CORPORATE NATIONALITY
JOSE ROY III v. SEC CHAIR HERBOSA
G.R. No. 207246 | Nov. 22, 2016 | Caguioa, J.:
Definition of Capital; SEC Control Test
FACTS
NATURE OF CASE: R. 65 PETITION TO ANNUL SEC-MC
No. 8 ISSUED BY THE SEC, FOR VIOLATING GAMBOA
v. TEVES SC DECISION
Gamboa Decision: 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).
Gamboa Resolution: In any event, the SEC has expressly
manifested that it will abide by the Court's decision and
defer to the Court's 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 Court's jurisdiction. It is clear,
therefore, that there exists no legal impediment against
the proper and immediate implementation of the Court's
directive to the SEC. The dispositive portion of the
Court's ruling is addressed not to PLDT but solely to the
SEC, which is the administrative agency tasked to
enforce the 60-40 ownership requirement in favor of
Filipino citizens in Section 11, Article XII of the
Constitution.
SEC POSTED A NOTICE IN NOV. 2012 AND MARCH
2013 INVITING THE PUBLIC TO COMMENT ON THE
DRAFT SEC-MC. ON MAY 20, 2013, THE SEC-MC WAS
PUBLISHED. QUOTED BELOW IS SECTION 2.
All covered corporations shall, at all times, observe the
constitutional or statutory ownership requirement. For
purposes of determining compliance therewith, the
required percentage of Filipino ownership shall be
applied to BOTH (a) the total number of outstanding
shares of stock entitled to vote in the election of
directors; AND (b) the total number of outstanding
shares of stock, whether or not entitled to vote in the
election of directors.
Corporations covered by special laws which provide
specific citizenship requirements shall comply with the
provisions of said law.
ROY III FILED THE PETITION SEEKING TO ANNUL
THE VALIDITY OF THE SEC-MC FOR NOT
CONFORMING TO THE GAMBOA DECISION. PSE ALSO
INTERVENED IN THE CASE.
On June 10, 2013, petitioner Roy, as a lawyer and
taxpayer, filed the Petition, assailing the validity of SEC-
MC No. 8 for not conforming to the letter and spirit ofthe
Gamboa Decision and Resolution and for having been
issued by the SEC with grave abuse of discretion.
Petitioner Roy seeks to apply the 60-40 Filipino
ownership requirement separately to each class of
shares of a public utility corporation, whether common,
MASANGKAY - RAZON - SANCHEZ
CORP
preferred non- voting, preferred voting or any other
class of shares.
On September 20, 2013, respondents Chairperson
Teresita Herbosa and SEC filed their Consolidated
Comment. (4) the SEC did not abuse its discretion; (5) on
PLDT's compliance with the capital requirement as
stated in the Gamboa ruling, the petitioners' challenge is
premature considering that the SEC has not yet issued a
definitive ruling thereon.
On June 18, 2014, the Philippine Stock Exchange, Inc.
("PSE") filed its Motion to Intervene with Leave of Court
and its Comment-in- Intervention. The PSE argued that
in the Gamboa ruling, "capital" refers only to shares
entitled to vote in the election of directors, and excludes
those not so entitled; and the dispositive portion of the
decision is the controlling factor that determines and
settles the questions presented in the case.
ISSUE
W/N SEC gravely abused its discretion in issuing SEC-MC
No. 8 in light of the Gamboa decision [NO]
HELD
PROCEDURAL ISSUES: ROY HAS NO STANDING TO
FILE THE PETITION, AND THERE IS NO ACTUAL
CONTROVERSY.
Petitioners' hypothetical illustration as to how SEC-MC
No. 8 "practically encourages circumvention of the 60-
40 ownership rule" is evidently speculative and fraught
with conjectures and assumptions. There is clearly
wanting specific facts against which the veracity ofthe
conclusions purportedly following from ·the
speculations and assumptions can be validated.
Petitioners' status as taxpayers is also of no moment.
SEC-MC No. 8 does not involve an additional expenditure
of public funds and the taxing or spending power of
Congress.
SUBSTANTIVE ISSUE: SEC-MC No. 8 WAS ISSUED IN
FEALTY TO GAMBOA
The sole issue in the Gamboa case was: "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 decretal portion of the Gamboa Decision follows the
definition of the term "capital" in the body of the
decision, to wit: "x x x we x x x 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)."
CORPORATE NATIONALITY CORP
THE INTENT OF THE FRAMERS WAS CONSIDERED IN GOING TO SEC-MC NO. 8, IT CLEARLY INCORPORATES
DRAFTING THE SEC-MC WHICH WAS BASED ON THE VOTING CONTROL TEST.
