Roy Vs Herbosa

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ATTY.

JOSE ROY VS SEC CHAIRPERSON  Apply the 60-40 Filipino ownership


HERBOSA requirement separately to each class of
shares of a public utility corporation,
These cases promulgated in 2016 and 2017 all whether common, preferred non-voting,
circulated on the argument by Atty. Roy that preferred voting or any other class of
the SEC Chairperson Herbosa committed grave shares.
abuse of discretion when it issued SEC  PLDT is not compliant with the constitutional
Memorandum Circular No. 8 alleging that it is rule on foreign ownership.
contrary to the letter and spirit of the Gamboa  Prays that the SEC-MC No. 8 be declared
decision and resolution which provided the unconstitutional and direct the SEC to issue
interpretation of the term capital as provided new guidelines regarding the determination
under Art. 12 ,sec 11 of the 1987 Constitution. of compliance with Section 11, Article XII of
the Constitution in accordance
In the case of Gamboa vs Teves , the court gave a
with Gamboa.
definition of the what the word “capital”is as
provided under sec. 11 , Art. 12 of the 1987
Constitution.
MAIN ISSUE: Whether the SEC gravely abused
Capital are the common shares which are only its discretion in issuing SEC-MC No. 8 in light of
shares of stock entitled to vote in the election of the Gamboa Decision and Gamboa Resolution.
directors and not to the total outstanding capital
stock (common and non-voting preferred shares).
RULING: No. The SEC did not commit grave abuse
Respondent SEC Chairperson Herboras was directed of discretion amounting to lack or excess of
to apply this definition of the term "capital" in jurisdiction when it issued SEC-MC No. 8. It was
determining the extent of allowable foreign issued in fealty to the ratio in the Gamboa Decision
ownership in PLDT. and Gamboa Resolution.
When the Gamboa Decision attained finality on
October 18, 2012, Chairperson Herboras sent a
notice inviting the public to attend a public dialogue The heart of the controversy is the interpretation of
and to submit comments on the draft memorandum Section 11, Article XII of the Constitution, which
circular. provides: "No franchise, certificate, or any other
form of authorization for the operation of a public
This contains the guidelines needed to comply with utility shall be granted except to citizens of the
the requirement of Filipino ownership in public Philippines or to corporations or associations
utilities corporations. To which Atty Roy gave his organized under the laws of the Philippines at least
comments as well. sixty per centum of whose capital is owned by such
citizens xxx."

Thereafter, SEC Chairperson Herbosa, issued SEC-MC


No. 8 which explains that in order for Filipino
Correlate this with the Gamboa Decision, where it
nationals to have ownership over the public
interpreted the term capital under sec. 11, Art. 12 as
corporation BOTH must be present:
only to shares of stock entitled to vote in the
(a) the total number of outstanding shares of election of directors, which means it only refers to
stock entitled to vote in the election of common shares, and NOT to the total outstanding
directors capital stock (common and non-voting preferred
shares).
(b) the total number of outstanding shares of
stock, whether or not entitled to vote in the
election of directors. COMMON SHARES have voting rights which
means there is power of control. Comparing
Atty. Roy filed a complaint alleging that SEC-MC No. this to PREFERRED SHARES where there are no
8 was issued with grave abuse of discretion for it did voting rights. However if the preferred shares
not conform to the letter and spirit of have the right to vote then capital as defined
the Gamboa Decision. under sec. 11 of Art. 12 includes these
preferred shares as part of the capital because
WHAT DID ATTY. ROY WANT?
the right to participate in the control or
management of the corporation is exercised
through the right to vote in the election of (a) the total number of outstanding shares of stock
directors. 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
In the GAMBOA DECISION in order that there be a directors.
full and legal ownership of the corporation, there
must be ownership of 60% of the outstanding 2. Incorporates the Voting Control Test or the
capital and 60% percent of the voting rights by controlling interest requirement. This section
the Fili[ino National. requires the 60-40 percentage ownership in the total
number of outstanding shares of stock, whether
voting or not.

And which according to the court was complied with


by SEC-MC No. 8 because it provides that:
This memorandum adhered to the Court's
For purposes of determining compliance [with the announcement that "[f]ull beneficial ownership of 60
constitutional or statutory ownership], the required percent of the outstanding capital stock, coupled
percentage of Filipino ownership shall be applied to with 60 percent of the voting rights is required.
BOTH
While SEC-MC No. 8 does not expressly mention the
(a) the total number of outstanding shares of stock
Beneficial Ownership Test or full beneficial ownership
entitled to vote in the election of directors; AND
of stocks requirement in the FIA, this will not, as it
(b) the total number of outstanding shares of stock, does not, render it invalid meaning, it does not follow
whether or not entitled to vote xxx."12 that the SEC will not apply this test in determining
whether the shares claimed to be owned by
Philippine nationals are Filipino, i.e., are held by
In sum, as provided under SEC MC No. 8 for their to them by mere title or in full beneficial ownership.
be ownership by Filipinos, BOTH total number of
outstanding shares of stock entitled to vote in the
election and total number of outstanding shares of stock To be sure, the SEC takes its guiding lights also from
w/n having the right to vote.
the FIA and its implementing rules, the Securities
Basically, SEC MC No. 8 requiers that a corporation Regulation Code (Republic Act No. 8799; "SRC") and
must have full and legal beneficial ownership of its implementing rules.83
60% of the outstanding capital stock, coupled
with 60% of the voting rights The full beneficial ownership test.

