I thank Professor Florin T. Hilbay, director of the Institute of Government and Law Reform of the University of the Philippines for sponsoring this Forum to dissect academically the June 28, 2011 decision of the Supreme Court in “Wilson Gamboa vs. Margarito Teves,” G. R. No. 176579 and for inviting me to deliver this main or keynote address.
Inasmuch as this case involves PLDT, let me – at the outset – formally disclose what I already wrote in my column last July 17 and is contained in my personal website that I have been sitting as an independent member of the board of advisers of PLDT since mid-2009. That was well after I had retired from the Supreme Court in 2006. In that independent capacity, I do not represent PLDT’s management or any stockholder. I cannot propose or second motions in the board of directors. Neither can I vote. My advice may or may not be heeded by the company but anyway I render it objectively and in good faith to the best of my modest knowledge of law and business.
Ratio of the Decision
I assume that you, my dear audience of academics, lawyers and students of law and government, have read the decision that is the subject of our forum. Thus, I will go direct to its meat. It disposed as follows:
“WHEREFORE, we PARTLY GRANT the petition and 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 directions, and thus in the present case only to common shares, and not to the total outstanding capital stock (common and non-voting preferred shares). Respondent Chairperson of the Securities and Exchange Commission is DIRECTED to apply this definition of the term “capital” in determining the extent of allowable foreign ownership in respondent Philippine Long Distance Telephone Company, and if there is a violation of Section II, Article XII of the Constitution, to impose the appropriate sanctions under the law.”
In arriving at the foregoing disposition, the decision – written by Justice Antonio T. Carpio and concurred in by nine other magistrates (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, Jose C. Mendoza and Maria Lourdes P. A. Sereno) – brushed aside the jurisdictional, procedural and due process issues raised by the three dissenters, led by Justice Presbitero J. Velasco Jr. and joined by two others (Chief Justice Renato C. Corona and Justice Roberto A. Abad, who wrote a separate dissent; two seats were vacant).
In ignoring these preliminary issues, the majority invoked the familiar mantra that when “a petition raises matters of transcendental importance,” procedural issues pale into insignificance and should be set aside.
Jurisdiction and Due Process
To the objection that the Supreme Court has no original jurisdiction to tackle petitions for declaratory relief, annulment of sales, and injunctions, the majority simply treated the petition as one for mandamus, even if the petitioner himself did not have a prayer that could remotely be considered one for mandamus, and even if there is no allegation, much less proof, that the Securities and Exchange Commission has refused to perform a mandatory duty, which is an essential element of mandamus.
It justified its eagerness to take on the petition by saying that “the Court shall confine the resolution of the instant controversy solely on the threshold and purely legal issue of 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.” (bold types in original)
However, in resolving this “threshold” and allegedly “purely legal” issue, the majority – in the body of its decision – nonetheless delved into facts it sourced from the Internet and from records of the Securities and Exchange Commission, in the process committing some egregious factual errors, as I will demonstrate later. I would have ignored these lapses, but I believe I cannot set aside the basic due process issues.
As could be gleaned from its disposition, the Court directed “the respondent Chairperson of the Securities and Exchange Commission” to investigate PLDT and to sanction it in case it violated the Constitution. But neither the SEC nor PLDT was a respondent in the case. True, “Chair Fe Barin of the Securities Exchange Commission” and “President Napoleon Nazareno of the Philippine Long Distance Telephone Company” were respondents. But the SEC itself and PLDT, as a corporate entity distinct and separate from its President, were not impleaded and given their day in court.
Prior to this decision, the government – notably the Department of Justice and the Securities and Exchange Commission – have, since 1935 when the Constitution was first approved, uniformly held that the entire capital stock of a corporation, including voting and non-voting shares, shall be used in determining the 40 percent allocation to non-Filipinos. On this basis, the government has since then enticed foreigners to invest here, most notably during so-called “road shows” sponsored by the government and actively promoted by its economic managers abroad. Relying on this representation, many foreigners invested in Philippine companies, including public utilities.
The decision, moreover, does not show that the foreigners, who relied on this representation and invested here, have been summoned and asked their side. While one foreigner, “Chairman Anthoni Salim of First Pacific Co. Ltd.” is mentioned in the title of the case, he has not been served with the petition or granted the opportunity to air his defense. Manuel V. Pangilinan, a Filipino, was sued “in his capacity as managing director of First Pacific Co. Ltd.” but First Pacific itself has not been included.
The very first section of our Bill of Rights solemnly proclaims, “No person shall be deprived of life, liberty or property without due process of law.” Clearly and unquestionably, the word “person” includes foreigners and corporations that would be forced to unload their investments at bargain prices.
