G.R. No.

143964 July 26, 2004

GLOBE TELECOM, INC., petitioner,
vs.
THE NATIONAL TELECOMMUNICATIONS COMMISSION, COMMISSIONER JOSEPH A.
SANTIAGO, DEPUTY COMMISSIONERS AURELIO M. UMALI and NESTOR DACANAY, and
SMART COMMUNICATIONS, INC. respondents.

Telecommunications services are affected by a high degree of public interest. Telephone companies
have historically been regulated as common carriers, and indeed, the 1936 Public Service Act has
classified wire or wireless communications systems as a "public service," along with other common
carriers. The present petition dramatizes to a degree the clash of philosophies between traditional
notions of regulation and the au corant trend to deregulation. Appropriately, it involves the most
ubiquitous feature of the mobile phone, Short Messaging Service ("SMS") or "text messaging," which
has been transformed from a mere technological fad into a vital means of communication.

Facts:

Globe and private respondent Smart Communications, Inc. are both grantees of valid and subsisting
legislative franchises, authorizing them, among others, to operate a Cellular Mobile Telephone System
("CMTS"), utilizing the Global System for Mobile Communication ("GSM") technology. Among the
inherent services supported by the GSM network is the Short Message Services (SMS),also known
colloquially as "texting," which has attained immense popularity in the Philippines as a mode of
electronic communication.

On 4 June 1999, Smart filed a Complaint with NTC to interconnect Smart's and Globe's GSM
networks, particularly their respective SMS or texting services. The Complaint arose from the inability
of the two leading CMTS providers to effect interconnection. Smart alleged that Globe, with evident
bad faith and malice, refused to grant Smart's request for the interconnection of SMS. But NTC also
declared that both Smart and Globe have been providing SMS without authority from it, in violation of
Section 420 (f) of MC No. 8-9-95 which requires PTEs intending to provide value-added services
(VAS) to secure prior approval from NTC through an administrative process.

Globe filed with the Court of Appeals a Petition for Certiorari and Prohibition to nullify and set aside the
Order and to prohibit NTC from taking any further action in the case. It reiterated its previous
arguments that the complaint should have been dismissed for failure to comply with conditions
precedent and the non-forum shopping rule. It also claimed that NTC acted without jurisdiction in
declaring that it had no authority to render SMS, pointing out that the matter was not raised as an
issue before it at all. Finally, Globe alleged that the Order is a patent nullity as it imposed an
administrative penalty for an offense for which neither it nor Smart was sufficiently charged nor heard
on in violation of their right to due process.

After the Court of Appeals denied the Motion for Partial Reconsideration, Globe elevated the
controversy to the Supreme Court.

Issues:

1. Whether NTC may legally require Globe to secure NTC approval before it continues providing
SMS;

2. Whether SMS is a VAS under the PTA, or special feature under NTC MC No. 14-11-97;

3. Whether NTC acted with due process in levying the fine against Globe; and

4. Whether Globe should have first filed a motion for reconsideration before the NTC, but this relatively
minor question can be resolved in brief.

Held:

Necessity of Filing Motion for Reconsideration

Globe deliberately did not file a motion for reconsideration with the NTC before elevating the matter to
the Court of Appeals via a petition for certiorari. Generally, a motion for reconsideration is a
prerequisite for the filing of a petition for certiorari.

In opting not to file the motion for reconsideration, Globe asserted before the Court of Appeals that the
case fell within the exceptions to the general rule. The appellate court in the questioned Decision cited
the purported procedural defect, yet chose anyway to rule on the merits as well.

Globe's election to elevate the case directly to the Court of Appeals, skipping the standard motion for
reconsideration, is not a mortal mistake. According to Globe, the Order is a patent nullity, it being
violative of due process; the motion for reconsideration was a useless or idle ceremony; and, the issue
raised purely one of law. Indeed, the circumstances adverted to are among the recognized exceptions
to the general rule.