How is the 60-40 ownership reflected? As provided


Under the IRR of FIA: For ownership of stocks by under sec. 11 of Art. 12 of the 1987 Constituion,
Filipino Nationals, mere legal title is not enough to there must be the ability to influence the
meet the required Filipino equity. There must be corporation through voting rights and economic
full ownership of the stocks and voting rights. benefits.

Who is considered as a beneficial owner? In other words, full ownership up to 60% of a public
utility encompasses both control and economic
[A]ny person who, directly or indirectly, through any
rights, both of which must stay in Filipino hands.
contract, arrangement, understanding, relationship
or otherwise, has or shares voting power (which Filipinos,must own 60% of the controlling test and
includes the power to vote or direct the voting of economic interests.
such security) and/or investment returns or power
which includes the power to dispose of, or direct the
disposition of such security. As defined in the SRC-IRR, "[b]eneficial
owner or beneficial ownership means any person
who, directly or indirectly, through any contract,
WHY IS THE SEC MC NO. 8 NOT INVALID? arrangement, understanding, relationship or
otherwise, has or shares voting power (which
1. To determine the required percentage of Filipino includes the power to vote or direct the voting of
ownership it shall apply to BOTH such security) and/or investment returns or power
(which includes the power to dispose of, or direct the
disposition of such security) x x x."84 have all the rights of ownership including, but not
limited to, offering certain preferred shares that may
have greater economic interest to foreign
investors� as the need for capital for corporate
The term "full beneficial ownership" found in the FIA- pursuits (such as expansion), may be good for the
IRR is to be understood in the context of the entire corporation that they own.
paragraph defining the term "Philippine national".
Surely, these "true owners" will not allow any dilution
Mere legal title is not enough to meet the required
of their ownership and control if such move will not
Filipino equity, which means that it is not sufficient
be beneficial to them.17
that a share is registered in the name of a Filipino
citizen or national, i.e., he should also have full
beneficial ownership (have voting power or
investment returns) of the share. Thus, the discussion of Justice Carpio's dissenting
opinion as to the voting preferred shares created by
respondent PLDT, their acquisition by BTF Holdings,
Hence, the notion that dividends accruing to any
Inc., which appears to be a wholly-owned company
particular stock are determinative of that stock's
of the PLDT Beneficial Trust Fund (BTF), and whether
"beneficial ownership."
or not it is respondent PLDT's management that
Dividend declaration is dictated by the corporation's controls BTF and BTF Holdings, Inc.� all these are
unrestricted retained earnings. On the other hand, factual matters that are outside the ambit of this
the corporation's need of capital for expansion Court's review which, as stated in the beginning, is
programs and special reserve for probable confined to determining whether or not the SEC
contingencies may limit retained earnings available committed grave abuse of discretion in issuing SEC-
for dividend declaration.15 It bears repeating here MC No. 8; that is, whether or not SEC-MC No.8
that the Court in the Gamboa Decision adopted the violated the ruling of the Court in Gamboa v. Finance
foregoing definition of the term "capital" in Section Secretary Teves,18 and the resolution in Heirs of
11, Article XII of the 1987 Constitution in express Wilson P. Gamboa v. Finance Sec. Teves19 denying
recognition of the sensitive and vital position of the Motion for Reconsideration therein as to the
public utilities both in the national economy and for proper understanding of "capital".
national security, so that the evident purpose of the
citizenship requirement is to prevent aliens from To be sure, it would be more prudent and advisable
assuming control of public utilities, which may be for the Court to await the SEC's prior determination
inimical to the national interest. of the citizenship of specific shares of stock held in
trust - based on proven facts - before the Court
This purpose prescinds from the "benefits"/dividends proceeds to pass upon the legality of such
that are derived from or accorded to the particular determination.
stocks held by Filipinos vis-a-vis the stocks held by
aliens. As to whether respondent PLDT is currently in
compliance with the Constitutional provision
regarding public utility entities, the Court must
So long as Filipinos have controlling interest of a likewise await the SEC's determination thereof
public utility corporation, their decision to declare applying SEC-MC No. 8. After all, as stated in the
more dividends for a particular stock over other Decision, it is the SEC which is the government
kinds of stock is their sole prerogative - an act of agency with the competent expertise and the
ownership that would presumably be for the benefit mandate of law to make such determination,.
of the public utility corporation itself.

Thus, as explained in the


Decision:chanRoblesvirtualLawlibrary

In this regard, it would be apropos to state that since


Filipinos own at least 60% of the outstanding shares
of stock entitled to vote directors, which is what the
Constitution precisely requires, then the Filipino
stockholders control the corporation, i.e., they
dictate corporate actions and decisions, and they

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