doctrines
and principles must be applied only to acts and events
transpiring after the precedent-setting judicial decision, and not
to those that occurred and were caused by persons who relied on
the "old" doctrine and acted on the faith thereof.
Not content with changing the rule in the middle of the game, the
majority, in the June 28, 2011 Decision, went a little further by
ordering respondent SEC Chairperson "to apply this definition of
the term capital in determining the extent of allowable foreign
ownership in respondent Philippine Long Distance Telephone
Company, and if there is a violation of Section 11, Article XII of the
Constitution, to impose the appropriate sanctions under the law."
This may be viewed as unreasonable and arbitrary. The Court in
the challenged June 28, 2011 Decision already made a finding
that foreigners hold 64.27% of the total number of PLDT common
shares while Filipinos hold only 35.73%.161 In this factual setting,
PLDT will, as clear as day, face sanctions since its present capital
structure is presently in breach of the rule on the 40% cap on
foreign ownership of voting shares even without need of a SEC
investigation.
In answering the SECs query regarding the proper period of
application and imposition of appropriate sanctions against PLDT,
Justice Carpio tersely stated that "once the 28 June 2011 Decision
becomes final, the SEC shall impose the appropriate sanctions
only if it finds after due hearing that, at the start of the
administrative cases or investigation, there is an existing violation
of Sec. 11, Art. XII of the Constitution." 162 As basis therefor, Justice
Carpio cited Halili v. Court of Appeals163 and United Church Board
for World Ministries (UCBWM) v. Sebastian.164However, these
cases do not provide a jurisprudential foundation to this mandate
that may very well deprive PLDT foreign shareholders of their
voting shares. In fact, UCBWM v. Sebastian respected the
voluntary transfer in a will by an American of his shares of stocks
in a land-holding corporation. In the same manner, Halili v. Court
of Appeals sustained as valid the waiver by an alien of her right of
inheritance over a piece of land in favour of her son. Nowhere in
these cases did this Court order the involuntary dispossession of
corporate stocks by alien stockholders. At most, these two cases
only recognized the principle validating the transfer of land to an
alien who, after the transfer, subsequently becomes a Philippine
citizen or transfers the land to a Filipino citizen. They do not
encompass the situation that will eventually ensue after the
investigation conducted by the SEC in accordance with the June
28, 2011 and the present resolution. They do not justify the
compulsory deprivation of voting shares in public utility
corporations from foreign stockholders who had legally acquired
these stocks in the first instance.
The abrupt application of the construction of Sec. 11, Art. XII of
the Constitution to foreigners currently holding voting shares in a
public utility corporation is not only constitutionally problematic; it
is likewise replete with pragmatic difficulties that could hinder the
real-world translation of this Courts Resolution. Although
apparently benevolent, the majoritys concession to allow "public
utilities that fail to comply with the nationality requirement under
Section 11, Article XII and the FIA [to] cure their deficiencies

prior to the start of the administrative case or

investigation"165 could indirectly occasion a compulsory
deprivation of the public utilities foreign stockholders of their
voting shares. Certainly, these public utilities must immediately
pare down their foreign-owned voting shares to avoid the
imposable sanctions. This holds true especially for PLDT whose
64.27% of its common voting shares are foreign-subscribed and
held. PLDT is, therefore, forced to immediately deprive, or at the
very least, dilute the property rights of their foreign stockholders
before the commencement of the administrative proceedings,
which would be a mere farce considering the transparency of the
public utility from the onset.
Even with the chance granted to the public utilities to remedy
their supposed deficiency, the nebulous time-frame given by the
majority, i.e., "prior to the start of the administrative case or
investigation,"166 may very well prove too short for these public
utilities to raise the necessary amount of money to increase the
number of their authorized capital stock in order to dilute the
property rights of their foreign stockholders holding voting
shares.167 Similarly, if they induce their foreign stockholders to
transfer the excess voting shares to qualified Philippine nationals,
this period before the filing of the administrative may not be
sufficient for these stockholders to find Philippine nationals willing
to purchase these voting shares at the market price. This Court
cannot ignore the fact that the voting shares of Philippine public
utilities like PLDT are listed and sold at large in foreign capital
markets. Hence, foreigners who have previously purchased their
voting shares in these markets will not have a ready Philippine
market to immediately transfer their shares. More than likely,
these foreign stockholders will be forced to sell their voting shares
at a loss to the few Philippine nationals with money to spare, or
the public utility itself will be constrained to acquire these voting
shares to the prejudice of its retained earnings.168
Whatever means the public utilities choose to employ in order to
cut down the foreign stockholdings of voting shares, it is
necessary to determine who among the foreign stockholders of
these public utilities must bear the burden of unloading the voting
shares or the dilution of their property rights. In a situation like
this, there is at present no settled rule on who should be deprived
of their property rights. Will it be the foreign stockholders who
bought the latest issuances? Or the first foreign stockholders of
the public utility corporations? This issue cannot be realistically
settled within the time-frame given by the majority without raising
more disputes. With these loose ends, the majority cannot
penalize the public utilities if they should fail to comply with the
directive of complying with the "nationality requirement under
Section 11, Article XII and the FIA" within the unreasonably
nebulous and limited period "prior to the start of the
administrative case or investigation."169
In the light of the new pronouncement of the Court that public
utilities that fail to comply with the nationality requirement under
Section 11, Article XII of the Constitution CAN CURE THEIR
DEFICIENCIES prior to the start of the administrative case or
investigation, I submit that affected companies like PLDT should
be given reasonable time to undertake the necessary measures to
make their respective capital structure compliant, and the SEC, as
the regulatory authority, should come up with the appropriate
guidelines on the process and supervise the same. SEC should
likewise adopt the necessary rules and regulations to implement
the prospective compliance by all affected companies with the
new ruling regarding the interpretation of the provision in
question. Such rules and regulations must respect the due process
rights of all affected corporations and define a reasonable period
for them to comply with the June 28, 2011 Decision.
A final note.
Year in and year out, the governments trade managers attend
economic summits courting businessmen to invest in the country,
doubtless promising them a playing field where the rules are
friendly as they are predictable. So it would appear odd if a
branch of government would make business life complicated for
investors who are already here. Indeed, stability and predictability
are the key pillars on which our legal system must be founded and

52
run to guarantee a business environment conducive to the
countrys sustainable economic growth. Hence, it behoves this
Court to respect the basic expectations taken into account by the
investors at the time they made the investments. In other words,
it is the duty of this Court to stand guard against any untoward
change of the rules in the middle of the game.
I, therefore, vote to GRANT the motions for reconsideration and
accordingly REVERSE and SET ASIDE the June 28, 2011
Decision. The Court should declare that the word "capital" in the
first sentence of Section 11, Article Xll of the 1987 Constitution
means the entire capital stock or both voting and non-voting
shares.
Since the June 28, 2011 Decision was however sustained, I submit
that said decision should take effect only on the date of its finality
and should be applied prospectively.
PLDT should be given time to umkrtake the nec~ssary meast1res
to make its capital structure compliant, and th~ Securities and
Exchange Commission should formulalc appropriate guidelines
and supervise the process. Said Commission should also adopt
ruks and regulations to implement the prospective compliance by
all affected companies with the new ruling on the interpretation of
Sec. 11, Art. XII of the Constitution. Such rules and regulations
must respect the due process rights of all affected corporations
and provide a reasonable period for them to com pi y with the
June 28, 2011 Decision. The rights of foreigners over the voting
shares they presently own in excess of 40% of said shares should,
in the meantime, be respected. PRESBITERO J. VELASCO, JR.
Associate Justice

53
G.R. No. 195580

April 21, 2014

NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO

MINING AND DEVELOPMENT, INC., and MCARTHUR MINING,
INC., Petitioners,
vs.
REDMONT CONSOLIDATED MINES CORP., Respondent.
DECISION
VELASCO, JR., J.:
Before this Court is a Petition for Review on Certiorari under Rule
45 filed by Narra Nickel and Mining Development Corp. (Narra),
Tesoro Mining and Development, Inc. (Tesoro), and McArthur
Mining Inc. (McArthur), which seeks to reverse the October 1,
2010 Decision1 and the February 15, 2011 Resolution of the Court
of Appeals (CA).
The Facts
Sometime in December 2006, respondent Redmont Consolidated
Mines Corp. (Redmont), a domestic corporation organized and
existing under Philippine laws, took interest in mining and
exploring certain areas of the province of Palawan. After inquiring
with the Department of Environment and Natural Resources
(DENR), it learned that the areas where it wanted to undertake
exploration and mining activities where already covered by
Mineral Production Sharing Agreement (MPSA) applications of
petitioners Narra, Tesoro and McArthur.
Petitioner McArthur, through its predecessor-in-interest Sara Marie
Mining, Inc. (SMMI), filed an application for an MPSA and
Exploration Permit (EP) with the Mines and Geo-Sciences Bureau
(MGB), Region IV-B, Office of the Department of Environment and
Natural Resources (DENR).
Subsequently, SMMI was issued MPSA-AMA-IVB-153 covering an
area of over 1,782 hectares in Barangay Sumbiling, Municipality of
Bataraza, Province of Palawan and EPA-IVB-44 which includes an
area of 3,720 hectares in Barangay Malatagao, Bataraza, Palawan.
The MPSA and EP were then transferred to Madridejos Mining
Corporation (MMC) and, on November 6, 2006, assigned to
petitioner McArthur.2
Petitioner Narra acquired its MPSA from Alpha Resources and
Development Corporation and Patricia Louise Mining &
Development Corporation (PLMDC) which previously filed an
application for an MPSA with the MGB, Region IV-B, DENR on
January 6, 1992. Through the said application, the DENR issued
MPSA-IV-1-12 covering an area of 3.277 hectares in barangays
Calategas and San Isidro, Municipality of Narra, Palawan.
Subsequently, PLMDC conveyed, transferred and/or assigned its
rights and interests over the MPSA application in favor of Narra.
Another MPSA application of SMMI was filed with the DENR Region
IV-B, labeled as MPSA-AMA-IVB-154 (formerly EPA-IVB-47) over
3,402 hectares in Barangays Malinao and Princesa Urduja,
Municipality of Narra, Province of Palawan. SMMI subsequently
conveyed, transferred and assigned its rights and interest over
the said MPSA application to Tesoro.
On January 2, 2007, Redmont filed before the Panel of Arbitrators
(POA) of the DENR three (3) separate petitions for the denial of
petitioners applications for MPSA designated as AMA-IVB-153,
AMA-IVB-154 and MPSA IV-1-12.
In the petitions, Redmont alleged that at least 60% of the capital
stock of McArthur, Tesoro and Narra are owned and controlled by
MBMI Resources, Inc. (MBMI), a 100% Canadian corporation.
Redmont reasoned that since MBMI is a considerable stockholder
of petitioners, it was the driving force behind petitioners filing of
the MPSAs over the areas covered by applications since it knows
that it can only participate in mining activities through

corporations which are deemed Filipino citizens. Redmont argued

that given that petitioners capital stocks were mostly owned by
MBMI, they were likewise disqualified from engaging in mining
activities through MPSAs, which are reserved only for Filipino
citizens.
In their Answers, petitioners averred that they were qualified
persons under Section 3(aq) of Republic Act No. (RA) 7942 or the
Philippine Mining Act of 1995 which provided:
Sec. 3 Definition of Terms. As used in and for purposes of this Act,
the following terms, whether in singular or plural, shall mean:
xxxx
(aq) "Qualified person" means any citizen of the Philippines with
capacity to contract, or a corporation, partnership, association, or
cooperative organized or authorized for the purpose of engaging
in mining, with technical and financial capability to undertake
mineral resources development and duly registered in accordance
with law at least sixty per cent (60%) of the capital of which is
owned by citizens of the Philippines: Provided, That a legally
organized foreign-owned corporation shall be deemed a qualified
person for purposes of granting an exploration permit, financial or
technical assistance agreement or mineral processing permit.
Additionally, they stated that their nationality as applicants is
immaterial because they also applied for Financial or Technical
Assistance Agreements (FTAA) denominated as AFTA-IVB-09 for
McArthur, AFTA-IVB-08 for Tesoro and AFTA-IVB-07 for Narra, which
are granted to foreign-owned corporations. Nevertheless, they
claimed that the issue on nationality should not be raised since
McArthur, Tesoro and Narra are in fact Philippine Nationals as 60%
of their capital is owned by citizens of the Philippines. They
asserted that though MBMI owns 40% of the shares of PLMC
(which owns 5,997 shares of Narra),3 40% of the shares of MMC
(which owns 5,997 shares of McArthur)4and 40% of the shares of
SLMC (which, in turn, owns 5,997 shares of Tesoro), 5 the shares of
MBMI will not make it the owner of at least 60% of the capital
stock of each of petitioners. They added that the best tool used in
determining the nationality of a corporation is the "control test,"
embodied in Sec. 3 of RA 7042 or the Foreign Investments Act of
1991. They also claimed that the POA of DENR did not have
jurisdiction over the issues in Redmonts petition since they are
not enumerated in Sec. 77 of RA 7942. Finally, they stressed that
Redmont has no personality to sue them because it has no
pending claim or application over the areas applied for by
petitioners.
On December 14, 2007, the POA issued a Resolution disqualifying
petitioners from gaining MPSAs. It held:
[I]t is clearly established that respondents are not qualified
applicants to engage in mining activities. On the other hand,
[Redmont] having filed its own applications for an EPA over the
areas earlier covered by the MPSA application of respondents may
be considered if and when they are qualified under the law. The
violation of the requirements for the issuance and/or grant of
permits over mining areas is clearly established thus, there is
reason to believe that the cancellation and/or revocation of
permits already issued under the premises is in order and open
the areas covered to other qualified applicants.
xxxx
WHEREFORE, the Panel of Arbitrators finds the Respondents,
McArthur Mining Inc., Tesoro Mining and Development, Inc., and
Narra Nickel Mining and Development Corp. as, DISQUALIFIED for
being considered as Foreign Corporations. Their Mineral
Production Sharing Agreement (MPSA) are hereby x x x DECLARED
NULL AND VOID.6
The POA considered petitioners as foreign corporations being
"effectively controlled" by MBMI, a 100% Canadian company and

54
declared their MPSAs null and void. In the same Resolution, it
gave due course to Redmonts EPAs. Thereafter, on February 7,
2008, the POA issued an Order7 denying the Motion for
Reconsideration filed by petitioners.
Aggrieved by the Resolution and Order of the POA, McArthur and
Tesoro filed a joint Notice of Appeal8 and Memorandum of
Appeal9 with the Mines Adjudication Board (MAB) while Narra
separately filed its Notice of Appeal10 and Memorandum of
Appeal.11
In their respective memorandum, petitioners emphasized that
they are qualified persons under the law. Also, through a letter,
they informed the MAB that they had their individual MPSA
applications converted to FTAAs. McArthurs FTAA was
denominated as AFTA-IVB-0912 on May 2007, while Tesoros MPSA
application was converted to AFTA-IVB-0813 on May 28, 2007, and
Narras FTAA was converted to AFTA-IVB-0714 on March 30, 2006.
Pending the resolution of the appeal filed by petitioners with the
MAB, Redmont filed a Complaint15 with the Securities and
Exchange Commission (SEC), seeking the revocation of the
certificates for registration of petitioners on the ground that they
are foreign-owned or controlled corporations engaged in mining in
violation of Philippine laws. Thereafter, Redmont filed on
September 1, 2008 a Manifestation and Motion to Suspend
Proceeding before the MAB praying for the suspension of the
proceedings on the appeals filed by McArthur, Tesoro and Narra.
Subsequently, on September 8, 2008, Redmont filed before the
Regional Trial Court of Quezon City, Branch 92 (RTC) a
Complaint16 for injunction with application for issuance of a
temporary restraining order (TRO) and/or writ of preliminary
injunction, docketed as Civil Case No. 08-63379. Redmont prayed
for the deferral of the MAB proceedings pending the resolution of
the Complaint before the SEC.
But before the RTC can resolve Redmonts Complaint and
applications for injunctive reliefs, the MAB issued an Order on
September 10, 2008, finding the appeal meritorious. It held:
WHEREFORE, in view of the foregoing, the Mines Adjudication
Board hereby REVERSES and SETS ASIDE the Resolution dated 14
December 2007 of the Panel of Arbitrators of Region IV-B
(MIMAROPA) in POA-DENR Case Nos. 2001-01, 2007-02 and 200703, and its Order dated 07 February 2008 denying the Motions for
Reconsideration of the Appellants. The Petition filed by Redmont
Consolidated Mines Corporation on 02 January 2007 is hereby
ordered DISMISSED.17
Belatedly, on September 16, 2008, the RTC issued an
Order18 granting Redmonts application for a TRO and setting the
case for hearing the prayer for the issuance of a writ of
preliminary injunction on September 19, 2008.
Meanwhile, on September 22, 2008, Redmont filed a Motion for
Reconsideration19 of the September 10, 2008 Order of the MAB.
Subsequently, it filed a Supplemental Motion for
Reconsideration20 on September 29, 2008.
Before the MAB could resolve Redmonts Motion for
Reconsideration and Supplemental Motion for Reconsideration,
Redmont filed before the RTC a Supplemental Complaint 21 in Civil
Case No. 08-63379.
On October 6, 2008, the RTC issued an Order22 granting the
issuance of a writ of preliminary injunction enjoining the MAB from
finally disposing of the appeals of petitioners and from resolving
Redmonts Motion for Reconsideration and Supplement Motion for
Reconsideration of the MABs September 10, 2008 Resolution.
On July 1, 2009, however, the MAB issued a second Order denying
Redmonts Motion for Reconsideration and Supplemental Motion
for Reconsideration and resolving the appeals filed by petitioners.

Hence, the petition for review filed by Redmont before the CA,
assailing the Orders issued by the MAB. On October 1, 2010, the
CA rendered a Decision, the dispositive of which reads:
WHEREFORE, the Petition is PARTIALLY GRANTED. The assailed
Orders, dated September 10, 2008 and July 1, 2009 of the Mining
Adjudication Board are reversed and set aside. The findings of the
Panel of Arbitrators of the Department of Environment and Natural
Resources that respondents McArthur, Tesoro and Narra are
foreign corporations is upheld and, therefore, the rejection of their
applications for Mineral Product Sharing Agreement should be
recommended to the Secretary of the DENR.
With respect to the applications of respondents McArthur, Tesoro
and Narra for Financial or Technical Assistance Agreement (FTAA)
or conversion of their MPSA applications to FTAA, the matter for its
rejection or approval is left for determination by the Secretary of
the DENR and the President of the Republic of the Philippines.
SO ORDERED.23
In a Resolution dated February 15, 2011, the CA denied the Motion
for Reconsideration filed by petitioners.
After a careful review of the records, the CA found that there was
doubt as to the nationality of petitioners when it realized that
petitioners had a common major investor, MBMI, a corporation
composed of 100% Canadians. Pursuant to the first sentence of
paragraph 7 of Department of Justice (DOJ) Opinion No. 020,
Series of 2005, adopting the 1967 SEC Rules which implemented
the requirement of the Constitution and other laws pertaining to
the exploitation of natural resources, the CA used the
"grandfather rule" to determine the nationality of petitioners. It
provided:
Shares belonging to corporations or partnerships at least 60% of
the capital of which is owned by Filipino citizens shall be
considered as of Philippine nationality, but if the percentage of
Filipino ownership in the corporation or partnership is less than
60%, only the number of shares corresponding to such percentage
shall be counted as of Philippine nationality. Thus, if 100,000
shares are registered in the name of a corporation or partnership
at least 60% of the capital stock or capital, respectively, of which
belong to Filipino citizens, all of the shares shall be recorded as
owned by Filipinos. But if less than 60%, or say, 50% of the capital
stock or capital of the corporation or partnership, respectively,
belongs to Filipino citizens, only 50,000 shares shall be recorded
as belonging to aliens.24 (emphasis supplied)
In determining the nationality of petitioners, the CA looked into
their corporate structures and their corresponding common
shareholders. Using the grandfather rule, the CA discovered that
MBMI in effect owned majority of the common stocks of the
petitioners as well as at least 60% equity interest of other
majority shareholders of petitioners through joint venture
agreements. The CA found that through a "web of corporate
layering, it is clear that one common controlling investor in all
mining corporations involved x x x is MBMI."25 Thus, it concluded
that petitioners McArthur, Tesoro and Narra are also in partnership
with, or privies-in-interest of, MBMI.
Furthermore, the CA viewed the conversion of the MPSA
applications of petitioners into FTAA applications suspicious in
nature and, as a consequence, it recommended the rejection of
petitioners MPSA applications by the Secretary of the DENR.
With regard to the settlement of disputes over rights to mining
areas, the CA pointed out that the POA has jurisdiction over them
and that it also has the power to determine the of nationality of
petitioners as a prerequisite of the Constitution prior the
conferring of rights to "co-production, joint venture or productionsharing agreements" of the state to mining rights. However, it
also stated that the POAs jurisdiction is limited only to the
resolution of the dispute and not on the approval or rejection of
the MPSAs. It stipulated that only the Secretary of the DENR is
vested with the power to approve or reject applications for MPSA.

55
Finally, the CA upheld the findings of the POA in its December 14,
2007 Resolution which considered petitioners McArthur, Tesoro
and Narra as foreign corporations. Nevertheless, the CA
determined that the POAs declaration that the MPSAs of
McArthur, Tesoro and Narra are void is highly improper.

VI.
The Court of Appeals erred when it concluded that the conversion
of the MPSA Applications into FTAA Applications were of
"suspicious nature" as the same is based on mere conjectures and
surmises without any shred of evidence to show the same. 31

While the petition was pending with the CA, Redmont filed with
the Office of the President (OP) a petition dated May 7, 2010
seeking the cancellation of petitioners FTAAs. The OP rendered a
Decision26 on April 6, 2011, wherein it canceled and revoked
petitioners FTAAs for violating and circumventing the
"Constitution x x x[,] the Small Scale Mining Law and
Environmental Compliance Certificate as well as Sections 3 and 8
of the Foreign Investment Act and E.O. 584."27 The OP, in affirming
the cancellation of the issued FTAAs, agreed with Redmont stating
that petitioners committed violations against the abovementioned
laws and failed to submit evidence to negate them. The Decision
further quoted the December 14, 2007 Order of the POA focusing
on the alleged misrepresentation and claims made by petitioners
of being domestic or Filipino corporations and the admitted
continued mining operation of PMDC using their locally secured
Small Scale Mining Permit inside the area earlier applied for an
MPSA application which was eventually transferred to Narra. It
also agreed with the POAs estimation that the filing of the FTAA
applications by petitioners is a clear admission that they are "not
capable of conducting a large scale mining operation and that
they need the financial and technical assistance of a foreign entity
in their operation, that is why they sought the participation of
MBMI Resources, Inc."28 The Decision further quoted:

We find the petition to be without merit.

The filing of the FTAA application on June 15, 2007, during the
pendency of the case only demonstrate the violations and lack of
qualification of the respondent corporations to engage in mining.
The filing of the FTAA application conversion which is allowed
foreign corporation of the earlier MPSA is an admission that
indeed the respondent is not Filipino but rather of foreign
nationality who is disqualified under the laws. Corporate
documents of MBMI Resources, Inc. furnished its stockholders in
their head office in Canada suggest that they are conducting
operation only through their local counterparts.29
The Motion for Reconsideration of the Decision was further denied
by the OP in a Resolution30 dated July 6, 2011. Petitioners then
filed a Petition for Review on Certiorari of the OPs Decision and
Resolution with the CA, docketed as CA-G.R. SP No. 120409. In the
CA Decision dated February 29, 2012, the CA affirmed the
Decision and Resolution of the OP. Thereafter, petitioners
appealed the same CA decision to this Court which is now pending
with a different division.
Thus, the instant petition for review against the October 1, 2010
Decision of the CA. Petitioners put forth the following errors of the
CA:
I.
The Court of Appeals erred when it did not dismiss the case for
mootness despite the fact that the subject matter of the
controversy, the MPSA Applications, have already been converted
into FTAA applications and that the same have already been
granted.
II.
The Court of Appeals erred when it did not dismiss the case for
lack of jurisdiction considering that the Panel of Arbitrators has no
jurisdiction to determine the nationality of Narra, Tesoro and
McArthur.
III.
The Court of Appeals erred when it did not dismiss the case on
account of Redmonts willful forum shopping.
IV.
The Court of Appeals ruling that Narra, Tesoro and McArthur are
foreign corporations based on the "Grandfather Rule" is contrary
to law, particularly the express mandate of the Foreign
Investments Act of 1991, as amended, and the FIA Rules.
V.
The Court of Appeals erred when it applied the exceptions to the
res inter alios acta rule.

This case not moot and academic

The claim of petitioners that the CA erred in not rendering the
instant case as moot is without merit.
Basically, a case is said to be moot and/or academic when it
"ceases to present a justiciable controversy by virtue of
supervening events, so that a declaration thereon would be of no
practical use or value."32 Thus, the courts "generally decline
jurisdiction over the case or dismiss it on the ground of
mootness."33
The "mootness" principle, however, does accept certain
exceptions and the mere raising of an issue of "mootness" will not
deter the courts from trying a case when there is a valid reason to
do so. In David v. Macapagal-Arroyo (David), the Court provided
four instances where courts can decide an otherwise moot case,
thus:
1.) There is a grave violation of the Constitution;
2.) The exceptional character of the situation and
paramount public interest is involved;
3.) When constitutional issue raised requires formulation
of controlling principles to guide the bench, the bar, and
the public; and
4.) The case is capable of repetition yet evading review. 34
All of the exceptions stated above are present in the instant case.
We of this Court note that a grave violation of the Constitution,
specifically Section 2 of Article XII, is being committed by a foreign
corporation right under our countrys nose through a myriad of
corporate layering under different, allegedly, Filipino corporations.
The intricate corporate layering utilized by the Canadian
company, MBMI, is of exceptional character and involves
paramount public interest since it undeniably affects the
exploitation of our Countrys natural resources. The corresponding
actions of petitioners during the lifetime and existence of the
instant case raise questions as what principle is to be applied to
cases with similar issues. No definite ruling on such principle has
been pronounced by the Court; hence, the disposition of the
issues or errors in the instant case will serve as a guide "to the
bench, the bar and the public." 35 Finally, the instant case is
capable of repetition yet evading review, since the Canadian
company, MBMI, can keep on utilizing dummy Filipino corporations
through various schemes of corporate layering and conversion of
applications to skirt the constitutional prohibition against foreign
mining in Philippine soil.
Conversion of MPSA applications to FTAA applications
We shall discuss the first error in conjunction with the sixth error
presented by petitioners since both involve the conversion of
MPSA applications to FTAA applications. Petitioners propound that
the CA erred in ruling against them since the questioned MPSA
applications were already converted into FTAA applications; thus,
the issue on the prohibition relating to MPSA applications of
foreign mining corporations is academic. Also, petitioners would
want us to correct the CAs finding which deemed the
aforementioned conversions of applications as suspicious in
nature, since it is based on mere conjectures and surmises and
not supported with evidence.
We disagree.

56
The CAs analysis of the actions of petitioners after the case was
filed against them by respondent is on point. The changing of
applications by petitioners from one type to another just because
a case was filed against them, in truth, would raise not a few
sceptics eyebrows. What is the reason for such conversion? Did
the said conversion not stem from the case challenging their
citizenship and to have the case dismissed against them for being
"moot"? It is quite obvious that it is petitioners strategy to have
the case dismissed against them for being "moot."
Consider the history of this case and how petitioners responded to
every action done by the court or appropriate government
agency: on January 2, 2007, Redmont filed three separate
petitions for denial of the MPSA applications of petitioners before
the POA. On June 15, 2007, petitioners filed a conversion of their
MPSA applications to FTAAs. The POA, in its December 14, 2007
Resolution, observed this suspect change of applications while the
case was pending before it and held:
The filing of the Financial or Technical Assistance Agreement
application is a clear admission that the respondents are not
capable of conducting a large scale mining operation and that
they need the financial and technical assistance of a foreign entity
in their operation that is why they sought the participation of
MBMI Resources, Inc. The participation of MBMI in the corporation
only proves the fact that it is the Canadian company that will
provide the finances and the resources to operate the mining
areas for the greater benefit and interest of the same and not the
Filipino stockholders who only have a less substantial financial
stake in the corporation.
xxxx

Respondent Redmont, in its Comment dated October 10, 2011,

made known to the Court the fact of the OPs Decision and
Resolution. In their Reply, petitioners chose to ignore the OP
Decision and continued to reuse their old arguments claiming that
they were granted FTAAs and, thus, the case was moot.
Petitioners filed a Manifestation and Submission dated October 19,
2012,40 wherein they asserted that the present petition is moot
since, in a remarkable turn of events, MBMI was able to sell/assign
all its shares/interest in the "holding companies" to DMCI Mining
Corporation (DMCI), a Filipino corporation and, in effect, making
their respective corporations fully-Filipino owned.
Again, it is quite evident that petitioners have been trying to have
this case dismissed for being "moot." Their final act, wherein
MBMI was able to allegedly sell/assign all its shares and interest in
the petitioner "holding companies" to DMCI, only proves that they
were in fact not Filipino corporations from the start. The recent
divesting of interest by MBMI will not change the stand of this
Court with respect to the nationality of petitioners prior the
suspicious change in their corporate structures. The new
documents filed by petitioners are factual evidence that this Court
has no power to verify.
The only thing clear and proved in this Court is the fact that the
OP declared that petitioner corporations have violated several
mining laws and made misrepresentations and falsehood in their
applications for FTAA which lead to the revocation of the said
FTAAs, demonstrating that petitioners are not beyond going
against or around the law using shifty actions and strategies.
Thus, in this instance, we can say that their claim of mootness is
moot in itself because their defense of conversion of MPSAs to
FTAAs has been discredited by the OP Decision.

x x x The filing of the FTAA application on June 15, 2007, during

the pendency of the case only demonstrate the violations and lack
of qualification of the respondent corporations to engage in
mining. The filing of the FTAA application conversion which is
allowed foreign corporation of the earlier MPSA is an admission
that indeed the respondent is not Filipino but rather of foreign
nationality who is disqualified under the laws. Corporate
documents of MBMI Resources, Inc. furnished its stockholders in
their head office in Canada suggest that they are conducting
operation only through their local counterparts.36

Grandfather test

On October 1, 2010, the CA rendered a Decision which partially

granted the petition, reversing and setting aside the September
10, 2008 and July 1, 2009 Orders of the MAB. In the said Decision,
the CA upheld the findings of the POA of the DENR that the herein
petitioners are in fact foreign corporations thus a recommendation
of the rejection of their MPSA applications were recommended to
the Secretary of the DENR. With respect to the FTAA applications
or conversion of the MPSA applications to FTAAs, the CA deferred
the matter for the determination of the Secretary of the DENR and
the President of the Republic of the Philippines.37

Basically, there are two acknowledged tests in determining the

nationality of a corporation: the control test and the grandfather
rule. Paragraph 7 of DOJ Opinion No. 020, Series of 2005, adopting
the 1967 SEC Rules which implemented the requirement of the
Constitution and other laws pertaining to the controlling interests
in enterprises engaged in the exploitation of natural resources
owned by Filipino citizens, provides:

In their Motion for Reconsideration dated October 26, 2010,

petitioners prayed for the dismissal of the petition asserting that
on April 5, 2010, then President Gloria Macapagal-Arroyo signed
and issued in their favor FTAA No. 05-2010-IVB, which rendered
the petition moot and academic. However, the CA, in a Resolution
dated February 15, 2011 denied their motion for being a mere
"rehash of their claims and defenses."38 Standing firm on its
Decision, the CA affirmed the ruling that petitioners are, in fact,
foreign corporations. On April 5, 2011, petitioners elevated the
case to us via a Petition for Review on Certiorari under Rule 45,
questioning the Decision of the CA. Interestingly, the OP rendered
a Decision dated April 6, 2011, a day after this petition for review
was filed, cancelling and revoking the FTAAs, quoting the Order of
the POA and stating that petitioners are foreign corporations since
they needed the financial strength of MBMI, Inc. in order to
conduct large scale mining operations. The OP Decision also
based the cancellation on the misrepresentation of facts and the
violation of the "Small Scale Mining Law and Environmental
Compliance Certificate as well as Sections 3 and 8 of the Foreign
Investment Act and E.O. 584."39 On July 6, 2011, the OP issued a
Resolution, denying the Motion for Reconsideration filed by the
petitioners.

