Gamboa v. Teves etal., GR No.

176579, October 9, 2012

Facts:The issue started when petitioner Gamboa questioned the indirect sale of shares involving almost
12 million shares of the Philippine Long Distance Telephone Company (PLDT) owned by PTIC to First
Pacific. Thus, First Pacific’s common shareholdings in PLDT increased from 30.7 percent to 37 percent,
thereby increasing the total common shareholdings of foreigners in PLDT to about 81.47%. The
petitioner contends that it violates the Constitutional provision on filipinazation of public utility, stated
in 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%. Then, in 2011, the court ruled the case in favor of the
petitioner, hence this new case, resolving the motion for reconsideration for the 2011 decision filed by
the respondents.

Issue: Whether or not the Court made an erroneous interpretation of the term ‘capital’ in its 2011
decision?

Held/Reason: The Court said that the Constitution is clear in expressing its State policy of developing an
economy ‘effectively controlled’ by Filipinos. Asserting the ideals that our Constitution’s Preamble want
to achieve, that is – to conserve and develop our patrimony , hence, the State should fortify a Filipino-
controlled economy. In the 2011 decision, the Court finds no wrong in the construction of the term
‘capital’ which refers to the ‘shares with voting rights, as well as with full beneficial ownership’ (Art. 12,
sec. 10) which implies that the right to vote in the election of directors, coupled with benefits, is
tantamount to an effective control. Therefore, the Court’s interpretation of the term ‘capital’ was not
erroneous. Thus, the motion for reconsideration is denied.

In the Matter of: The Corporate Rehabilitation of Bayan Telecommunications, Inc.

December 5, 2012

Villarama, Jr.

Digest by Eugenio Leynes

NOTES: The case is on Corporate Rehabilitation. I just took the parts regarding foreign ownership of a
public utility.

Topic and Provisions: Constitutional Provisions; Ownership

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.

Facts:

 Respondent Bayantel is a duly organized domestic corporation engaged in the business of

providing telecommunication services. It is 98.6% owned by Bayan Telecommunications
Holdings Corporation (BTHC), which in turn is 85.4% owned by the Lopez Group of Companies
and Benpres Holdings Corporation.

 In July 1999, Bayantel issued US$200 million worth of 13.5% Senior Notes pursuant to an
Indenture dated July 22, 1999 that it entered into with The Bank of New York (petitioner in G.R.
Nos. 175418-20) as trustee for the holders of said notes. Pursuant to the said Indenture, the
notes are due in 2006 and Bayantel shall pay interest on them semi-annually. Bayantel managed
to make two interest payments, on January 15, 2000 and July 15, 2000, before it defaulted on its
obligation.

 By May 31, 2003, Bayantel’s total indebtedness had reached US$674 million or P35.928 billion in
unpaid principal and interest, based on the prevailing conversion rate of US$1 = P53.282. Out of
its total liabilities, Bayantel allegedly owes 43.2% or US$291 million (P15.539 billion) to the
Holders of the Notes.

 On June 28, 2004, the Pasig RTC, Branch 158, acting as a Rehabilitation Court, approved the
Report and Recommendations[23] attached by the Receiver to his “Submission with Prayer for
Further Guidance from the Honorable Court,”[24] subject to the following clarifications and/or
amendments:

o 5. All provisions relating to equity in the rehabilitation plan, as approved and amended,
must strictly conform to the requirements of the Constitution limiting foreign ownership
to 40%.

Issue: WON the conversion of debt to equity in excess of 40% of the outstanding capital stock in favor of
petitioners violates the constitutional limit on foreign ownership of a public utility.
Held: YES. The conversion of debt to equity or common stock (which is a voting stock) violates the
constitutional limit on foreign ownership of a public utility.