The Merits

Globe hinges its claim of exemption from obtaining prior approval from the NTC on NTC Memorandum
Circular No. 14-11-97 ("MC No. 14-11-97"). Globe notes that in a 7 October 1998 ruling on the
application of Islacom for the operation of SMS, NTC declared that the applicable circular for SMS is
MC No. 14-11-97. Under this ruling, it is alleged, NTC effectively denominated SMS as a "special
feature" which under MC No. 14-11-97 is a deregulated service that needs no prior authorization from
NTC. Globe further contends that NTC's requiring it to secure prior authorization violates the due
process and equal protection clauses, since earlier it had exempted the similarly situated Islacom from
securing NTC approval prior to its operation of SMS.

The statutory basis for the NTC's determination must be thoroughly examined. Our first level of inquiry
should be into the PTA. It is the authority behind MC No. 8-9-95. It is also the law that governs all
public telecommunications entities ("PTEs") in the Philippines.

Public Telecommunications Act

The PTA has not strictly adopted laissez-faire as its underlying philosophy to promote the
telecommunications industry. In fact, the law imposes strictures that restrain within reason how PTEs
conduct their business. For example, it requires that any access charge/revenue sharing
arrangements between all interconnecting carriers that are entered into have to be submitted for
approval to NTC. At the same time, the general thrust of the PTA is towards modernizing the legal
framework for the telecommunications services sector. The transmutation has become necessary due
to the rapid changes as well within the telecommunications industry.

One of the novel introductions of the PTA is the concept of a "value-added service" ("VAS"). Section
11 of the PTA governs the operations of a "value-added service provider," which the law defines as
"an entity which relying on the transmission, switching and local distribution facilities of the local
exchange and inter-exchange operators, and overseas carriers, offers enhanced services beyond
those ordinarily provided for by such carriers." Section 11 recognizes that VAS providers need not
secure a franchise, provided that they do not put up their own network. However, a different rule is laid
down for telecommunications entities such as Globe and PLDT.

The Pertinent NTC Memorandum Circulars
The NTC relied on Section 420(f) of the Implementing Rules of the PTA ("Implementing Rules") as
basis for its claim that prior approval must be secured from it before Globe can operate SMS. Section
420 of the Implementing Rules, contained in MC No. 8-9-95.

In short, the legal basis invoked by NTC in claiming that SMS is VAS has not been duly established.
The fault falls squarely on NTC. With the dual classification of SMS as a special feature and a VAS
and the varying rules pertinent to each classification, NTC has unnecessarily complicated the
regulatory framework to the detriment of the industry and the consumers. But does that translate to a
finding that the NTC Order subjecting Globe to prior approval is void? There is a fine line between
professional mediocrity and illegality. NTC's byzantine approach to SMS regulation is certainly
inefficient. Unfortunately for NTC, its actions have also transgressed due process in many ways, as
shown in the ensuing elucidation.

Detailed Digest of Gamboa vs. Finance Secretary, G.R. No. 176579, June 28, 2011
WILSON P. GAMBOA vs. FINANCE SECRETARY TEVES

G.R. No. 176579, promulgated June 28, 2011
X-----------------------------------------------------------------------------X

D E C I S I O N

CARPIO, J.:

I. THE FACTS

This is a petition to nullify the sale of shares of stock of Philippine Telecommunications Investment
Corporation (PTIC) by the government of the Republic of the Philippines, acting through the Inter-
Agency Privatization Council (IPC), to Metro Pacific Assets Holdings, Inc. (MPAH), an affiliate of First
Pacific Company Limited (First Pacific), a Hong Kong-based investment management and holding
company and a shareholder of the Philippine Long Distance Telephone Company (PLDT).

The petitioner questioned the sale on the ground that it also involved an indirect sale of 12 million
shares (or about 6.3 percent of the outstanding common shares) of PLDT owned by PTIC to First
Pacific. With the this sale, First Pacifics common shareholdings in PLDT increased from 30.7 percent
to 37 percent, thereby increasing the total common shareholdings of foreigners in PLDT to about
81.47%. This, according to the petitioner, violates Section 11, Article XII of the 1987 Philippine
Constitution which limits foreign ownership of the capital of a public utility to not more than 40%.

