SC judgment entry eases capital rule

An entry of judgment by the Supreme Court (SC) on its earlier ruling defining the nationality of capital invested in a corporation relaxed what was being criticized as a rigid interpretation of the tribunal on the ownership question and paved the way for the Securities and Exchange Commission (SEC) to adopt non-controversial and relaxed guidelines in determining foreign ownership in local companies in accordance with the Constitution. In an entry of judgment dated Jan. 9, the SC directed the SEC to define “capital” in Section 11, Article XII of the 1987 Constitution to refer 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 — as certified in its June 28, 2011 decision.” The belated SC issuance was evidently made to go around the implementation a controversial Supreme Court (SC) ruling last October penned by Associate Justice Antonio Carpio that interpreted the Constitution’s provisions on foreign ownership limits. The ruling applied the 60-40 constitutional ownership provision on utility firms on all classes of shares but in the entry of judgment, the SC stated that only voting shares would be covered by the ownership restriction and thus the nationality of a company that included other class of shares reverts to the earlier relaxed definition. The ruling was triggered by an ownership question raised on Philippine Long Distance Telephone Co. (PLDT) which under the relaxed definition included both common and preferred shares but which the Carpio definition referred to only the common shares. Owing to the entry of judgment, the rigid restrictions does not apply anymore particularly in the implementing rules being drawn up by the SEC. Citing the entry of judgment purportedly handed down by the SC to parties, reports quoting officials of the Department of Trade and Industry and the Philippine Stock Exchange and the Securities of Exchanges Commission (SEC) said the Supreme Court clarifying its earlier decision had practically reversed itself when it required strict adherence to the constitutional provisions. An entry of judgment is defined in legal books as the formal recording of the result of a lawsuit that is based upon the determination by the court of the facts and applicable law, and that makes the result effective for purposes of bringing an action to enforce it or to commence an appeal. Speaking to the Tribune last night, acting spokesman Gleo S. Guerra said a copy of the said “entry of judgment” for comparison with the resolution of the SC was not available as of press time. Chief Justice Lourdes Sereno earlier claimed her court would not be dissuaded by the “doomsday scenario” of corporations covered by the constitutional limitations on foreign ownership which the firms said would diminish the country’s attraction to foreign investments. The Philippine Stock Exchange (PSE) in a statement said it will “welcome a final resolution to the foreign ownership limit that will continue to be supportive of investments in the country.” following SEC’s statement that it may relax its draft rules on foreign ownership. The Department of Trade and Industry (DTI) added that it welcomed what it described as the SC’s clarification of the definition of “capital” with regard to the guidelines on foreign ownership . “The entry of judgment clarifies the intent of the Supreme Court ruling and should eliminate most of the anxiety of the local business community and foreign investors,” Trade Secretary Gregory Domingo was quoted by online news outfit InterAksyon.com. The report added that the SEC last week received a clarification where the High Court directed the regulator to apply the definition of the term “capital” in Section 11, Article XII of the 1987 Constitution to refer only to voting shares. The initial draft of the foreign ownership rules presented by the SEC to the public last November drew opposition from business groups, specifically the provision that adheres to the Supreme Court’s Oct. 9, 2012 ruling that the 60-40 ownership requirement in favor of Filipino citizens must apply separately to each and every class of shares. A taxpayer suit by Wilson Gamboa earlier successfully sued before the SC to interpret the maximum allowable foreign equity in listed telecoms firm Philippine Long Distance Telephone Co. The Supreme Court, voting 10-3, has denied with finality the motions for reconsideration of its June 28, 2011 decision. In a 51-page resolution by Carpio, the Court En Banc declared that it “no further pleadings shall be entertained” in the case. Joining Senior Justice Carpio in his ponencia were Chief Justice Sereno and Justices Teresita J. Leonardo-De Castro, Arturo D. Brion, Diosdado M. Peralta, Lucas P. Bersamin, Mariano C. Del Castillo, Martin S. Villarama, Jr., Jose Portugal Perez, and Jose Catral Mendoza. The Court clarified that it 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 as such question indisputably calls for a presentation and determination of evidence through a hearing, which is generally outside the province of its jurisdiction, but well within the SEC’s statutory powers. The Court thus 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. The high court found that from the deliberations of the Constitutional Commission, it was clear that the term “capital” refers to controlling interest of a corporation. The SC held: “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.’” “Thus, there is no dispute that it is only after the SEC has determined PLDT’s 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 RA 7042, the Foreign Investments Act of 1991 (FIA) can cure their deficiencies prior to the start of the administrative case or investigation,” the SC ruled. The SC noted that the 1935, 1973, and 1987 Constitutions have the same 60 percent Filipino ownership and control requirement for public utilities like PLDT. It ruled that any deviation from this requirement necessitates an amendment to the Constitution as exemplified by the Parity Amendment. The tribunal also held that 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. “In other words, under Section 11, Article XII of the 1987 Constitution, to own and operate a public utility a corporation’s capital must at least be 60 percent owned by Philippine nationals,” held the Court. RA 7042, like all its predecessor statutes, clearly defines a “Philippine national” as a Philippine citizen, or a domestic corporation at least “60 percent of the capital stock outstanding and entitled to vote” is owned by Philippine citizens, noted the Court. The Court explained that the right to elect directors, coupled with beneficial ownership, translates to effective control. The Court stressed that its assailed 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.” It further held that it was “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 stock 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 restriction as stated in the articles of incorporation.” The SC further explained that 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. 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. In its June 28, 2011 decision, the Court ruled that 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, in the present case, only to common shares and not to the total outstanding capital stock comprising both common and non-voting preferred shares. The SEC was thus directed to apply the Court’s definition of the term “capital” in determining the extent of allowable foreign ownership in PLDT and to impose the appropriate sanctions under the law if there is any violation of sec. 11, Art. XII of the Constitution. Justice Velasco in his dissenting opinion stated that PLDT should be given time to undertake the necessary measures to make its capital structure compliant, and the SEC should formulate appropriate guidelines and supervise the process. He added that SEC should also adopt rules 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. Justice Abad said that Sec. 11, Art. XII already provides limitations on foreign participation in public utilities, hence, the Court need not add more by further restricting the meaning of the term “capital” when none was intended by the framers of the 1987 Constitution. He wrote that the authority to define “capital” in the said provision belongs to Congress as part of its policy making power. Granting otherwise, he opined that “capital” encompasses the entirety of a corporation’s outstanding capital stock and that the Court can simply adopt such interpretation of Constitution Commission by Fr. Joaquin Bernas and Dr. Bernardo M. Villegas.