Dispositive: WHEREFORE, the Court hereby RESOLVES to dispose of these consolidated petitions, as
follows:

(1) The petition for review on certiorari in G.R. Nos. 174457-59 is DENIED. The Decision dated August 18,
2006 of the Court of Appeals in CA-G.R. SP No. 87203 is AFFIRMED;

(2) The petition for review on certiorari in G.R. Nos. 175418-20 is DENIED. The Decision dated August 18,
2006 and Resolution dated November 8, 2006 of the Court of Appeals in CAG. R. SP Nos. 87100 and
87111 are AFFIRMED; and

(3) The petition for review on certiorari in G.R. No. 177270 is DENIED. The Decision dated October 27,
2006 and Resolution dated March 23, 2007 of the Court of Appeals in CA-G.R. SP No. 89894 are
AFFIRMED.

No pronouncement as to costs.

SO ORDERED.

Ratio:

 Petitioners (Bank of New York and Avenue Asia Capital Group) maintain that converting the
unsustainable debt to 77.7% equity in Bayantel will not violate the nationality requirement of
the 1987 Constitution. They aver that the debts to domestic bank creditors[51] account is
US$473 million or 70.18% of Bayantel’s total liabilities. Considering the substantial write-off of
penalties and default interest in the amount of US$34,044,553.00 and past due interest of
US$25,243,381.07, petitioners believe that it is only fair to accord the Financial Creditors greater
equity in Bayantel to compensate for said losses.

 Petitioners explain that the acquisition of shares by foreign Omnibus and Financial Creditors
shall be done, both directly and indirectly in order to meet the control test principle under RA
7042[93] or the Foreign Investments Act of 1991. Under the proposed structure, said creditors
shall own 40% of the outstanding capital stock of the telecommunications company on a direct
basis, while the remaining 40% of shares shall be registered to a holding company that shall
retain, on a direct basis, the other 60% equity reserved for Filipino citizens.

 Moreover, petitioners maintain that it is only fair to impose upon the Omnibus and Financial
Creditors a bigger equity conversion in Bayantel considering that petitioners will bear the bulk of
the accrued interests and penalties to be written off.

 This provision (Article XII, Section 11 of the 1987 Constitution) explicitly reserves to Filipino
citizens control over public utilities, pursuant to an overriding economic goal of the 1987
 Constitution: to “conserve and develop our patrimony” and ensure “a self-reliant and
independent national economy effectively controlled by Filipinos.”

 In the recent case of Gamboa v. Teves, the Court settled once and for all the meaning of
“capital” in the above-quoted Constitutional provision limiting foreign ownership in public
utilities. In said case, we held that 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.

o 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.

TEST USED:

 Applying this, two steps must be followed in order to determine whether the conversion of debt
to equity in excess of 40% of the outstanding capital stock violates the constitutional limit on
foreign ownership of a public utility: First, identify into which class of shares the debt shall be
converted, whether common shares, preferred shares that have the right to vote in the
election of directors or non-voting preferred shares; Second, determine the number of shares
with voting right held by foreign entities prior to conversion. If upon conversion, the total
number of shares held by foreign entities exceeds 40% of the capital stock with voting rights, the
constitutional limit on foreign ownership is violated. Otherwise, the conversion shall be
respected.

APPLICATION:

 In its Rehabilitation Plan, among the material financial commitments made by respondent
Bayantel is that its shareholders shall “relinquish the agreed-upon amount of common stock[s]
as payment to Unsecured Creditors as per the Term Sheet.” Evidently, the parties intend to
convert the unsustainable portion of respondent's debt into common stocks, which have voting
rights. If we indulge petitioners on their proposal, the Omnibus Creditors which are foreign
corporations, shall have control over 77.7% of Bayantel, a public utility company. This is
precisely the scenario proscribed by the Filipinization provision of the Constitution. Therefore,
the Court of Appeals acted correctly in sustaining the 40% debt-to-equity ceiling on conversion.

Radio Communications v NTC G.R. No. L-68729 May 29, 1987

J. Gutierrez Jr.
Facts:

RCPI operated a radio communications system since 1957 under legislative franchise granted by
Republic Act No. 2036 (1957). The petitioner established a radio telegraph service in Sorsogon, Sorsogon
(1968). in San Jose, Mindoro (1971), and Catarman, Samar (1983).

Kayumanggi Radio, on the other hand, was given the rights by the NTC to operate radio networks in the
same areas.