II. THE ISSUE

Does the term capital in Section 11, Article XII of the Constitution refer 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?

III. THE RULING

[The Court partly granted the petition and held 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 of a public utility,
or in the instant case, to the total common shares of PLDT.]

Section 11, Article XII (National Economy and Patrimony) of the 1987 Constitution mandates the
Filipinization of public utilities, to wit:

Section 11. 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;
nor shall such franchise, certificate, or authorization be exclusive in character or for a longer period
than fifty years. Neither shall any such franchise or right be granted except under the condition that it
shall be subject to amendment, alteration, or repeal by the Congress when the common good so
requires. The State shall encourage equity participation in public utilities by the general public. The
participation of foreign investors in the governing body of any public utility enterprise shall be limited to
their proportionate share in its capital, and all the executive and managing officers of such corporation
or association must be citizens of the Philippines. (Emphasis supplied)

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 thus in the present case only to common shares, and not to the
total outstanding capital stock comprising both common and non-voting preferred shares [of PLDT].

xxx xxx xxx

Indisputably, one of the rights of a stockholder is the right to participate in the control or management
of the corporation. This is exercised through his vote in the election of directors because it is the board
of directors that controls or manages the corporation. In the absence of provisions in the articles of
incorporation denying voting rights to preferred shares, preferred shares have the same voting rights
as common shares. However, preferred shareholders are often excluded from any control, that is,
deprived of the right to vote in the election of directors and on other matters, on the theory that the
preferred shareholders are merely investors in the corporation for income in the same manner as
bondholders. xxx.

Considering that common shares have voting rights which translate to control, as opposed to preferred
shares which usually have no voting rights, the term capital in Section 11, Article XII of the
Constitution refers only to common shares. However, if the preferred shares also have the right to vote
in the election of directors, then the term capital shall include such preferred shares because the
right to participate in the control or management of the corporation is exercised through the right to
vote in the election of directors. In short, the term capital in Section 11, Article XII of the Constitution
refers only to shares of stock that can vote in the election of directors.

xxx xxx xxx

Mere legal title is insufficient to meet the 60 percent Filipino-owned capital required in the
Constitution. Full beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60
percent of the voting rights, is required. The legal and beneficial ownership of 60 percent of the
outstanding capital stock must rest in the hands of Filipino nationals in accordance with the
constitutional mandate. Otherwise, the corporation is considered as non-Philippine national[s].

xxx xxx xxx

To construe broadly the term capital as the total outstanding capital stock, including both common
and non-voting preferred 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. A broad definition unjustifiably disregards who owns the all-important voting stock, which
necessarily equates to control of the public utility.

We shall illustrate the glaring anomaly in giving a broad definition to the term capital. Let us assume
that a corporation has 100 common shares owned by foreigners and 1,000,000 non-voting preferred
shares owned by Filipinos, with both classes of share having a par value of one peso (P1.00) per
share. Under the broad definition of the term capital, such corporation would be considered
compliant with the 40 percent constitutional limit on foreign equity of public utilities since the
overwhelming majority, or more than 99.999 percent, of the total outstanding capital stock is Filipino
owned. This is obviously absurd.

In the example given, only the foreigners holding the common shares have voting rights in the election
of directors, even if they hold only 100 shares. The foreigners, with a minuscule equity of less than
0.001 percent, exercise control over the public utility. On the other hand, the Filipinos, holding more
than 99.999 percent of the equity, cannot vote in the election of directors and hence, have no control
over the public utility. This starkly circumvents the intent of the framers of the Constitution, as well as
the clear language of the Constitution, to place the control of public utilities in the hands of Filipinos. It
also renders illusory the State policy of an independent national economy effectively controlled by
Filipinos.

The example given is not theoretical but can be found in the real world, and in fact exists in the
present case.

xxx xxx xxx

[O]nly holders of common shares can vote in the election of directors [of PLDT], meaning only
common shareholders exercise control over PLDT. Conversely, holders of preferred shares, who have
no voting rights in the election of directors, do not have any control over PLDT. In fact, under PLDTs
Articles of Incorporation, holders of common shares have voting rights for all purposes, while holders
of preferred shares have no voting right for any purpose whatsoever.

