SC upholds constitutionality of SEC order on public utility corporations

The Supreme Court (SC) has upheld the constitutionality of Memorandum Order No. 8 issued by the Securities and Exchange Commission (SEC) on the 60-40 participation of Filipinos and foreigners, respectively, in public utility corporations.

With the ruling, the SC dismissed the petition filed by Jose M. Roy III and the intervention lodged by the group of Wilson Gamboa Jr.

Memorandum Circular No.

8 states:

“All covered corporation shall, at all times, observe the constitutional or statutory ownership requirement. For purposes of determining compliance therewith, the required percentage of Filipino ownership shall be applied 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 or not entitled to vote in the election of directors.”

It was issued by the SEC in line with the SC’s 2011 decision which ruled that the term “capital” in a public utility corporation refers only to “common shares” and not to the total outstanding capital stocks composed of “common” or voting shares and “preferred” or non-voting shares.

With the decision, the 60-40 participation of Filipinos and foreigners, respectively, in public utility firms should be reckoned only the basis of their “common shares” holdings.

The SC said corporations that violate the constitutional requirement of 60 percent Filipino ownership and control are given time to cure their deficiencies prior to the start of an administrative case or investigation to be conducted by the SEC.

The SC decision was written by Senior Justice Antonio T. Carpio in the case of the Philippine Long Distance Telephone Company (PLDT).

In June, 2013, Roy asked the SC to declare unconstitutional SEC’s MC No. 8 and to order the SEC to investigate PLDT’s compliance with Section II, Article XII, of the Constitution that limits foreign ownership in public utility companies to 40 percent.

Roy said the SEC had declared PLDT compliant with the requirement of the Constitution and the SC decision of 2012 as it issued MC8 last year.

He pointed out that based on the SC decision, the 60-40 Filipino-foreign ownership in public utility corporations like the PLDT should apply separately to each class of shares.

He said that SEC’s MC8 did not make a distinction between the different classes of shares, and “instead, offered only a general distinction between voting and all other shares.”

“The standing interpretation of the SEC found in MC8 practically encourages circumvention of the 60-40 ownership rule by impliedly allowing the creation of several classes of voting shares with different degrees of beneficial ownership over the same, but at the same time, not imposing a 40 per cent limit on foreign ownership of the higher yielding stocks,” he said.

Roy also said SEC’s MC8 appeared to be “tailor-made” for PLDT to make it appear that the public utility company has conformed with the provision of the Constitution and the ruling of the SC on foreign ownership.

He pointed out that even before the issuance of MC8, PLDT had already sought amendment of its articles of incorporation, issued ‘preferred voting shares’ and sold them to “non-complying” entities called BTF Holdings Corporation (BTF) and Mediaquest Holdings, Inc.

He said the two companies which were created from the funds of PLDT Beneficial Trust Fund, were erroneously declared as 100 percent Filipinoowned corporations.

The 2011 SC decision on PLDT which became final in 2012 was issued on the case filed by the late human rights lawyer Wilson Gamboa.

Gamboa wanted to annul the sale of the government-acquired 111,415 Philippine Telecommunications Investment Corporation (PTIC) in PLDT shares to Hong Kong-based First Pacific Co. Ltd. in the amount of P25.2 billion.

He said the sale violated the constitutional limitation on foreign ownership of a public utility and that the respondents committed grave abuse of discretion by allowing the sale of PTIC shares to First Pacific.

Section 11, Article XII, of the Constitution 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 .... ”

In its 2012 ruling, the SC said that “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 … 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,” it said.

“Under prevailing jurisprudence, public utilities that fail to comply with the nationality requirement under Section 11, Article XII, and the FIA (Foreign Investments Act) can cure their deficiencies prior to the start of the administrative case or investigation,” it said.

In resolving Roy’s petition and Gamboa Jr.’s intervention, the SC deliberated on two issues – “1. whether the SEC gravely abused its discretion in issuing MC No. 8 in light of the Gamboa Decision (2011) and the Gamboa Resolution (2012); and 2. whether the SEC gravely abused its discretion in ruling that PLDT is compliant with the constitutional limitation on foreign ownership.”

In its resolution, the SC’s public information office (PIO) said: “The Court disposed of the second issue summarily for lack of merit. The Court found that the SEC had yet to make a definitive ruling on PLDT’s compliance with the capital requirement pursuant to the Gamboa Decision and the Gamboa Resolution, thus any ruling would be premature.”

The PIO also said that “the Court cited that the determination of PLDT’s compliance with the capital requirement is a question of fact best left to the SEC as the Court is not a trier of facts.”

On the substantive issue, the PIO said “the Court found that that SEC did not gravely abuse its discretion as it was simply implementing the Gamboa Decision and the Gamboa Resolution.”

Thus, the PIO said, the SC denied the petition and the intervention “for lack of merit, both on procedural and substantive grounds.”