The main issue in this case is centered on the issue of petitioners

nationality, whether Filipino or foreign. In their previous petitions,
they had been adamant in insisting that they were Filipino
corporations, until they submitted their Manifestation and
Submission dated October 19, 2012 where they stated the alleged
change of corporate ownership to reflect their Filipino ownership.
Thus, there is a need to determine the nationality of petitioner
corporations.

Shares belonging to corporations or partnerships at least 60% of

the capital of which is owned by Filipino citizens shall be
considered as of Philippine nationality, but if the percentage of
Filipino ownership in the corporation or partnership is less than
60%, only the number of shares corresponding to such percentage
shall be counted as of Philippine nationality. Thus, if 100,000
shares are registered in the name of a corporation or partnership
at least 60% of the capital stock or capital, respectively, of which
belong to Filipino citizens, all of the shares shall be recorded as
owned by Filipinos. But if less than 60%, or say, 50% of the capital
stock or capital of the corporation or partnership, respectively,
belongs to Filipino citizens, only 50,000 shares shall be counted as
owned by Filipinos and the other 50,000 shall be recorded as
belonging to aliens.
The first part of paragraph 7, DOJ Opinion No. 020, stating "shares
belonging to corporations or partnerships at least 60% of the
capital of which is owned by Filipino citizens shall be considered
as of Philippine nationality," pertains to the control test or the
liberal rule. On the other hand, the second part of the DOJ Opinion
which provides, "if the percentage of the Filipino ownership in the
corporation or partnership is less than 60%, only the number of
shares corresponding to such percentage shall be counted as
Philippine nationality," pertains to the stricter, more stringent
grandfather rule.

57
Prior to this recent change of events, petitioners were constant in
advocating the application of the "control test" under RA 7042, as
amended by RA 8179, otherwise known as the Foreign
Investments Act (FIA), rather than using the stricter grandfather
rule. The pertinent provision under Sec. 3 of the FIA provides:
SECTION 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 the citizens of the Philippines; 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 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 were 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, in order that the
corporation shall be considered a Philippine national. (emphasis
supplied)
The grandfather rule, petitioners reasoned, has no leg to stand on
in the instant case since the definition of a "Philippine National"
under Sec. 3 of the FIA does not provide for it. They further claim
that the grandfather rule "has been abandoned and is no longer
the applicable rule."41 They also opined that the last portion of
Sec. 3 of the FIA admits the application of a "corporate layering"
scheme of corporations. Petitioners claim that the clear and
unambiguous wordings of the statute preclude the court from
construing it and prevent the courts use of discretion in applying
the law. They said that the plain, literal meaning of the statute
meant the application of the control test is obligatory.
We disagree. "Corporate layering" is admittedly allowed by the
FIA; but if it is used to circumvent the Constitution and pertinent
laws, then it becomes illegal. Further, the pronouncement of
petitioners that the grandfather rule has already been abandoned
must be discredited for lack of basis.
Art. XII, Sec. 2 of the Constitution provides:
Sec. 2. All lands of the public domain, waters, minerals, coal,
petroleum and other mineral oils, all forces of potential energy,
fisheries, forests or timber, wildlife, flora and fauna, and other
natural resources are owned by the State. With the exception of
agricultural lands, all other natural resources shall not be
alienated. The exploration, development, and utilization of natural
resources shall be under the full control and supervision of the
State. The State may directly undertake such activities, or it may
enter into co-production, joint venture or production-sharing
agreements with Filipino citizens, or corporations or associations
at least sixty per centum of whose capital is owned by such
citizens. Such agreements may be for a period not exceeding
twenty-five years, renewable for not more than twenty-five years,
and under such terms and conditions as may be provided by law.
xxxx
The President may enter into agreements with Foreign-owned
corporations involving either technical or financial assistance for
large-scale exploration, development, and utilization of minerals,
petroleum, and other mineral oils according to the general terms
and conditions provided by law, based on real contributions to the
economic growth and general welfare of the country. In such
agreements, the State shall promote the development and use of
local scientific and technical resources. (emphasis supplied)
The emphasized portion of Sec. 2 which focuses on the State
entering into different types of agreements for the exploration,
development, and utilization of natural resources with entities
who are deemed Filipino due to 60 percent ownership of capital is

pertinent to this case, since the issues are centered on the

utilization of our countrys natural resources or specifically,
mining. Thus, there is a need to ascertain the nationality of
petitioners since, as the Constitution so provides, such
agreements are only allowed corporations or associations "at least
60 percent of such capital is owned by such citizens." The
deliberations in the Records of the 1986 Constitutional
Commission shed light on how a citizenship of a corporation will
be determined:
Mr. BENNAGEN: Did I hear right that the Chairmans interpretation
of an independent national economy is freedom from undue
foreign control? What is the meaning of undue foreign control?
MR. VILLEGAS: Undue foreign control is foreign control which
sacrifices national sovereignty and the welfare of the Filipino in
the economic sphere.
MR. BENNAGEN: Why does it have to be qualified still with the
word "undue"? Why not simply freedom from foreign control? I
think that is the meaning of independence, because as phrased, it
still allows for foreign control.
MR. VILLEGAS: It will now depend on the interpretation because if,
for example, we retain the 60/40 possibility in the cultivation of
natural resources, 40 percent involves some control; not total
control, but some control.
MR. BENNAGEN: In any case, I think in due time we will propose
some amendments.
MR. VILLEGAS: Yes. But we will be open to improvement of the
phraseology.
Mr. BENNAGEN: Yes.
Thank you, Mr. Vice-President.
xxxx
MR. NOLLEDO: In Sections 3, 9 and 15, the Committee stated local
or Filipino equity and foreign equity; namely, 60-40 in Section 3,
60-40 in Section 9, and 2/3-1/3 in Section 15.
MR. VILLEGAS: That is right.
MR. NOLLEDO: In teaching law, we are always faced with the
question: Where do we base the equity requirement, is it on the
authorized capital stock, on the subscribed capital stock, or on the
paid-up capital stock of a corporation? Will the Committee please
enlighten me on this?
MR. VILLEGAS: We have just had a long discussion with the
members of the team from the UP Law Center who provided us
with a draft. The phrase that is contained here which we adopted
from the UP draft is 60 percent of the voting stock.
MR. NOLLEDO: That must be based on the subscribed capital
stock, because unless declared delinquent, unpaid capital stock
shall be entitled to vote.
MR. VILLEGAS: That is right.
MR. NOLLEDO: Thank you.
With respect to an investment by one corporation in another
corporation, say, a corporation with 60-40 percent equity invests
in another corporation which is permitted by the Corporation
Code, does the Committee adopt the grandfather rule?
MR. VILLEGAS: Yes, that is the understanding of the Committee.
MR. NOLLEDO: Therefore, we need additional Filipino capital?

58
MR. VILLEGAS: Yes.42 (emphasis supplied)
It is apparent that it is the intention of the framers of the
Constitution to apply the grandfather rule in cases where
corporate layering is present.
Elementary in statutory construction is when there is conflict
between the Constitution and a statute, the Constitution will
prevail. In this instance, specifically pertaining to the provisions
under Art. XII of the Constitution on National Economy and
Patrimony, Sec. 3 of the FIA will have no place of application. As
decreed by the honorable framers of our Constitution, the
grandfather rule prevails and must be applied.
Likewise, paragraph 7, DOJ Opinion No. 020, Series of 2005
provides:
The above-quoted SEC Rules provide for the manner of calculating
the Filipino interest in a corporation for purposes, among others,
of determining compliance with nationality requirements (the
Investee Corporation). Such manner of computation is necessary
since the shares in the Investee Corporation may be owned both
by individual stockholders (Investing Individuals) and by
corporations and partnerships (Investing Corporation). The said
rules thus provide for the determination of nationality depending
on the ownership of the Investee Corporation and, in certain
instances, the Investing Corporation.
Under the above-quoted SEC Rules, there are two cases in
determining the nationality of the Investee Corporation. The first
case is the liberal rule, later coined by the SEC as the Control
Test in its 30 May 1990 Opinion, and pertains to the portion in said
Paragraph 7 of the 1967 SEC Rules which states, (s)hares
belonging to corporations or partnerships at least 60% of the
capital of which is owned by Filipino citizens shall be considered
as of Philippine nationality. Under the liberal Control Test, there is
no need to further trace the ownership of the 60% (or more)
Filipino stockholdings of the Investing Corporation since a
corporation which is at least 60% Filipino-owned is considered as
Filipino.
The second case is the Strict Rule or the Grandfather Rule Proper
and pertains to the portion in said Paragraph 7 of the 1967 SEC
Rules which states, "but if the percentage of Filipino ownership in
the corporation or partnership is less than 60%, only the number
of shares corresponding to such percentage shall be counted as of
Philippine nationality." Under the Strict Rule or Grandfather Rule
Proper, the combined totals in the Investing Corporation and the
Investee Corporation must be traced (i.e., "grandfathered") to
determine the total percentage of Filipino ownership.
Moreover, the ultimate Filipino ownership of the shares must first
be traced to the level of the Investing Corporation and added to
the shares directly owned in the Investee Corporation x x x.
xxxx
In other words, based on the said SEC Rule and DOJ Opinion, the
Grandfather Rule or the second part of the SEC Rule applies only
when the 60-40 Filipino-foreign equity ownership is in doubt (i.e.,
in cases where the joint venture corporation with Filipino and
foreign stockholders with less than 60% Filipino stockholdings [or
59%] invests in other joint venture corporation which is either 6040% Filipino-alien or the 59% less Filipino). Stated differently,
where the 60-40 Filipino- foreign equity ownership is not in doubt,
the Grandfather Rule will not apply. (emphasis supplied)
After a scrutiny of the evidence extant on record, the Court finds
that this case calls for the application of the grandfather rule
since, as ruled by the POA and affirmed by the OP, doubt prevails
and persists in the corporate ownership of petitioners. Also, as
found by the CA, doubt is present in the 60-40 Filipino equity
ownership of petitioners Narra, McArthur and Tesoro, since their
common investor, the 100% Canadian corporationMBMI, funded
them. However, petitioners also claim that there is "doubt" only
when the stockholdings of Filipinos are less than 60%.43

The assertion of petitioners that "doubt" only exists when the

stockholdings are less than 60% fails to convince this Court. DOJ
Opinion No. 20, which petitioners quoted in their petition, only
made an example of an instance where "doubt" as to the
ownership of the corporation exists. It would be ludicrous to limit
the application of the said word only to the instances where the
stockholdings of non-Filipino stockholders are more than 40% of
the total stockholdings in a corporation. The corporations
interested in circumventing our laws would clearly strive to have
"60% Filipino Ownership" at face value. It would be senseless for
these applying corporations to state in their respective articles of
incorporation that they have less than 60% Filipino stockholders
since the applications will be denied instantly. Thus, various
corporate schemes and layerings are utilized to circumvent the
application of the Constitution.
Obviously, the instant case presents a situation which exhibits a
scheme employed by stockholders to circumvent the law, creating
a cloud of doubt in the Courts mind. To determine, therefore, the
actual participation, direct or indirect, of MBMI, the grandfather
rule must be used.
McArthur Mining, Inc.
To establish the actual ownership, interest or participation of MBMI
in each of petitioners corporate structure, they have to be
"grandfathered."
As previously discussed, McArthur acquired its MPSA application
from MMC, which acquired its application from SMMI. McArthur
has a capital stock of ten million pesos (PhP 10,000,000) divided
into 10,000 common shares at one thousand pesos (PhP 1,000)
per share, subscribed to by the following:44
Interestingly, looking at the corporate structure of MMC, we take
note that it has a similar structure and composition as McArthur.
In fact, it would seem that MBMI is also a major investor and
"controls"45 MBMI and also, similar nominal shareholders were
present, i.e. Fernando B. Esguerra (Esguerra), Lauro L. Salazar
(Salazar), Michael T. Mason (Mason) and Kenneth Cawkell
(Cawkell):
Name

Nationali Numb
Amount
Amount
ty
er of
Subscribed Paid
Shares

Madridejos
Mining
Corporatio
n

Filipino

5,997

PhP
5,997,000.0
0

PhP
825,000.00

MBMI
Canadian
Resources
, Inc.

3,998

PhP
3,998,000.0

PhP
1,878,174.
60

Lauro L.
Salazar

Filipino

PhP
1,000.00

PhP
1,000.00

Fernando
Filipino
B. Esguerra

PhP
1,000.00

PhP
1,000.00

Manuel A.
Agcaoili

Filipino

PhP
1,000.00

PhP
1,000.00

Michael T.
Mason

American

PhP
1,000.00

PhP
1,000.00

Kenneth
Cawkell

Canadian

PhP
1,000.00

PhP
1,000.00

Total

10,000

PhP
10,000,000.
00

PhP
2,708,174.
60
(emphasis
supplied)

Madridejos Mining Corporation

Name

Nationali

Numb

Amount

Amount

59

Olympic
Mines &

ty

er of
Share
s

Subscribed Paid

Filipino

6,663

PhP
6,663,000.0
0

PhP 0

Developme
nt

Tesoro, which acquired its MPSA application from SMMI, has a

capital stock of ten million pesos (PhP 10,000,000) divided into
ten thousand (10,000) common shares at PhP 1,000 per share, as
demonstrated below:
[[reference = http://sc.judiciary.gov.ph/pdf/web/viewer.html?
file=/jurisprudence/2014/april2014/195580.pdf]]

Name

Nationa
lity

Numb
er of
Share
s

Amount
Subscribe
d

Amount
Paid

Sara
Marie
Mining,
Inc.

Filipino

5,997

PhP
5,997,000.
00

PhP
825,000.0
0

MBMI
Resourc
es, Inc.

Canadia
n

3,998

PhP
3,998,000.
00

PhP
1,878,174
.60

Lauro L.
Salazar

Filipino

PhP
1,000.00

PhP
1,000.00

Fernando
B.
Esguerra

Filipino

PhP
1,000.00

PhP
1,000.00

Manuel
A.
Agcaoili

Filipino

PhP
1,000.00

PhP
1,000.00

Michael
T. Mason

America
n

PhP
1,000.00

PhP
1,000.00

Kenneth
Cawkell

Canadia
n

PhP
1,000.00

PhP
1,000.00

Total

10,000

PhP
10,000,000
.00

PhP
2,708,174
.60

Corp.

MBMI
Resources,

Canadian

3,331

PhP
3,331,000.0
0

PhP
2,803,900.
00

Amanti
Limson

Filipino

PhP
1,000.00

PhP
1,000.00

Fernando
B.

Filipino

PhP
1,000.00

PhP
1,000.00

Inc.

Esguerra

Lauro
Salazar

Filipino

Emmanuel
G.

Filipino

1
1

PhP
1,000.00

PhP
1,000.00

PhP
1,000.00

PhP
1,000.00

Hernando

Michael T.
Mason

American

PhP
1,000.00

PhP
1,000.00

Kenneth
Cawkell

Canadian

PhP
1,000.00

PhP
1,000.00

Total

10,000

PhP
10,000,000.
00

PhP
2,809,900.
00

Noticeably, Olympic Mines & Development Corporation (Olympic)

did not pay any amount with respect to the number of shares they
subscribed to in the corporation, which is quite absurd since
Olympic is the major stockholder in MMC. MBMIs 2006 Annual
Report sheds light on why Olympic failed to pay any amount with
respect to the number of shares it subscribed to. It states that
Olympic entered into joint venture agreements with several
Philippine companies, wherein it holds directly and indirectly a
60% effective equity interest in the Olympic Properties. 46 Quoting
the said Annual report:
On September 9, 2004, the Company and Olympic Mines &
Development Corporation ("Olympic") entered into a series of
agreements including a Property Purchase and Development
Agreement (the Transaction Documents) with respect to three
nickel laterite properties in Palawan, Philippines (the "Olympic
Properties"). The Transaction Documents effectively establish a
joint venture between the Company and Olympic for purposes of
developing the Olympic Properties. The Company holds directly
and indirectly an initial 60% interest in the joint venture. Under
certain circumstances and upon achieving certain milestones, the
Company may earn up to a 100% interest, subject to a 2.5% net
revenue royalty.47 (emphasis supplied)
Thus, as demonstrated in this first corporation, McArthur, when it
is "grandfathered," company layering was utilized by MBMI to gain
control over McArthur. It is apparent that MBMI has more than
60% or more equity interest in McArthur, making the latter a
foreign corporation.
Tesoro Mining and Development, Inc.

Except for the name "Sara Marie Mining, Inc.," the table above
shows exactly the same figures as the corporate structure of
petitioner McArthur, down to the last centavo. All the other
shareholders are the same: MBMI, Salazar, Esguerra, Agcaoili,
Mason and Cawkell. The figures under "Nationality," "Number of
Shares," "Amount Subscribed," and "Amount Paid" are exactly the
same. Delving deeper, we scrutinize SMMIs corporate structure:
Sara Marie Mining, Inc.

Name

Nationality

Number
of
Shares

Amount
Subscribed

Amount
Paid

Olympic Mines &

Development
Corp.

Filipino

6,663

PhP
6,663,000.0
0

PhP 0

MBMI Resources,
Inc.

Canadian

3,331

PhP
3,331,000.0
0

PhP
2,794,000.
00

Amanti Limson

Filipino

PhP
1,000.00

PhP
1,000.00

Fernando B.
Esguerra

Filipino

PhP
1,000.00

PhP
1,000.00

Lauro Salazar

Filipino

PhP
1,000.00

PhP
1,000.00

Emmanuel G.
Hernando

Filipino

PhP
1,000.00

PhP
1,000.00

60
Michael T. Mason

American

PhP
1,000.00

PhP
1,000.00

Kenneth Cawkell

Canadian

PhP
1,000.00

PhP
1,000.00

Total

10,000

PhP
10,000,000.
00

PhP
2,809,900.
00

Again, MBMI, along with other nominal stockholders, i.e., Mason,

Agcaoili and Esguerra, is present in this corporate structure.
Patricia Louise Mining & Development Corporation
Using the grandfather method, we further look and examine
PLMDCs corporate structure:
Name

After subsequently studying SMMIs corporate structure, it is not

farfetched for us to spot the glaring similarity between SMMI and
MMCs corporate structure. Again, the presence of identical
stockholders, namely: Olympic, MBMI, Amanti Limson (Limson),
Esguerra, Salazar, Hernando, Mason and Cawkell. The figures
under the headings "Nationality," "Number of Shares," "Amount
Subscribed," and "Amount Paid" are exactly the same except for
the amount paid by MBMI which now reflects the amount of two
million seven hundred ninety four thousand pesos (PhP
2,794,000). Oddly, the total value of the amount paid is two
million eight hundred nine thousand nine hundred pesos (PhP
2,809,900).
Accordingly, after "grandfathering" petitioner Tesoro and factoring
in Olympics participation in SMMIs corporate structure, it is clear
that MBMI is in control of Tesoro and owns 60% or more equity
interest in Tesoro. This makes petitioner Tesoro a non-Filipino
corporation and, thus, disqualifies it to participate in the
exploitation, utilization and development of our natural resources.
Narra Nickel Mining and Development Corporation
Moving on to the last petitioner, Narra, which is the transferee and
assignee of PLMDCs MPSA application, whose corporate
structures arrangement is similar to that of the first two
petitioners discussed. The capital stock of Narra is ten million
pesos (PhP 10,000,000), which is divided into ten thousand
common shares (10,000) at one thousand pesos (PhP 1,000) per
share, shown as follows:

Nationality
Number
of
Shares

Amount
Subscribed

Amount Paid

Palawan Alpha
South Resources
Development
Corporation

Filipino

6,596

PhP
6,596,000.00

PhP 0

MBMI Resources,

Canadian

3,396

PhP
3,396,000.00

PhP
2,796,000.00

Higinio C. Mendoza,
Jr.

Filipino

PhP 1,000.00

PhP 1,000.00

Fernando B.
Esguerra

Filipino

PhP 1,000.00

PhP 1,000.00

Henry E. Fernandez

Filipino

PhP 1,000.00

PhP 1,000.00

Lauro L. Salazar

Filipino

PhP 1,000.00

PhP 1,000.00

Manuel A. Agcaoili

Filipino

PhP 1,000.00

PhP 1,000.00

Bayani H. Agabin

Filipino

PhP 1,000.00

PhP 1,000.00

Michael T. Mason

American

PhP 1,000.00

PhP 1,000.00

Kenneth Cawkell

Canadian

PhP 1,000.00

PhP 1,000.00

Total

10,000

PhP
10,000,000.00

PhP
2,708,174.60

Inc.

Yet again, the usual players in petitioners corporate structures

are present. Similarly, the amount of money paid by the 2nd tier
majority stock holder, in this case, Palawan Alpha South Resources
and Development Corp. (PASRDC), is zero.

Name

Nationality

Number
of
Shares

Amount
Subscribed

Amount Paid

Patricia Louise
Mining &
Development
Corp.

Filipino

5,997

PhP
5,997,000.00

PhP
1,677,000.00

MBMI
Resources, Inc.

Canadian

3,998

PhP
3,996,000.00

PhP
1,116,000.00

Higinio C.
Mendoza, Jr.

Filipino

PhP 1,000.00

PhP 1,000.00

Henry E.
Fernandez

Filipino

PhP 1,000.00

PhP 1,000.00

(a) Olympic Group

Manuel A.
Agcaoili

Filipino

PhP 1,000.00

PhP 1,000.00

The Philippine companies holding the Olympic Property, and the

ownership and interests therein, are as follows:

Ma. Elena A.
Bocalan

Filipino

PhP 1,000.00

PhP 1,000.00

Olympic- Philippines (the "Olympic Group")

Bayani H. Agabin

Filipino

PhP 1,000.00

PhP 1,000.00

Sara Marie Mining Properties Ltd. ("Sara Marie") 33.3%

Robert L.
McCurdy

American

PhP 1,000.00

PhP 1,000.00

Tesoro Mining & Development, Inc. (Tesoro) 60.0%

Kenneth Cawkell

Canadian

PhP 1,000.00

PhP 1,000.00

Total

10,000

PhP
10,000,000.00

PhP
2,800,000.00
(emphasis
supplied)

Studying MBMIs Summary of Significant Accounting Policies dated

October 31, 2005 explains the reason behind the intricate
corporate layering that MBMI immersed itself in:
JOINT VENTURES The Companys ownership interests in various
mining ventures engaged in the acquisition, exploration and
development of mineral properties in the Philippines is described
as follows:

Pursuant to the Olympic joint venture agreement the Company

holds directly and indirectly an effective equity interest in the
Olympic Property of 60.0%. Pursuant to a shareholders
agreement, the Company exercises joint control over the
companies in the Olympic Group.
(b) Alpha Group

61
The Philippine companies holding the Alpha Property, and the
ownership interests therein, are as follows:
Alpha- Philippines (the "Alpha Group")
Patricia Louise Mining Development Inc. ("Patricia") 34.0%
Narra Nickel Mining & Development Corporation (Narra) 60.4%
Under a joint venture agreement the Company holds directly and
indirectly an effective equity interest in the Alpha Property of
60.4%. Pursuant to a shareholders agreement, the Company
exercises joint control over the companies in the Alpha
Group.48 (emphasis supplied)
Concluding from the above-stated facts, it is quite safe to say that
petitioners McArthur, Tesoro and Narra are not Filipino since MBMI,
a 100% Canadian corporation, owns 60% or more of their equity
interests. Such conclusion is derived from grandfathering
petitioners corporate owners, namely: MMI, SMMI and PLMDC.
Going further and adding to the picture, MBMIs Summary of
Significant Accounting Policies statement regarding the "joint
venture" agreements that it entered into with the "Olympic" and
"Alpha" groupsinvolves SMMI, Tesoro, PLMDC and Narra.
Noticeably, the ownership of the "layered" corporations boils
down to MBMI, Olympic or corporations under the "Alpha" group
wherein MBMI has joint venture agreements with, practically
exercising majority control over the corporations mentioned. In
effect, whether looking at the capital structure or the underlying
relationships between and among the corporations, petitioners
are NOT Filipino nationals and must be considered foreign since
60% or more of their capital stocks or equity interests are owned
by MBMI.
Application of the res inter alios acta rule
Petitioners question the CAs use of the exception of the res inter
alios acta or the "admission by co-partner or agent" rule and
"admission by privies" under the Rules of Court in the instant
case, by pointing out that statements made by MBMI should not
be admitted in this case since it is not a party to the case and that
it is not a "partner" of petitioners.
Secs. 29 and 31, Rule 130 of the Revised Rules of Court provide:
Sec. 29. Admission by co-partner or agent.- The act or declaration
of a partner or agent of the party within the scope of his authority
and during the existence of the partnership or agency, may be
given in evidence against such party after the partnership or
agency is shown by evidence other than such act or declaration
itself. The same rule applies to the act or declaration of a joint
owner, joint debtor, or other person jointly interested with the
party.
Sec. 31. Admission by privies.- Where one derives title to property
from another, the act, declaration, or omission of the latter, while
holding the title, in relation to the property, is evidence against
the former.
Petitioners claim that before the above-mentioned Rule can be
applied to a case, "the partnership relation must be shown, and
that proof of the fact must be made by evidence other than the
admission itself."49 Thus, petitioners assert that the CA erred in
finding that a partnership relationship exists between them and
MBMI because, in fact, no such partnership exists.

"partnerships" and "joint venture agreements." Further, they

asserted that before this particular partnership can be formed, it
should have been formally reduced into writing since the capital
involved is more than three thousand pesos (PhP 3,000). Being
that there is no evidence of written agreement to form a
partnership between petitioners and MBMI, no partnership was
created.
We disagree.
A partnership is defined as two or more persons who bind
themselves to contribute money, property, or industry to a
common fund with the intention of dividing the profits among
themselves.50 On the other hand, joint ventures have been
deemed to be "akin" to partnerships since it is difficult to
distinguish between joint ventures and partnerships. Thus:
[T]he relations of the parties to a joint venture and the nature of
their association are so similar and closely akin to a partnership
that it is ordinarily held that their rights, duties, and liabilities are
to be tested by rules which are closely analogous to and
substantially the same, if not exactly the same, as those which
govern partnership. In fact, it has been said that the trend in the
law has been to blur the distinctions between a partnership and a
joint venture, very little law being found applicable to one that
does not apply to the other.51
Though some claim that partnerships and joint ventures are
totally different animals, there are very few rules that differentiate
one from the other; thus, joint ventures are deemed "akin" or
similar to a partnership. In fact, in joint venture agreements, rules
and legal incidents governing partnerships are applied.52
Accordingly, culled from the incidents and records of this case, it
can be assumed that the relationships entered between and
among petitioners and MBMI are no simple "joint venture
agreements." As a rule, corporations are prohibited from entering
into partnership agreements; consequently, corporations enter
into joint venture agreements with other corporations or
partnerships for certain transactions in order to form "pseudo
partnerships."
Obviously, as the intricate web of "ventures" entered into by and
among petitioners and MBMI was executed to circumvent the legal
prohibition against corporations entering into partnerships, then
the relationship created should be deemed as "partnerships," and
the laws on partnership should be applied. Thus, a joint venture
agreement between and among corporations may be seen as
similar to partnerships since the elements of partnership are
present.
Considering that the relationships found between petitioners and
MBMI are considered to be partnerships, then the CA is justified in
applying Sec. 29, Rule 130 of the Rules by stating that "by
entering into a joint venture, MBMI have a joint interest" with
Narra, Tesoro and McArthur.
Panel of Arbitrators jurisdiction
We affirm the ruling of the CA in declaring that the POA has
jurisdiction over the instant case. The POA has jurisdiction to
settle disputes over rights to mining areas which definitely involve
the petitions filed by Redmont against petitioners Narra, McArthur
and Tesoro. Redmont, by filing its petition against petitioners, is
asserting the right of Filipinos over mining areas in the Philippines
against alleged foreign-owned mining corporations. Such claim
constitutes a "dispute" found in Sec. 77 of RA 7942:

Partnerships vs. joint venture agreements

Petitioners claim that the CA erred in applying Sec. 29, Rule 130 of
the Rules by stating that "by entering into a joint venture, MBMI
have a joint interest" with Narra, Tesoro and McArthur. They
challenged the conclusion of the CA which pertains to the close
characteristics of

Within thirty (30) days, after the submission of the case by the
parties for the decision, the panel shall have exclusive and
original jurisdiction to hear and decide the following:
(a) Disputes involving rights to mining areas
(b) Disputes involving mineral agreements or permits

62
We held in Celestial Nickel Mining Exploration Corporation v.
Macroasia Corp.:53
The phrase "disputes involving rights to mining areas" refers to
any adverse claim, protest, or opposition to an application for
mineral agreement. The POA therefore has the jurisdiction to
resolve any adverse claim, protest, or opposition to a pending
application for a mineral agreement filed with the concerned
Regional Office of the MGB. This is clear from Secs. 38 and 41 of
the DENR AO 96-40, which provide:
Sec. 38.
xxxx
Within thirty (30) calendar days from the last date of
publication/posting/radio announcements, the authorized
officer(s) of the concerned office(s) shall issue a certification(s)
that the publication/posting/radio announcement have been
complied with. Any adverse claim, protest, opposition shall be
filed directly, within thirty (30) calendar days from the last date of
publication/posting/radio announcement, with the concerned
Regional Office or through any concerned PENRO or CENRO for
filing in the concerned Regional Office for purposes of its
resolution by the Panel of Arbitrators pursuant to the provisions of
this Act and these implementing rules and regulations. Upon final
resolution of any adverse claim, protest or opposition, the Panel of
Arbitrators shall likewise issue a certification to that effect within
five (5) working days from the date of finality of resolution thereof.
Where there is no adverse claim, protest or opposition, the Panel
of Arbitrators shall likewise issue a Certification to that effect
within five working days therefrom.

may also be filed directly with the Panel of Arbitrators within the
concerned periods for filing such claim, protest or opposition as
specified in said Sections.
Sec. 43. Publication/Posting of Mineral Agreement.xxxx
The Regional Director or concerned Regional Director shall also
cause the posting of the application on the bulletin boards of the
Bureau, concerned Regional office(s) and in the concerned
province(s) and municipality(ies), copy furnished the barangays
where the proposed contract area is located once a week for two
(2) consecutive weeks in a language generally understood in the
locality. After forty-five (45) days from the last date of
publication/posting has been made and no adverse claim, protest
or opposition was filed within the said forty-five (45) days, the
concerned offices shall issue a certification that
publication/posting has been made and that no adverse claim,
protest or opposition of whatever nature has been filed. On the
other hand, if there be any adverse claim, protest or opposition,
the same shall be filed within forty-five (45) days from the last
date of publication/posting, with the Regional Offices concerned,
or through the Departments Community Environment and Natural
Resources Officers (CENRO) or Provincial Environment and Natural
Resources Officers (PENRO), to be filed at the Regional Office for
resolution of the Panel of Arbitrators. However previously
published valid and subsisting mining claims are exempted from
posted/posting required under this Section.

xxxx

No mineral agreement shall be approved unless the requirements

under this section are fully complied with and any
opposition/adverse claim is dealt with in writing by the Director
and resolved by the Panel of Arbitrators. (Emphasis supplied.)

No Mineral Agreement shall be approved unless the requirements

under this Section are fully complied with and any adverse
claim/protest/opposition is finally resolved by the Panel of
Arbitrators.

It has been made clear from the aforecited provisions that the
"disputes involving rights to mining areas" under Sec. 77(a)
specifically refer only to those disputes relative to the applications
for a mineral agreement or conferment of mining rights.

Sec. 41.