The most basic concept of due process is traced to Themistocles who cried, “Strike, but hear me first!” and the most oft-quoted definition of due process is credited to Daniel Webster, who defined to it as “a law that hears before it condemns, proceeds upon inquiry and renders judgment only after trial.”
One may even agree with the Supreme Court’s restriction on foreign stockholdings, but – with due respect – no one, not even the highest court of the land, may impose it without first hearing the persons who would be most adversely affected, the foreign investors.
Substantive Content of the Decision
Let me preface my discussion of the substance of the decision, by quoting the relevant portions of the key provision of the Constitution on the subject, namely, Section 11 of Article XII. It states that (1) only Filipino citizens or “corporations… at least 60 per centum of whose capital is owned by such citizens” may operate a public utility such as a telephone company; (2) “the participation of foreign investors in the (board of directors) of any public utility enterprise shall be limited to their proportionate share in its capital,” and (3) “all the executive and managing officers of such corporations must be citizens of the Philippines.”
As we all know, the capital stock of a corporation may be divided into (a) “voting” or “common” and (b) “non-voting” or “preferred” shares. Only voting or common shares can be used to elect members of the board of directors. Non-voting or preferred shares cannot; but they may legally be used in voting on very important issues, like in disposing of all or substantially all of the corporate assets; in incurring or increasing bonded indebtedness; or in merging the corporation with another; or in dissolving the corporation; etc.
To repeat, the majority’s decision ruled that the word “capital” in the cited charter provision should refer only to voting shares, “not to the total outstanding capital stock.” Hence, foreign investments in public utilities, like PLDT, should be limited to only 40 per cent of the voting shares. The majority said that this interpretation will ensure that Filipinos will “effectively control” public utilities because “it is the board of directors that controls or manages a corporation.”
To assure such control, it directed – if I may repeat – the chairperson of the Securities and Exchange Commission (SEC) “to apply this definition of the term ‘capital’ in determining the extent of allowable foreign ownership in respondent Philippine Long Distance Telephone Company, and if there is a violation of… the Constitution, to impose the appropriate sanctions under the law.” Again, while the dispositive portion of the decision alluded to “respondent” PLDT, the petition did not implead the telephone company.
The dissenters argued that “capital” should include not only the voting but also the preferred shares because this was the interpretation given by the framers of the current and previous Constitutions since 1935. Even the majority’s decision concedes that over the last 75 years, the Charter has been uniformly construed to refer to all shares, not to voting shares only.
The Velasco dissent further said that under item 2 above, the Constitution already assures Filipino control of public utilities because, in electing directors, foreigners can use only 40 percent of the common shares they hold, even if they own more than that percentage. Hence, “they will never be in a position to elect majority of the members of the Board of Directors… (Filipinos will always control the board) although they (may) actually own less than 50 % of the common shares.” Also under item 3, only Filipinos may be “executive and managing officers” of public utilities, thus doubly ensuring Filipino control. In point of fact, of the 13 directors of PLDT, only two are foreigners (Japanese) while the rest of the 11 are Filipinos.
Liberty and Prosperity
I believe that in construing the economic provisions of the Constitution, courts should – absent grave abuse of discretion – defer to the government, especially the Executive Department. Here, judicial restraint – nay, self-restraint – is the better course. Au contraire, in litigations involving civil liberties, the scales of justice should weigh heavily against the government and in favor of the people, particularly the poor and marginalized. I have always espoused this philosophy of “liberty and prosperity.”
With due respect, I submit that the judiciary does not have the mandate, not to say the expertise, to decide on matters relating to the economy and prosperity, and must – as much as possible – defer to the officials elected by the people to look after these issues. After all, if these elective officials fail to deliver on their mandate, they can be held accountable during periodic elections. This is how democracy thrives.
During the last several decades, our elected leaders – despite their partisan differences – have always relied on foreign investments to propel our economy and alleviate poverty. Let us remember that foreigners have a wide choice. Almost all of the 200 or so nations in the world, including China and other heretofore hermit states, offer them various kinds of incentives to lure them.
Most objectionable is the threat of sanction that the Court ordered the SEC chair to impose retroactively. How can we punish investors who relied in good faith on government’s blandishments over the last 75 years? That is most cruel and unfair.
However, if the decision cannot be reversed, I respectfully submit that, instead of being sanctioned, investors should be given a reasonable period of time, a few years, to comply with the new ruling. Finally, I believe Congress should consider passing a new law, which will govern an orderly and fair divestment process that will not unduly derail the country’s economic progress.