It must be stressed, and respondents do not dispute, that foreigners hold a majority of the common
shares of PLDT. In fact, based on PLDTs 2010 General Information Sheet (GIS), which is a document
required to be submitted annually to the Securities and Exchange Commission, foreigners hold
120,046,690 common shares of PLDT whereas Filipinos hold only 66,750,622 common shares. In
other words, foreigners hold 64.27% of the total number of PLDTs common shares, while Filipinos
hold only 35.73%. Since holding a majority of the common shares equates to control, it is clear that
foreigners exercise control over PLDT. Such amount of control unmistakably exceeds the allowable 40
percent limit on foreign ownership of public utilities expressly mandated in Section 11, Article XII of the
Constitution.

As shown in PLDTs 2010 GIS, as submitted to the SEC, the par value of PLDT common shares
is P5.00 per share, whereas the par value of preferred shares is P10.00 per share. In other words,
preferred shares have twice the par value of common shares but cannot elect directors and have only
1/70 of the dividends of common shares. Moreover, 99.44% of the preferred shares are owned by
Filipinos while foreigners own only a minuscule 0.56% of the preferred shares. Worse, preferred
shares constitute 77.85% of the authorized capital stock of PLDT while common shares constitute only
22.15%. This undeniably shows that beneficial interest in PLDT is not with the non-voting preferred
shares but with the common shares, blatantly violating the constitutional requirement of 60 percent
Filipino control and Filipino beneficial ownership in a public utility.

The legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the
hands of Filipinos in accordance with the constitutional mandate. Full beneficial ownership of 60
percent of the outstanding capital stock, coupled with 60 percent of the voting rights, is constitutionally
required for the States grant of authority to operate a public utility. The undisputed fact that the PLDT
preferred shares, 99.44% owned by Filipinos, are non-voting and earn only 1/70 of the dividends that
PLDT common shares earn, grossly violates the constitutional requirement of 60 percent Filipino
control and Filipino beneficial ownership of 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. This directly contravenes the express command in Section 11, Article XII of the
Constitution that [n]o franchise, certificate, or any other form of authorization for the operation of a
public utility shall be granted except to x x x corporations x x x organized under the laws of the
Philippines, at least sixty per centum of whose capital is owned by such citizens x x x.

To repeat, (1) foreigners own 64.27% of the common shares of PLDT, which class of shares exercises
the sole right to vote in the election of directors, and thus exercise control over PLDT; (2) Filipinos own
only 35.73% of PLDTs common shares, constituting a minority of the voting stock, and thus do not
exercise control over PLDT; (3) preferred shares, 99.44% owned by Filipinos, have no voting rights;
(4) preferred shares earn only 1/70 of the dividends that common shares earn; (5) preferred shares
have twice the par value of common shares; and (6) preferred shares constitute 77.85% of the
authorized capital stock of PLDT and common shares only 22.15%. This kind of ownership and control
of a public utility is a mockery of the Constitution.

Incidentally, the fact that 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 only P10.92 to P11.06 per share, is a glaring confirmation
by the market that control and beneficial ownership of PLDT rest with the common shares, not with the
preferred shares.

xxx xxx xxx

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 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). 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 11, Article XII of the Constitution, to impose the appropriate sanctions under
the law.