The jurisdiction of the POA over adverse claims, protest, or

oppositions to a mining right application is further elucidated by
Secs. 219 and 43 of DENRO AO 95-936, which reads:

xxxx
Within fifteen (15) working days form the receipt of the
Certification issued by the Panel of Arbitrators as provided in
Section 38 hereof, the concerned Regional Director shall initially
evaluate the Mineral Agreement applications in areas outside
Mineral reservations. He/She shall thereafter endorse his/her
findings to the Bureau for further evaluation by the Director within
fifteen (15) working days from receipt of forwarded documents.
Thereafter, the Director shall endorse the same to the secretary
for consideration/approval within fifteen working days from receipt
of such endorsement.
In case of Mineral Agreement applications in areas with Mineral
Reservations, within fifteen (15) working days from receipt of the
Certification issued by the Panel of Arbitrators as provided for in
Section 38 hereof, the same shall be evaluated and endorsed by
the Director to the Secretary for consideration/approval within
fifteen days from receipt of such endorsement. (emphasis
supplied)
It has been made clear from the aforecited provisions that the
"disputes involving rights to mining areas" under Sec. 77(a)
specifically refer only to those disputes relative to the applications
for a mineral agreement or conferment of mining rights.
The jurisdiction of the POA over adverse claims, protest, or
oppositions to a mining right application is further elucidated by
Secs. 219 and 43 of DENR AO 95-936, which read:
Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.Notwithstanding the provisions of Sections 28, 43 and 57 above,
any adverse claim, protest or opposition specified in said sections

Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.Notwithstanding the provisions of Sections 28, 43 and 57 above,
any adverse claim, protest or opposition specified in said sections
may also be filed directly with the Panel of Arbitrators within the
concerned periods for filing such claim, protest or opposition as
specified in said Sections.
Sec. 43. Publication/Posting of Mineral Agreement Application.xxxx
The Regional Director or concerned Regional Director shall also
cause the posting of the application on the bulletin boards of the
Bureau, concerned Regional office(s) and in the concerned
province(s) and municipality(ies), copy furnished the barangays
where the proposed contract area is located once a week for two
(2) consecutive weeks in a language generally understood in the
locality. After forty-five (45) days from the last date of
publication/posting has been made and no adverse claim, protest
or opposition was filed within the said forty-five (45) days, the
concerned offices shall issue a certification that
publication/posting has been made and that no adverse claim,
protest or opposition of whatever nature has been filed. On the
other hand, if there be any adverse claim, protest or opposition,
the same shall be filed within forty-five (45) days from the last
date of publication/posting, with the Regional offices concerned,
or through the Departments Community Environment and Natural
Resources Officers (CENRO) or Provincial Environment and Natural
Resources Officers (PENRO), to be filed at the Regional Office for
resolution of the Panel of Arbitrators. However, previously
published valid and subsisting mining claims are exempted from
posted/posting required under this Section.

63
No mineral agreement shall be approved unless the requirements
under this section are fully complied with and any
opposition/adverse claim is dealt with in writing by the Director
and resolved by the Panel of Arbitrators. (Emphasis supplied.)

Moreover, the jurisdiction of the RTC involves civil actions while

what petitioners filed with the DENR Regional Office or any
concerned DENRE or CENRO are MPSA applications. Thus POA has
jurisdiction.

These provisions lead us to conclude that the power of the POA to

resolve any adverse claim, opposition, or protest relative to
mining rights under Sec. 77(a) of RA 7942 is confined only to
adverse claims, conflicts and oppositions relating to applications
for the grant of mineral rights.

Furthermore, the POA has jurisdiction over the MPSA applications

under the doctrine of primary jurisdiction. Euro-med Laboratories
v. Province of Batangas55 elucidates:

POAs jurisdiction is confined only to resolutions of such adverse

claims, conflicts and oppositions and it has no authority to
approve or reject said applications. Such power is vested in the
DENR Secretary upon recommendation of the MGB Director.
Clearly, POAs jurisdiction over "disputes involving rights to mining
areas" has nothing to do with the cancellation of existing mineral
agreements. (emphasis ours)
Accordingly, as we enunciated in Celestial, the POA
unquestionably has jurisdiction to resolve disputes over MPSA
applications subject of Redmonts petitions. However, said
jurisdiction does not include either the approval or rejection of the
MPSA applications, which is vested only upon the Secretary of the
DENR. Thus, the finding of the POA, with respect to the rejection of
petitioners MPSA applications being that they are foreign
corporation, is valid.
Justice Marvic Mario Victor F. Leonen, in his Dissent, asserts that it
is the regular courts, not the POA, that has jurisdiction over the
MPSA applications of petitioners.
This postulation is incorrect.
It is basic that the jurisdiction of the court is determined by the
statute in force at the time of the commencement of the action. 54
Sec. 19, Batas Pambansa Blg. 129 or "The Judiciary Reorganization
Act of 1980" reads:
Sec. 19. Jurisdiction in Civil Cases.Regional Trial Courts shall
exercise exclusive original jurisdiction:
1. In all civil actions in which the subject of the litigation is
incapable of pecuniary estimation.
On the other hand, the jurisdiction of POA is unequivocal from
Sec. 77 of RA 7942:
Section 77. Panel of Arbitrators.
x x x Within thirty (30) days, after the submission of the
case by the parties for the decision, the panel shall have
exclusive and original jurisdiction to hear and decide the
following:

The doctrine of primary jurisdiction holds that if a case is such

that its determination requires the expertise, specialized training
and knowledge of an administrative body, relief must first be
obtained in an administrative proceeding before resort to the
courts is had even if the matter may well be within their proper
jurisdiction.
Whatever may be the decision of the POA will eventually reach
the court system via a resort to the CA and to this Court as a last
recourse.
Selling of MBMIs shares to DMCI
As stated before, petitioners Manifestation and Submission dated
October 19, 2012 would want us to declare the instant petition
moot and academic due to the transfer and conveyance of all the
shareholdings and interests of MBMI to DMCI, a corporation duly
organized and existing under Philippine laws and is at least 60%
Philippine-owned.56 Petitioners reasoned that they now cannot be
considered as foreign-owned; the transfer of their shares
supposedly cured the "defect" of their previous nationality. They
claimed that their current FTAA contract with the State should
stand since "even wholly-owned foreign corporations can enter
into an FTAA with the State."57Petitioners stress that there should
no longer be any issue left as regards their qualification to enter
into FTAA contracts since they are qualified to engage in mining
activities in the Philippines. Thus, whether the "grandfather rule"
or the "control test" is used, the nationalities of petitioners cannot
be doubted since it would pass both tests.
The sale of the MBMI shareholdings to DMCI does not have any
bearing in the instant case and said fact should be disregarded.
The manifestation can no longer be considered by us since it is
being tackled in G.R. No. 202877 pending before this
Court.1wphi1 Thus, the question of whether petitioners,
allegedly a Philippine-owned corporation due to the sale of MBMI's
shareholdings to DMCI, are allowed to enter into FTAAs with the
State is a non-issue in this case.
In ending, the "control test" is still the prevailing mode of
determining whether or not a corporation is a Filipino corporation,
within the ambit of Sec. 2, Art. II of the 1987 Constitution, entitled
to undertake the exploration, development and utilization of the
natural resources of the Philippines. When in the mind of the Court
there is doubt, based on the attendant facts and circumstances of
the case, in the 60-40 Filipino-equity ownership in the corporation,
then it may apply the "grandfather rule."

(c) Disputes involving rights to mining areas

WHEREFORE, premises considered, the instant petition is DENIED.

The assailed Court of Appeals Decision dated October 1, 2010 and
Resolution dated February 15, 2011 are hereby AFFIRMED.

(d) Disputes involving mineral agreements or permits

SO ORDERED.

It is clear that POA has exclusive and original jurisdiction over any
and all disputes involving rights to mining areas. One such dispute
is an MPSA application to which an adverse claim, protest or
opposition is filed by another interested applicant.1wphi1 In the
case at bar, the dispute arose or originated from MPSA
applications where petitioners are asserting their rights to mining
areas subject of their respective MPSA applications. Since
respondent filed 3 separate petitions for the denial of said
applications, then a controversy has developed between the
parties and it is POAs jurisdiction to resolve said disputes.

64
G.R. No. 178158
December 4, 2009
STRATEGIC ALLIANCE DEVELOPMENT
CORPORATION, Petitioner,
vs.
RADSTOCK SECURITIES LIMITED and PHILIPPINE NATIONAL
CONSTRUCTION CORPORATION,Respondents.
ASIAVEST MERCHANT BANKERS BERHAD, Intervenor.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 180428
LUIS SISON, Petitioner,
vs.
PHILIPPINE NATIONAL CONSTRUCTION CORPORATION and
RADSTOCK SECURITIES LIMITED,Respondents.
DECISION
CARPIO, J.:
Prologue
This case is an anatomy of a P6.185 billion1 pillage of the public
coffers that ranks among one of the most brazen and hideous in
the history of this country. This case answers the questions why
our Government perennially runs out of funds to provide basic
services to our people, why the great masses of the Filipino
people wallow in poverty, and why a very select few amass
unimaginable wealth at the expense of the Filipino people.
On 1 May 2007, the 30-year old franchise of Philippine National
Construction Corporation (PNCC) under Presidential Decree No.
1113 (PD 1113), as amended by Presidential Decree No. 1894 (PD
1894), expired. During the 13th Congress, PNCC sought to extend
its franchise. PNCC won approval from the House of
Representatives, which passed House Bill No. 57492 renewing
PNCCs franchise for another 25 years. However, PNCC failed to
secure approval from the Senate, dooming the extension of
PNCCs franchise. Led by Senator Franklin M. Drilon, the Senate
opposed PNCCs plea for extension of its franchise. 3 Senator
Drilons privilege speech4 explains why the Senate chose not to
renew PNCCs franchise:

Second, the PNCC shares of stock with a par value of P2.3 billion
were marked to market and therefore were valued only at P713
million.
Third, the share of the toll revenue assigned was given a net
present value of only P1,287,000,000 because of a 15%
discounted rate that was applied.
In other words, Mr. President, the toll collection of P9,382,374,922
for 27 years was given a net present value of only P1,287,000,000
so that it is made to appear that the compromise agreement is
only worth P6,196,000,000.
Mr. President, my dear colleagues, this agreement will
substantially wipe out all the assets of PNCC. It will be left with
nothing else except, probably, the collection for the next 25 years
or so from the North Luzon Expressway. This agreement brought
PNCC to the cleaners and literally cleaned the PNCC of all its
assets. They brought PNCC to the cleaners and cleaned it to the
tune of P17,676,000,000.
xxxx
Mr. President, are we not entitled, as members of the Committee,
to know who is Radstock Securities Limited?
Radstock Securities Limited was allegedly incorporated under the
laws of the British Virgin Islands. It has no known board of
directors, except for its recently appointed attorney-in-fact, Mr.
Carlos Dominguez.
Mr. President, are the members of the Committee not entitled to
know why 20 years after the account to Marubeni Corporation,
which gave rise to the compromise agreement 20 years after the
obligation was allegedly incurred, PNCC suddenly recognized this
obligation in its books when in fact this obligation was not found in
its books for 20 years?

I repeat, Mr. President. PNCC has agreed in a compromise

agreement dated 17 August 2006 to transfer to Radstock
Securities Limited P17,676,063,922, no small money, Mr.
President, my dear colleagues, P17.6 billion.

In other words, Mr. President, for 20 years, the financial

statements of PNCC did not show any obligation to Marubeni,
much less, to Radstock. Why suddenly on October 20, 2000, P10
billion in obligation was recognized? Why was it recognized?

What does it consist of? It consists of the following: 19 pieces of

real estate properties with an appraised value ofP5,993,689,000.
Do we know what is the bulk of this? An almost 13-hectare
property right here in the Financial Center. As we leave the
Senate, as we go out of this Hall, as we drive thru past the GSIS,
we will see on the right a vacant lot, that is PNCC property. As we
turn right on Diosdado Macapagal, we see on our right new
buildings, these are all PNCC properties. That is 12.9 hectares of
valuable asset right in this Financial Center that is
worthP5,993,689.000.

During the hearing on December 18, Mr. President, we asked this

question to the Asset Privatization Trust (APT) trustee, Atty.
Raymundo Francisco, and he was asked: "What is the basis of your
recommendation to recognize this?" He said: "I based my
recommendation on a legal opinion of Feria and Feria." I asked
him: "Who knew of this opinion?" He said: "Only me and the
chairman of PNCC, Atty. Renato Valdecantos." I asked him: "Did
you share this opinion with the members of the board who
recognized the obligation of P10 billion?" He said: "No." "Can you
produce this opinion now?" He said: "I have no copy."

What else, Mr. President? The 20% of the outstanding capital stock
of PNCC with a par value of P2,300,000,000-- I repeat, 20% of the
outstanding capital stock of PNCC worth P2,300 billion-- was
assigned to Radstock.

Mysteriously, Mr. President, an obligation of P10 billion based on a

legal opinion which, even Mr. Arthur Aguilar, the chairman of
PNCC, is not aware of, none of the members of the PNCC board on
October 20, 2000 who recognized this obligation had seen this
opinion. It is mysterious.

In addition, Mr. President and my dear colleagues, please hold on

to your seats because part of the agreement is 50% of PNCCs 6%
share in the gross toll revenue of the Manila North Tollways
Corporation for 27 years, from 2008 to 2035, is being assigned to
Radstock. How much is this worth? It is worth P9,382,374,922. I
repeat,P9,382,374,922.
xxxx
Mr. President, P17,676,000,000, however, was made to appear in
the agreement to be only worthP6,196,156,488. How was this
achieved? How was an aggregate amount of P17,676,000,000
made to appear to be only P6,196,156,488? First, the 19 pieces of
real estate worth P5,993,689,000 were only assigned a value
ofP4,195,000,000 or only 70% of their appraised value.

Mr. President, are the members of our Committee not entitled to

know why Radstock Securities Limited is given preference over all
other creditors notwithstanding the fact that this is an unsecured
obligation? There is no mortgage to secure this obligation.
More importantly, Mr. President, equally recognized is the
obligation of PNCC to the Philippine government to the tune
of P36 billion. PNCC owes the Philippine government P36 billion
recognized in its books, apart from P3 billion in taxes. Why in the
face of all of these is Radstock given preference? Why is it that
Radstock is given preference to claim P17.676 billion of the assets
of PNCC and give it superior status over the claim of the Philippine
government, of the Filipino people to the extent of P36 billion and
taxes in the amount of P3 billion? Why, Mr. President? Why is
Radstock given preference not only over the Philippine

65
government claims of P39 billion but also over other creditors
including a certain best merchant banker in Asia, which has
already a final and executory judgment against PNCC for
about P300 million? Why, Mr. President? Are we not entitled to
know why the compromise agreement assigned P17.676 billion to
Radstock? Why was it executed?5 (Emphasis supplied)
Aside from Senator Drilon, Senator Sergio S. Osmea III also saw
irregularities in the transactions involving the Marubeni loans,
thus:

million. Okay." They would have walked away. But evidently, the
"ninongs" of Radstock See, I dont care who owns Radstock. I
want to know who is the ninong here who stands to make a lot of
money by being able to get to courts, the government agencies,
OGCC, or whoever else has been involved in this, to agree to 6
billion or whatever it was. Thats a lot of money. And believe me,
Radstock will probably get one or two billion and four billion will
go into somebody elses pocket. Or Radstock will turn around, sell
that claim for P4 billion and let the new guy just collect the
payments over the years.

SEN. OSMEA. Ah okay. Good.

x x x x7

Now, I'd like to point out to the Committee that it seems that
this was a politically driven deal like IMPSA. Because the
acceptance of the 10 billion or 13 billion debt came in October
2000 and the Radstock assignment was January 10, 2001. Now,
why would Marubeni sell for $2 million three months after there
was a recognition that it was owed P10 billion. Can you explain
that, Mr. Dominguez?

SEN. OSMEA. x x x I just wanted to know is CDCP Mining a 100

percent subsidiary of PNCC?
MR. AGUILAR. Hindi ho. Ah, no.
SEN. OSMEA. If theyre not a 100 percent, why would they sign
jointly and severally? I just want to plug the loopholes.
MR. AGUILAR. I think it was if I may just speculate. It was just
common ownership at that time.
SEN. OSMEA. Al right. Now Also, the ...
MR. AGUILAR. Ah, 13 percent daw, Your Honor.
SEN. OSMEA. Huh?
MR. AGUILAR. Thirteen percent ho.
SEN. OSMEA. Whats 13 percent?
MR. AGUILAR. We owned ...
xxxx
SEN. OSMEA. x x x CDCP Mining, how many percent of the equity
of CDCP Mining was owned by PNCC, formerly CDCP?
MS. PASETES. Thirteen percent.
SEN. OSMEA. Thirteen. And as a 13 percent owner, they agreed
to sign jointly and severally?
MS. PASETES. Yes.
SEN. OSMEA. One-three? So poor PNCC and CDCP got taken to
the cleaners here. They sign for a 100 percent and they only own
13 percent.
x x x x8 (Emphasis supplied)
I.
The Case

MR. DOMINGUEZ. Your Honor, I am not aware of the decision

making process of Marubeni. But my understanding was, the
Japanese culture is not a litigious one and they didn't want to get
into a, you know, a court situation here in the Philippines having a
lot of other interest, et cetera.
SEN. OSMEA. Well, but that is beside the point, Mr. Dominguez.
All I am asking is does it stand to reason that after you get an
acceptance by a debtor that he owes you 10 billion, you sell your
note for 100 million.
Now, if that had happened a year before, maybe I would have
understood why he sold for such a low amount. But right after, it
seems that this was part of an orchestrated deal wherein with
certain powerful interest would be able to say, "Yes, we will push
through. We'll fix the courts. We'll fix the board. We'll fix the APT.
And we will be able to do it, just give us 55 percent of whatever is
recovered," am I correct?
MR. DOMINGUEZ. As I said, Your Honor, I am not familiar with the
decision making process of Marubeni. But my understanding was,
as I said, they didn't want to get into a
SEN. OSMEA. All right.
MR. DOMINGUEZ. ...litigious situation.6
xxxx
SEN. OSMEA. All of these financial things can be arranged. They
can hire a local bank, Filipino, to be trustee for the real estate.
So ...
SEN. DRILON. Well, then, thats a dummy relationship.
SEN. OSMEA. In any case, to me the main point here is that a
third party, Radstock, whoever owns it, bought Marubenis right
for $2 million or P100 million. Then, they are able to go through all
these legal machinations and get awarded with the consent of
PNCC of 6 billion. Thats a 100 million to 6 billion. Now, Mr. Aguilar,
you have been in the business for such a long time. I mean, this
hedge funds whether its Radstock or New Bridge or Texas Pacific
Group or Carlyle or Avenue Capital, they look at their returns. So if
Avenue Capital buys something for $2 million and you give him $4
million in one year, its a 100 percent return. Theyll walk away
and dance to their stockholders. So here in this particular case, if
you know that Radstock only bought it for $2 million, I would have
gotten board approval and say, "Okay, lets settle this for $4
million." And Radstock would have jumped up and down. So what
looks to me is that this was already a scheme. Marubeni wrote it
off already. Marubeni wrote everything off. They just got a $2
million and they probably have no more residual rights or maybe
theres a clause there, a secret clause, that says, "I want 20
percent of whatever youre able to eventually collect." So $2
million. But whatever it is, Marubeni practically wrote it off.
Radstocks liability now or exposure is only $2 million plus all the
lawyer fees, under-the-table, etcetera. All right. Okay. So its
pretty obvious to me that if anybody were using his brain, I would
have gone up to Radstock and say, "Heres $4 million. Heres P200

Before this Court are the consolidated petitions for review9 filed by
Strategic Alliance Development Corporation (STRADEC) and Luis
Sison (Sison), with a motion for intervention filed by Asiavest
Merchant Bankers Berhad (Asiavest), challenging the validity of
the Compromise Agreement between PNCC and Radstock. The
Court of Appeals approved the Compromise Agreement in its
Decision of 25 January 200710 in CA-G.R. CV No. 87971.
II.
The Antecedents
PNCC was incorporated in 1966 for a term of fifty years under the
Corporation Code with the name Construction Development
Corporation of the Philippines (CDCP).11 PD 1113, issued on 31
March 1977, granted CDCP a 30-year franchise to construct,
operate and maintain toll facilities in the North and South Luzon
Tollways. PD 1894, issued on 22 December 1983, amended PD
1113 to include in CDCPs franchise the Metro Manila Expressway,
which would "serve as an additional artery in the transportation of
trade and commerce in the Metro Manila area."
Sometime between 1978 and 1981, Basay Mining Corporation
(Basay Mining), an affiliate of CDCP, obtained loans from Marubeni
Corporation of Japan (Marubeni) amounting to 5,460,000,000 yen
and US$5 million. A CDCP official issued letters of guarantee for
the loans, committing CDCP to pay solidarily for the full amount of
the 5,460,000,000 yen loan and to the extent of P20 million for
the US$5 million loan. However, there was no CDCP Board
Resolution authorizing the issuance of the letters of guarantee.
Later, Basay Mining changed its name to CDCP Mining Corporation
(CDCP Mining). CDCP Mining secured the Marubeni loans when
CDCP and CDCP Mining were still privately owned and managed.
Subsequently in 1983, CDCP changed its corporate name to PNCC
to reflect the extent of the Government's equity investment in the
company, which arose when government financial institutions
converted their loans to PNCC into equity following PNCCs

66
inability to pay the loans.12 Various government financial
institutions held a total of seventy-seven point forty-eight percent
(77.48%) of PNCCs voting equity, most of which were later
transferred to the Asset Privatization Trust (APT) under
Administrative Orders No. 14 and 64, series of 1987 and 1988,
respectively.13 Also, the Presidential Commission on Good
Government holds some 13.82% of PNCCs voting equity under a
writ of sequestration and through the voluntary surrender of
certain PNCC shares. In fine, the Government owns 90.3% of the
equity of PNCC and only 9.70% of PNCCs voting equity is under
private ownership.14
Meanwhile, the Marubeni loans to CDCP Mining remained unpaid.
On 20 October 2000, during the short-lived Estrada
Administration, the PNCC Board of Directors15 (PNCC Board)
passed Board Resolution No. BD-092-2000 admitting PNCCs
liability to Marubeni for P10,743,103,388 as of 30 September
1999. PNCC Board Resolution No. BD-092-2000 reads as follows:
RESOLUTION NO. BD-092-2000
RESOLVED, That the Board recognizes, acknowledges and
confirms PNCCs obligations as of September 30, 1999 with the
following entities, exclusive of the interests and other charges
that may subsequently accrue and still become due therein, to
wit:

attachment against PNCC. The trial court ordered PNCCs bank

accounts garnished and several of its real properties attached. On
14 February 2001, PNCC moved to set aside the 23 January 2001
Order and to discharge the writ of attachment. PNCC also filed a
motion to dismiss the case. The trial court denied both motions.
PNCC filed motions for reconsideration, which the trial court also
denied. PNCC filed a petition for certiorari before the Court of
Appeals, docketed as CA-G.R. SP No. 66654, assailing the denial of
the motion to dismiss. On 30 August 2002, the Court of Appeals
denied PNCCs petition. PNCC filed a motion for reconsideration,
which the Court of Appeals also denied in its 22 January 2003
Resolution. PNCC filed a petition for review before this Court,
docketed as G.R. No. 156887.
Meanwhile, on 19 June 2001, at the start of the Arroyo
Administration, the PNCC Board, under a new President and
Chairman, revoked Board Resolution No. BD-099-2000.
The trial court continued to hear the main case. On 10 December
2002, the trial court ruled in favor of Radstock, as follows:
WHEREFORE, premises considered, judgment is hereby rendered
in favor of the plaintiff and the defendant is directed to pay the
total amount of Thirteen Billion One Hundred Fifty One Million Nine
Hundred Fifty Six thousand Five Hundred Twenty Eight Pesos
(P13,151,956,528.00) with interest from October 15, 2001 plus
Ten Million Pesos (P10,000,000.00) as attorneys fees.

a). the Government of the Republic of the Philippines in

the amount of P36,023,784,751.00; and

SO ORDERED.16

b). Marubeni Corporation in the amount

of P10,743,103,388.00. (Emphasis supplied)

PNCC appealed the trial courts decision to the Court of Appeals,

docketed as CA-G.R. CV No. 87971.

This was the first PNCC Board Resolution admitting PNCCs liability
for the Marubeni loans. Previously, for two decades the PNCC
Board consistently refused to admit any liability for the Marubeni
loans.
Less than two months later, or on 22 November 2000, the PNCC
Board passed Board Resolution No. BD-099-2000 amending Board
Resolution No. BD-092-2000. PNCC Board Resolution No. BD-0992000 reads as follows:
RESOLUTION NO. BD-099-2000
RESOLVED, That the Board hereby amends its Resolution No. BD092-2000 dated October 20, 2000 so as to read as follows:
RESOLVED, That the Board recognizes, acknowledges and
confirms its obligations as of September 30, 1999 with the
following entities, exclusive of the interests and other charges
that may subsequently accrue and still due thereon, subject to the
final determination by the Commission on Audit (COA) of the
amount of obligation involved, and subject further to the
declaration of the legality of said obligations by the Office of the
Government Corporate Counsel (OGCC), to wit:
a). the Government of the Republic of the Philippines in
the amount of P36,023,784,751.00; and
b). Marubeni Corporation in the amount
of P10,743,103,388.00. (Emphasis supplied)
In January 2001, barely three months after the PNCC Board first
admitted liability for the Marubeni loans, Marubeni assigned its
entire credit to Radstock for US$2 million or less than P100
million. In short, Radstock paid Marubeni less than 10% of
the P10.743 billion admitted amount. Radstock immediately sent
a notice and demand letter to PNCC.
On 15 January 2001, Radstock filed an action for collection and
damages against PNCC before the Regional Trial Court of
Mandaluyong City, Branch 213 (trial court). In its order of 23
January 2001, the trial court issued a writ of preliminary

On 19 March 2003, this Court issued a temporary restraining order

in G.R. No. 156887 forbidding the trial court from implementing
the writ of preliminary attachment and ordering the suspension of
the proceedings before the trial court and the Court of Appeals. In
its 3 October 2005 Decision, this Court ruled as follows:
WHEREFORE, the petition is partly GRANTED and insofar as the
Motion to Set Aside the Order and/or Discharge the Writ of
Attachment is concerned, the Decision of the Court of Appeals on
August 30, 2002 and its Resolution of January 22, 2003 in CA-G.R.
SP No. 66654 are REVERSED and SET ASIDE. The attachments
over the properties by the writ of preliminary attachment are
hereby ordered LIFTED effective upon the finality of this Decision.
The Decision and Resolution of the Court of Appeals are AFFIRMED
in all other respects. The Temporary Restraining Order is
DISSOLVED immediately and the Court of Appeals is directed to
PROCEED forthwith with the appeal filed by PNCC.
No costs.
SO ORDERED.17
On 17 August 2006, PNCC and Radstock entered into the
Compromise Agreement where they agreed to reduce PNCCs
liability to Radstock, supposedly from P17,040,843,968,
to P6,185,000,000. PNCC and Radstock submitted the
Compromise Agreement to this Court for approval. In a Resolution
dated 4 December 2006 in G.R. No. 156887, this Court referred
the Compromise Agreement to the Commission on Audit (COA) for
comment. The COA recommended approval of the Compromise
Agreement. In a Resolution dated 22 November 2006, this Court
noted the Compromise Agreement and referred it to the Court of
Appeals in CA-G.R. CV No. 87971. In its 25 January 2007 Decision,
the Court of Appeals approved the Compromise Agreement.
STRADEC moved for reconsideration of the 25 January 2007
Decision. STRADEC alleged that it has a claim against PNCC as a
bidder of the National Governments shares, receivables,
securities and interests in PNCC. The matter is subject of a
complaint filed by STRADEC against PNCC and the Privatization
and Management Office (PMO) for the issuance of a Notice of
Award of Sale to Dong-A Consortium of which STRADEC is a

67
partner. The case, docketed as Civil Case No. 05-882, is pending
before the Regional Trial Court of Makati, Branch 146 (RTC Branch
146).
The Court of Appeals treated STRADECs motion for
reconsideration as a motion for intervention and denied it in its 31
May 2007 Resolution. STRADEC filed a petition for review before
this Court, docketed as G.R. No. 178158.
Rodolfo Cuenca (Cuenca), a stockholder and former PNCC
President and Board Chairman, filed an intervention before the
Court of Appeals. Cuenca alleged that PNCC had no obligation to
pay Radstock. The Court of Appeals also denied Cuencas motion
for intervention in its Resolution of 31 May 2007. Cuenca did not
appeal the denial of his motion.
On 2 July 2007, this Court issued an order directing PNCC and
Radstock, their officers, agents, representatives, and other
persons under their control, to maintain the status quo ante.
Meanwhile, on 20 February 2007, Sison, also a stockholder and
former PNCC President and Board Chairman, filed a Petition for
Annulment of Judgment Approving Compromise Agreement before
the Court of Appeals. The case was docketed as CA-G.R. SP No.
97982.
Asiavest, a judgment creditor of PNCC, filed an Urgent Motion for
Leave to Intervene and to File the Attached Opposition and
Motion-in-Intervention before the Court of Appeals in CA-G.R. SP
No. 97982.
In a Resolution dated 12 June 2007, the Court of Appeals
dismissed Sisons petition on the ground that it had no jurisdiction
to annul a final and executory judgment also rendered by the
Court of Appeals. In the same resolution, the Court of Appeals also
denied Asiavests urgent motion.
Asiavest filed its Urgent Motion for Leave to Intervene and to File
the Attached Opposition and Motion-in-Intervention in G.R. No.
178158.18
Sison filed a motion for reconsideration. In its 5 November 2007
Resolution, the Court of Appeals denied Sisons motion.
On 26 November 2007, Sison filed a petition for review before this
Court, docketed as G.R. No. 180428.
In a Resolution dated 18 February 2008, this Court consolidated
G.R. Nos. 178158 and 180428.
On 13 January 2009, the Court held oral arguments on the
following issues:
1. Does the Compromise Agreement violate public
policy?
2. Does the subject matter involve an assumption by the
government of a private entitys obligation in violation of
the law and/or the Constitution? Is the PNCC Board
Resolution of 20 October 2000 defective or illegal?
3. Is the Compromise Agreement viable in the light of the
non-renewal of PNCCs franchise by Congress and its
inclusion of all or substantially all of PNCCs assets?
4. Is the Decision of the Court of Appeals annullable even
if final and executory on grounds of fraud and violation of
public policy and the Constitution?

III.
Propriety of Actions

The Court of Appeals denied STRADECs motion for intervention

on the ground that the motion was filed only after the Court of
Appeals and the trial court had promulgated their respective
decisions.
Section 2, Rule 19 of the 1997 Rules of Civil Procedure provides:
SECTION 2. Time to intervene. The motion to intervene may be
filed at any time before rendition of judgment by the trial court. A
copy of the pleading-in-intervention shall be attached to the
motion and served on the original parties.
The rule is not absolute. The rule on intervention, like all other
rules of procedure, is intended to make the powers of the Court
completely available for justice.19 It is aimed to facilitate a
comprehensive adjudication of rival claims, overriding
technicalities on the timeliness of the filing of the claims.20 This
Court has ruled:
[A]llowance or disallowance of a motion for intervention rests on
the sound discretion of the court after consideration of the
appropriate circumstances. Rule 19 of the Rules of Court is a rule
of procedure whose object is to make the powers of the court fully
and completely available for justice. Its purpose is not to hinder or
delay but to facilitate and promote the administration of justice.
Thus, interventions have been allowed even beyond the
prescribed period in the Rule in the higher interest of justice.
Interventions have been granted to afford indispensable parties,
who have not been impleaded, the right to be heard even after a
decision has been rendered by the trial court, when the petition
for review of the judgment was already submitted for decision
before the Supreme Court, and even where the assailed order has
already become final and executory. In Lim v. Pacquing (310 Phil.
722 (1995)], the motion for intervention filed by the Republic of
the Philippines was allowed by this Court to avoid grave injustice
and injury and to settle once and for all the substantive issues
raised by the parties.21
In Collado v. Court of Appeals,22 this Court reiterated that
exceptions to Section 2, Rule 12 could be made in the interest of
substantial justice. Citing Mago v. Court of Appeals,23 the Court
stated:
It is quite clear and patent that the motions for intervention filed
by the movants at this stage of the proceedings where trial had
already been concluded x x x and on appeal x x x the same
affirmed by the Court of Appeals and the instant petition for
certiorari to review said judgments is already submitted for
decision by the Supreme Court, are obviously and, manifestly late,
beyond the period prescribed under x x x Section 2, Rule 12 of the
Rules of Court.
But Rule 12 of the Rules of Court, like all other Rules therein
promulgated, is simply a rule of procedure, the whole purpose and
object of which is to make the powers of the Court fully and
completely available for justice. The purpose of procedure is not
to thwart justice. Its proper aim is to facilitate the application of
justice to the rival claims of contending parties. It was created not
to hinder and delay but to facilitate and promote the
administration of justice. It does not constitute the thing itself
which courts are always striving to secure to litigants. It is
designed as the means best adopted to obtain that thing. In other
words, it is a means to an end.
Concededly, STRADEC has no legal interest in the subject matter
of the Compromise Agreement. Section 1, Rule 19 of the 1997
Rules of Civil Procedure states:
SECTION 1. Who may intervene. - A person who has a legal
interest in the matter in litigation, or in the success of either of
the parties, or an interest against both, or is so situated as to be
adversely affected by a distribution or other disposition of
property in the custody of the court or of an officer thereof may,
with leave of court, be allowed to intervene in the action. The
Court shall consider whether or not the intervention will unduly
delay or prejudice the adjudication of the rights of the original

68
parties, and whether or not the intervenors rights may be fully
protected in a separate proceeding.

recognized.31 In Solicitor General v. The Metropolitan Manila

Authority,32 this Court held:

STRADECs interest is dependent on the outcome of Civil Case No.

