Supreme Court ruling on "capital" stock






July 29, 2011

On 28 June 2011, the Supreme Court ruled that “capital” stock of public utilities, as the term is used in the Philippine Constitution, refers only to shares of stock that can vote in the election of directors. The Supreme Court also ordered the Securities and Exchange Commission to determine whether or not the Philippine Long Distance Telephone Company (PLDT) violated the limitation on foreign ownership imposed on telecommunication companies.

The Court issued the decision in the case of Wilson Gamboa v. PLDT (GR No. 176579) interpreting Section 11, Article XII 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 associations organized under the laws of the Philippines, at least sixty per centum of whose capital is owned by such citizens…” The Court explained that the term “capital ” generally refers to common shares because of its voting rights which translate to control, as opposed to preferred shares which usually have no voting rights. Where the corporation’s articles of incorporation, however, provides that preferred shares shall 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.

The Supreme Court also ruled that “mere legal title is insufficient to meet the 60 percent Filipino-owned ‘capital’ required in the Constitution. Full beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60 percent of the voting rights, is required. The legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the hands of Filipino nationals in accordance with the constitutional mandate.” Thus, in order for a corporation to be considered a Philippine national, 60 percent of the outstanding capital stock, coupled with 60 percent of the voting rights must be owned by Filipino citizens.

In addition, the Supreme Court noted that 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 investment to Filipino citizens, such as the exploitation of natural resources as well as the ownership of land, educational institutions and advertising businesses.