CASE 2012-0072: HEIRS OF WILSON P. GAMBOA, PETITIONERS, VS. FINANCE SECRETARY
MARGARITO B. TEVES, FINANCE UNDERSECRETARY JOHN P. SEVILLA, AND COMMISSIONER
RICARDO ABCEDE OF THE PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT (PCGG) IN
THEIR CAPACITIES AS CHAIR AND MEMBERS, RESPECTIVELY, OF THE PRIVATIZATION
COUNCIL, CHAIRMAN ANTHONI SALIM OF FIRST PACIFIC CO., LTD. IN HIS CAPACITY AS
DIRECTOR OF METRO PACIFIC ASSET HOLDINGS INC., CHAIRMAN MANUEL V. PANGILINAN
OF PHILIPPINE LONG DISTANCE TELEPHONE COMPANY (PLDT) IN HIS CAPACITY AS
MANAGING DIRECTOR OF FIRST PACIFIC CO., LTD., PRESIDENT NAPOLEON L. NAZARENO
OF PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, CHAIR FE BARIN OF THE
SECURITIES AND EXCHANGE COMMISSION, AND PRESIDENT FRANCIS LIM OF THE
PHILIPPINE STOCK EXCHANGE, RESPONDENTS. (G.R. NO. 176579, 09 OCTOBER 2012,
CARPIO, J.) SUBJECT/S: DEFINITION OF CAPITAL IN CORPORATION LAW; THE GODFATHER
RULE (BRIEF TITLE: HEIRS OF GAMBOA VS. TEVES)
=====================
DISPOSITIVE:
WHEREFORE, we DENY the motions for reconsideration WITH FINALITY. No further pleadings shall
be entertained.

SO ORDERED.
=====================

SUBJECTS/DOCTRINES/DIGEST:

SUPPOSE A PETITION FOR REVIEW IS PROCEDURALLY DEFECTIVE. WILL THE SUPREME
STILL ENTERTAIN THE PETITION?


YES, IF THE MAIN ISSUE IN THE CASE IS OF TRANSCENDENTAL IMPORTANCE.

In Luzon Stevedoring Corp. v. Anti-Dummy Board,8 the Court deemed it wise and expedient to resolve
the case although the petition for declaratory relief could be outrightly dismissed for being procedurally
defective. There, appellant admittedly had already committed a breach of the Public Service Act in
relation to the Anti-Dummy Law since it had been employing non-American aliens long before the
decision in a prior similar case. However, the main issue in Luzon Stevedoring was of transcendental
importance, involving the exercise or enjoyment of rights, franchises, privileges, properties and
businesses which only Filipinos and qualified corporations could exercise or enjoy under the
Constitution and the statutes.

XXXXXXXXXXXXXXXXXXXXXXX

WHAT IS TRANSCENDENTAL IN THE CASE AT HAND AND WHY?


THE INTERPRETATION OF THE TERM CAPITAL IN SECTION 11, ARTICLE XII OF THE
CONSTITUTION HAS FAR-REACHING IMPLICATIONS TO THE NATIONAL ECONOMY. IN FACT,
A RESOLUTION OF THIS ISSUE WILL DETERMINE WHETHER FILIPINOS ARE MASTERS, OR
SECOND-CLASS CITIZENS, IN THEIR OWN COUNTRY. WHAT IS AT STAKE HERE IS WHETHER
FILIPINOS OR FOREIGNERS WILL HAVE EFFECTIVE CONTROL OF THE PHILIPPINE NATIONAL
ECONOMY.

XXXXXXXXXXXXXXXXXXXXXXX

PANGILINAN ET AL CONTEND THAT THE TERM CAPITAL IN SECTION 11, ARTICLE XII OF
THE CONSTITUTION HAS LONG BEEN SETTLED AND DEFINED TO REFER TO THE TOTAL
OUTSTANDING SHARES OF STOCK, WHETHER VOTING OR NON-VOTING. IS THEIR
CONTENTION CORRECT?


NO. THE SUPREME COURT HAS NEVER YET INTERPRETED THE MEANING OF CAPITAL IN
THE CONTEXT OF SECTION 11, ARTICLE XII OF THE CONSTITUTION.

For more than 75 years since the 1935 Constitution, the Court has not interpreted or defined the term
capital found in various economic provisions of the 1935, 1973 and 1987 Constitutions. There has
never been a judicial precedent interpreting the term capital in the 1935, 1973 and 1987
Constitutions, until now. Hence, it is patently wrong and utterly baseless to claim that the Court in
defining the term capital in its 28 June 2011 Decision modified, reversed, or set aside the purported
long-standing

definition of the term capital, which supposedly refers to the total outstanding shares of stock,
whether voting or non-voting.