05-882. Unless STRADEC can show that RTC Branch 146 had
already decided in its favor, its legal interest is simply contingent
and expectant.

Unquestionably, the Court has the power to suspend procedural

rules in the exercise of its inherent power, as expressly recognized
in the Constitution, to promulgate rules concerning pleading,
practice and procedure in all courts. In proper cases, procedural
rules may be relaxed or suspended in the interest of substantial
justice, which otherwise may be miscarried because of a rigid and
formalistic adherence to such rules. x x x

However, Asiavest has a direct and material interest in the

approval or disapproval of the Compromise Agreement. Asiavest is
a judgment creditor of PNCC in G.R. No. 110263 and a court has
already issued a writ of execution in its favor. Asiavests interest is
actual and material, direct and immediate characterized by either
gain or loss from the judgment that this Court may
render.24 Considering that the Compromise Agreement involves
the disposition of all or substantially all of the assets of PNCC,
Asiavest, as PNCCs judgment creditor, will be greatly prejudiced if
the Compromise Agreement is eventually upheld.
Sison has legal standing to challenge the Compromise Agreement.
Although there was no allegation that Sison filed the case as a
derivative suit in the name of PNCC, it could be fairly deduced
that Sison was assailing the Compromise Agreement as a
stockholder of PNCC. In such a situation, a stockholder of PNCC
can sue on behalf of PNCC to annul the Compromise Agreement.
A derivative action is a suit by a stockholder to enforce a
corporate cause of action.25 Under the Corporation Code, where a
corporation is an injured party, its power to sue is lodged with its
board of directors or trustees.26However, an individual stockholder
may file a derivative suit on behalf of the corporation to protect or
vindicate corporate rights whenever the officials of the
corporation refuse to sue, or are the ones to be sued, or hold
control of the corporation.27 In such actions, the corporation is the
real party-in-interest while the suing stockholder, on behalf of the
corporation, is only a nominal party.28
In this case, the PNCC Board cannot conceivably be expected to
attack the validity of the Compromise Agreement since the PNCC
Board itself approved the Compromise Agreement. In fact, the
PNCC Board steadfastly defends the Compromise Agreement for
allegedly being advantageous to PNCC.
Besides, the circumstances in this case are peculiar. Sison, as
former PNCC President and Chairman of the PNCC Board, was
responsible for the approval of the Board Resolution issued on 19
June 2001 revoking the previous Board Resolution admitting
PNCCs liability for the Marubeni loans.29 Such revocation,
however, came after Radstock had filed an action for collection
and damages against PNCC on 15 January 2001. Then, when the
trial court rendered its decision on 10 December 2002 in favor of
Radstock, Sison was no longer the PNCC President and Chairman,
although he remains a stockholder of PNCC.
When the case was on appeal before the Court of Appeals, there
was no need for Sison to avail of any remedy, until PNCC and
Radstock entered into the Compromise Agreement, which
disposed of all or substantially all of PNCCs assets. Sison came to
know of the Compromise Agreement only in December 2006.
PNCC and Radstock submitted the Compromise Agreement to the
Court of Appeals for approval on 10 January 2007. The Court of
Appeals approved the Compromise Agreement on 25 January
2007. To require Sison at this stage to exhaust all the remedies
within the corporation will render such remedies useless as the
Compromise Agreement had already been approved by the Court
of Appeals. PNCCs assets are in danger of being dissipated in
favor of a private foreign corporation. Thus, Sison had no recourse
but to avail of an extraordinary remedy to protect PNCCs assets.
Besides, in the interest of substantial justice and for compelling
reasons, such as the nature and importance of the issues raised in
this case,30 this Court must take cognizance of Sisons action. This
Court should exercise its prerogative to set aside technicalities in
the Rules, because after all, the power of this Court to suspend its
own rules whenever the interest of justice requires is well

We have made similar rulings in other cases, thus:

Be it remembered that rules of procedure are but mere tools
designed to facilitate the attainment of justice. Their strict and
rigid application, which would result in technicalities that tend to
frustrate rather than promote substantial justice, must always be
avoided. x x x Time and again, this Court has suspended its own
rules and excepted a particular case from their operation
whenever the higher interests of justice so require.
IV.
The PNCC Board Acted in Bad Faith and with Gross
Negligence
in Directing the Affairs of PNCC
In this jurisdiction, the members of the board of directors have a
three-fold duty: duty of obedience, duty of diligence, and duty of
loyalty.33 Accordingly, the members of the board of directors (1)
shall direct the affairs of the corporation only in accordance with
the purposes for which it was organized;34 (2) shall not willfully
and knowingly vote for or assent to patently unlawful acts
of the corporation or act in bad faith or with gross
negligence in directing the affairs of the corporation;35 and
(3) shall not acquire any personal or pecuniary interest in conflict
with their duty as such directors or trustees. 36
In the present case, the PNCC Board blatantly violated its duty of
diligence as it miserably failed to act in good faith in handling the
affairs of PNCC.
First. For almost two decades, the PNCC Board had consistently
refused to admit liability for the Marubeni loans because of the
absence of a PNCC Board resolution authorizing the issuance of
the letters of guarantee.
There is no dispute that between 1978 and 1980, Marubeni
Corporation extended two loans to Basay Mining (later renamed
CDCP Mining): (1) US$5 million to finance the purchase of copper
concentrates by Basay Mining; and (2)Y5.46 billion to finance the
completion of the expansion project of Basay Mining including
working capital.
There is also no dispute that it was only on 20 October 2000 when
the PNCC Board approved a resolution expressly admitting PNCCs
liability for the Marubeni loans. This was the first Board Resolution
admitting liability for the Marubeni loans, for PNCC never admitted
liability for these debts in the past. Even Radstock admitted that
PNCCs 1994 Financial Statements did not reflect the Marubeni
loans.37 Also, former PNCC Chairman Arthur Aguilar stated during
the Senate hearings that "the Marubeni claim was never in the
balance sheet x x x nor was it in a contingent account." 38 Miriam
M. Pasetes, SVP Finance of PNCC, and Atty. Herman R. Cimafranca
of the Office of the Government Corporate Counsel, confirmed this
fact, thus:
SEN. DRILON. x x x And so, PNCC itself did not recognize this as an
obligation but the board suddenly recognized it as an obligation. It
was on that basis that the case was filed, is that correct? In fact,
the case hinges on they knew that this claim has prescribed but
because of that board resolution which recognized the obligation
they filed their complaint, is that correct?

69
MR. CIMAFRANCA. Apparently, it's like that, Senator, because the
filing of the case came after the acknowledgement.

demand by the creditor, or when there is any written

acknowledgment of the debt by the debtor.45

SEN. DRILON. Yes. In fact, the filing of the case came three months
after the acknowledgement.

In this case, Basay Mining obtained the Marubeni loans sometime

between 1978 and 1981. While Radstock claims that numerous
demand letters were sent to PNCC, based on the records, the
extrajudicial demands to pay the loans appear to have been made
only in 1984 and 1986. Meanwhile, the written acknowledgment
of the debt, in the form of Board Resolution No. BD-092-2000, was
issued only on 20 October 2000.

MR. CIMAFRANCA. Yes. And that made it difficult to handle on our

part.
SEN. DRILON. That is correct. So, that it was an obligation
which was not recognized in the financial statements of
PNCC but revived in the financial statements because it
has prescribed but revived by the board effectively. That's
the theory, at least, of the plaintiff. Is that correct? Who
can answer that?
Ms. Pasetes, yes.
MS. PASETES. It is not an obligation of PNCC that is why it is not
reflected in the financial statements.39 (Emphasis supplied)
In short, after two decades of consistently refuting its liability for
the Marubeni loans, the PNCC Board suddenly and inexplicably
reversed itself by admitting in October 2000 liability for the
Marubeni loans. Just three months after the PNCC Board
recognized the Marubeni loans, Radstock acquired Marubeni's
receivable and filed the present collection case.
Second. The PNCC Board admitted liability for the Marubeni loans
despite PNCCs total liabilities far exceeding its assets. There is no
dispute that the Marubeni loans, once recognized, would wipe out
the assets of PNCC, "virtually emptying the coffers of the
PNCC."40 While PNCC insists that it remains financially viable, the
figures in the COA Audit Reports tell otherwise.41 For 2006 and
2005, "the Corporation has incurred negative gross margin
of P84.531 Million and P80.180 Million, respectively,
and net losses that had accumulated in a deficit
of P14.823 Billion as of 31 December 2006."42 The COA even
opined that "unless [PNCC] Management addresses the
issue on net losses in its financial rehabilitation plan, x x x
the Corporation may not be able to continue its operations
as a going concern."
Notably, during the oral arguments before this Court, the
Government Corporate Counsel admitted the PNCCs huge
negative net worth, thus:
JUSTICE CARPIO
x x x what is the net worth now of PNCC? Negative what?
Negative 6 Billion at least[?]
ATTY. AGRA

Thus, more than ten years would have already lapsed between
Marubenis extrajudicial demands in 1984 and 1986 and the
acknowledgment by the PNCC Board of the Marubeni loans in
2000. However, the PNCC Board suddenly passed Board
Resolution No. BD-092-2000 expressly admitting liability for the
Marubeni loans. In short, the PNCC Board admitted liability for the
Marubeni loans despite the fact that the same might no longer be
judicially collectible. Although the legal advantage was obviously
on its side, the PNCC Board threw in the towel even before the
fight could begin. During the Senate hearings, the matter of
prescription was discussed, thus:
SEN. DRILON. ... the prescription period is 10 years and there were
no payments the last demands were made, when? The last
demands for payment?
MS. OGAN. It was made January 2001 prior to the filing of the
case.
SEN. DRILON. Yes, all right. Before that, when was the last
demand made? By the time they filed the complaint more than 10
years already lapsed.
MS. OGAN. On record, Mr. Chairman, we have demands starting
from - - a series of demands which started from May 23, 1984,
letter from Marubeni to PNCC, demand payment. And we also
have the letter of September 3, 1986, letter of Marubeni to then
PNCC Chair Mr. Jaime. We have the June 24, 1986 letter from
Marubeni to the PNCC Chairman. Also the March 4, 1988 letter...
SEN. DRILON. The March 4, 1988 letter is not a demand letter.
MS. OGAN. It is exactly addressed to the Asset Privatization Trust.
SEN. DRILON. It is not a demand letter? Okay.
MS. OGAN. And we have also...
SEN. DRILON. Anyway...
THE CHAIRMAN. Please answer when you are asked, Ms. Ogan. We
want to put it on the record whether it is "yes" or "no".
MS. OGAN. Yes, sir.
SEN. DRILON. So, even assuming that all of those were demand
letters, the 10 years prescription set in and it should have
prescribed in 1998, whatever is the date, or before the case was
filed in 2001.

Yes, your Honor.43 (Emphasis supplied)

Clearly, the PNCC Boards admission of liability for the Marubeni
loans, given PNCCs huge negative net worth of at least P6 billion
as admitted by PNCCs counsel, or P14.823 billion based on the
2006 COA Audit Report, would leave PNCC an empty shell, without
any assets to pay its biggest creditor, the National Government
with an admitted receivable of P36 billion from PNCC.
Third. In a debilitating self-inflicted injury, the PNCC Board revived
what appeared to have been a dead claim by abandoning one of
PNCCs strong defenses, which is the prescription of the action to
collect the Marubeni loans.
Settled is the rule that actions prescribe by the mere lapse of time
fixed by law.44 Under Article 1144 of the Civil Code, an action upon
a written contract, such as a loan contract, must be brought
within ten years from the time the right of action accrues. The
prescription of such an action is interrupted when the action is
filed before the court, when there is a written extrajudicial

MR. CIMAFRANCA. The 10-year period for if the contract is

written, it's 10 years and it should have prescribed in 10 years
and we did raise that in our answer, in our motion to dismiss.
SEN. DRILON. I know. You raised this in your motion to dismiss and
you raised this in your answer. Now, we are not saying that you
were negligent in not raising that. What we are just putting on the
record that indeed there is basis to argue that these claims have
prescribed.
Now, the reason why there was a colorable basis on the complaint
filed in 2001 was that somehow the board of PNCC recognized the
obligation in a special board meeting on October 20, 2000. Hindi
ba ganoon 'yon?
MS. OGAN. Yes, that is correct.

70
SEN. DRILON. Why did the PNCC recognize this obligation in 2000
when it was very clear that at that point more than 10 years have
lapsed since the last demand letter?

Fourth. The basis for the admission of liability for the Marubeni
loans, which was an opinion of the Feria Law Office, was not even
shown to the PNCC Board.

MR. AGUILAR. May I volunteer an answer?

Atty. Raymundo Francisco, the APT trustee overseeing the

proposed privatization of PNCC at the time, was responsible for
recommending to the PNCC Board the admission of PNCCs
liability for the Marubeni loans. Atty. Francisco based his
recommendation solely on a mere alleged opinion of the Feria Law
Office. Atty. Francisco did not bother to show this "Feria opinion"
to the members of the PNCC Board, except to Atty. Renato
Valdecantos, who as the then PNCC Chairman did not also show
the "Feria opinion" to the other PNCC Board members. During the
Senate hearings, Atty. Francisco could not produce a copy of the
"Feria opinion." The Senators grilled Atty. Francisco on his
recommendation to recognize PNCCs liability for the Marubeni
loans, thus:

SEN. DRILON. Please.

MR. AGUILAR. I looked into that, Mr. Chairman, Your Honor. It was
as a result of and I go to the folder letter "N." In our own demand
research it was not period, Your Honor, that Punongbayan in the
big folder, sir, letter "N" it was the period where PMO was selling
PNCC and Punongbayan and Araullo Law Office came out with an
investment brochure that indicated liabilities both to national
government and to Marubeni/Radstock. So, PMO said, "For good
order, can you PNCC board confirm that by board resolution?"
That's the tone of the letter.
SEN. DRILON. Confirm what? Confirm the liabilities that are
contained in the Punongbayan investment prospectus both to the
national government and to PNCC. That is the reason at least from
the record, Your Honor, how the PNCC board got to deliberate on
the Marubeni.
THE CHAIRMAN. What paragraph? Second to the last paragraph?
MR. AGUILAR. Yes. Yes, Mr. Chairman. Ito po 'yong that"s to our
recollection, in the records, that was the reason.
SEN. DRILON. Is that the only reason why ...
MR. AGUILAR. From just the records, Mr. Chairman, and then
interviews with people who are still around.
SEN. DRILON. You mean, you acknowledged a prescribed
obligation because of this paragraph?
MR. AGUILAR. I dont know what legal advice we were following at
that time, Mr. Chairman.46 (Emphasis supplied)
Besides prescription, the Office of the Government Corporate
Counsel (OGCC) originally believed that PNCC had another
formidable legal weapon against Radstock, that is, the lack of
authority of Alfredo Asuncion, then Executive Vice-President of
PNCC, to sign the letter of guarantee on behalf of CDCP. During
the Senate hearings, the following exchange reveals the OGCCs
original opinion:
THE CHAIRMAN. What was the opinion of the Office of the
Government Corporate Counsel?
MS. OGAN. The opinion of the Office of the Government Corporate
Counsel is that PNCC should exhaust all means to resist the case
using all defenses available to a guarantee and a surety that there
is a valid ground for PNCC's refusal to honor or make good the
alleged guarantee obligation. It appearing that from the
documents submitted to the OGCC that there is no board
authority in favor or authorizing Mr. Asuncion, then EVP, to sign or
execute the letter of guarantee in behalf of CDCP and that said
letter of guarantee is not legally binding upon or enforceable
against CDCP as principals, your Honors.47
xxxx
SEN. DRILON. Now that we have read this, what was the opinion of
the Government Corporate Counsel, Mr. Cimafranca?
MR. CIMAFRANCA. Yes, Senator, we did issue an opinion upon the
request of PNCC and our opinion was that there was no valid
obligation, no valid guarantee. And we incorporated that in our
pleadings in court.48 (Emphasis supplied)
Clearly, PNCC had strong defenses against the collection suit filed
by Radstock, as originally opined by the OGCC. It is quite puzzling,
therefore, that the PNCC Board, which had solid grounds to refute
the legitimacy of the Marubeni loans, admitted its liability and
entered into a Compromise Agreement that is manifestly and
grossly prejudicial to PNCC.

THE CHAIRMAN. x x x You were the one who wrote this letter or
rather this memorandum dated 17 October 2000 to Atty.
Valdecantos. Can you tell us the background why you wrote the
letter acknowledging a debt which is non-existent?
MR. FRANCISCO. I was appointed as the trustee in charge of the
privatization of the PNCC at that time, sir. And I was tasked to do a
study and engage the services of financial advisors as well as
legal advisors to do a legal audit and financial study on the
position of PNCC. I bidded out these engagements, the financial
advisership went to Punongbayan and Araullo. The legal audit
went to the Feria Law Offices.
THE CHAIRMAN. Spell it. Boy Feria?
MR. FRANCISCO. Feria-- Feria.
THE CHAIRMAN. Lugto?
MR. FRANCISCO. Yes. Yes, Your Honor. And this was the findings of
the Feria Law Office that the Marubeni account was a legal
obligation.
So, I presented this to our board. Based on the findings of the
legal audit conducted by the Ferial Law Offices, sir.
THE CHAIRMAN. Why did you not ask the government corporate
counsel? Why did you have to ask for the opinion of an outside
counsel?
MR. FRANCISCO. That was the that was the mandate given to us,
sir, that we have to engage the ...
THE CHAIRMAN. Mandate given by whom?
MR. FRANCISCO. That is what we usually do, sir, in the APT.
THE CHAIRMAN. Ah, you get outside counsel?
MR. FRANCISCO. Yes, we...
THE CHAIRMAN. Not necessarily the government corporate
counsel?
MR. FRANCISCO. No, sir.
THE CHAIRMAN. So, on the basis of the opinion of outside counsel,
private, you proceeded to, in effect, recognize an obligation which
is not even entered in the books of the PNCC? You probably
resuscitated a non-existing obligation anymore?
MR. FRANCISCO. Sir, I just based my recommendation on the
professional findings of the law office that we engaged, sir.
THE CHAIRMAN. Did you not ask for the opinion of the government
corporate counsel?
MR. FRANCISCO. No, sir.
THE CHAIRMAN. Why?
MR. FRANCISCO. I felt that the engagements of the law office was
sufficient, anyway we were going to raise it to the Committee on
Privatization for their approval or disapproval, sir.
THE CHAIRMAN. The COP?
MR. FRANCISCO. Yes, sir.
THE CHAIRMAN. Thats a cabinet level?

71
MR. FRANCISCO. Yes, sir. And we did that, sir.
THE CHAIRMAN. Now... So you sent your memo to Atty. Renato B.
Valdecantos, who unfortunately is not here but I think we have to
get his response to this. And as part of the minutes of special
meeting with the board of directors on October 20, 2000, the
board resolved in its Board Resolution No. 092-2000, the board
resolved to recognize, acknowledge and confirm PNCCs
obligations as of September 30, 1999, etcetera, etcetera. (A), or
rather (B), Marubeni Corporation in the amount of P10,740,000.
Now, we asked to be here because the franchise of PNCC is
hanging in a balance because of the on the questions on this
acknowledgement. So we want to be educated.
Now, the paper trail starts with your letter. So, thats it thats my
kuwan, Frank.
Yes, Senator Drilon.
SEN. DRILON. Thank you, Mr. Chairman.
Yes, Atty. Francisco, you have a copy of the minutes of October 20,
2000?
MR. FRANCISCO. Im sorry, sir, we dont have a copy.
SEN. DRILON. May we ask the corporate secretary of PNCC to
provide us with a copy?
Okay naman andiyan siya.
(Ms. Ogan handing the document to Mr. Francisco.)
You have familiarized yourselves with the minutes, Atty. Francisco?
MR. FRANCISCO. Yes, sir.
SEN. DRILON. Now, mention is made of a memorandum here on
line 8, page 3 of this boards minutes. It says, "Director Francisco
has prepared a memorandum requesting confirmation,
acknowledgement, and ratification of this indebtedness of PNCC
to the national government which was determined by Bureau of
Treasury as of September 30, 1999 is 36,023,784,751. And with
respect to PNCCs obligation to Marubeni, this has been
determined to be in the total amount of 10,743,103,388, also as
of September 30, 1999; that there is need to ratify this because
there has already been a representation made with respect to the
review of the financial records of PNCC by Punongbayan and
Araullo, which have been included as part of the package of APTs
disposition to the national governments interest in PNCC."
You recall having made this representation as found in the
minutes, I assume, Atty. Francisco?
MR. FRANCISCO. Yes, sir. But Id like to be refreshed on the
memorandum, sir, because I dont have a copy.
SEN. DRILON. Yes, this memorandum was cited earlier by Senator
Arroyo, and maybe the secretary can give him a copy? Give him a
copy?
MS. OGAN. (Handing the document to Mr. Francisco.)

SEN. DRILON. ... Navarro denied that he made this

recommendation.
THE CHAIRMAN. He asked for opinion, legal opinion.
SEN. DRILON. He said that they never made this representation
and the transcript will bear us out. They said that they never
made this representation that the account of Marubeni should be
recognized.
MR. FRANCISCO. Mr. Chairman, in the memorandum, I only
mentioned here the acknowledgement and confirmation of the
PNCC obligations. I was not asking for a ratification. I never
mentioned ratification in the memorandum. I just based my memo
based on the due diligence audit of the Feria Law Offices.
SEN. DRILON. Can you say that again? You never asked for a
ratification...
MR. FRANCISCO. No. I never mentioned in my memorandum that I
was asking for a ratification. I was just in my memo it says,
"acknowledging and confirming the PNCC obligation." This was
what ...
SEN. DRILON. Isnt it the same as ratification? I mean, whats the
difference?
MR. FRANCISCO. I well, my memorandum was meant really just
to confirm the findings of the legal audit as ...
SEN. DRILON. In your mind as a lawyer, Atty. Francisco, theres a
difference between ratification and whats your term? -acknowledgment and confirmation?
MR. FRANCISCO. Well, I guess theres no difference, Mr. Chairman.
SEN. DRILON. Right.
Anyway, just of record, the Punongbayan representatives here
yesterday said that they never made such representation.
In any case, now youre saying its the Feria Law Office who
rendered that opinion? Can we you know, yesterday we were
asking for a copy of this opinion but we were never furnished one.
The ... no less than the Chairman of this Committee was asking for
a copy.
THE CHAIRMAN. Well, copy of the opinion...
MS. OGAN. Yes, Mr. Chairman, we were never furnished a copy of
this opinion because its opinion rendered for the Asset
Privatization Trust which is its client, not the PNCC, Mr. Chairman.

MR. FRANCISCO. Your Honor, I have here a memorandum to the

PNCC board through Atty. Valdecantos, which says that in the
last paragraph, if I may read? "May we request therefore, that a
board resolution be adopted, acknowledging and confirming the
aforementioned PNCC obligations with the national government
and Marubeni as borne out by the due diligence audit."

THE CHAIRMAN. All right. The question is whether but you see,
this is a memorandum of Atty. Francisco to the Chairman of the
Asset Privatization Trust. You say now that you were never
furnished a copy because thats supposed to be with the Asset ...

SEN. DRILON. This is the memorandum referred to in these

minutes. This memorandum dated 17 October 2000 is the
memorandum referred to in the minutes.

THE CHAIRMAN. ... but yet the action of or rather the opinion of
the Feria Law Offices was in effect adopted by the board of
directors of PNCC in its minutes of October 20, 2000 where you
are the corporate secretary, Ms. Ogan.

MS. OGAN. Yes, Mr. Chairman.

MR. FRANCISCO. I would assume, Mr. Chairman.

MS. OGAN. Yes, Mr. Chairman.
SEN. DRILON. Right.
Now, the Punongbayan representative who was here yesterday,
Mr...

THE CHAIRMAN. So, what I am saying is that this opinion or rather

the opinion of the Feria Law Offices of which you dont have a
copy?

THE CHAIRMAN. Navarro.

MS. OGAN. Yes, sir.

72
THE CHAIRMAN. And the reason being that, it does not concern
the PNCC because thats an opinion rendered for APT and not for
the PNCC.
MS. OGAN. Yes, Mr. Chairman, that was what we were told
although we made several requests to the APT, sir.
THE CHAIRMAN. All right. Now, since it was for the APT and not for
the PNCC, I ask the question why did PNCC adopt it? That was not
for the consumption of PNCC. It was for the consumption of the
Asset Privatization Trust. And that is what Atty. Francisco says and
its confirmed by you saying that this was a memo you dont
have a copy because this was sought for by APT and the Feria Law
Offices just provided an opinion provided the APT with an
opinion. So, as corporate secretary, the board of directors of PNCC
adopted it, recognized the Marubeni Corporation.
You read the minutes of the October 20, 2000 meeting of the
board of directors on Item V. The resolution speaks of .. so, go
ahead.
MS. OGAN. I gave my copies. Yes, sir.
THE CHAIRMAN. In effect the Feria Law Offices opinion was for the
consumption of the APT.
MS. OGAN. That was what we were told, Mr. Chairman.
THE CHAIRMAN. And you were not even provided with a copy.
THE CHAIRMAN. Yet you adopted it.
MS. OGAN. Yes, sir.
SEN DRILON. Considering you were the corporate secretary.
THE CHAIRMAN. She was the corporate secretary.
SEN. DRILON. She was just recording the minutes.
THE CHAIRMAN. Yes, she was recording.
Now, we are asking you now why it was taken up?
MS. OGAN. Yes, sir, Mr. Chairman, this was mentioned in the
memorandum of Atty. Francisco, memorandum to the board.
SEN. DRILON. Mr. Chairman, Mr. Francisco represented APT in the
board of PNCC. And is that correct, Mr. Francisco?
THE CHAIRMAN. Youre an ex-officio member.
SEN. DRILON. Yes.
MR. FRANCISCO. Ex-officio member only, sir, as trustee in charge
of the privatization of PNCC.
SEN. DRILON. With the permission of Mr. Chair, may I ask a
question...
THE CHAIRMAN. Oh, yes, Senator Drilon.
SEN. DRILON. Atty. Francisco, you sat in the PNCC board as APT
representative, you are a lawyer, there was a legal opinion of
Feria, Feria, Lugto, Lao Law Offices which you cited in your
memorandum. Did you discuss first, did you give a copy of this
opinion to PNCC?
MR. FRANCISCO. I gave a copy of this opinion, sir, to our chairman
who was also a member of the board of PNCC, Mr. Valdecantos, sir.
SEN. DRILON. And because he was...
MR. FRANCISCO. Because he was my immediate boss in the APT.
SEN. DRILON. Apparently, [it] just ended up in the personal
possession of Mr. Valdecantos because the corporate secretary,
Glenda Ogan, who is supposed to be the custodian of the records
of the board never saw a copy of this.
MR. FRANCISCO. Well, sir, my the copy that I gave was to Mr.
Valdecantos because he was the one sitting in the PNCC board, sir.
SEN. DRILON. No, you sit in the board.
MR. FRANCISCO. I was just an ex-officio member. And all my
reports were coursed through our Chairman, Mr. Valdecantos, sir.
SEN. DRILON. Now, did you ever tell the board that there is a legal
position taken or at least from the documents it is possible that
the claim has prescribed?
MR. FRANCISCO. I took this up in the board meeting of the PNCC
at that time and I told them about this matter, sir.
SEN. DRILON. No, you told them that the claim could have, under
the law, could have prescribed?
MR. FRANCISCO. No, sir.
SEN. DRILON. Why? You mean, you didnt tell the board that it is
possible that this liability is no longer a valid liability because it
has prescribed?

MR. FRANCISCO. I did not dwell into the findings anymore, sir,
because I found the professional opinion of the Feria Law Office to
be sufficient.49 (Emphasis supplied)
Atty. Franciscos act of recommending to the PNCC Board the
acknowledgment of the Marubeni loans based only on an opinion
of a private law firm, without consulting the OGCC and without
showing this opinion to the members of the PNCC Board except to
Atty. Valdecantos, reflects how shockingly little his concern was for
PNCC, contrary to his claim that "he only had the interest of PNCC
at heart." In fact, if what was involved was his own money, Atty.
Francisco would have preferred not just two, but at least three
different opinions on how to deal with the matter, and he would
have maintained his non-liability.
SEN. OSMEA. x x x
All right. And lastly, just to clear our minds, there has always been
this finger-pointing, of course, whenever this is typical Filipino.
When they're caught in a bind, they always point a finger, they
pretend they don't know. And it just amazes me that you have
been appointed trustees, meaning, representatives of the Filipino
people, that's what you were at APT, right? You were not Erap's
representatives, you were representative of the Filipino people
and you were tasked to conserve the assets that that had been
confiscated from various cronies of the previous administration.
And here, you are asked to recognize the P10 billion debt and you
point only to one law firm. If you have cancer, don't you to a
second opinion, a second doctor or a third doctor? This is just a
question. I am just asking you for your opinion if you would take
the advice of the first doctor who tells you that he's got to open
you up.
MR. FRANCISCO. I would go to three or more doctors, sir.
SEN. OSMEA. Three or more. Yeah, that's right. And in this case
the APT did not do so.
MR. FRANCISCO. We relied on the findings of the
SEN. OSMEA. If these were your money, would you have gone
also to obtain a second, third opinion from other law firms. Kung
pera mo itong 10 billion na ito. Siguro you're not gonna give it up
that easily ano, 'di ba?
MR. FRANCISCO. Yes, sir.
SEN. OSMEA. You'll probably keep it in court for the next 20
years.
x x x x50 (Emphasis supplied)
This is a clear admission by Atty. Francisco of bad faith in directing
the affairs of PNCC - that he would not have recognized the
Marubeni loans if his own funds were involved or if he were the
owner of PNCC.
The PNCC Board admitted liability for the P10.743 billion Marubeni
loans without seeing, reading or discussing the "Feria opinion"
which was the sole basis for its admission of liability. Such act
surely goes against ordinary human nature, and amounts to gross
negligence and utter bad faith, even bordering on fraud, on the
part of the PNCC Board in directing the affairs of the corporation.
Owing loyalty to PNCC and its stockholders, the PNCC Board
should have exercised utmost care and diligence in admitting a
gargantuan debt of P10.743 billion that would certainly force
PNCC into insolvency, a debt that previous PNCC Boards in the
last two decades consistently refused to admit.
Instead, the PNCC Board admitted PNCCs liability for the
Marubeni loans relying solely on a mere opinion of a private law
office, which opinion the PNCC Board members never saw, except
for Atty. Valdecantos and Atty. Francisco. The PNCC Board knew
that PNCC, as a government owned and controlled corporation
(GOCC), must rely "exclusively" on the opinion of the OGCC.

73
Section 1 of Memorandum Circular No. 9 dated 27 August 1998
issued by the President states:

MR. LAYA. Yes, sir.

