BD Telecommunications, Inc. (BDTI), a Filipino-owned corporation, sold its 1,000 common shares of stock in the Philippine Telecommunications Company (PTC), a public utility, to Australian Telecommunications (AT), another stockholder of the PTC which also owns 1,000 common shares. A Filipino stockholder of PTC questions the sale on the ground that it will increase the common shares of AT, a foreign company, to more than 40% of the capital (stock) of PTC in violation of the 40% limitation of foreign ownership of a public utility. AT argues that the sale does not violate the 60-40 ownership requirement in favor of Filipino citizens decreed in Section II, Article XII of the 1987 Constitution because Filipinos still own 70% of the capital of the PTC. AT points to the fact that it owns only 2,000 common voting shares and 1,000 non-voting preferred shares while Filipino stockholders own 1,000 common shares and 6,000 preferred shares, therefore, Filipino stockholders still own a majority of the outstanding capital stock of the corporation, and both classes of shares have a par value of Php 20.00 per share. Decide. (5%)
Suggested answer only. Not an official answer and not legal advice.
The sale of common shares to Australian Telecommunications (AT) is invalid for violating the foreign ownership restriction on public utilities.
Under Section 11, Article XII of the Constitution, public utility franchises require at least 60% Filipino ownership of capital. In Gamboa v. Teves and Roy v. Herbosa, the Supreme Court held that the 60% requirement applies separately to both the total voting shares entitled to elect directors and the total outstanding capital stock.
Here, after the sale, AT owns 2,000 of 3,000 common voting shares (66.67%), reducing Filipino voting ownership to 33.33%. Although Filipinos hold 70% of total stock via preferred shares, foreign ownership in the voting shares exceeds the 40% constitutional limit.
Therefore, AT's argument is untenable, and the sale violates the constitutional limitation on foreign control.
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Quick check
Under Section 11, Article XII of the Constitution, what minimum percentage of a public utility's capital must be owned by Filipino citizens?
Section 11, Article XII of the 1987 Constitution mandates that at least 60% of the capital of a public utility must be owned by Philippine citizens.
In Gamboa v. Teves, how did the Supreme Court define the term 'capital' for public utility corporations?
The Supreme Court held in Gamboa v. Teves that the 60% capital requirement applies separately to voting shares and total outstanding shares.
If a foreign corporation owns 66.67% of the common voting shares of a Philippine public utility, does it comply with the Constitution if Filipinos own 70% of total stock?
Foreign ownership of voting shares exceeding 40% violates the constitutional requirement of at least 60% Filipino voting control.
Why does the constitutional 60-40 rule apply strictly to voting shares in public utility corporations?
Applying the 60% requirement to voting shares ensures that effective management and voting control of public utilities remain in Filipino hands.
What is the legal effect of a share transfer that results in foreign ownership exceeding 40% of the voting stock of a public utility?
Any share transfer that violates the constitutional limits on foreign ownership of public utilities is illegal and void.
Learn more about these topics
1. Foreign Equity Restriction
Under Section 11, Article XII of the 1987 Philippine Constitution, no franchise, certificate, or authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations at least sixty percent of whose capital is owned by such citizens. This constitutional restriction ensures that foreign control over strategic national industries and public utilities is strictly limited. The policy aims to safeguard national economy and patrimony, preventing foreign domination of public service enterprises vital to national interest and public welfare.
2. Capital Definition Rule
In Gamboa v. Teves and Roy v. Herbosa, the Supreme Court defined the term "capital" in Section 11, Article XII of the Constitution. The Court ruled that the sixty percent Filipino ownership requirement applies separately to both the total number of outstanding shares of stock entitled to vote in the election of directors and the total number of outstanding shares of stock, whether voting or non-voting. Defining capital solely based on total outstanding stock without regard to voting control would circumvent the constitutional intent to keep effective control of public utilities in Filipino hands.
3. Control Test Application
The control test requires that effective control of a public utility corporation must reside in Filipino citizens. Effective control is primarily exercised through voting rights, which determine the election of the board of directors and key corporate policies. Even if Filipino citizens own a numerical majority of the total outstanding shares through non-voting preferred stock, foreign ownership exceeding forty percent of common voting shares violates the constitutional mandate. Consequently, corporate arrangements that concentrate voting power in foreign stockholders, thereby diluting Filipino voting strength below sixty percent, are unconstitutional and invalid.