To repeat, until the present case there has never been a Court ruling categorically defining the term
capital found in the various economic provisions of the 1935, 1973 and 1987 Philippine
Constitutions.

XXXXXXXXXXXXXXXXXX

PANGILINAN ET AL CONTENDS THAT SEC AND DOJ HAVE ALWAYS INTERPRETED CAPITAL
TO REFER TO THE TOTAL OUTSTANDING SHARES OF STOCK WHETHER VOTING OR NOT. IS
THEIR CONTENTION CORRECT?

NO. DOJ AND SEC HAVE ISSUED CONFLICTING INTERPRETATIONS.

. . . . .

The opinions of the SEC, as well as of the Department of Justice (DOJ), on the definition of the term
capital as referring to both voting and non-voting shares (combined total of common and preferred
shares) are, in the first place, conflicting and inconsistent.

XXXXXXXXXXXXXXX

IS THERE ANY DOJ OPINION WHICH IS CONSISTENT WITH THE SC RULING, BEING NOW
CONTESTED, ON THE MATTER?

YES IN DOJ OPINION NO. 130 DATED 07 OCTOBER 1985, DOJ RULED THAT THE RESULTING
OWNERSHIP STRUCTURE OF THE SUBJECT CORPORATION WOULD BE UNCONSTITUTIONAL
BECAUSE 60% OF THE VOTING STOCK WOULD BE OWNED BY JAPANESE WHILE FILIPINOS
WOULD OWN ONLY 40% OF THE VOTING STOCK, ALTHOUGH WHEN THE NON-VOTING
STOCK IS ADDED, FILIPINOS WOULD OWN 60% OF THE COMBINED VOTING AND NON-
VOTING STOCK.

In DOJ Opinion No. 130, s. 1985,10 dated 7 October 1985, the scope of the term capital in Section
9, Article XIV of the 1973 Constitution was raised, that is, whether the term capital includes both
preferred and common stocks. The issue was raised in relation to a stock-swap transaction between
a Filipino and a Japanese corporation, both stockholders of a domestic corporation that owned lands
in the Philippines. Then Minister of Justice Estelito P. Mendoza ruled that the resulting ownership
structure of the corporation would be unconstitutional because 60% of the voting stock would be
owned by Japanese while Filipinos would own only 40% of the voting stock, although when the non-
voting stock is added, Filipinos would own 60% of the combined voting and non-voting stock.

In short, Minister Mendoza categorically rejected the theory that the term capital in Section 9, Article
XIV of the 1973 Constitution includes both preferred and common stocks treated as the same class
of shares regardless of differences in voting rights and privileges. Minister Mendoza stressed that the
60-40 ownership requirement in favor of Filipino citizens in the Constitution is not complied with unless
the corporation satisfies the criterion of beneficial ownership and that in applying the same the
primordial consideration is situs of control.

XXXXXXXXXXXXX

IS THERE ANY SEC OPINION WHICH IS CONSISTENT WITH THE SC RULING, BEING NOW
CONTESTED, ON THE MATTER?



YES. IN OPINION NO. 23-10 DATED18 AUGUST 2012, SEC APPLIED THE VOTING CONTROL
TEST, THAT IS USING ONLY THE VOTING STOCK TO DETERMINE WHETHER A
CORPORATION IS A PHILIPPINE NATIONAL.

On the other hand, in Opinion No. 23-10 dated 18 August 2010, addressed to Castillo Laman Tan
Pantaleon & San Jose, then SEC General Counsel Vernette G. Umali-Paco applied the Voting Control
Test, that is, using only the voting stock to determine whether a corporation is a Philippine national.

XXXXXXXXXXXXXXXXXXX

WILL THE OPINION ISSUED BY A SEC LEGAL OFFICER OR A SEC COMMISSIONER ESTABLISH
PRECEDENCE?

NO. THEIR OPINION APPLIES ONLY TO A PARTICULAR CASE. IT IS THE OPINION OF THE
WHOLE COMMISSION THAT ESTABLISHES A PRECEDENCE.