THE CHAIRMAN. This minutes that we have?

SECTION 1. All legal matters pertaining to government-owned or

controlled corporations, their subsidiaries, other corporate offsprings and government acquired asset corporations (GOCCs)
shall be exclusively referred to and handled by the Office of the
Government Corporate Counsel (OGCC). (Emphasis supplied)
The PNCC Board acted in bad faith in relying on the opinion of a
private lawyer knowing that PNCC is required to rely "exclusively"
on the OGCCs opinion. Worse, the PNCC Board, in admitting
liability for P10.743 billion, relied on the recommendation of a
private lawyer whose opinion the PNCC Board members have not
even seen.
During the oral arguments, Atty. Sison explained to the Court that
the intention of APT was for the PNCC Board merely to disclose
the claim of Marubeni as part of APT's full disclosure policy to
prospective buyers of PNCC. Atty. Sison stated that it was not the
intention of APT for the PNCC Board to admit liability for the
Marubeni loans, thus:
x x x It was the Asset Privatization Trust A-P-T that was tasked to
sell the company. The A-P-T, for purposes of disclosure
statements, tasked the Feria Law Office to handle the
documentation and the study of all legal issues that had to be
resolved or clarified for the information of prospective bidders and
or buyers. In the performance of its assigned task the Feria Law
Office came upon the Marubeni claim and mentioned that the
APTC and/or PNCC must disclose that there is a claim by Marubeni
against PNCC for purposes of satisfying the requirements of full
disclosure. This seemingly innocent statement or requirement
made by the Feria Law Office was then taken by two officials of
the Asset Privatization Trust and with malice aforethought turned
it into the basis for a multi-billion peso debt by the now
government owned and/or controlled PNCC. x x x. 51 (Emphasis
supplied)
While the PNCC Board passed Board Resolution No. BD-099-2000
amending Board Resolution No. BD-092-2000, such amendment
merely added conditions for the recognition of the Marubeni loans,
namely, subjecting the recognition to a final determination by
COA of the amount involved and to the declaration by OGCC of
the legality of PNCCs liability. However, the PNCC Board
reiterated and stood firm that it "recognizes, acknowledges and
confirms its obligations" for the Marubeni loans. Apparently, Board
Resolution No. BD-099-2000 was a futile attempt to "revoke"
Board Resolution No. BD-092-2000. Atty. Alfredo Laya, Jr., a former
PNCC Director, spoke on his protests against Board Resolution No.
BD-092-2000 at the Senate hearings, thus:
MR. LAYA. Mr. Chairman, if I can
THE CHAIRMAN. Were you also at the board?
MR. LAYA. At that time, yes, sir.
THE CHAIRMAN. Okay, go ahead.
MR. LAYA. That's why if maybe this can help clarify the
sequence. There was this meeting on October 20. This matter of
the Marubeni liability or account was also discussed. Mr.
Macasaet, if I may try to refresh. And there was some discussion,
sir, and in fact, they were saying even at that stage that there
should be a COA or an OGCC audit. Now, that was during the
discussion of October 20. Later on, the minutes came out. The
practice, then, sir, was for the minutes to come out at the start of
the meeting of the subsequent. So the minutes of October 20
came out on November 22 and then we were going over it. And
that is in the subsequent minutes of the meeting
THE CHAIRMAN. May I interrupt. You were taking up in your
November 22 meeting the October 20 minutes?

MR. LAYA. Yes, sir.

THE CHAIRMAN. All right, go ahead.
MR. LAYA. Now, in the November 22 meeting, we noticed this
resolution already for confirmation of the board proceedings of
October 20. So immediately we made actually, protest would be
a better term for that we protested the wording of the resolution
and that's why we came up with this resolution amending the
October 20 resolution.
SEN. DRILON. So you are saying, Mr. Laya, that the minutes of
October 20 did not accurately reflect the decisions that you made
on October 20 because you were saying that this recognition
should be subject to OGCC and COA? You seem to imply and we
want to make it and I want to get that for the record. You seem
to imply that there was no decision to recognize the obligation
during that meeting because you wanted it to subject it to COA
and OGCC, is that correct?
MR. LAYA. Yes, your Honor.
SEN. DRILON. So how did...
MR. LAYA. That's my understanding of the proceedings at that
time, that's why in the subsequent November 22 meeting, we
raised this point about obtaining a COA and OGCC opinion.
SEN. DRILON. Yes. But you know, the November 22 meeting
repeated the wording of the resolution previously adopted only
now you are saying subject to final determination which is
completely of different import from what you are saying was your
understanding of the decision arrived at on October 20.
MR. LAYA. Yes, sir. Because our thinking then...
SEN. DRILON. What do you mean, yes, sir?
MR. LAYA. It's just a claim under discussion but then the way it is
translated, as the minutes of October 20 were not really verbatim.
SEN. DRILON. So, you never intended to recognize the obligation.
MR. LAYA. I think so, sir. That was our personally, that was my
position.
SEN. DRILON. How did it happen, Corporate Secretary Ogan, that
the minutes did not reflect what the board
THE CHAIRMAN. Ms. Pasetes
MS. PASETES. Yes, Mr. Chairman.
THE CHAIRMAN. you are the chief financial officer of PNCC.
MS. PASETES. Your Honor, before that November 22 board
meeting, management headed by Mr. Rolando Macasaet, myself
and Atty. Ogan had a discussion about the recognition of the
obligations of 10 billion of Marubeni and 36 billion of the national
government on whether to recognize this as an obligation in our
books or recognize it as an obligation in the pro forma financial
statement to be used for the privatization of PNCC because
recognizing both obligations in the books of PNCC would defeat
our going concern status and that is where the position of the
president then, Mr. Macasaet, stemmed from and he went back to
the board and moved to reconsider the position of October 20,
2000, Mr. Chair.52 (Emphasis supplied)
In other words, despite Atty. Layas objections to PNCCs admitting
liability for the Marubeni loans, the PNCC Board still admitted the
same and merely imposed additional conditions to temper
somehow the devastating effects of Board Resolution No. BD-0922000.
The act of the PNCC Board in issuing Board Resolution No. BD-0922000 expressly admitting liability for the Marubeni loans
demonstrates the PNCC Boards gross and willful disregard of the
requisite care and diligence in managing the affairs of PNCC,
amounting to bad faith and resulting in grave and irreparable
injury to PNCC and its stockholders. This reckless and treacherous
move on the part of the PNCC Board clearly constitutes a serious
breach of its fiduciary duty to PNCC and its stockholders,

74
rendering the members of the PNCC Board liable under Section 31
of the Corporation Code, which provides:
SEC. 31. Liability of directors, trustees or officers. -- Directors or
trustees who willfully and knowingly vote for or assent to patently
unlawful acts of the corporation or who are guilty of gross
negligence or bad faith in directing the affairs of the corporation
or acquire any personal or pecuniary interest in conflict with their
duty as such directors or trustees shall be liable jointly and
severally for all damages resulting therefrom suffered by the
corporation, its stockholders or members and other persons.
When a director, trustee or officer attempts to acquire or acquires,
in violation of his duty, any interest adverse to the corporation in
respect of any matter which has been reposed in him in
confidence, as to which equity imposes a disability upon him to
deal in his own behalf, he shall be liable as a trustee for the
corporation and must account for the profits which otherwise
would have accrued to the corporation.
Soon after the short-lived Estrada Administration, the PNCC Board
revoked its previous admission of liability for the Marubeni loans.
During the oral arguments, Atty. Sison narrated to the Court:
x x x After President Estrada was ousted, I was appointed as
President and Chairman of PNCC in April of 2001, this particular
board resolution was brought to my attention and I immediately
put the matter before the board. I had no problem in convincing
them to reverse the recognition as it was illegal and had no basis
in fact. The vote to overturn that resolution was unanimous.
Strange to say that some who voted to overturn the recognition
were part of the old board that approved it. Stranger still, Renato
Valdecantos who was still a member of the Board voted in favor of
reversing the resolution he himself instigated and pushed. Some
of the board members who voted to recognize the obligation of
Marubeni even came to me privately and said "pinilit lang kami." x
x x.53 (Emphasis supplied)
In approving PNCC Board Resolution Nos. BD-092-2000 and BD099-2000, the PNCC Board caused undue injury to the
Government and gave unwarranted benefits to Radstock, through
manifest partiality, evident bad faith or gross inexcusable
negligence of the PNCC Board. Such acts are declared under
Section 3(e) of RA 3019 or the Anti-Graft and Corrupt Practices
Act, as "corrupt practices xxx and xxx unlawful." Being unlawful
and criminal acts, these PNCC Board Resolutions are void ab initio
and cannot be implemented or in any way given effect by the
Executive or Judicial branch of the Government.
Not content with forcing PNCC to commit corporate suicide with
the admission of liability for the Marubeni loans under Board
Resolution Nos. BD-092-2000 and BD-099-2000, the PNCC Board
drove the last nail on PNCCs coffin when the PNCC Board entered
into the manifestly and grossly disadvantageous Compromise
Agreement with Radstock. This time, the OGCC, headed by Agnes
DST Devanadera, reversed itself and recommended approval of
the Compromise Agreement to the PNCC Board. As Atty. Sison
explained to the Court during the oral arguments:
x x x While the case was pending in the Court of Appeals,
Radstock in a rare display of extreme generosity, conveniently
convinced the Board of PNCC to enter into a compromise
agreement for the amount of the judgment rendered by the RTC
or P6.5 Billion Pesos. This time the OGCC, under the leadership of
now Solicitor General Agnes Devanadera, approved the
compromise agreement abandoning the previous OGCC position
that PNCC had a meritorious case and would be hard press to lose
the case. What is strange is that although the compromise
agreement we seek to stop ostensibly is for P6.5 Billion only, truth
and in fact, the agreement agrees to convey to Radstock all or
substantially all of the assets of PNCC worth P18 Billion Pesos.
There are three items that are undervalued here, the real estate
that was turned over as a result of the controversial agreement,
the toll revenues that were being assigned and the value of the
new shares of PNCC the difference is about P12 Billion Pesos. x x x
(Emphasis supplied)

V.
The Compromise Agreement is Void
for Being Contrary to the Constitution,
Existing Laws, and Public Policy
For a better understanding of the present case, the pertinent
terms and conditions of the Compromise Agreement between
PNCC and Radstock are quoted below:
COMPROMISE AGREEMENT
KNOW ALL MEN BY THESE PRESENTS:
This Agreement made and entered into this 17th day of August
2006, in Mandaluyong City, Metro Manila, Philippines, by and
between:
PHILIPPINE NATIONAL CONSTRUCTION CORPORATION, a
government acquired asset corporation, created and existing
under the laws of the Republic of the Philippines, with principal
office address at EDSA corner Reliance Street, Mandaluyong City,
Philippines, duly represented herein by its Chairman ARTHUR N.
AGUILAR, pursuant to a Board Resolution attached herewith as
Annex "A" and made an integral part hereof, hereinafter referred
to as PNCC;
- and RADSTOCK SECURITIES LIMITED, a private corporation
incorporated in the British Virgin Islands, with office address at
Suite 1402 1 Duddell Street, Central Hongkong duly-represented
herein by its Director, CARLOS G. DOMINGUEZ, pursuant to a
Board Resolution attached herewith as Annex "B" and made an
integral part hereof, hereinafter referred to as RADSTOCK.
WITNESSETH:
WHEREAS, on January 15, 2001, RADSTOCK, as assignee of
Marubeni Corporation, filed a complaint for sum of money and
damages with application for a writ of preliminary attachment
with the Regional Trial Court (RTC), Mandaluyong City, docketed as
Civil Case No. MC-01-1398, to collect on PNCCs guarantees on the
unpaid loan obligations of CDCP Mining Corporation as provided
under an Advance Payment Agreement and Loan Agreement;
WHEREAS, on December 10, 2002, the RTC of Mandaluyong
rendered a decision in favor of plaintiff RADSTOCK directing PNCC
to pay the total amount of Thirteen Billion One Hundred Fifty One
Million Nine Hundred Fifty-Six Thousand Five Hundred TwentyEight Pesos (P13,151,956,528.00) with interest from October 15,
2001 plus Ten Million Pesos (P10,000,000.00) as attorney's fees.
WHEREAS, PNCC had elevated the case to the Court of Appeals
(CA-G.R. SP No. 66654) on Certiorari and thereafter, to the
Supreme Court (G.R. No. 156887) which Courts have consistently
ruled that the RTC did not commit grave abuse of discretion when
it denied PNCCs Motion to Dismiss which sets forth similar or
substantially the same grounds or defenses as those raised in
PNCC's Answer;
WHEREAS, the case has remained pending for almost six (6) years
even after the main action was appealed to the Court of Appeals;
WHEREAS, on the basis of the RTC Decision dated December 10,
2002, the current value of the judgment debt against PNCC stands
at P17,040,843,968.00 as of July 31, 2006 (the "Judgment Debt");
WHEREAS, RADSTOCK is willing to settle the case at the reduced
Compromise Amount of Six Billion One Hundred Ninety-Six Million
Pesos (P6,196,000,000.00) which may be paid by PNCC, either in
cash or in kind to avoid the trouble and inconvenience of further
litigation as a gesture of goodwill and cooperation;

75
WHEREAS, it is an established legal policy or principle that
litigants in civil cases should be encouraged to compromise or
amicably settle their claims not only to avoid litigation but also to
put an end to one already commenced (Articles 2028 and 2029,
Civil Code);
WHEREAS, this Compromise Agreement has been approved by the
respective Board of Directors of both PNCC and RADSTOCK,
subject to the approval of the Honorable Court;
NOW, THEREFORE, for and in consideration of the foregoing
premises, and the mutual covenants, stipulations and agreements
herein contained, PNCC and RADSTOCK have agreed to amicably
settle the above captioned Radstock case under the following
terms and conditions:
1. RADSTOCK agrees to receive and accept from PNCC in
full and complete settlement of the Judgment Debt, the
reduced amount of Six Billion, One Hundred Ninety-Six
Million Pesos (P6,196,000,000.00) (the "Compromise
Amount").
2. This Compromise Amount shall be paid by PNCC to
RADSTOCK in the following manner:
a. PNCC shall assign to a third party assignee to be designated by
RADSTOCK all its rights and interests to the following real
properties provided the assignee shall be duly qualified to own
real properties in the Philippines;
(1) PNCCs rights over that parcel of land located in Pasay
City with a total area of One Hundred Twenty-Nine
Thousand Five Hundred Forty-Eight (129,548) square
meters, more or less, and which is covered by and more
particularly described in Transfer Certificate of Title No. T34997 of the Registry of Deeds for Pasay City. The
transfer value is P3,817,779,000.00.
PNCCs rights and interests in Transfer Certificate of Title
No. T-34997 of the Registry of Deeds for Pasay City is
defined and delineated by Administrative Order No. 397,
Series of 1998, and RADSTOCK is fully aware and
recognizes that PNCC has an undertaking to cede at least
2 hectares of this property to its creditor, the Philippine
National Bank; and that furthermore, the Government
Service Insurance System has also a current and existing
claim in the nature of boundary conflicts, which
undertaking and claim will not result in the diminution of
area or value of the property. Radstock recognizes and
acknowledges the rights and interests of GSIS over the
said property.
(2) T-452587 (T-23646) - Paraaque (5,123 sq. m.)
subject to the clarification of the Privatization and
Management Office (PMO) claims thereon. The transfer
value isP45,000,900.00.
(3) T-49499 (529715 including T-68146-G (S-29716)
(1,9747-A)-Paraaque (107 sq. m.) (54 sq. m.) subject to
the clarification of the Privatization and Management
Office (PMO) claims thereon. The transfer value
is P1,409,100.00.
(4) 5-29716-Paraaque (27,762 sq. m.) subject to the
clarification of the Privatization and Management Office
(PMO) claims thereon. The transfer value
is P242,917,500.00.
(5) P-169 - Tagaytay (49,107 sq. m.). The transfer value
is P13,749,400.00.
(6) P-170 - Tagaytay (49,100 sq. m.). The transfer value
is P13,749,400.00.
(7) N-3320 - Town and Country Estate, Antipolo (10,000
sq. m.). The transfer value isP16,800,000.00.
(8) N-7424 - Antipolo (840 sq. m.). The transfer value
is P940,800.00.
(9) N-7425 - Antipolo (850 sq. m.). The transfer value
is P952,000.00.

(10) N-7426 - Antipolo (958 sq. m.). The transfer value

is P1,073,100.00.
(11) T-485276 - Antipolo (741 sq. m.). The transfer value
is P830,200.00.
(12) T-485277 - Antipolo (680 sq. m.). The transfer value
is P761,600.00.
(13) T-485278 - Antipolo (701 sq. m.). The transfer value
is P785,400.00.
(14) T-131500 - Bulacan (CDCP Farms Corp.) (4,945 sq,
m.). The transfer value isP6,475,000.00.
(15) T-131501 - Bulacan (678 sq. m.). The transfer value
is P887,600.00.
(16) T-26,154 (M) - Bocaue, Bulacan (2,841 sq. m.). The
transfer value is P3,779,300.00.
(17) T-29,308 (M) - Bocaue, Bulacan (733 sq. m.). The
transfer value is P974,400.00.
(18) T-29,309 (M) Bocaue, Bulacan (1,141 sq. m.). The
transfer value is P1,517,600.00.
(19) T-260578 (R. Bengzon) Sta. Rita, Guiguinto, Bulacan
(20,000 sq. m.). The transfer value isP25,200,000.00.
The transfer values of the foregoing properties are based on 70%
of the appraised value of the respective properties.
b. PNCC shall issue to RADSTOCK or its assignee common shares
of the capital stock of PNCC issued at par value which shall
comprise 20% of the outstanding capital stock of PNCC after the
conversion to equity of the debt exposure of the Privatization
Management Office (PMO) and the National Development
Company (NDC) and other government agencies and creditors
such that the total government holdings shall not fall below 70%
voting equity subject to the approval of the Securities and
Exchange Commission (SEC) and ratification of PNCCs
stockholders, if necessary. The assigned value of the shares
issued to RADSTOCK is P713 Million based on the approximate last
trading price of PNCC shares in the Philippine Stock Exchange as
the date of this agreement, based further on current generally
accepted accounting standards which stipulates the valuation of
shares to be based on the lower of cost or market value.
Subject to the procurement of any and all necessary approvals
from the relevant governmental authorities, PNCC shall deliver to
RADSTOCK an instrument evidencing an undertaking of the
Privatization and Management Office (PMO) to give RADSTOCK or
its assignee the right to match any offer to buy the shares of the
capital stock and debts of PNCC held by PMO, in the event the
same shares and debt are offered for privatization.
c. PNCC shall assign to RADSTOCK or its assignee 50% of the
PNCC's 6% share in the gross toll revenue of the Manila North
Tollways Corporation (MNTC), with a Net Present Value of P1.287
Billion computed in the manner outlined in Annex "C" herein
attached as an integral part hereof, that shall be due and owing to
PNCC pursuant to the Joint Venture Agreement between PNCC and
First Philippine Infrastructure Development Corp. dated August 29,
1995 and other related existing agreements, commencing in
2008. It shall be understood that as a result of this assignment,
PNCC shall charge and withhold the amounts, if any, pertaining to
taxes due on the amounts assigned.
Under the Compromise Agreement, PNCC shall pay Radstock the
reduced amount ofP6,185,000,000.00 in full settlement of PNCCs
guarantee of CDCP Minings debt allegedly
totalingP17,040,843,968.00 as of 31 July 2006. To satisfy its
reduced obligation, PNCC undertakes to (1) "assign to a third
party assignee to be designated by Radstock all its rights and
interests" to the listed real properties therein; (2) issue to
Radstock or its assignee common shares of the capital stock of
PNCC issued at par value which shall comprise 20% of the
outstanding capital stock of PNCC; and (3) assign to Radstock or
its assignee 50% of PNCCs 6% share, for the next 27 years (20082035), in the gross toll revenues of the Manila North Tollways
Corporation.

76
A. The PNCC Board has no power to compromise
the P6.185 billion amount.
Does the PNCC Board have the power to compromise the P6.185
billion "reduced" amount? The answer is in the negative.1avvphi1
The Dissenting Opinion asserts that PNCC has the power, citing
Section 36(2) of Presidential Decree No. 1445 (PD 1445),
otherwise known as the Government Auditing Code of the
Philippines, enacted in 1978. Section 36 states:
SECTION 36. Power to Compromise Claims. (1) When the
interest of the government so requires, the Commission may
compromise or release in whole or in part, any claim or settled
liability to any government agency not exceeding ten thousand
pesos and with the written approval of the Prime Minister, it may
likewise compromise or release any similar claim or liability not
exceeding one hundred thousand pesos, the application for relief
therefrom shall be submitted, through the Commission and the
Prime Minister, with their recommendations, to the National
Assembly.
(2) The respective governing bodies of government-owned or
controlled corporations, and self-governing boards, commissions
or agencies of the government shall have the exclusive power to
compromise or release any similar claim or liability when
expressly authorized by their charters and if in their judgment, the
interest of their respective corporations or agencies so requires.
When the charters do not so provide, the power to compromise
shall be exercised by the Commission in accordance with the
preceding paragraph. (Emphasis supplied)
The Dissenting Opinion asserts that since PNCC is incorporated
under the Corporation Code, the PNCC Board has all the powers
granted to the governing boards of corporations incorporated
under the Corporation Code, which includes the power to
compromise claims or liabilities.
Section 36 of PD 1445, enacted on 11 June 1978, has been
superseded by a later law -- Section 20(1), Chapter IV, Subtitle B,
Title I, Book V of Executive Order No. 292 or the Administrative
Code of 1987, which provides:
Section 20. Power to Compromise Claims. - (1) When the interest
of the Government so requires, the Commission may compromise
or release in whole or in part, any settled claim or liability to any
government agency not exceeding ten thousand pesos arising out
of any matter or case before it or within its jurisdiction, and with
the written approval of the President, it may likewise compromise
or release any similar claim or liability not exceeding one hundred
thousand pesos. In case the claim or liability exceeds one hundred
thousand pesos, the application for relief therefrom shall be
submitted, through the Commission and the President, with their
recommendations, to the Congress[.] x x x (Emphasis supplied)
Under this provision,54 the authority to compromise a settled claim
or liability exceeding P100,000.00 involving a government
agency, as in this case where the liability amounts to P6.185
billion, is vested not in COA but exclusively in Congress. Congress
alone has the power to compromise the P6.185 billion purported
liability of PNCC. Without congressional approval, the Compromise
Agreement between PNCC and Radstock involvingP6.185 billion is
void for being contrary to Section 20(1), Chapter IV, Subtitle B,
Title I, Book V of the Administrative Code of 1987.
PNCC is a "government agency" because Section 2 on
Introductory Provisions of the Revised Administrative Code of
1987 provides that
Agency of the Government refers to any of the various units of the
Government, including a department, bureau, office,
instrumentality, or government-owned or controlled corporation,
or a local government or a distinct unit therein. (Boldfacing
supplied)

Thus, Section 20(1), Chapter IV, Subtitle B, Title I, Book V of the

Administrative Code of 1987 applies to PNCC, which indisputably
is a government owned or controlled corporation.
In the same vein, the COAs stamp of approval on the Compromise
Agreement is void for violating Section 20(1), Chapter IV, Subtitle
B, Title I, Book V of the Administrative Code of 1987. Clearly, the
Dissenting Opinions reliance on the COAs finding that the terms
and conditions of the Compromise Agreement are "fair and above
board" is patently erroneous.
Citing Benedicto v. Board of Administrators of Television Stations
RPN, BBC and IBC,55 the Dissenting Opinion views that
congressional approval is not required for the validity of the
Compromise Agreement because the liability of PNCC is not yet
"settled."
In Benedicto, the PCGG filed in the Sandiganbayan a civil case to
recover from the defendants (including Roberto S. Benedicto) their
ill-gotten wealth consisting of funds and other properties. The
PCGG executed a compromise agreement with Roberto S.
Benedicto ceding to the latter a substantial part of his ill-gotten
assets and the State granting him immunity from further
prosecution. The Court held that prior congressional approval is
not required for the PCGG to enter into a compromise agreement
with persons against whom it has filed actions for recovery of illgotten wealth.
In Benedicto, the Court found that the governments claim against
Benedicto was not yet settled unlike here where the PNCC Board
expressly admitted the liability of PNCC for the Marubeni loans. In
Benedicto, the ownership of the alleged ill-gotten assets was still
being litigated in the Sandiganbayan and no party ever admitted
any liability, unlike here where the PNCC Board had already
admitted through a formal Board Resolution PNCCs liability for
the Marubeni loans. PNCCs express admission of liability for the
Marubeni loans is essentially the premise of the execution of the
Compromise Agreement. In short, Radstocks claim against PNCC
is settled by virtue of PNCCs express admission of liability for the
Marubeni loans. The Compromise Agreement merely reduced this
settled liability from P17 billion to P6.185 billion.
The provision of the Revised Administrative Code on the power to
settle claims or liabilities was precisely enacted to prevent
government agencies from admitting liabilities against the
government, then compromising such "settled" liabilities. The
present case is exactly what the law seeks to prevent, a
compromise agreement on a creditors claim settled through
admission by a government agency without the approval of
Congress for amounts exceeding P100,000.00. What makes the
application of the law even more necessary is that the PNCC
Boards twin moves are manifestly and grossly disadvantageous
to the Government. First, the PNCC admitted solidary liability for a
staggering P10.743 billion private debt incurred by a private
corporation which PNCC does not even control. Second, the PNCC
Board agreed to pay Radstock P6.185 billion as a compromise
settlement ahead of all other creditors, including the Government
which is the biggest creditor.
The Dissenting Opinion further argues that since the PNCC is
incorporated under the Corporation Code, it has the power,
through its Board of Directors, to compromise just like any other
private corporation organized under the Corporation Code. Thus,
the Dissenting Opinion states:
Not being a government corporation created by special law, PNCC
does not owe its creation to some charter or special law, but to
the Corporation Code. Its powers are enumerated in the
Corporation Code and its articles of incorporation. As an
autonomous entity, it undoubtedly has the power to compromise,
and to enter into a settlement through its Board of Directors, just
like any other private corporation organized under the Corporation
Code. To maintain otherwise is to ignore the character of PNCC as
a corporate entity organized under the Corporation Code, by
which it was vested with a personality and identity distinct and
separate from those of its stockholders or members. (Boldfacing
and underlining supplied)

77
The Dissenting Opinion is woefully wide off the mark. The PNCC is
not "just like any other private corporation" precisely because it is
not a private corporation but indisputably a government owned
corporation. Neither is PNCC "an autonomous entity" considering
that PNCC is under the Department of Trade and Industry, over
which the President exercises control. To claim that PNCC is an
"autonomous entity" is to say that it is a lost command in the
Executive branch, a concept that violates the President's
constitutional power of control over the entire Executive branch of
government.56
The government nominees in the PNCC Board, who practically
compose the entire PNCC Board, are public officers subject to the
Anti-Graft and Corrupt Practices Act, accountable to the
Government and the Filipino people. To hold that a corporation
incorporated under the Corporation Code, despite its being 90.3%
owned by the Government, is "an autonomous entity" that could
solely through its Board of Directors compromise, and transfer
ownership of, substantially all its assets to a private third party
without the approval required under the Administrative Code of
1987,57 is to invite the plunder of all such government owned
corporations.
The Dissenting Opinions claim that PNCC is an autonomous entity
just like any other private corporation is inconsistent with its
assertion that Section 36(2) of the Government Auditing Code is
the governing law in determining PNCC's power to compromise.
Section 36(2) of the Government Auditing Code expressly states
that it applies to the governing bodies of "government-owned
or controlled corporations." The phrase "government-owned or
controlled corporations" refers to both those created by special
charter as well as those incorporated under the Corporation Code.
Section 2, Article IX-D of the Constitution provides:

Petitioner forgets that the constitutional criterion on the exercise

of COA's audit jurisdiction depends on the government's
ownership or control of a corporation. The nature of the
corporation, whether it is private, quasi-public, or public is
immaterial.
The Constitution vests in the COA audit jurisdiction over
"government-owned and controlled corporations with original
charters," as well as "government-owned or controlled
corporations" without original charters. GOCCs with original
charters are subject to COA pre-audit, while GOCCs without
original charters are subject to COA post-audit. GOCCs without
original charters refer to corporations created under the
Corporation Code but are owned or controlled by the government.
The nature or purpose of the corporation is not material in
determining COA's audit jurisdiction. Neither is the manner of
creation of a corporation, whether under a general or special law.
Clearly, the COAs audit jurisdiction extends to government owned
or controlled corporations incorporated under the Corporation
Code. Thus, the COA must apply the Government Auditing Code in
the audit and examination of the accounts of such government
owned or controlled corporations even though incorporated under
the Corporation Code. This means that Section 20(1), Chapter IV,
Subtitle B, Title I, Book V of the Administrative Code of 1987 on
the power to compromise, which superseded Section 36 of the
Government Auditing Code, applies to the present case in
determining PNCCs power to compromise. In fact, the COA has
been regularly auditing PNCC on a post-audit basis in accordance
with Section 2, Article IX-D of the Constitution, the Government
Auditing Code, and COA rules and regulations.
B. PNCCs toll fees are public funds.

SECTION 2. (1) The Commission on Audit shall have the power,

authority, and duty to examine, audit, and settle all accounts
pertaining to the revenue and receipts of, and expenditures or
uses of funds and property, owned or held in trust by, or
pertaining to, the Government, or any of its subdivisions,
agencies, or instrumentalities, including government-owned or
controlled corporations with original charters, and on a post-audit
basis: (a) constitutional bodies, commissions and offices that have
been granted fiscal autonomy under this Constitution; (b)
autonomous state colleges and universities; (c) other
government-owned or controlled corporations and their
subsidiaries; and (d) such non-governmental entities receiving
subsidy or equity, directly or indirectly, from or through the
Government, which are required by law or the granting institution
to submit to such audit as a condition of subsidy or equity.
However, where the internal control system of the audited
agencies is inadequate, the Commission may adopt such
measures, including temporary or special pre-audit, as are
necessary and appropriate to correct the deficiencies. It shall keep
the general accounts of the Government and, for such period as
may be provided by law, preserve the vouchers and other
supporting papers pertaining thereto.