GAMBOA. In fact, Section 2 goes beyond requiring a 60-40 ratio in
The Court adopted the foregoing definition of the term favor of Filipino nationals in the voting stocks; it
"capital" in Section 11, Article XII of the 1987 moreover requires the 60-40 percentage ownership in
Constitution in furtherance of "the intent and letter of the total number of outstanding shares of stock, whether
the Constitution that the 'State shall develop a self- voting or not. The SEC formulated SEC-MC No. 8 to
reliant and independent national economy effectively adhere to the Court's unambiguous pronouncement that
controlled by Filipinos' [because a] broad definition "[f]ull beneficial ownership of 60 percent of the
unjustifiably disregards who owns the all-important outstanding capital stock, coupled with 60 percent of the
voting stock, which necessarily equates to control of the voting rights is required.
public utility."
ILLUSTRATION
…the foregoing interpretation is consistent with the 100 common shares |
 100 Class A preferred shares
intent of the framers of the Constitution to place in the
(with right to elect directors) | 100 Class B preferred
hands of Filipino citizens the control and management of
shares (without right to elect directors)
public utilities; and, as revealed in the deliberations
ofthe Constitutional Commission, "capital" refers to the
If at least a total of 120 of common shares and Class A
voting stock or controlling interest of a corporation.
preferred shares (in any combination) are owned and
controlled by Filipinos, Company X is compliant with the
In this regard, it would be apropos to state that since
60% of the voting rights in favor of Filipinos
Filipinos own at least 60% of the outstanding shares of
requirement of both SEC-MC No. 8 and the Gamboa
stock entitled to vote directors, which is what the
Decision.
Constitution precisely requires, then the Filipino
stockholders control the corporation.
If at least a total of 180 shares of all the outstanding
capital stock of Company X are owned and controlled by
THIS DEFINITION OF CAPITAL IS CONSISTENT WITH
Filipinos, provided that among those 180 shares a total
THE FOREIGN INVESTMENTS ACT DEFINITION OF
of 120 of the common shares and Class A preferred
PHILIPPINE NATIONAL.
shares (in any combination) are owned and controlled
In the FIA: Compliance with the required Filipino
by Filipinos, then Company X is compliant with both
ownership of a corporation shall be determined on the
requirements of voting rights and beneficial ownership
basis of outstanding capital stock whether fully paid or
under SEC-MC No. 8 and the Gamboa Decision and
not, but only such stocks which are generally entitled to
Resolution.
vote are considered.
PETITIONERS’ RESTRICTIVE INTERPRETATION OF
For stocks to be deemed owned and held by Philippine
“CAPITAL” IS UNWARRANTED.
citizens or Philippine nationals, mere legal title is not
Petitioners' insistence that the 60% Filipino equity
enough to meet the required Filipino equity. Full
requirement must be applied to each class of shares is
beneficial ownership of the stocks, coupled with
simply beyond the literal text and contemplation of
appropriate voting rights is essential. Thus, stocks, the
Section 11, Article XII of the 1987 Constitution
voting rights of which have been assigned or transferred
to aliens cannot be considered held by Philippine
The application of the 60-40 Filipino-foreign ownership
citizens or Philippine nationals.
requirement separately to each class of shares, whether
common, preferred non-voting, preferred voting or any
In Gamboa: Mere legal title is insufficient to meet the 60
other class of shares fails to understand and appreciate
percent Filipino- owned "capital" required in the
the nature and features of stocks as financial
Constitution. Full beneficial ownership of 60 percent of
instruments.
the outstanding capital stock, coupled with 60 percent of
the voting rights, is required. The legal and beneficial
The Gamboa Decision held that preferred shares are to
ownership of 60 percent of the outstanding capital stock
be factored in only if they are entitled to vote in the
must rest in the hands of Filipino nationals in accordance
election of directors. If preferred shares have no voting
with the constitutional mandate. Otherwise, the
rights, then they cannot elect members of the board of
corporation is "considered as non-Philippine
directors, which wields control of the corporation. As to
national[s]."
the right of non- voting preferred shares to vote in the 8
instances enumerated in Section 6 of the Corporation
Code, the Gamboa Decision considered them but, in the
end, did not find them significant in resolving the issue
of the proper interpretation of the word "capital" in
Section 11, Article XII of the Constitution.

MASANGKAY - RAZON - SANCHEZ