RCPI filed a complaint in the NTC and sought to prohibit Kayumanggi Radio to operate in the same areas.
The NTC ruled against the RTC’s favor and commanded RCPI to desist in the operation of radio
telegraphs in the three areas.

RTC filed a MFR in 1984. This was denied.

In the SC, Petitioner alleged that the Public Service Law had sections that was still in effect even if the
Public Service Commission was abolished and the NTC was established.

These were S13- the Commission shall have jurisdiction, supervision, and control over all public services
and their franchises

S 14- Radio companies are exempt from the commission’s authority except with respect to the fixing of
rates

And S 15-no public service shall operate in the Philippines without possessing a valid and subsisting
certificate from the Public Service Commission, known as "certificate of public convenience,"

Issue: Whether or not petitioner RCPI, a grantee of a legislative franchise to operate a radio company, is
required to secure a certificate of public convenience and necessity before it can validly operate its radio
stations including radio telephone services in the aforementioned areas

Held: Yes. Petition dismissed.

Ratio:

Presidential Decree No. 1- the Public Service Commission was abolished and its functions were
transferred to three specialized regulatory boards, as follows: the Board of Transportation, the Board of
Communications and the Board of Power and Waterworks. The functions so transferred were still
subject to the limitations provided in sections 14 and 15 of the Public Service Law, as amended.
The succeeding Executive Order No. 546- the Board of Communications and the Telecommunications
Control Bureau were abolished and their functions were transferred to the National
Telecommunications Commission

Section 15- b. Establish, prescribe and regulate areas of operation of particular operators of public
service communications; and determine and prescribe charges or rates pertinent to the operation of
such public utility facilities and services except in cases where charges or rates are established by
international bodies or associations of which the Philippines is a participating member or by bodies
recognized by the Philippine Government as the proper arbiter of such charges or rates;

c. Grant permits for the use of radio frequencies for wireless telephone and telegraph systems and radio
communication systems including amateur radio stations and radio and television broadcasting systems;

The exemption enjoyed by radio companies from the jurisdiction of the Public Service Commission and
the Board of Communications no longer exists because of the changes effected by the Reorganization
Law and implementing executive orders.

The petitioner's claim that its franchise cannot be affected by Executive Order No. 546 on the ground
that it has long been in operation since 1957 cannot be sustained.

Today, a franchise, being merely a privilege emanating from the sovereign power of the state and owing
its existence to a grant, is subject to regulation by the state itself by virtue of its police power through its
administrative agencies. Pangasinan transportation Co.- statutes enacted for the regulation of public
utilities, being a proper exercise by the State of its police power, are applicable not only to those public
utilities coming into existence after its passage, but likewise to those already established and in
operation .

Executive Order No. 546, being an implementing measure of P.D. No. I insofar as it amends the Public
Service Law (CA No. 146, as amended) is applicable to the petitioner who must be bound by its
provisions.

The position of the petitioner that by the mere grant of its franchise under RA No. 2036 it can operate a
radio communications system anywhere within the Philippines is erroneous.

Sec. 4(a). This franchise shall not take effect nor shall any powers thereunder be exercised by the
grantee until the Secretary of Public works and Communications shall have allotted to the grantee the
frequencies and wave lengths to be used, and issued to the grantee a license for such case.

Thus, in the words of R.A. No. 2036 itself, approval of the then Secretary of Public Works and
Communications was a precondition before the petitioner could put up radio stations in areas where it
desires to operate.

The records of the case do not show any grant of authority from the then Secretary of Public Works and
Communications before the petitioner installed the questioned radio telephone services in San Jose,
Mindoro in 1971. The same is true as regards the radio telephone services opened in Sorsogon,
Sorsogon and Catarman, Samar in 1983. No certificate of public convenience and necessity appears to
have been secured by the petitioner from the public respondent when such certificate,was required by
the applicable public utility regulations.

The Constitution mandates that a franchise cannot be exclusive in nature nor can a franchise be granted
except that it must be subject to amendment, alteration, or even repeal by the legislature when the
common good so requires.