PD 1113 granted PNCC a 30-year franchise to construct, operate

and maintain toll facilities in the North and South Luzon
Expressways. Section 1 of PD 111359 provides:

(2) The Commission shall have exclusive authority, subject to the

limitations in this Article, to define the scope of its audit and
examination, establish the techniques and methods required
therefor, and promulgate accounting and auditing rules and
regulations, including those for the prevention and disallowance of
irregular, unnecessary, excessive, extravagant, or unconscionable
expenditures, or uses of government funds and properties.
(Emphasis supplied)

Section 2 of PD 1894,60 which amended PD 1113 to include in

PNCCs franchise the Metro Manila expressway, also provides:

In explaining the extent of the jurisdiction of COA over

government owned or controlled corporations, this Court declared
in Feliciano v. Commission on Audit:58
The COA's audit jurisdiction extends not only to government
"agencies or instrumentalities," but also to "government-owned
and controlled corporations with original charters" as well as
"other government-owned or controlled corporations" without
original charters.
xxxx

Section 1. Any provision of law to the contrary notwithstanding,

there is hereby granted to the Construction and Development
Corporation of the Philippines (CDCP), a corporation duly
organized and registered under the laws of the Philippines,
hereinafter called the GRANTEE, for a period of thirty (30) years
from May 1, 1977 the right, privilege and authority to construct,
operate and maintain toll facilities covering the expressways from
Balintawak (Station 9 + 563) to Carmen, Rosales, Pangasinan and
from Nichols, Pasay City (Station 10 + 540) to Lucena, Quezon,
hereinafter referred to collectively as North Luzon Expressway,
respectively.
The franchise herein granted shall include the right to collect toll
fees at such rates as may be fixed and/or authorized by the Toll
Regulatory Board hereinafter referred to as the Board created
under Presidential Decree No. 1112 for the use of the expressways
above-mentioned. (Emphasis supplied)

Section 2. The term of the franchise provided under Presidential

Decree No. 1113 for the North Luzon Expressway and the South
Luzon Expressway which is thirty (30) years from 1 May 1977 shall
remain the same; provided that, the franchise granted for the
Metro Manila Expressway and all extensions linkages, stretches
and diversions that may be constructed after the date of approval
of this decree shall likewise have a term of thirty (30) years
commencing from the date of completion of the project.
(Emphasis supplied)
Based on these provisions, the franchise of the PNCC expired on 1
May 2007 or thirty years from 1 May 1977.
PNCC, however, claims that under PD 1894, the North Luzon
Expressway (NLEX) shall have a term of 30 years from the date of
its completion in 2005. PNCC argues that the proviso in Section 2
of PD 1894 gave "toll road projects completed within the franchise

78
period and after the approval of PD No. 1894 on 12 December
1983 their own thirty-year term commencing from the date of the
completion of the said project, notwithstanding the expiry of the
said franchise."
This contention is untenable.
The proviso in Section 2 of PD 1894 refers to the franchise
granted for the Metro Manila Expressway and all extensions
linkages, stretches and diversions constructed after the approval
of PD 1894. It does not pertain to the NLEX because the term of
the NLEX franchise, "which is 30 years from 1 May 1977, shall
remain the same," as expressly provided in the first sentence of
the same Section 2 of PD 1894. To construe that the NLEX
franchise had a new term of 30 years starting from 2005 glaringly
conflicts with the plain, clear and unequivocal language of the first
sentence of Section 2 of PD 1894. That would be clearly absurd.
There is no dispute that Congress did not renew PNCCs franchise
after its expiry on 1 May 2007. However, PNCC asserts that it
"remains a viable corporate entity even after the expiration of its
franchise under Presidential Decree No. 1113." PNCC points out
that the Toll Regulatory Board (TRB) granted PNCC a "Tollway
Operation Certificate" (TOC) which conferred on PNCC the
authority to operate and maintain toll facilities, which includes the
power to collect toll fees. PNCC further posits that the toll fees are
private funds because they represent "the consideration given to
tollway operators in exchange for costs they incurred or will incur
in constructing, operating and maintaining the tollways."
This contention is devoid of merit.
With the expiration of PNCCs franchise, the assets and facilities of
PNCC were automatically turned over, by operation of law, to the
government at no cost. Sections 2(e) and 9 of PD 1113 and
Section 5 of PD 1894 provide:
Section 2 [of PD 1113]. In consideration of this franchise, the
GRANTEE shall:
(e) Turn over the toll facilities and all equipment directly related
thereto to the government upon expiration of the franchise period
without cost.
Section 9 [of PD 1113]. For the purposes of this franchise, the
Government, shall turn over to the GRANTEE (PNCC) not later than
April 30, 1977 all physical assets and facilities including all
equipment and appurtenances directly related to the operations of
the North and South Toll Expressways: Provided, That, the
extensions of such Expressways shall also be turned over to
GRANTEE upon completion of their construction or of functional
sections thereof: Provided, However, That upon termination of the
franchise period, said physical assets and facilities including
improvements thereon, together with equipment and
appurtenances directly related to their operations, shall be turned
over to the Government without any cost or obligation on the part
of the latter. (Emphasis supplied)
Section 5 [of PD No. 1894]. In consideration of this franchise, the
GRANTEE shall:
(a) Construct, operate and maintain at its own expense
the Expressways; and
(b) Turn over, without cost, the toll facilities and all
equipment, directly related thereto to the Government
upon expiration of the franchise period. (Emphasis
supplied)
The TRB does not have the power to give back to PNCC the toll
assets and facilities which were automatically turned over to the
Government, by operation of law, upon the expiration of the
franchise of the PNCC on 1 May 2007. Whatever power the TRB
may have to grant authority to operate a toll facility or to issue a
"Tollway Operation Certificate," such power does not obviously

include the authority to transfer back to PNCC ownership of

National Government assets, like the toll assets and facilities,
which have become National Government property upon the
expiry of PNCCs franchise. Such act by the TRB would repeal
Section 5 of PD 1894 which automatically vested in the National
Government ownership of PNCCs toll assets and facilities upon
the expiry of PNCCs franchise. The TRB obviously has no power to
repeal a law. Further, PD 1113, as amended by PD 1894, granting
the franchise to PNCC, is a later law that must necessarily prevail
over PD 1112 creating the TRB. Hence, the provisions of PD 1113,
as amended by PD 1894, are controlling.
The governments ownership of PNCC's toll assets and facilities
inevitably results in the governments ownership of the toll fees
and the net income derived from these toll assets and facilities.
Thus, the toll fees form part of the National Governments General
Fund, which includes public moneys of every sort and other
resources pertaining to any agency of the government.61 Even
Radstocks counsel admits that the toll fees are public
funds, to wit:
ASSOCIATE JUSTICE CARPIO:
Okay. Now, when the franchise of PNCC expired on May 7, 2007,
under the terms of the franchise under PD 1896, all the assets, toll
way assets, equipment, etcetera of PNCC became owned by
government at no cost, correct, under the franchise?
DEAN AGABIN:
Yes, Your Honor.
ASSOCIATE JUSTICE CARPIO:
Okay. So this is now owned by the national government. [A]ny
income from these assets of the national government is national
government income, correct?
DEAN AGABIN:
Yes, Your Honor.62
xxxx
ASSOCIATE JUSTICE CARPIO:
x x x My question is very simple x x x Is the income from these
assets of the national government (interrupted)
DEAN AGABIN:
Yes, Your Honor.63
xxxx
ASSOCIATE JUSTICE CARPIO:
So, its the government [that] decides whether it goes to the
general fund or another fund. [W]hat is that other fund? Is there
another fund where revenues of the government go?
DEAN AGABIN:
Its the same fund, Your Honor, except that (interrupted)
ASSOCIATE JUSTICE CARPIO:
So it goes to the general fund?
DEAN AGABIN:
Except that it can be categorized as a private fund in a
commercial sense, and it can be categorized as a public fund in a
Public Law sense.
ASSOCIATE JUSTICE CARPIO:
Okay. So we agree that, okay, it goes to the general fund. I agree
with you, but you are saying it is categorized still as a private
funds?
DEAN AGABIN:
Yes, Your Honor.
ASSOCIATE JUSTICE CARPIO:
But its part of the general fund. Now, if it is part of the general
fund, who has the authority to spend that money?
DEAN AGABIN:
Well, the National Government itself.
ASSOCIATE JUSTICE CARPIO:
Who in the National Government, the Executive, Judiciary or
Legislative?
DEAN AGABIN:
Well, the funds are usually appropriated by the Congress.
ASSOCIATE JUSTICE CARPIO:
x x x you mean to say there are exceptions that money from the
general fund can be spent by the Executive without going
t[hrough] Congress, or xxx is [that] the absolute rule?
DEAN AGABIN:

79
Well, in so far as the general fund is concerned, that is the
absolute rule set aside by the National Government.
ASSOCIATE JUSTICE CARPIO:
x x x you are saying this is general fund money - the collection
from the assets[?]
DEAN AGABIN:
Yes.64 (Emphasis supplied)
Forming part of the General Fund, the toll fees can only be
disposed of in accordance with the fundamental principles
governing financial transactions and operations of any
government agency, to wit: (1) no money shall be paid out of the
Treasury except in pursuance of an appropriation made by law, as
expressly mandated by Section 29(1), Article VI of the
Constitution; and (2) government funds or property shall be spent
or used solely for public purposes, as expressly mandated by
Section 4(2) of PD 1445 or the Government Auditing Code. 65
Section 29(1), Article VI of the Constitution provides:
Section 29(1). No money shall be paid out of the Treasury except
in pursuance of an appropriation made by law.
The power to appropriate money from the General Funds of the
Government belongs exclusively to the Legislature. Any act in
violation of this iron-clad rule is unconstitutional.
Reinforcing this Constitutional mandate, Sections 84 and 85 of PD
1445 require that before a government agency can enter into a
contract involving the expenditure of government funds, there
must be an appropriation law for such expenditure, thus:
Section 84. Disbursement of government funds.
1. Revenue funds shall not be paid out of any public treasury or
depository except in pursuance of an appropriation law or other
specific statutory authority.
xxxx
Section 85. Appropriation before entering into contract.
1. No contract involving the expenditure of public funds shall be
entered into unless there is an appropriation therefor, the
unexpended balance of which, free of other obligations, is
sufficient to cover the proposed expenditure.
xxxx
Section 86 of PD 1445, on the other hand, requires that the proper
accounting official must certify that funds have been appropriated
for the purpose.66 Section 87 of PD 1445 provides that any
contract entered into contrary to the requirements of
Sections 85 and 86 shall be void, thus:
Section 87. Void contract and liability of officer. Any contract
entered into contrary to the requirements of the two immediately
preceding sections shall be void, and the officer or officers
entering into the contract shall be liable to the government or
other contracting party for any consequent damage to the same
extent as if the transaction had been wholly between private
parties. (Emphasis supplied)
Applying Section 29(1), Article VI of the Constitution, as implanted
in Sections 84 and 85 of the Government Auditing Code, a law
must first be enacted by Congress appropriating P6.185 billion as
compromise money before payment to Radstock can be
made.67 Otherwise, such payment violates a prohibitory law and
thus void under Article 5 of the Civil Code which states that
"[a]cts executed against the provisions of mandatory or
prohibitory laws shall be void, except when the law itself
authorizes their validity."

Indisputably, without an appropriation law, PNCC cannot lawfully

pay P6.185 billion to Radstock. Any contract allowing such
payment, like the Compromise Agreement, "shall be void" as
provided in Section 87 of the Government Auditing Code. In
Comelec v. Quijano-Padilla,68 this Court ruled:
Petitioners are justified in refusing to formalize the contract with
PHOTOKINA. Prudence dictated them not to enter into a contract
not backed up by sufficient appropriation and available funds.
Definitely, to act otherwise would be a futile exercise for the
contract would inevitably suffer the vice of nullity. In Osmea vs.
Commission on Audit, this Court held:
The Auditing Code of the Philippines (P.D. 1445) further provides
that no contract involving the expenditure of public funds shall be
entered into unless there is an appropriation therefor and the
proper accounting official of the agency concerned shall have
certified to the officer entering into the obligation that funds have
been duly appropriated for the purpose and the amount necessary
to cover the proposed contract for the current fiscal year is
available for expenditure on account thereof. Any contract entered
into contrary to the foregoing requirements shall be VOID.
Clearly then, the contract entered into by the former Mayor
Duterte was void from the very beginning since the agreed cost
for the project (P,368,920.00) was way beyond the appropriated
amount (P,419,180.00) as certified by the City Treasurer. Hence,
the contract was properly declared void and unenforceable in
COA's 2nd Indorsement, dated September 4, 1986. The COA
declared and we agree, that:
The prohibition contained in Sec. 85 of PD 1445 (Government
Auditing Code) is explicit and mandatory. Fund availability is, as it
has always been, an indispensable prerequisite to the execution of
any government contract involving the expenditure of public
funds by all government agencies at all levels. Such contracts are
not to be considered as final or binding unless such a certification
as to funds availability is issued (Letter of Instruction No. 767, s.
1978). Antecedent of advance appropriation is thus essential to
government liability on contracts (Zobel vs. City of Manila, 47 Phil.
169). This contract being violative of the legal requirements
aforequoted, the same contravenes Sec. 85 of PD 1445 and is null
and void by virtue of Sec. 87.
Verily, the contract, as expressly declared by law, is inexistent and
void ab initio. This is to say that the proposed contract is without
force and effect from the very beginning or from its incipiency, as
if it had never been entered into, and hence, cannot be validated
either by lapse of time or ratification. (Emphasis supplied)
Significantly, Radstocks counsel admits that an appropriation law
is needed before PNCC can use toll fees to pay Radstock, thus:
ASSOCIATE JUSTICE CARPIO:
Okay, I agree with you. Now, you are saying that money can be
paid out of the general fund only through an appropriation by
Congress, correct? Thats what you are saying.
DEAN AGABIN:
Yes, Your Honor.
ASSOCIATE JUSTICE CARPIO:
I agree with you also. Okay, now, can PNCC xxx use this money to
pay Radstock without Congressional approval?
DEAN AGABIN:
Well, I believe that that may not be necessary. Your Honor,
because earlier, the government had already decreed that PNCC
should be properly paid for the reclamation works which it had
done. And so (interrupted)
ASSOCIATE JUSTICE CARPIO:
No. I am talking of the funds.
DEAN AGABIN:
And so it is like a foreign obligation.
ASSOCIATE JUSTICE CARPIO:
Counsel, I'm talking of the general funds, collection from the toll
fees. Okay. You said, they go to the general fund. You also said,

80
money from the general fund can be spent only if there is an
appropriation law by Congress.
DEAN AGABIN:
Yes, Your Honor.
There is no law.
DEAN AGABIN:
Yes, except that, Your Honor, this fund has not yet gone to the
general fund.
ASSOCIATE JUSTICE CARPIO:
No. Its being collected everyday. As of May 7, 2007, national
government owned those assets already. All those x x x
collections that would have gone to PNCC are now national
government owned. It goes to the general fund. And any body
who uses that without appropriation from Congress commits
malversation, I tell you.
DEAN AGABIN:
That is correct, Your Honor, as long as it has already gone into the
general fund.
ASSOCIATE JUSTICE CARPIO:
Oh, you mean to say that its still being held now by the agent,
PNCC. It has not been remitted to the National Government?
DEAN AGABIN:
Well, if PNCC (interrupted)
ASSOCIATE JUSTICE CARPIO:
But if (interrupted)
DEAN AGABIN:
If this is the share that properly belongs to PNCC as a private
entity (interrupted)
ASSOCIATE JUSTICE CARPIO:
No, no. I am saying that You just agreed that all those collections
now will go to the National Government forming part of the
general fund. If, somehow, PNCC is holding this money in the
meantime, it holds xxx it in trust, correct? Because you said, it
goes to the general fund, National Government. So it must be
holding this in trust for the National Government.
DEAN AGABIN:
Yes, Your Honor.
ASSOCIATE JUSTICE CARPIO:
Okay. Can the person holding in trust use it to pay his private
debt?
DEAN AGABIN:
No, Your Honor.
ASSOCIATE JUSTICE CARPIO:
Cannot be.
DEAN AGABIN:
But I assume that there must be some portion of the collections
which properly pertain to PNCC.
ASSOCIATE JUSTICE CARPIO:
If there is some portion that xxx may be [for] operating expenses
of PNCC. But that is not
DEAN AGABIN:
Even profit, Your Honor.
ASSOCIATE JUSTICE CARPIO:
Yeah, but that is not the six percent. Out of the six percent, that
goes now to PNCC, thats entirely national government. But the
National Government and the PNCC can agree on service fees for
collecting, to pay toll collectors.
DEAN AGABIN:
Yes, Your Honor.
ASSOCIATE JUSTICE CARPIO:
But those are expenses. We are talking of the net income. It goes
to the general fund. And its only Congress that can authorize that
expenditure. Not even the Court of Appeals can give its stamp of
approval that it goes to Radstock, correct?
DEAN AGABIN:
Yes, Your Honor.69 (Emphasis supplied)
Without an appropriation law, the use of the toll fees to pay
Radstock would constitute malversation of public funds. Even
counsel for Radstock expressly admits that the use of the toll fees
to pay Radstock constitutes malversation of public funds, thus:
ASSOCIATE JUSTICE CARPIO:
x x x As of May 7, 2007, [the] national government owned those
assets already. All those x x x collections that would have gone to
PNCC are now national government owned. It goes to the general
fund. And any body who uses that without appropriation from
Congress commits malversation, I tell you.
DEAN AGABIN:
That is correct, Your Honor, as long as it has already gone into the
general fund.

ASSOCIATE JUSTICE CARPIO:

Oh, you mean to say that its still being held now by the agent,
PNCC. It has not been remitted to the National Government?
DEAN AGABIN:
Well, if PNCC (interrupted)
ASSOCIATE JUSTICE CARPIO:
But if (interrupted)
DEAN AGABIN:
If this is the share that properly belongs to PNCC as a private
entity (interrupted)
ASSOCIATE JUSTICE CARPIO:
No, no. I am saying that You just agreed that all those collections
now will go to the National Government forming part of the
general fund. If, somehow, PNCC is holding this money in the
meantime, it holds x x x it in trust, correct? Because you said, it
goes to the general fund, National Government. So it must be
holding this in trust for the National Government.
DEAN AGABIN:
Yes, Your Honor.70 (Emphasis supplied)
Indisputably, funds held in trust by PNCC for the National
Government cannot be used by PNCC to pay a private debt
of CDCP Mining to Radstock, otherwise the PNCC Board
will be liable for malversation of public funds.
In addition, to pay Radstock P6.185 billion violates the
fundamental public policy, expressly articulated in Section 4(2) of
the Government Auditing Code,71 that government funds or
property shall be spent or used solely for pubic purposes, thus:
Section 4. Fundamental Principles. x x x (2) Government funds or
property shall be spent or used solely for public purposes.
(Emphasis supplied)
There is no question that the subject of the Compromise
Agreement is CDCP Minings private debt to Marubeni, which
Marubeni subsequently assigned to Radstock. Counsel for
Radstock admits that Radstock holds a private debt of CDCP
Mining, thus:
ASSOCIATE JUSTICE CARPIO:
So your client is holding a private debt of CDCP Mining,
correct?
DEAN AGABIN:
Correct, Your Honor.72 (Emphasis supplied)
CDCP Mining obtained the Marubeni loans when CDCP Mining and
PNCC (then CDCP) were still privately owned and managed
corporations. The Government became the majority stockholder of
PNCC only because government financial institutions converted
their loans to PNCC into equity when PNCC failed to pay the loans.
However, CDCP Mining have always remained a majority privately
owned corporation with PNCC owning only 13% of its equity as
admitted by former PNCC Chairman Arthur N. Aguilar and PNCC
SVP Finance Miriam M. Pasetes during the Senate hearings, thus:
SEN. OSMEA. x x x I just wanted to know is CDCP Mining a 100
percent subsidiary of PNCC?
MR. AGUILAR. Hindi ho. Ah, no.
SEN. OSMEA. If theyre not a 100 percent, why would they sign
jointly and severally? I just want to plug the loopholes.
MR. AGUILAR. I think it was if I may just speculate. It was just
common ownership at that time.
SEN. OSMEA. Al right. Now Also, the ...
MR. AGUILAR. Ah, 13 percent daw, your Honor.
SEN. OSMEA. Huh?
MR. AGUILAR. Thirteen percent ho.
SEN. OSMEA. Whats 13 percent?
MR. AGUILAR. We owned ...
MS. PASETES. Thirteen percent of ...
SEN. OSMEA. PNCC owned ...
MS. PASETES. (Mike off) CDCP ...
SEN. DRILON. Use the microphone, please.
MS. PASETES. Sorry. Your Honor, the ownership of CDCP of CDCP
Basay Mining ...
SEN. OSMEA. No, no, the ownership of CDCP. CDCP Mining, how
many percent of the equity of CDCP Mining was owned by PNCC,
formerly CDCP?
MS. PASETES. Thirteen percent.
SEN. OSMEA. Thirteen. And as a 13 percent owner, they agreed
to sign jointly and severally?
MS. PASETES. Yes.
SEN. OSMEA. One-three?

81
So poor PNCC and CDCP got taken to the cleaners here. They sign
for a 100 percent and they only own 13 percent.
x x x x73 (Emphasis supplied)
PNCC cannot use public funds, like toll fees that indisputably form
part of the General Fund, to pay a private debt of CDCP Mining to
Radstock. Such payment cannot qualify as expenditure for a
public purpose. The toll fees are merely held in trust by PNCC for
the National Government, which is the owner of the toll fees.
Considering that there is no appropriation law passed by Congress
for the P6.185 billion compromise amount, the Compromise
Agreement is void for being contrary to law, specifically Section
29(1), Article VI of the Constitution and Section 87 of PD 1445.
And since the payment of the P6.185 billion pertains to CDCP
Minings private debt to Radstock, the Compromise Agreement is
also void for being contrary to the fundamental public policy that
government funds or property shall be spent or used solely for
public purposes, as provided in Section 4(2) of the Government
Auditing Code.
C. Radstock is not qualified to own land in the Philippines.
Radstock is a private corporation incorporated in the British Virgin
Islands. Its office address is at Suite 14021 Duddell Street, Central
Hongkong. As a foreign corporation, with unknown owners whose
nationalities are also unknown, Radstock is not qualified to own
land in the Philippines pursuant to Section 7, in relation to Section
3, Article XII of the Constitution. These provisions state:
Section. 3. Lands of the public domain are classified into
agricultural, forest or timber, mineral lands, and national parks.
Agricultural lands of the public domain may be further classified
by law according to the uses to which they may be devoted.
Alienable lands of the public domain shall be limited to
agricultural lands. Private corporations or associations may not
hold such lands of the public domain except by lease, for a period
not exceeding twenty-five years, renewable for not more than
twenty-five years, and not to exceed one hundred thousand
hectares in area. Citizens of the Philippines may lease not more
than five hundred hectares, or acquire not more than twelve
hectares thereof by purchase, homestead, or grant.
Taking into account the requirements of conservation, ecology,
and development, and subject to the requirements of agrarian
reform, the Congress shall determine, by law, the size of lands of
the public domain which may be acquired, developed, held, or
leased and the conditions therefor.
xxxx
Section 7. Save in cases of hereditary succession, no private lands
shall be transferred or conveyed except to individuals,
corporations, or associations qualified to acquire or hold lands of
the public domain.
The OGCC admits that Radstock cannot own lands in the
Philippines. However, the OGCC claims that Radstock can own the
rights to ownership of lands in the Philippines, thus:
ASSOCIATE JUSTICE CARPIO:
Under the law, a foreigner cannot own land, correct?
ATTY. AGRA:
Yes, Your Honor.
ASSOCIATE JUSTICE CARPIO:
Can a foreigner who xxx cannot own land assign the right of
ownership to the land?
ATTY. AGRA:
Again, Your Honor, at that particular time, it will be PNCC, not
through Radstock, that chain of events should be, theres a
qualified nominee (interrupted)
ASSOCIATE JUSTICE CARPIO:
Yes, xxx you said, Radstock will assign the right of ownership to
the qualified assignee[.] So my question is, can a foreigner own

the right to ownership of a land when it cannot own the land

itself?
ATTY. AGRA:
The foreigner cannot own the land, Your Honor.
ASSOCIATE JUSTICE CARPIO:
But you are saying it can own the right of ownership to the land,
because you are saying, the right of ownership will be assigned by
Radstock.
ATTY. AGRA:
The rights over the properties, Your Honors, if theres a valid
assignment made to a qualified party, then the assignment will be
made.
ASSOCIATE JUSTICE CARPIO:
Who makes the assignment?
ATTY. AGRA:
It will be Radstock, Your Honor.
ASSOCIATE JUSTICE CARPIO:
So, if Radstock makes the assignment, it must own its rights,
otherwise, it cannot assign it, correct?
ATTY. AGRA:
Pursuant to the compromise agreement, once approved, yes, Your
Honors.
ASSOCIATE JUSTICE CARPIO:
So, you are saying that Radstock can own the rights to ownership
of the land?
ATTY. AGRA:
Yes, Your Honors.
ASSOCIATE JUSTICE CARPIO:
Yes?
ATTY. AGRA:
The premise, Your Honor, you mentioned a while ago was, if this
Court approves said compromise (interrupted)
ASSOCIATE JUSTICE CARPIO:
No, no. Whether there is such a compromise agreement - - Its an
academic question I am asking you, can a foreigner assign rights
to ownership of a land in the Philippines?
ATTY. AGRA:
Under the Compromise Agreement, Your Honors, these rights
should be respected.
ASSOCIATE JUSTICE CARPIO:
So, it can?
ATTY. AGRA:
It can. Your Honor. But again, this right must, cannot be perfected
or cannot be, could not take effect.
ASSOCIATE JUSTICE CARPIO:
But if it cannot - - Its not perfected, how can it assign?
ATTY. AGRA:
Not directly, Your Honors. Again, there must be a qualified
nominee assigned by Radstock.
ASSOCIATE JUSTICE CARPIO:
Its very clear, its an indirect way of selling property that is
prohibited by law, is it not?
ATTY. AGRA:
Again, Your Honor, know, believe this is a Compromise Agreement.
This is a dacion en pago.
ASSOCIATE JUSTICE CARPIO:
So, dacion en pago is an exception to the constitutional
prohibition.
ATTY. AGRA:
No, Your Honor. PNCC, will still hold on to the property, absent a
valid assignment of properties.
ASSOCIATE JUSTICE CARPIO:
But what rights will PNCC have over that land when it has already
signed the compromise? It is just waiting for instruction xxx from
Radstock what to do with it? So, its a trustee of somebody,
because it does not, it cannot, [it] has no dominion over it
anymore? Its just holding it for Radstock. So, PNCC becomes a
dummy, at that point, of Radstock, correct?
ATTY. AGRA:
No, Your Honor, I believe it (interrupted)
ASSOCIATE JUSTICE CARPIO:
Yeah, but it does not own the land, but it still holding the land in
favor of the other party to the Compromise Agreement
ATTY. AGRA:
Pursuant to the compromise agreement, that will happen.
ASSOCIATE JUSTICE CARPIO:
Okay. May I (interrupted)
ATTY. AGRA:

82
Again, Your Honor, if the compromise agreement ended with a
statement that Radstock will be the owner of the property
(interrupted)
ASSOCIATE JUSTICE CARPIO:
Yeah. Unfortunately, it says, to a qualified assignee.
ATTY. AGRA:
Yes, Your Honor.
ASSOCIATE JUSTICE CARPIO:
And at this point, when it is signed and execut[ed] and approved,
PNCC has no dominion over that land anymore. Who has dominion
over it?
ATTY. AGRA:
Pending the assignment to a qualified party, Your Honor, PNCC will
hold on to the property.
ASSOCIATE JUSTICE CARPIO:
Hold on, but who x x x can exercise acts of dominion, to sell it, to
lease it?
ATTY. AGRA:
Again, Your Honor, without the valid assignment to a qualified
nominee, the compromise agreement in so far as the transfer of
these properties will not become effective. It is subject to such
condition. Your Honor.74 (Emphasis supplied)
There is no dispute that Radstock is disqualified to own lands in
the Philippines. Consequently, Radstock is also disqualified to own
the rights to ownership of lands in the Philippines. Contrary to the
OGCCs claim, Radstock cannot own the rights to ownership of any
land in the Philippines because Radstock cannot lawfully own the
land itself. Otherwise, there will be a blatant circumvention of the
Constitution, which prohibits a foreign private corporation from
owning land in the Philippines. In addition, Radstock cannot
transfer the rights to ownership of land in the Philippines if it
cannot own the land itself. It is basic that an assignor or seller
cannot assign or sell something he does not own at the time the
ownership, or the rights to the ownership, are to be transferred to
the assignee or buyer.75
The third party assignee under the Compromise Agreement who
will be designated by Radstock can only acquire rights duplicating
those which its assignor (Radstock) is entitled by law to
exercise.76 Thus, the assignee can acquire ownership of the land
only if its assignor, Radstock, owns the land. Clearly, the
assignment by PNCC of the real properties to a nominee to be
designated by Radstock is a circumvention of the Constitutional
prohibition against a private foreign corporation owning lands in
the Philippines. Such circumvention renders the Compromise
Agreement void.
D. Public bidding is required for
the disposal of government properties.
Under Section 79 of the Government Auditing Code,77 the
disposition
of government lands to private parties requires public
bidding.78 COA Circular No. 89-926, issued on 27 January 1989,
sets forth the guidelines on the disposal of property and other
assets of the government. Part V of the COA Circular provides:
V. MODE OF DISPOSAL/DIVESTMENT: This Commission recognizes the following modes of
disposal/divestment of assets and property of national
government agencies, local government units and governmentowned or controlled corporations and their subsidiaries, aside
from other such modes as may be provided for by law.
1. Public Auction
Conformably to existing state policy, the divestment or disposal of
government property as contemplated herein shall be undertaken
primarily thru public auction. Such mode of divestment or disposal
shall observe and adhere to established mechanics and
procedures in public bidding, viz:

a. adequate publicity and notification so as to attract the

greatest number of interested parties; (vide, Sec. 79, P.D.
1445)
b. sufficient time frame between publication and date of
auction;
c. opportunity afforded to interested parties to inspect
the property or assets to be disposed of;
d. confidentiality of sealed proposals;
e. bond and other prequalification requirements to
guarantee performance; and
f. fair evaluation of tenders and proper notification of
award.
It is understood that the Government reserves the right to reject
any or all of the tenders. (Emphasis supplied)
Under the Compromise Agreement, PNCC shall dispose of
substantial parcels of land, by way of dacion en pago, in favor of
Radstock. Citing Uy v. Sandiganbayan,79 PNCC argues that
a dacion en pago is an exception to the requirement of a public
bidding.
PNCCs reliance on Uy is misplaced. There is nothing in Uy
declaring that public bidding is dispensed with in a dacion en pago
transaction. The Court explained the transaction in Uy as follows:
We do not see any infirmity in either the MOA or the SSA executed
between PIEDRAS and respondent banks. By virtue of its
shareholdings in OPMC, PIEDRAS was entitled to subscribe to
3,749,906,250 class "A" and 2,499,937,500 class "B" OPMC
shares. Admittedly, it was financially sound for PIEDRAS to
exercise its pre-emptive rights as an existing shareholder of OPMC
lest its proportionate shareholdings be diluted to its detriment.
However, PIEDRAS lacked the necessary funds to pay for the
additional subscription. Thus, it resorted to contract loans from
respondent banks to finance the payment of its additional
subscription. The mode of payment agreed upon by the parties
was that the payment would be made in the form of part of the
shares subscribed to by PIEDRAS. The OPMC shares therefore
were agreed upon by the parties to be equivalent payment for the
amount advanced by respondent banks. We see the wisdom in the
conditions of the loan transaction. In order to save PIEDRAS and/or
the government from the trouble of selling the shares in order to
raise funds to pay off the loans, an easier and more direct way
was devised in the form of the dacion en pago agreements.
Moreover, we agree with the Sandiganbayan that neither PIEDRAS
nor the government sustained any loss in these transactions. In
fact, after deducting the shares to be given to respondent banks
as payment for the shares, PIEDRAS stood to gain about
1,540,781,554 class "A" and 710,550,000 class "B" OPMC shares
virtually for free. Indeed, the question that must be asked is
whether or not PIEDRAS, in the exercise of its pre-emptive rights,
would have been able to acquire any of these shares at all if it did
not enter into the financing agreements with the respondent
banks.80
Suffice it to state that in Uy, neither PIEDRAS81 nor the
government suffered any loss in the dacion en pagotransactions,
unlike here where the government stands to lose at least P6.185
billion worth of assets.
Besides, a dacion en pago is in essence a form of sale, which
basically involves a disposition of a property. In Filinvest Credit
Corp. v. Philippine Acetylene, Co., Inc.,82 the Court defined dacion
en pago in this wise:
Dacion en pago, according to Manresa, is the transmission of the
ownership of a thing by the debtor to the creditor as an accepted
equivalent of the performance of obligation. In dacion en pago, as
a special mode of payment, the debtor offers another thing to the
creditor who accepts it as equivalent of payment of an
outstanding debt. The undertaking really partakes in one sense of
the nature of sale, that is, the creditor is really buying the thing or
property of the debtor, payment for which is to be charged
against the debtor's debt.As such, the essential elements of a

83
contract of sale, namely, consent, object certain, and cause or
consideration must be present. In its modern concept, what
actually takes place in dacion en pago is an objective novation of
the obligation where the thing offered as an accepted equivalent
of the performance of an obligation is considered as the object of
the contract of sale, while the debt is considered as the purchase
price. In any case, common consent is an essential prerequisite,
be it sale or innovation to have the effect of totally extinguishing
the debt or obligation.83 (Emphasis supplied)
E. PNCC must follow rules on preference of credit.
Radstock is only one of the creditors of PNCC. Asiavest is PNCCs
judgment creditor. In its Board Resolution No. BD-092-2000, PNCC
admitted not only its debt to Marubeni but also its debt to the
National Government84 in the amount of P36 billion.85 During the
Senate hearings, PNCC admitted that it owed the Government P36
billion, thus:
SEN. OSMEA. All right. Now, second question is, the
management of PNCC also recognize the obligation to the national
government of 36 billion. It is part of the board resolution.
MS. OGAN. Yes, sir, it is part of the October 20 board resolution.
SEN. OSMEA. All right. So if you owe the national government 36
billion and you owe Marubeni 10 billion, you know, I would just
declare bankruptcy and let an orderly disposition of assets be
done. What happened in this case to the claim, the 36 billion
claim of the national government? How was that disposed of by
the PNCC? Mas malaki ang utang ninyo sa national government,
36 billion. Ang gagawin ninyo, babayaran lahat ang utang ninyo
sa Marubeni without any assets left to satisfy your obligations to
the national government. There should have been, at least, a pari
passu payment of all your obligations, 'di ba?
MS. PASETES. Mr. Chairman...
SEN. OSMEA. Yes.
MS. PASETES. PNCC still carries in its books an equity account
called equity adjustments arising from transfer of obligations to
national government - - 5.4 billion - - in addition to shares held by
government amounting to 1.2 billion.
SEN. OSMEA. What is the 36 billion?
THE CHAIRMAN. Ms. Pasetes...
SEN. OSMEA. Wait, wait, wait.
THE CHAIRMAN. Baka ampaw yun eh.
SEN. OSMEA. Teka muna. What is the 36 billion that appear in
the resolution of the board in September 2000 (sic)? This is the
same resolution that recognizes, acknowledges and confirms
PNCC's obligations to Marubeni. And subparagraph (a) says
"Government of the Philippines, in the amount of 36,023,784,000
and change. And then (b) Marubeni Corporation in the amount of
10,743,000,000. So, therefore, in the same resolution, you
acknowledged that had something like P46.7 billion in obligations.
Why did PNCC settle the 10 billion and did not protect the national
government's 36 billion? And then, number two, why is it now in
your books, the 36 billion is now down to five? If you use that
ratio, then Marubeni should be down to one.
MS. PASETES. Sir, the amount of 36 billion is principal plus interest
and penalties.
SEN. OSMEA. And what about Marubeni? Is that just principal
only?
MS. PASETES. Principal and interest.