XXXXXXXXXXXXXX

The opinions issued by SEC legal officers do not have the force and effect of SEC rules and
regulations because only the SEC en banc can adopt rules and regulations. As expressly provided in
Section 4.6 of the Securities Regulation Code,12 the SEC cannot delegate to any of its individual
Commissioner or staff the power to adopt any rule or regulation. Further, under Section 5.1 of the
same Code, it is the SEC as a collegial body, and not any of its legal officers, that is empowered to
issue opinions and approve rules and regulations.

XXXXXXXXXXXXXXXXXXXX
IS THE GRANDFATHER RULE APPLICABLE TO THIS CASE?
YES. EVEN SEC APPLIED IT.

Significantly, the SEC en banc, which is the collegial body statutorily empowered to issue rules and
opinions on behalf of the SEC, has adopted the 60-40 ownership requirement in favor of Filipino
citizens mandated by the Constitution for certain economic activities. This prevailing SEC ruling, which
the SEC correctly adopted to thwart any circumvention of the required Filipino ownership and control,
is laid down in the 25 March 2010 SEC en banc ruling in Redmont Consolidated Mines, Corp. v.
McArthur Mining, Inc., et al.,15 to wit:

The avowed purpose of the Constitution is to place in the hands of Filipinos the exploitation of our
natural resources. Necessarily, therefore, the Rule interpreting the constitutional provision should not
diminish that right through the legal fiction of corporate ownership and control. But the constitutional
provision, as interpreted and practiced via the 1967 SEC Rules, has favored foreigners contrary to the
command of the Constitution. Hence, the Grandfather Rule must be applied to accurately determine
the actual participation, both direct and indirect, of foreigners in a corporation engaged in a
nationalized activity or business.
XXXXXXXXXXXXX
WHAT IS THE GRANDFATHER RULE?

COMPLIANCE WITH THE CONSTITUTIONAL LIMITATION(S) ON ENGAGING IN NATIONALIZED
ACTIVITIES MUST BE DETERMINED BY ASCERTAINING IF 60% OF THE INVESTING
CORPORATIONS OUTSTANDING CAPITAL STOCK IS OWNED BY FILIPINO CITIZENS, OR AS
INTERPRETED, BY NATURAL OR INDIVIDUAL FILIPINO CITIZENS. IF SUCH INVESTING
CORPORATION IS IN TURN OWNED TO SOME EXTENT BY ANOTHER INVESTING
CORPORATION, THE SAME PROCESS MUST BE OBSERVED. ONE MUST NOT STOP UNTIL
THE CITIZENSHIPS OF THE INDIVIDUAL OR NATURAL STOCKHOLDERS OF LAYER AFTER
LAYER OF INVESTING CORPORATIONS HAVE BEEN ESTABLISHED.

xxxxxxxxxxxxxxxx
WHAT WAS THE MAIN RULING IN THE 28 JUNE 2011 DECISION OF THE SC REGARDING THIS
CASE?

THAT THE 60-40 OWNERSHIP REQUIREMENT IN FAVOR OF FILIPINO CITIZENS IN 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. MERE LEGAL TITLE IS INSUFFICIENT TO MEET THE 60 PERCENT
FILIPINO OWNED CAPITAL REQUIRED IN THE CONSTITUTION. FULL BENEFICIAL
OWNERSHIP OF 60 PERCENT OF THE OUTSTANDING CAPITAL STOCK, COUPLED WITH 60
PERCENT OF THE VOTING RIGHTS, IS REQUIRED. THE LEGAL AND BENEFICIAL OWNERSHIP
OF 60 PERCENT OF THE OUTSTANDING CAPITAL STOCK MUST REST IN THE HANDS OF
FILIPINO NATIONALS IN ACCORDANCE WITH THE CONSTITUTIONAL MANDATE. OTHERWISE,
THE CORPORATION IS CONSIDERED AS NON-PHILIPPINE NATIONAL[S]. BOTH THE VOTING
CONTROL TEST AND THE BENEFICIAL OWNERSHIP TEST MUST BE APPLIED TO DETERMINE
WHETHER A CORPORATION IS A PHILIPPINE NATIONAL.