Errors in Business and Finance
Earlier, I said that the majority committed egregious errors of fact as well as, if I may add now, errors in business, economics and finance. The decision observed that the par value of PLDT’s voting or common shares is only P5.00, yet they each earned P70 in cash dividends in 2009. (Parenthetically, this is erroneous because cash dividends declared in 2009 were double that amount. But for purposes of our discussion, let us assume the Court’s findings of fact are correct.) In contrast, the non-voting or preferred shares have a par value of P10.00, but their cash dividends was “a measly P1.00 per share… In other words, preferred shares have twice the par value of common shares but they cannot elect directors and have only 1/70 of the dividends of common shares.”
Then, it concluded, “This undeniably shows that beneficial interest in PLDT is not with the non-voting preferred shares (mostly owned by Filipinos) but with the common shares (mostly owned by aliens), blatantly violating the constitutional requirement of 60 percent… Filipino beneficial ownership in a public utility… In short, Filipinos hold less than 60 percent of the voting stock, and earn less than 60 percent of the dividends of PLDT.” (bold types in original)
The uninitiated in business may find the foregoing discussion logical. But I respectfully submit that it is neither legal nor logical. It is not legal because the Constitution does not speak of dividends. Nowhere does it talk of how much each kind of shares should earn. The Charter speaks only of the ownership or “effective control” of the “capital” of a corporation engaged in public utilities, not of “beneficial ownership.”
It is not logical because it ignored the market value of the shares and their rate of returns. The decision itself noted that “the PLDT common shares with a par value of P5.00 have a current stock market value of P2,328.00 per share, while PLDT preferred shares with a par value of P10.00 per share have a current stock market value ranging from… P10.92 to P11.06 per share.”
However, it failed to use this critical information in computing the actual and real financial benefits. Look, on the basis of the facts given by the majority, an investor needs about P11.00 to buy a PLDT preferred share, which would earn P1.00. Here, the rate of return on the investment is nine percent. On the other hand, to acquire a common share, an investor must pay P2,328 yet earn only P70 or only about three percent.
On this basis, preferred shares earn three times more than the common shares. So, it is neither logical nor correct to say that “beneficial ownership” in PLDT rests with foreigners just because they hold more common shares than Filipinos.
Not Determinative of Real Value
Clearly, the par values of shares are not determinative of their real worth or earning potential. Investors buy shares from the company or from the stock market, depending on their appetite for risks, not on the shares’ par values. Conservatives want preferred shares because they are less risky and their earnings, like bank deposits, are fixed. The adventurous choose common shares because they could potentially be worth much more. Or much less, if the company flops.
While common shares may yield smaller dividends, they can – in time – increase their market value. Sometimes, a company strikes oil, or perfects its high tech products. When this happens, the market value of common shares exponentially grows while the yields of preferred shares remain fixed.
A classic example of exponential growth is Microsoft, which made Bill Gates the richest American almost overnight. Another example. In 2001, PLDT’s net income was about P3.4 billion; its common shares had a market price of P417. Then, led by Manuel V. Pangilinan and his gung ho Filipino management team, it expanded into the high-risk but high-reward wireless digital cell phone technology. In just four years, in 2005, its net income exponentially soared ten times to P34 billion. And kept growing since then. In 2010, its net income was P40 billion and its common shares’ market price rose to P2,554.
Of course, in bad times, common shares could collapse and reduce billionaires to paupers, as has happened here in 1997, and in the US in 2008. To recall, in 1997, the Asian financial crisis hit Thailand first and then spread everywhere. Because of this, the real estate business in the Philippines collapsed. The foray of Metro Pacific Holdings into Fort Bonifacio – led also by Manuel V. Pangilinan – failed and almost bankrupted the company. We are also familiar with the financial crisis in 2008 that started in the United States and resulted in the bankruptcy of several heretofore financial untouchables like Lehman Brothers, Merrill Lynch, American International Group (AIG) and Washington Mutual, the largest savings and loan association in the United States.
But then, that’s what business is all about. It is about taking and managing risks, not about legislating profits or promulgating decisions awarding economic benefits. It is not for the faint-hearted or for jurists to intrude into unnecessarily and imprudently.
In sum, the majority’s theoretical requirement that 60 percent of all financial benefits in a public utility must go to Filipinos regardless of how much they invested is totally unfair and blatantly ignores the most fundamental tenets of investments. Under this absurd thesis, no foreigner will invest in our country. For the most basic rule in a free market economy is that investors share in the profits and other benefits of an enterprise based on the amount they invested and the risk they assumed.
Maraming salamat po. I am now ready for your questions.