SEN. OSMEA. So, I mean, you know, it's equal treatment. Ten
point seven billion is principal plus penalties plus interest, hindi
ba?
MS. PASETES. Yes, sir. Yes, Your Honor.
SEN. OSMEA. All right. So now, what you are saying is that you
gonna pay Marubeni 6 billion and change and the national
government is only recognizing 5 billion. I don't think that's
protecting the interest of the national government at all.86
In giving priority and preference to Radstock, the Compromise
Agreement is certainly in fraud of PNCCs other creditors,
including the National Government, and violates the provisions of
the Civil Code on concurrence and preference of credits.
This Court has held that while the Corporation Code allows the
transfer of all or substantially all of the assets of a corporation,
the transfer should not prejudice the creditors of the assignor
corporation.87 Assuming that PNCC may transfer all or
substantially all its assets, to allow PNCC to do so without the
consent of its creditors or without requiring Radstock to assume
PNCCs debts will defraud the other PNCC creditors 88 since the
assignment will place PNCCs assets beyond the reach of its other
creditors.89 As this Court held in Caltex (Phil.), Inc. v. PNOC
Shipping and Transport Corporation:90
While the Corporation Code allows the transfer of all or
substantially all the properties and assets of a corporation, the
transfer should not prejudice the creditors of the assignor. The
only way the transfer can proceed without prejudice to the
creditors is to hold the assignee liable for the obligations of the
assignor. The acquisition by the assignee of all or substantially all
of the assets of the assignor necessarily includes the assumption
of the assignor's liabilities, unless the creditors who did not
consent to the transfer choose to rescind the transfer on the
ground of fraud. To allow an assignor to transfer all its business,
properties and assets without the consent of its creditors and
without requiring the assignee to assume the assignor's
obligations will defraud the creditors. The assignment will place
the assignor's assets beyond the reach of its creditors. (Emphasis
supplied)
Also, the law, specifically Article 138791 of the Civil Code,
presumes that there is fraud of creditors when property is
alienated by the debtor after judgment has been rendered against
him, thus:
Alienations by onerous title are also presumed fraudulent when
made by persons against whom some judgment has been
rendered in any instance or some writ of attachment has been
issued. The decision or attachment need not refer to the property
alienated, and need not have been obtained by the party seeking
rescission. (Emphasis supplied)
As stated earlier, Asiavest is a judgment creditor of PNCC in G.R.
No. 110263 and a court has already issued a writ of execution in
its favor. Thus, when PNCC entered into the Compromise
Agreement conveying several prime lots in favor of Radstock, by
way of dacion en pago, there is a legal presumption that such
conveyance is fraudulent under Article 1387 of the Civil
Code.92 This presumption is strengthened by the fact that the
conveyance has virtually left PNCCs other creditors, including the
biggest creditor the National Government - with no other asset
to garnish or levy.
Notably, the presumption of fraud or intention to defraud creditors
is not just limited to the two instances set forth in the first and
second paragraphs of Article 1387 of the Civil Code. Under the
third paragraph of the same article, "the design to defraud
creditors may be proved in any other manner recognized by the
law of evidence." In Oria v. Mcmicking,93 this Court considered the
following instances as badges of fraud:
1. The fact that the consideration of the conveyance is
fictitious or is inadequate.

84
2. A transfer made by a debtor after suit has begun and
while it is pending against him.
3. A sale upon credit by an insolvent debtor.
4. Evidence of large indebtedness or complete
insolvency.
5. The transfer of all or nearly all of his property by a
debtor, especially when he is insolvent or greatly
embarrassed financially.
6. The fact that the transfer is made between father and
son, when there are present other of the above
circumstances.
7. The failure of the vendee to take exclusive possession
of all the property. (Emphasis supplied)
Among the circumstances indicating fraud is a transfer of all or
nearly all of the debtors assets, especially when the debtor is
greatly embarrassed financially. Accordingly, neither a declaration
of insolvency nor the institution of insolvency proceedings is a
condition sine qua non for a transfer of all or nearly all of a
debtors assets to be regarded in fraud of creditors. It is sufficient
that a debtor is greatly embarrassed financially.
In this case, PNCCs huge negative net worth - at least P6 billion
as expressly admitted by PNCCs counsel during the oral
arguments, or P14 billion based on the 2006 COA Audit Report necessarily translates to an extremely embarrassing financial
situation. With its huge negative net worth arising from unpaid
billions of pesos in debt, PNCC cannot claim that it is financially
stable. As a consequence, the Compromise Agreement stipulating
a transfer in favor of Radstock of substantially all of PNCCs assets
constitutes fraud. To legitimize the Compromise Agreement just
because there is still no judicial declaration of PNCCs insolvency
will work fraud on PNCCs other creditors, the biggest creditor of
which is the National Government. To insist that PNCC is very
much liquid, given its admitted huge negative net worth, is
nothing but denial of the truth. The toll fees that PNCC collects
belong to the National Government. Obviously, PNCC cannot claim
it is liquid based on its collection of such toll fees, because PNCC
merely holds such toll fees in trust for the National Government.
PNCC does not own the toll fees, and such toll fees do not form
part of PNCCs assets.
PNCC owes the National Government P36 billion, a substantial
part of which constitutes taxes and fees, thus:
SEN. ROXAS. Thank you, Mr. Chairman.
Mr. PNCC Chairman, could you describe for us the composition of
your debt of about five billion there are in thousands, so this
looks like five and half billion. Current portion of long-term debt,
about five billion. What is this made of?
MS. PASETES. The five billion is composed of what is owed
the Bureau of Treasury and the Toll Regulatory Board for
concession fees thats almost three billion and another 2.4
billion owed Philippine National Bank.

The Company was assessed by the Bureau of Internal Revenue

(BIR) of its deficiencies in various taxes. However, no provision for
any liability has been made yet in the Companys financial
statements.
1980 deficiency income tax, deficiency contractors tax and
deficiency documentary stamp tax assessments by the BIR
totaling P212.523 Million.
xxxx
Deficiency business tax of P64 Million due the Belgian
Consortium, PNCCs partner in its LRT Project.
1992 deficiency income tax, deficiency value-added tax and
deficiency expanded withholding tax of P1.04 Billion which was
reduced to P709 Million after the Companys written protest.
xxxx
2002 deficiency internal revenue taxes totaling P72.916 Million.
x x x x.95 (Emphasis supplied)
Clearly, PNCC owes the National Government substantial taxes
and fees amounting to billions of pesos.
The P36 billion debt to the National Government was
acknowledged by the PNCC Board in the same board resolution
that recognized the Marubeni loans. Since PNCC is clearly
insolvent with a huge negative net worth, the government enjoys
preference over Radstock in the satisfaction of PNCCs liability
arising from taxes and duties, pursuant to the provisions of the
Civil Code on concurrence and preference of credits. Articles
2241,96 224297 and 224398 of the Civil Code expressly mandate
that taxes and fees due the National Government "shall be
preferred" and "shall first be satisfied" over claims like those
arising from the Marubeni loans which "shall enjoy no preference"
under Article 2244.99
However, in flagrant violation of the Civil Code, the PNCC Board
favored Radstock over the National Government in the order of
credits. This would strip PNCC of its assets leaving virtually
nothing for the National Government. This action of the PNCC
Board is manifestly and grossly disadvantageous to the National
Government and amounts to fraud.
During the Senate hearings, Senator Osmea pointed out that in
the Board Resolution of 20 October 2000, PNCC acknowledged its
obligations to the National Government amounting
to P36,023,784,000 and to Marubeni amounting
to P10,743,000,000. Yet, Senator Osmea noted that in the PNCC
books at the time of the hearing, theP36 billion obligation to the
National Government was reduced to P5 billion. PNCCs Miriam M.
Pasetes could not properly explain this discrepancy, except by
stating that the P36 billion includes the principal plus interest and
penalties, thus:

SEN. ROXAS. So, how much is the Bureau of Treasury?

MS. PASETES. Three billion.
SEN. ROXAS. Three Why do you owe the Bureau of Treasury
three billion?
MS. PASETES. That represents the concession fees due Toll
Regulatory Board principal plus interest, Your Honor.
x x x x94 (Emphasis supplied)

SEN. OSMEA. Teka muna. What is the 36 billion that appear in

the resolution of the board in September 2000 (sic)? This is the
same resolution that recognizes, acknowledges and confirms
PNCC's obligations to Marubeni. And subparagraph (a) says
"Government of the Philippines, in the amount of 36,023,784,000
and change. And then (b) Marubeni Corporation in the amount of
10,743,000,000. So, therefore, in the same resolution, you
acknowledged that had something like P46.7 billion in obligations.
Why did PNCC settle the 10 billion and did not protect the national
government's 36 billion? And then, number two, why is it now in
your books, the 36 billion is now down to five? If you use that
ratio, then Marubeni should be down to one.

In addition, PNCCs 2006 Audit Report by COA states as follows:

TAX MATTERS

MS. PASETES. Sir, the amount of 36 billion is principal plus interest

and penalties.

85
SEN. OSMEA. And what about Marubeni? Is that just principal
only?
MS. PASETES. Principal and interest.
SEN. OSMEA. So, I mean, you know, it's equal treatment. Ten
point seven billion is principal plus penalties plus interest, hindi
ba?
MS. PASETES. Yes, sir. Yes, Your Honor.
SEN. OSMEA. All right. So now, what you are saying is that you
gonna pay Marubeni 6 billion and change and the national
government is only recognizing 5 billion. I don't think that's
protecting the interest of the national government at all.100
PNCC failed to explain satisfactorily why in its books the obligation
to the National Government was reduced when no payment to the
National Government appeared to have been made. PNCC failed
to justify why it made it appear that the obligation to the National
Government was less than the obligation to Marubeni. It is
another obvious ploy to justify the preferential treatment given to
Radstock to the great prejudice of the National Government.

ATTY. AGRA:
Pursuant to the compromise agreement, once approved, yes, Your
Honors.
ASSOCIATE JUSTICE CARPIO:
So, you are saying that Radstock can own the rights to ownership
of the land?
ATTY. AGRA:
Yes, Your Honors.
ASSOCIATE JUSTICE CARPIO:
Yes?
ATTY. AGRA:
The premise, Your Honor, you mentioned a while ago was, if this
Court approves said compromise (interrupted).102 (Emphasis
supplied)
This Court is not, and should never be, a rubber stamp for litigants
hankering to pocket public funds for their selfish private gain. This
Court is the ultimate guardian of the public interest, the last
bulwark against those who seek to plunder the public coffers. This
Court cannot, and must never, bring itself down to the level of
legitimizer of violations of the Constitution, existing laws or public
policy.
Conclusion

VI.
Supreme Court is Not Legitimizer of Violations of Laws
During the oral arguments, counsels for Radstock and PNCC
admitted that the Compromise Agreement violates the
Constitution and existing laws. However, they rely on this Court to
approve the Compromise Agreement to shield their clients from
possible criminal acts arising from violation of the Constitution
and existing laws. In their view, once this Court approves the
Compromise Agreement, their clients are home free from
prosecution, and can enjoy the P6.185 billion loot. The following
exchanges during the oral arguments reveal this view:
ASSOCIATE JUSTICE CARPIO:
If there is no agreement, they better remit all of that to the
National Government. They cannot just hold that. They are
holding that [in] trust, as you said, x x x you agree, for the
National Government.

In sum, the acts of the PNCC Board in (1) issuing Board Resolution
Nos. BD-092-2000 and BD-099-2000 expressly admitting liability
for the Marubeni loans, and (2) entering into the Compromise
Agreement, constitute evident bad faith and gross inexcusable
negligence, amounting to fraud, in the management of PNCCs
affairs. Being public officers, the government nominees in the
PNCC Board must answer not only to PNCC and its stockholders,
but also to the Filipino people for grossly mishandling PNCCs
finances.
Under Article 1409 of the Civil Code, the Compromise Agreement
is "inexistent and void from the beginning," and "cannot be
ratified," thus:
Art. 1409. The following contracts are inexistent and void from the
beginning:
(1) Those whose cause, object or purpose is contrary to
law, morals, good customs, public order or public policy;

DEAN AGABIN:
xxx
Yes, thats why, they are asking the Honorable Court to approve
the compromise agreement.
ASSOCIATE JUSTICE CARPIO:
We cannot approve that if the power to authorize the
expenditure [belongs] to Congress. How can we usurp x x
x the power of Congress to authorize that expenditure[?]
Its only Congress that can authorize the expenditure of
funds from the general funds.
DEAN AGABIN:
But, Your Honor, if the Honorable Court would approve of
this compromise agreement, I believe that this would be
binding on Congress.
ASSOCIATE JUSTICE CARPIO:
Ignore the Constitutional provision that money shall be
paid out of the National Treasury only pursuant to an
appropriation by law. You want us to ignore that[?]
DEAN AGABIN:
Not really, Your Honor, but I suppose that Congress would have no
choice, because this is a final judgment of the Honorable Court. 101
xxxx
ASSOCIATE JUSTICE CARPIO:
So, if Radstock makes the assignment, it must own its rights,
otherwise, it cannot assign it, correct?

(7) Those expressly prohibited or declared void by law.

These contracts cannot be ratified. x x x. (Emphasis supplied)
The Compromise Agreement is indisputably contrary to the
Constitution, existing laws and public policy. Under Article 1409,
the Compromise Agreement is expressly declared void and
"cannot be ratified." No court, not even this Court, can ratify or
approve the Compromise Agreement. This Court must perform its
duty to defend and uphold the Constitution, existing laws, and
fundamental public policy. This Court must not shirk in declaring
the Compromise Agreement inexistent and void ab initio.
WHEREFORE, we GRANT the petition in G.R. No. 180428. We SET
ASIDE the Decision dated 25 January 2007 and the Resolutions
dated 12 June 2007 and 5 November 2007 of the Court of
Appeals. We DECLARE (1) PNCC Board Resolution Nos. BD-0922000 and BD-099-2000 admitting liability for the Marubeni loans
VOID AB INITIO for causing undue injury to the Government and
giving unwarranted benefits to a private party, constituting a
corrupt practice and unlawful act under Section 3(e) of the AntiGraft and Corrupt Practices Act, and (2) the Compromise
Agreement between the Philippine National Construction
Corporation and Radstock Securities Limited INEXISTENT AND
VOID AB INITIO for being contrary to Section 29(1), Article VI and
Sections 3 and 7, Article XII of the Constitution; Section 20(1),
Chapter IV, Subtitle B, Title I, Book V of the Administrative Code of

86
1987; Sections 4(2), 79, 84(1), and 85 of the Government Auditing
Code; and Articles 2241, 2242, 2243 and 2244 of the Civil Code.
We GRANT the intervention of Asiavest Merchant Bankers Berhad
in G.R. No. 178158 but DECLARE that Strategic Alliance
Development Corporation has no legal standing to sue.
SO ORDERED.

87
ANTONIO T. CARPIO
Associate Justice
G.R. No. L-14441

work or tend to work fraud on the investors. On August 29, 1958,

and on September 9, 1958 the Securities and Exchange
Commissioner issued the orders object of the present appeal.
December 17, 1966
The issues raised by the parties in this appeal are as follows:

PEDRO R. PALTING, petitioner,

vs.
SAN JOSE PETROLEUM INCORPORATED, respondent.
BARRERA, J.:
This is a petition for review of the order of August 29, 1958, later
supplemented and amplified by another dated September 9,
1958, of the Securities and Exchange Commission denying the
opposition to, and instead, granting the registration, and licensing
the sale in the Philippines, of 5,000,000 shares of the capital stock
of the respondent-appellee San Jose Petroleum, Inc. (hereafter
referred to as SAN JOSE PETROLEUM), a corporation organized and
existing in the Republic of Panama.
On September 7, 1956, SAN JOSE PETROLEUM filed with the
Philippine Securities and Exchange Commission a sworn
registration statement, for the registration and licensing for sale in
the Philippines Voting Trust Certificates representing 2,000,000
shares of its capital stock of a par value of $0.35 a share, at P1.00
per share. It was alleged that the entire proceeds of the sale of
said securities will be devoted or used exclusively to finance the
operations of San Jose Oil Company, Inc. (a domestic mining
corporation hereafter to be referred to as SAN JOSE OIL) which has
14 petroleum exploration concessions covering an area of a little
less than 1,000,000 hectares, located in the provinces of
Pangasinan, Tarlac, Nueva Ecija, La Union, Iloilo, Cotabato, Davao
and Agusan. It was the express condition of the sale that every
purchaser of the securities shall not receive a stock certificate, but
a registered or bearer-voting-trust certificate from the voting
trustees named therein James L. Buckley and Austin G.E. Taylor,
the first residing in Connecticut, U.S.A., and the second in New
York City. While this application for registration was pending
consideration by the Securities and Exchange Commission, SAN
JOSE PETROLEUM filed an amended Statement on June 20, 1958,
for registration of the sale in the Philippines of its shares of capital
stock, which was increased from 2,000,000 to 5,000,000, at a
reduced offering price of from P1.00 to P0.70 per share. At this
time the par value of the shares has also been reduced from $.35
to $.01 per share.1
Pedro R. Palting and others, allegedly prospective investors in the
shares of SAN JOSE PETROLEUM, filed with the Securities and
Exchange Commission an opposition to registration and licensing
of the securities on the grounds that (1) the tie-up between the
issuer, SAN JOSE PETROLEUM, a Panamanian corporation and SAN
JOSE OIL, a domestic corporation, violates the Constitution of the
Philippines, the Corporation Law and the Petroleum Act of 1949;
(2) the issuer has not been licensed to transact business in the
Philippines; (3) the sale of the shares of the issuer is fraudulent,
and works or tends to work a fraud upon Philippine purchasers;
and (4) the issuer as an enterprise, as well as its business, is
based upon unsound business principles. Answering the foregoing
opposition of Palting, et al., the registrant SAN JOSE PETROLEUM
claimed that it was a "business enterprise" enjoying parity rights
under the Ordinance appended to the Constitution, which parity
right, with respect to mineral resources in the Philippines, may be
exercised, pursuant to the Laurel-Langley Agreement, only
through the medium of a corporation organized under the laws of
the Philippines. Thus, registrant which is allegedly qualified to
exercise rights under the Parity Amendment, had to do so through
the medium of a domestic corporation, which is the SAN JOSE OIL.
It refused the contention that the Corporation Law was being
violated, by alleging that Section 13 thereof applies only to
foreign corporations doing business in the Philippines, and
registrant was not doing business here. The mere fact that it was
a holding company of SAN JOSE OIL and that registrant undertook
the financing of and giving technical assistance to said
corporation did not constitute transaction of business in the
Philippines. Registrant also denied that the offering for sale in the
Philippines of its shares of capital stock was fraudulent or would

1. Whether or not petitioner Pedro R. Palting, as a

"prospective investor" in respondent's securities, has
personality to file the present petition for review of the
order of the Securities and Exchange Commission;
2. Whether or not the issue raised herein is already moot
and academic;
3. Whether or not the "tie-up" between the respondent
SAN JOSE PETROLEUM, a foreign corporation, and SAN
JOSE OIL COMPANY, INC., a domestic mining corporation,
is violative of the Constitution, the Laurel-Langley
Agreement, the Petroleum Act of 1949, and the
Corporation Law; and
4. Whether or not the sale of respondent's securities is
fraudulent, or would work or tend to work fraud to
purchasers of such securities in the Philippines.
1. In answer to the notice and order of the Securities and
Exchange Commissioner, published in 2 newspapers of general
circulation in the Philippines, for "any person who is opposed" to
the petition for registration and licensing of respondent's
securities, to file his opposition in 7 days, herein petitioner so filed
an opposition. And, the Commissioner, having denied his
opposition and instead, directed the registration of the securities
to be offered for sale, oppositor Palting instituted the present
proceeding for review of said order.
Respondent raises the question of the personality of petitioner to
bring this appeal, contending that as a mere "prospective
investor", he is not an "Aggrieved" or "interested" person who
may properly maintain the suit. Citing a 1931 ruling of Utah State
Supreme Court2 it is claimed that the phrase "party aggrieved"
used in the Securities Act3and the Rules of Court4 as having the
right to appeal should refer only to issuers, dealers and salesmen
of securities.
It is true that in the cited case, it was ruled that the phrase
"person aggrieved" is that party "aggrieved by the judgment or
decree where it operates on his rights of property or bears directly
upon his interest", that the word "aggrieved" refers to "a
substantial grievance, a denial of some personal property right or
the imposition upon a party of a burden or obligation." But a
careful reading of the case would show that the appeal therein
was dismissed because the court held that an order of registration
was not final and therefore not appealable. The foregoing
pronouncement relied upon by herein respondent was made in
construing the provision regarding an order of revocation which
the court held was the one appealable. And since the law provides
that in revoking the registration of any security, only the issuer
and every registered dealer of the security are notified, excluding
any person or group of persons having no such interest in the
securities, said court concluded that the phrase "interested
person" refers only to issuers, dealers or salesmen of securities.
We cannot consider the foregoing ruling by the Utah State Court
as controlling on the issue in this case. Our Securities Act in
Section 7(c) thereof, requires the publication and notice of the
registration statement. Pursuant thereto, the Securities and
Exchange Commissioner caused the publication of an order in part
reading as follows:
. . . Any person who is opposed with this petition must
file his written opposition with this Commission within
said period (2 weeks). . . .

88
In other words, as construed by the administrative office
entrusted with the enforcement of the Securities Act, any person
(who may not be "aggrieved" or "interested" within the legal
acceptation of the word) is allowed or permitted to file an
opposition to the registration of securities for sale in the
Philippines. And this is in consonance with the generally accepted
principle that Blue Sky Laws are enacted to protect investors and
prospective purchasers and to prevent fraud and preclude the sale
of securities which are in fact worthless or worth substantially less
than the asking price. It is for this purpose that herein petitioner
duly filed his opposition giving grounds therefor. Respondent SAN
JOSE PETROLEUM was required to reply to the opposition.
Subsequently both the petition and the opposition were set for
hearing during which the petitioner was allowed to actively
participate and did so by cross-examining the respondent's
witnesses and filing his memorandum in support of his opposition.
He therefore to all intents and purposes became a party to the
proceedings. And under the New Rules of Court,5 such a party can
appeal from a final order, ruling or decision of the Securities and
Exchange Commission. This new Rule eliminating the word
"aggrieved" appearing in the old Rule, being procedural in
nature,6 and in view of the express provision of Rule 144 that the
new rules made effective on January 1, 1964 shall govern not only
cases brought after they took effect but all further proceedings in
cases then pending, except to the extent that in the opinion of the
Court their application would not be feasible or would work
injustice, in which event the former procedure shall apply, we hold
that the present appeal is properly within the appellate
jurisdiction of this Court.
The order allowing the registration and sale of respondent's
securities is clearly a final order that is appealable. The mere fact
that such authority may be later suspended or revoked,
depending on future developments, does not give it the character
of an interlocutory or provisional ruling. And the fact that seven
days after the publication of the order, the securities are deemed
registered (Sec. 7, Com. Act 83, as amended), points to the
finality of the order. Rights and obligations necessarily arise
therefrom if not reviewed on appeal.
Our position on this procedural matter that the order is
appealable and the appeal taken here is proper is strengthened
by the intervention of the Solicitor General, under Section 23 of
Rule 3 of the Rules of Court, as the constitutional issues herein
presented affect the validity of Section 13 of the Corporation Law,
which, according to the respondent, conflicts with the Parity
Ordinance and the Laurel-Langley Agreement recognizing, it is
claimed, its right to exploit our petroleum resources
notwithstanding said provisions of the Corporation Law.
2. Respondent likewise contends that since the order of
Registration/Licensing dated September 9, 1958 took effect 30
days from September 3, 1958, and since no stay order has been
issued by the Supreme Court, respondent's shares became
registered and licensed under the law as of October 3, 1958.
Consequently, it is asserted, the present appeal has become
academic. Frankly we are unable to follow respondent's
argumentation. First it claims that the order of August 29 and that
of September 9, 1958 are not final orders and therefor are not
appealable. Then when these orders, according to its theory
became final and were implemented, it argues that the orders can
no longer be appealed as the question of registration and
licensing became moot and academic.
But the fact is that because of the authority to sell, the securities
are, in all probabilities, still being traded in the open market.
Consequently the issue is much alive as to whether respondent's
securities should continue to be the subject of sale. The purpose
of the inquiry on this matter is not fully served just because the
securities had passed out of the hands of the issuer and its
dealers. Obviously, so long as the securities are outstanding and
are placed in the channels of trade and commerce, members of
the investing public are entitled to have the question of the worth
or legality of the securities resolved one way or another.
But more fundamental than this consideration, we agree with the
late Senator Claro M. Recto, who appeared asamicus curiae in this

case, that while apparently the immediate issue in this appeal is

the right of respondent SAN JOSE PETROLEUM to dispose of and
sell its securities to the Filipino public, the real and ultimate
controversy here would actually call for the construction of the
constitutional provisions governing the disposition, utilization,
exploitation and development of our natural resources. And
certainly this is neither moot nor academic.
3. We now come to the meat of the controversy the "tie-up"
between SAN JOSE OIL on the one hand, and the respondent SAN
JOSE PETROLEUM and its associates, on the other. The relationship
of these corporations involved or affected in this case is admitted
and established through the papers and documents which are
parts of the records: SAN JOSE OIL, is a domestic mining
corporation, 90% of the outstanding capital stock of which is
owned by respondent SAN JOSE PETROLEUM, a foreign
(Panamanian) corporation, the majority interest of which is owned
by OIL INVESTMENTS, Inc., another foreign (Panamanian)
company. This latter corporation in turn is wholly (100%) owned
by PANTEPEC OIL COMPANY, C.A., and PANCOASTAL PETROLEUM
COMPANY, C.A., both organized and existing under the laws of
Venezuela. As of September 30, 1956, there were 9,976
stockholders of PANCOASTAL PETROLEUM found in 49 American
states and U.S. territories, holding 3,476,988 shares of stock;
whereas, as of November 30, 1956, PANTEPEC OIL COMPANY was
said to have 3,077,916 shares held by 12,373 stockholders
scattered in 49 American state. In the two lists of stockholders,
there is no indication of the citizenship of these stockholders,7 or
of the total number of authorized stocks of each corporation, for
the purpose of determining the corresponding percentage of these
listed stockholders in relation to the respective capital stock of
said corporation.
Petitioner, as well as the amicus curiae and the Solicitor
General8 contend that the relationship between herein respondent
SAN JOSE PETROLEUM and its subsidiary, SAN JOSE OIL, violates
the Petroleum Law of 1949, the Philippine Constitution, and
Section 13 of the Corporation Law, which inhibits a mining
corporation from acquiring an interest in another mining
corporation. It is respondent's theory, on the other hand, that far
from violating the Constitution; such relationship between the two
corporations is in accordance with the Laurel-Langley Agreement
which implemented the Ordinance Appended to the Constitution,
and that Section 13 of the Corporation Law is not applicable
because respondent is not licensed to do business, as it is not
doing business, in the Philippines.
Article XIII, Section 1 of the Philippine Constitution provides:
SEC. 1. All agricultural, timber, and mineral lands of the
public domain, waters, minerals, coal, petroleum, and
other mineral oils, all forces of potential energy, and
other natural resources of the Philippines belong to the
State, and their disposition, exploitation, development, or
utilization shall be limited to citizens of the Philippines, or
to corporations or associations at least sixty per centum
of the capital of which is owned by such citizens, subject
to any existing right, grant, lease or concession at the
time of the inauguration of this Government established
under this Constitution. . . . (Emphasis supplied)
In the 1946 Ordinance Appended to the Constitution, this right (to
utilize and exploit our natural resources) was extended to citizens
of the United States, thus:
Notwithstanding the provisions of section one, Article
Thirteen, and section eight, Article Fourteen, of the
foregoing Constitution, during the effectivity of the
Executive Agreement entered into by the President of the
Philippines with the President of the United States on the
fourth of July, nineteen hundred and forty-six, pursuant to
the provisions of Commonwealth Act Numbered Seven
hundred and thirty-three, but in no case to extend
beyond the third of July, nineteen hundred and seventyfour, the disposition, exploitation, development, and
utilization of all agricultural, timber, and mineral lands of
the public domain, waters, minerals, coal, petroleum, and

89
other mineral oils, all forces of potential energy, and
other natural resources of the Philippines, and the
operation of public utilities shall, if open to any person,
be open to citizens of the United States, and to all forms
of business enterprises owned or controlled, directly or
indirectly, by citizens of the United States in the same
manner as to, and under the same conditions imposed
upon, citizens of the Philippines or corporations or
associations owned or controlled by citizens of the
Philippines (Emphasis supplied.)
In the 1954 Revised Trade Agreement concluded between the
United States and the Philippines, also known as the LaurelLangley Agreement, embodied in Republic Act 1355, the following
provisions appear:
ARTICLE VI
1. The disposition, exploitation, development and
utilization of all agricultural, timber, and mineral lands of
the public domain, waters, minerals, coal, petroleum and
other mineral oils, all forces and sources of potential
energy, and other natural resources of either Party, and
the operation of public utilities, shall, if open to any
person, be open to citizens of the other Party and to all
forms of business enterprise owned or controlled,
directly or indirectly, by citizens of such other Party in
the same manner as to and under the same conditions
imposed upon citizens or corporations or associations
owned or controlled by citizens of the Party granting the
right.
2. The rights provided for in Paragraph 1 may be
exercised, . . . in the case of citizens of the United States,
with respect to natural resources in the public domain in
the Philippines, only through the medium of a
corporation organized under the laws of the Philippines
and at least 60% of the capital stock of which is owned
or controlled by citizens of the United States. . . .
3. The United States of America reserves the rights of the
several States of the United States to limit the extent to
which citizens or corporations or associations owned or
controlled by citizens of the Philippines may engage in
the activities specified in this Article. The Republic of the
Philippines reserves the power to deny any of the rights
specified in this Article to citizens of the United States
who are citizens of States, or to corporations or
associations at least 60% of whose capital stock or
capital is owned or controlled by citizens of States, which
deny like rights to citizens of the Philippines, or to
corporations or associations which are owned or
controlled by citizens of the Philippines. . . . (Emphasis
supplied.)
Re-stated, the privilege to utilize, exploit, and develop the natural
resources of this country was granted, by Article XIII of the
Constitution, to Filipino citizens or to corporations or associations
60% of the capital of which is owned by such citizens. With the
Parity Amendment to the Constitution, the same right was
extended to citizens of the United States and business
enterprises owned or controlled directly or indirectly, by citizens
of the United States.
There could be no serious doubt as to the meaning of the word
"citizens" used in the aforementioned provisions of the
Constitution. The right was granted to 2 types of persons: natural
persons (Filipino or American citizens) and juridical persons
(corporations 60% of which capital is owned by Filipinos and
business enterprises owned or controlled directly or indirectly, by
citizens of the United States). In American law, "citizen" has been
defined as "one who, under the constitution and laws of the
United States, has a right to vote for representatives in congress
and other public officers, and who is qualified to fill offices in the
gift of the people. (1 Bouvier's Law Dictionary, p. 490.) A citizen is

One of the sovereign people. A constituent member of

the sovereignty, synonymous with the people." (Scott v.
Sandford, 19 Ho. [U.S.] 404, 15 L. Ed. 691.)
A member of the civil state entitled to all its privileges.
(Cooley, Const. Lim. 77. See U.S. v. Cruikshank 92 U.S.
542, 23 L. Ed. 588; Minor v. Happersett 21 Wall. [U.S.]
162, 22 L. Ed. 627.)
These concepts clarified, is herein respondent SAN JOSE
PETROLEUM an American business enterprise entitled to parity
rights in the Philippines? The answer must be in the negative, for
the following reasons:
Firstly It is not owned or controlled directly by citizens of the
United States, because it is owned and controlled by a
corporation, the OIL INVESTMENTS, another foreign (Panamanian)
corporation.
Secondly Neither can it be said that it is indirectly owned and
controlled by American citizens through the OIL INVESTMENTS, for
this latter corporation is in turn owned and controlled, not by
citizens of the United States, but still by two foreign (Venezuelan)
corporations, the PANTEPEC OIL COMPANY and PANCOASTAL
PETROLEUM.
Thirdly Although it is claimed that these two last corporations
are owned and controlled respectively by 12,373 and 9,979
stockholders residing in the different American states, there is no
showing in the certification furnished by respondent that the
stockholders of PANCOASTAL or those of them holding the
controlling stock, are citizens of the United States.
Fourthly Granting that these individual stockholders are
American citizens, it is yet necessary to establish that the
different states of which they are citizens, allow Filipino citizens or
corporations or associations owned or controlled by Filipino
citizens, to engage in the exploitation, etc. of the natural
resources of these states (see paragraph 3, Article VI of the
Laurel-Langley Agreement, supra). Respondent has presented no
proof to this effect.
Fifthly But even if the requirements mentioned in the two
immediately preceding paragraphs are satisfied, nevertheless to
hold that the set-up disclosed in this case, with a long chain of
intervening foreign corporations, comes within the purview of the
Parity Amendment regarding business enterprises indirectly
owned or controlled by citizens of the United States, is to unduly
stretch and strain the language and intent of the law. For, to what
extent must the word "indirectly" be carried? Must we trace the
ownership or control of these various corporationsad infinitum for
the purpose of determining whether the American ownershipcontrol-requirement is satisfied? Add to this the admitted fact that
the shares of stock of the PANTEPEC and PANCOASTAL which are
allegedly owned or controlled directly by citizens of the United
States, are traded in the stock exchange in New York, and you
have a situation where it becomes a practical impossibility to
determine at any given time, the citizenship of the controlling
stock required by the law. In the circumstances, we have to hold
that the respondent SAN JOSE PETROLEUM, as presently
constituted, is not a business enterprise that is authorized to
exercise the parity privileges under the Parity Ordinance, the
Laurel-Langley Agreement and the Petroleum Law. Its tie-up with
SAN JOSE OIL is, consequently, illegal.
What, then, would be the Status of SAN JOSE OIL, about 90% of
whose stock is owned by SAN JOSE PETROLEUM? This is a query
which we need not resolve in this case as SAN JOSE OIL is not a
party and it is not necessary to do so to dispose of the present
controversy. But it is a matter that probably the Solicitor General
would want to look into.
There is another issue which has been discussed extensively by
the parties. This is whether or not an American mining corporation
may lawfully "be in anywise interested in any other corporation
(domestic or foreign) organized for the purpose of engaging in

90
agriculture or in mining," in the Philippines or whether an
American citizen owning stock in more than one corporation
organized for the purpose of engaging in agriculture or in mining,
may own more than 15% of the capital stock then outstanding
and entitled to vote, of each of such corporations, in view of the
express prohibition contained in Section 13 of the Philippine
Corporation Law. The petitioner in this case contends that the
provisions of the Corporation Law must be applied to American
citizens and business enterprise otherwise entitled to exercise the
parity privileges, because both the Laurel-Langley Agreement
(Art. VI, par. 1) and the Petroleum Act of 1948 (Art. 31),
specifically provide that the enjoyment by them of the same rights
and obligations granted under the provisions of both laws shall be
"in the same manner as to, and under the same conditions
imposed upon, citizens of the Philippines or corporations or
associations owned or controlled by citizens of the Philippines."
The petitioner further contends that, as the enjoyment of the
privilege of exploiting mineral resources in the Philippines by
Filipino citizens or corporations owned or controlled by citizens of
the Philippines (which corporation must necessarily be organized
under the Corporation Law), is made subject to the limitations
provided in Section 13 of the Corporation Law, so necessarily the
exercise of the parity rights by citizens of the United States or
business enterprise owned or controlled, directly or indirectly, by
citizens of the United States, must equally be subject to the same
limitations contained in the aforesaid Section 13 of the
Corporation Law.
In view of the conclusions we have already arrived at, we deem it
not indispensable for us to pass upon this legal question,
especially taking into account the statement of the respondent
(SAN JOSE PETROLEUM) that it is essentially a holding company,
and as found by the Securities and Exchange Commissioner, its
principal activity is limited to the financing and giving technical
assistance to SAN JOSE OIL.
4. Respondent SAN JOSE PETROLEUM, whose shares of stock were
allowed registration for sale in the Philippines, was incorporated
under the laws of Panama in April, 1956 with an authorized capital
stock of $500,000.00, American currency, divided into 50,000,000
shares at par value of $0.01 per share. By virtue of a 3-party
Agreement of June 14, 1956, respondent was supposed to have
received from OIL INVESTMENTS 8,000,000 shares of the capital
stock of SAN JOSE OIL (at par value of $0.01 per share), plus a
note for $250,000.00 due in 6 months, for which respondent
issued in favor of OIL INVESTMENTS 16,000,000 shares of its
capital stock, at $0.01 per share or with a value of $160,000.00,
plus a note for $230,297.97 maturing in 2 years at 6% per annum
interest,9 and the assumption of payment of the unpaid price of
7,500,000 (of the 8,000,000 shares of SAN JOSE OIL).
On June 27, 1956, the capitalization of SAN JOSE PETROLEUM was
increased from $500,000.00 to $17,500,000.00 by increasing the
par value of the same 50,000,000 shares, from $0.01 to $0.35.
Without any additional consideration, the 16,000,000 shares of
$0.01 previously issued to OIL INVESTMENTS with a total value of
$160,000.00 were changed with 16,000,000 shares of the
recapitalized stock at $0.35 per share, or valued at
$5,600,000.00. And, to make it appear that cash was received for
these re-issued 16,000,000 shares, the board of directors of
respondent corporation placed a valuation of $5,900,000.00 on
the 8,000,000 shares of SAN JOSE OIL (still having par value of
$0.10 per share) which were received from OIL INVESTMENTS as
part-consideration for the 16,000,000 shares at $0.01 per share.
In the Balance Sheet of respondent, dated July 12, 1956, from the
$5,900,000.00, supposedly the value of the 8,000,000 shares of
SAN JOSE OIL, the sum of $5,100,000.00 was deducted,
corresponding to the alleged difference between the "value" of
the said shares and the subscription price thereof which is
$800,000.00 (at $0.10 per share). From this $800,000.00, the
subscription price of the SAN JOSE OIL shares, the amount of
$319,702.03 was deducted, as allegedly unpaid subscription
price, thereby giving a difference of $480,297.97, which was
placed as the amount allegedly paid in on the subscription price of
the 8,000,000 SAN JOSE OIL shares. Then, by adding thereto the
note receivable from OIL INVESTMENTS, for $250,000.00 (part-

consideration for the 16,000,000 SAN JOSE PETROLEUM shares),

and the sum of $6,516.21, as deferred expenses, SAN JOSE
PETROLEUM appeared to have assets in the sum of $736,814.18.
These figures are highly questionable. Take the item
$5,900,000.00 the valuation placed on the 8,000,000 shares of
SAN JOSE OIL. There appears no basis for such valuation other
than belief by the board of directors of respondent that "should
San Jose Oil Company be granted the bulk of the concessions
applied for upon reasonable terms, that it would have a
reasonable value of approximately $10,000,000." 10 Then, of this
amount, the subscription price of $800,000.00 was deducted and
called it "difference between the (above) valuation and the
subscription price for the 8,000,000 shares." Of this $800,000.00
subscription price, they deducted the sum of $480,297.97 and the
difference was placed as the unpaid portion of the subscription
price. In other words, it was made to appear that they paid in
$480,297.97 for the 8,000,000 shares of SAN JOSE OIL. This
amount ($480,297.97) was supposedly that $250,000.00 paid by
OIL INVESMENTS for 7,500,000 shares of SAN JOSE OIL, embodied
in the June 14 Agreement, and a sum of $230,297.97 the amount
expended or advanced by OIL INVESTMENTS to SAN JOSE OIL. And
yet, there is still an item among respondent's liabilities, for
$230,297.97 appearing as note payable to Oil Investments,
maturing in two (2) years at six percent (6%) per annum. 11 As far
as it appears from the records, for the 16,000,000 shares at $0.35
per share issued to OIL INVESTMENTS, respondent SAN JOSE
PETROLEUM received from OIL INVESTMENTS only the note for
$250,000.00 plus the 8,000,000 shares of SAN JOSE OIL, with par
value of $0.10 per share or a total of $1,050,000.00 the only
assets of the corporation. In other words, respondent actually lost
$4,550,000.00, which was received by OIL INVESTMENTS.
But this is not all. Some of the provisions of the Articles of
Incorporation of respondent SAN JOSE PETROLEUM are
noteworthy; viz:
(1) the directors of the Company need not be
shareholders;
(2) that in the meetings of the board of directors, any
director may be represented and may vote through a
proxy who also need not be a director or stockholder; and
(3) that no contract or transaction between the
corporation and any other association or partnership will
be affected, except in case of fraud, by the fact that any
of the directors or officers of the corporation is interested
in, or is a director or officer of, such other association or
partnership, and that no such contract or transaction of
the corporation with any other person or persons, firm,
association or partnership shall be affected by the fact
that any director or officer of the corporation is a party to
or has an interest in, such contract or transaction, or has
in anyway connected with such other person or persons,
firm, association or partnership; and finally, that all and
any of the persons who may become director or officer of
the corporation shall be relieved from all responsibility
for which they may otherwise be liable by reason of any
contract entered into with the corporation, whether it be
for his benefit or for the benefit of any other person, firm,
association or partnership in which he may be interested.
These provisions are in direct opposition to our corporation law
and corporate practices in this country. These provisions alone
would outlaw any corporation locally organized or doing business
in this jurisdiction. Consider the unique and unusual provision that
no contract or transaction between the company and any other
association or corporation shall be affected except in case of
fraud, by the fact that any of the directors or officers of the
company may be interested in or are directors or officers of such
other association or corporation; and that none of such contracts
or transactions of this company with any person or persons, firms,
associations or corporations shall be affected by the fact that any
director or officer of this company is a party to or has an interest
in such contract or transaction or has any connection with such
person or persons, firms associations or corporations; and that

91
any and all persons who may become directors or officers of this
company are hereby relieved of all responsibility which they would
otherwise incur by reason of any contract entered into which this
company either for their own benefit, or for the benefit of any
person, firm, association or corporation in which they may be
interested.
The impact of these provisions upon the traditional judiciary
relationship between the directors and the stockholders of a
corporation is too obvious to escape notice by those who are
called upon to protect the interest of investors. The directors and
officers of the company can do anything, short of actual fraud,
with the affairs of the corporation even to benefit themselves
directly or other persons or entities in which they are interested,
and with immunity because of the advance condonation or relief
from responsibility by reason of such acts. This and the other
provision which authorizes the election of non-stockholders as
directors, completely disassociate the stockholders from the
government and management of the business in which they have
invested.
To cap it all on April 17, 1957, admittedly to assure continuity of
the management and stability of SAN JOSE PETROLEUM, OIL
INVESTMENTS, as holder of the only subscribed stock of the
former corporation and acting "on behalf of all future holders of
voting trust certificates," entered into a voting trust
agreement12 with James L. Buckley and Austin E. Taylor, whereby
said Trustees were given authority to vote the shares represented
by the outstanding trust certificates (including those that may
henceforth be issued) in the following manner:
(a) At all elections of directors, the Trustees will
designate a suitable proxy or proxies to vote for the
election of directors designated by the Trustees in their
own discretion, having in mind the best interests of the
holders of the voting trust certificates, it being
understood that any and all of the Trustees shall be
eligible for election as directors;
(b) On any proposition for removal of a director, the
Trustees shall designate a suitable proxy or proxies to
vote for or against such proposition as the Trustees in
their own discretion may determine, having in mind the
best interest of the holders of the voting trust
certificates;
(c) With respect to all other matters arising at any
meeting of stockholders, the Trustees will instruct such
proxy or proxies attending such meetings to vote the
shares of stock held by the Trustees in accordance with
the written instructions of each holder of voting trust
certificates. (Emphasis supplied.)
It was also therein provided that the said Agreement shall be
binding upon the parties thereto, their successors, and upon all
holders of voting trust certificates.
And these are the voting trust certificates that are offered to
investors as authorized by Security and Exchange Commissioner.
It can not be doubted that the sale of respondent's securities
would, to say the least, work or tend to work fraud to Philippine
investors.
FOR ALL THE FOREGOING CONSIDERATIONS, the motion of
respondent to dismiss this appeal, is denied and the orders of the
Securities and Exchange Commissioner, allowing the registration
of Respondent's securities and licensing their sale in the
Philippines are hereby set aside. The case is remanded to the
Securities and Exchange Commission for appropriate action in
consonance with this decision. With costs. Let a copy of this
decision be furnished the Solicitor General for whatever action he
may deem advisable to take in the premises. So ordered.

92
G.R. No. 172671

April 16, 2009

WHEREFORE, judgment is hereby rendered in Civil Case No. CEB16145, to wit:

MARISSA R. UNCHUAN, Petitioner,

vs.
ANTONIO J.P. LOZADA, ANITA LOZADA and THE REGISTER
OF DEEDS OF CEBU CITY, Respondents.

1. Plaintiff Antonio J.P. Lozada is declared the absolute

owner of the properties in question;

QUISUMBING, J.:

2. The Deed of Donation (Exh. "9") is declared null and

void, and Defendant Marissa R. Unchuan is directed to
surrender the original thereof to the Court for
cancellation;

For review are the Decision1 dated February 23, 2006 and
Resolution2 dated April 12, 2006 of the Court of Appeals in CA-G.R.
CV. No. 73829. The appellate court had affirmed with modification
the Order3 of the Regional Trial Court (RTC) of Cebu City, Branch
10 reinstating its Decision4 dated June 9, 1997.

3. The Register of Deeds of Cebu City is ordered to cancel

the annotations of the Affidavit of Adverse Claim of
defendant Marissa R. Unchuan on TCT Nos. 53257 and
53258 and on such all other certificates of title issued in
lieu of the aforementioned certificates of title;

The facts of the case are as follows:

4. Defendant Marissa R. Unchuan is ordered to pay

Antonio J.P. Lozada and Anita Lozada Slaughter the sum
of P100,000.00 as moral damages; exemplary damages
of P50,000.00; P50,000.00 for litigation expenses and
attorneys fees of P50,000.00; and

DECISION

Sisters Anita Lozada Slaughter and Peregrina Lozada Saribay were

the registered co-owners of Lot Nos. 898-A-3 and 898-A-4 covered
by Transfer Certificates of Title (TCT) Nos. 532585 and 532576 in
Cebu City.
The sisters, who were based in the United States, sold the lots to
their nephew Antonio J.P. Lozada (Antonio) under a Deed of
Sale7 dated March 11, 1994. Armed with a Special Power of
Attorney8 from Anita, Peregrina went to the house of their brother,
Dr. Antonio Lozada (Dr. Lozada), located at 4356 Faculty Avenue,
Long Beach California.9 Dr. Lozada agreed to advance the
purchase price of US$367,000 or P10,000,000 for Antonio, his
nephew. The Deed of Sale was later notarized and authenticated
at the Philippine Consuls Office. Dr. Lozada then forwarded the
deed, special power of attorney, and owners copies of the titles to
Antonio in the Philippines. Upon receipt of said documents, the
latter recorded the sale with the Register of Deeds of Cebu.
Accordingly, TCT Nos. 12832210 and 12832311 were issued in the
name of Antonio Lozada.
Pending registration of the deed, petitioner Marissa R. Unchuan
caused the annotation of an adverse claim on the lots. Marissa
claimed that Anita donated an undivided share in the lots to her
under an unregistered Deed of Donation 12 dated February 4, 1987.
Antonio and Anita brought a case against Marissa for quieting of
title with application for preliminary injunction and restraining
order. Marissa for her part, filed an action to declare the Deed of
Sale void and to cancel TCT Nos. 128322 and 128323. On motion,
the cases were consolidated and tried jointly.
At the trial, respondents presented a notarized and duly
authenticated sworn statement, and a videotape where Anita
denied having donated land in favor of Marissa. Dr. Lozada
testified that he agreed to advance payment for Antonio in
preparation for their plan to form a corporation. The lots are to be
eventually infused in the capitalization of Damasa Corporation,
where he and Antonio are to have 40% and 60% stake,
respectively. Meanwhile, Lourdes G. Vicencio, a witness for
respondents confirmed that she had been renting the ground floor
of Anitas house since 1983, and tendering rentals to Antonio.
For her part, Marissa testified that she accompanied Anita to the
office of Atty. Cresencio Tomakin for the signing of the Deed of
Donation. She allegedly kept it in a safety deposit box but
continued to funnel monthly rentals to Peregrinas account.
A witness for petitioner, one Dr. Cecilia Fuentes, testified on
Peregrinas medical records. According to her interpretation of
said records, it was physically impossible for Peregrina to have
signed the Deed of Sale on March 11, 1994, when she was
reported to be suffering from edema. Peregrina died on April 4,
1994.
In a Decision dated June 9, 1997, RTC Judge Leonardo B. Caares
disposed of the consolidated cases as follows:

5. The counterclaims of defendant Marissa R. Unchuan

[are] DISMISSED.
In Civil Case No. CEB-16159, the complaint is hereby DISMISSED.
In both cases, Marissa R. Unchuan is ordered to pay the costs of
suit.
SO ORDERED.13
On motion for reconsideration by petitioner, the RTC of Cebu City,
Branch 10, with Hon. Jesus S. dela Pea as Acting Judge, issued an
Order14 dated April 5, 1999. Said order declared the Deed of Sale
void, ordered the cancellation of the new TCTs in Antonios name,
and directed Antonio to pay Marissa P200,000 as moral
damages, P100,000 as exemplary damages, P100,000 attorneys
fees and P50,000 for expenses of litigation. The trial court also
declared the Deed of Donation in favor of Marissa valid. The RTC
gave credence to the medical records of Peregrina.
Respondents moved for reconsideration. On July 6, 2000, now with
Hon. Soliver C. Peras, as Presiding Judge, the RTC of Cebu City,
Branch 10, reinstated the Decision dated June 9, 1997, but with
the modification that the award of damages, litigation expenses
and attorneys fees were disallowed.
Petitioner appealed to the Court of Appeals. On February 23, 2006
the appellate court affirmed with modification the July 6, 2000
Order of the RTC. It, however, restored the award of P50,000
attorneys fees and P50,000 litigation expenses to respondents.
Thus, the instant petition which raises the following issues:
I.
WHETHER THE COURT OF APPEALS ERRED AND VIOLATED
PETITIONERS RIGHT TO DUE PROCESS WHEN IT FAILED TO
RESOLVE PETITIONERS THIRD ASSIGNED ERROR.
II.
WHETHER THE HONORABLE SUPREME COURT MAY AND SHOULD
REVIEW THE CONFLICTING FACTUAL FINDINGS OF THE
HONORABLE REGIONAL TRIAL COURT IN ITS OWN DECISION AND
RESOLUTIONS ON THE MOTIONS FOR RECONSIDERATION, AND
THAT OF THE HONORABLE COURT OF APPEALS.
III.

93
WHETHER THE HONORABLE COURT OF APPEALS ERRED IN
HOLDING THAT PETITIONERS CASE IS BARRED BY LACHES.

regularly performed,25 and all matters within an issue in a case

were laid down before the court and were passed upon by it. 26

IV.

In this case, we find nothing to show that the sale between the
sisters Lozada and their nephew Antonio violated the public policy
prohibiting aliens from owning lands in the Philippines. Even as Dr.
Lozada advanced the money for the payment of Antonios share,
at no point were the lots registered in Dr. Lozadas name. Nor was
it contemplated that the lots be under his control for they are
actually to be included as capital of Damasa Corporation.
According to their agreement, Antonio and Dr. Lozada are to hold
60% and 40% of the shares in said corporation, respectively.
Under Republic Act No. 7042,27 particularly Section 3,28 a
corporation organized under the laws of the Philippines of which
at least 60% of the capital stock outstanding and entitled to vote
is owned and held by citizens of the Philippines, is considered a
Philippine National. As such, the corporation may acquire
disposable lands in the Philippines. Neither did petitioner present
proof to belie Antonios capacity to pay for the lots subjects of this
case.

WHETHER THE HONORABLE COURT OF APPEALS ERRED IN

HOLDING THAT THE DEED OF DONATION EXECUTED IN FAVOR OF
PETITIONER IS VOID.
V.
WHETHER THE HONORABLE COURT OF APPEALS ERRED IN NOT
HOLDING THAT ANITA LOZADAS VIDEOTAPED STATEMENT IS
HEARSAY.15
Simply stated, the issues in this appeal are: (1) Whether the Court
of Appeals erred in upholding the Decision of the RTC which
declared Antonio J.P. Lozada the absolute owner of the questioned
properties; (2) Whether the Court of Appeals violated petitioners
right to due process; and (3) Whether petitioners case is barred
by laches.
Petitioner contends that the appellate court violated her right to
due process when it did not rule on the validity of the sale
between the sisters Lozada and their nephew, Antonio. Marissa
finds it anomalous that Dr. Lozada, an American citizen, had paid
the lots for Antonio. Thus, she accuses the latter of being a mere
dummy of the former. Petitioner begs the Court to review the
conflicting factual findings of the trial and appellate courts on
Peregrinas medical condition on March 11, 1994 and Dr. Lozadas
financial capacity to advance payment for Antonio. Likewise,
petitioner assails the ruling of the Court of Appeals which nullified
the donation in her favor and declared her case barred by laches.
Petitioner finally challenges the admissibility of the videotaped
statement of Anita who was not presented as a witness.
On their part, respondents pray for the dismissal of the petition for
petitioners failure to furnish the Register of Deeds of Cebu City
with a copy thereof in violation of Sections 316 and 4,17 Rule 45 of
the Rules. In addition, they aver that Peregrinas unauthenticated
medical records were merely falsified to make it appear that she
was confined in the hospital on the day of the sale. Further,
respondents question the credibility of Dr. Fuentes who was
neither presented in court as an expert witness18 nor
professionally involved in Peregrinas medical care.
Further, respondents impugn the validity of the Deed of Donation
in favor of Marissa. They assert that the Court of Appeals did not
violate petitioners right to due process inasmuch as it resolved
collectively all the factual and legal issues on the validity of the
sale.
Faithful adherence to Section 14,19 Article VIII of the 1987
Constitution is indisputably a paramount component of due
process and fair play. The parties to a litigation should be
informed of how it was decided, with an explanation of the factual
and legal reasons that led to the conclusions of the court. 20
In the assailed Decision, the Court of Appeals reiterates the rule
that a notarized and authenticated deed of sale enjoys the
presumption of regularity, and is admissible without further proof
of due execution. On the basis thereof, it declared Antonio a buyer
in good faith and for value, despite petitioners contention that
the sale violates public policy. While it is a part of the right of
appellant to urge that the decision should directly meet the issues
presented for resolution,21 mere failure by the appellate court to
specify in its decision all contentious issues raised by the
appellant and the reasons for refusing to believe appellants
contentions is not sufficient to hold the appellate courts decision
contrary to the requirements of the law22 and the
Constitution.23 So long as the decision of the Court of Appeals
contains the necessary findings of facts to warrant its conclusions,
we cannot declare said court in error if it withheld "any specific
findings of fact with respect to the evidence for the defense." 24 We
will abide by the legal presumption that official duty has been

Petitioner, likewise, calls on the Court to ascertain Peregrinas

physical ability to execute the Deed of Sale on March 11, 1994.
This essentially necessitates a calibration of facts, which is not the
function of this Court.29Nevertheless, we have sifted through the
Decisions of the RTC and the Court of Appeals but found no reason
to overturn their factual findings. Both the trial court and
appellate court noted the lack of substantial evidence to establish
total impossibility for Peregrina to execute the Deed of Sale.
In support of its contentions, petitioner submits a copy of
Peregrinas medical records to show that she was confined at the
Martin Luther Hospital from February 27, 1994 until she died on
April 4, 1994. However, a Certification 30 from Randy E. Rice,
Manager for the Health Information Management of the hospital
undermines the authenticity of said medical records. In the
certification, Rice denied having certified or having mailed copies
of Peregrinas medical records to the Philippines. As a rule, a
document to be admissible in evidence, should be previously
authenticated, that is, its due execution or genuineness should be
first shown.31 Accordingly, the unauthenticated medical records
were excluded from the evidence. Even assuming that Peregrina
was confined in the cited hospital, the Deed of Sale was executed
on March 11, 1994, a month before Peregrina reportedly
succumbed to Hepato Renal Failure caused by Septicemia due to
Myflodysplastic Syndrome.32 Nothing in the records appears to
show that Peregrina was so incapacitated as to prevent her from
executing the Deed of Sale. Quite the contrary, the records reveal
that close to the date of the sale, specifically on March 9, 1994,
Peregrina was even able to issue checks33 to pay for her attorneys
professional fees and her own hospital bills. At no point in the
course of the trial did petitioner dispute this revelation.
Now, as to the validity of the donation, the provision of Article 749
of the Civil Code is in point:
art. 749. In order that the donation of an immovable may be valid,
it must be made in a public document, specifying therein the
property donated and the value of the charges which the donee
must satisfy.
The acceptance may be made in the same deed of donation or in
a separate public document, but it shall not take effect unless it is
done during the lifetime of the donor.
If the acceptance is made in a separate instrument, the donor
shall be notified thereof in an authentic form, and this step shall
be noted in both instruments.
When the law requires that a contract be in some form in order
that it may be valid or enforceable, or that a contract be proved in
a certain way, that requirement is absolute and
indispensable.34 Here, the Deed of Donation does not appear to be
duly notarized. In page three of the deed, the stamped name of
Cresencio Tomakin appears above the words Notary Public until
December 31, 1983 but below it were the typewritten words

94
Notary Public until December 31, 1987. A closer examination of
the document further reveals that the
number 7 in 1987and Series of 1987 were merely
superimposed.35 This was confirmed by petitioners nephew
Richard Unchuan who testified that he saw petitioners husband
write 7 over 1983 to make it appear that the deed was notarized
in 1987. Moreover, a Certification36 from Clerk of Court Jeoffrey S.
Joaquino of the Notarial Records Division disclosed that the Deed
of Donation purportedly identified in Book No. 4, Document No.
48, and Page No. 35 Series of 1987 was not reported and filed
with said office. Pertinent to this, the Rules require a party
producing a document as genuine which has been altered and
appears to have been altered after its execution, in a part material
to the question in dispute, to account for the alteration. He may
show that the alteration was made by another, without his
concurrence, or was made with the consent of the parties affected
by it, or was otherwise properly or innocently made, or that the
alteration did not change the meaning or language of the
instrument. If he fails to do that, the document shall, as in this
case, not be admissible in evidence.371avvphi1
Remarkably, the lands described in the Deed of Donation are
covered by TCT Nos. 7364538 and 73646,39 both of which had been
previously cancelled by an Order40 dated April 8, 1981 in LRC
Record No. 5988. We find it equally puzzling that on August 10,
1987, or six months after Anita supposedly donated her undivided
share in the lots to petitioner, the Unchuan Development
Corporation, which was represented by petitioners husband, filed
suit to compel the Lozada sisters to surrender their titles by virtue
of a sale. The sum of all the circumstances in this case calls for no
other conclusion than that the Deed of Donation allegedly in favor
of petitioner is void. Having said that, we deem it unnecessary to
rule on the issue of laches as the execution of the deed created no
right from which to reckon delay in making any claim of rights
under the instrument.
Finally, we note that petitioner faults the appellate court for not
excluding the videotaped statement of Anita as hearsay evidence.
Evidence is hearsay when its probative force depends, in whole or
in part, on the competency and credibility of some persons other
than the witness by whom it is sought to be produced. There are
three reasons for excluding hearsay evidence: (1) absence of
cross-examination; (2) absence of demeanor evidence; and (3)
absence of oath.41 It is a hornbook doctrine that an affidavit is
merely hearsay evidence where its maker did not take the witness
stand.42 Verily, the sworn statement of Anita was of this kind
because she did not appear in court to affirm her averments
therein. Yet, a more circumspect examination of our rules of
exclusion will show that they do not cover admissions of a

party;43 the videotaped statement of Anita appears to belong to

this class. Section 26 of Rule 130 provides that "the act,
declaration or omission of a party as to a relevant fact may be
given in evidence against him. It has long been settled that these
admissions are admissible even if they are hearsay. 44Indeed, there
is a vital distinction between admissions against interest and
declaration against interest. Admissions against interest are those
made by a party to a litigation or by one in privity with or
identified in legal interest with such party, and are admissible
whether or not the declarant is available as a witness. Declaration
against interest are those made by a person who is neither a party
nor in privity with a party to the suit, are secondary evidence and
constitute an exception to the hearsay rule. They are admissible
only when the declarant is unavailable as a witness. 45 Thus, a
mans acts, conduct, and declaration, wherever made, if
voluntary, are admissible against him, for the reason that it is fair
to presume that they correspond with the truth, and it is his fault
if they do not.46However, as a further qualification, object
evidence, such as the videotape in this case, must be
authenticated by a special testimony showing that it was a faithful
reproduction.47 Lacking this, we are constrained to exclude as
evidence the videotaped statement of Anita. Even so, this does
not detract from our conclusion concerning petitioners failure to
prove, by preponderant evidence, any right to the lands subject of
this case.
Anent the award of moral damages in favor of respondents, we
find no factual and legal basis therefor. Moral damages cannot be
awarded in the absence of a wrongful act or omission or fraud or
bad faith. When the action is filed in good faith there should be no
penalty on the right to litigate. One may have erred, but error
alone is not a ground for moral damages.48 The award of moral
damages must be solidly anchored on a definite showing that
respondents actually experienced emotional and mental
sufferings. Mere allegations do not suffice; they must be
substantiated by clear and convincing proof. 49 As exemplary
damages can be awarded only after the claimant has shown
entitlement to moral damages,50 neither can it be granted in this
case.
WHEREFORE, the instant petition is DENIED. The Decision dated
February 23, 2006, and Resolution dated April 12, 2006 of the
Court of Appeals in CA-G.R. CV. No. 73829 are AFFIRMED with
MODIFICATION. The awards of moral damages and exemplary
damages in favor of respondents are deleted. No pronouncement
as to costs.
SO ORDERED.