PLDT operating in violation of Charter

The Philippine Long Distance Telephone Co. is operating in violation of the Constitution and of a Supreme Court decision. Because of this, the PLDT-Digitel merger cannot be approved, however you look at it.

This was revealed by Sen. Joker Arroyo in a dissenting opinion to a Senate committee report on the PLDT-Digitel deal which was signed by only four bona fide members out of the 14 members of the committee.

The dissent was anchored on the recent ruling of the tribunal in Gamboa v. Teves (GR No. 176579, June 28, 2011) where the Court decreed that PLDT does not meet the minimum constitutional requirement that Filipinos must own at least 60 percent of the capital of a public utility company like PLDT. The Court which lopsidedly voted 10-3 against PLDT, derided PLDT’s “kind of ownership and control of a public utility (as) a mockery of the Constitution,” Arroyo said.

“Not being compliant with the Constitution, PLDT, if it has to continue operations, must first correct its ownership structure as required by the Constitution,” the senator added. “As matters stand, it operates in continuing violation of the Constitution.”

Yet a revised Committee Report 477 is being routed as if, by right, PLDT can continue to make business deals even before it has complied with the constitutional conscription.

In the decision mentioned above, the high court admonished the Securities and Exchange Commission (SEC) for its failure to crack the whip when the dominant telephone company, PLDT, breached the 40-percent limit on common shares that foreign shareholders can own.

Saying that the present state of share ownership in PLDT “is a mockery of the Constitution,” the tribunal, speaking through Senior Associate Justice Antonio T. Carpio, directed the SEC to “perform its statutory duty” especially with the 2010 filings of the company, where it is very clear that it was in breach of the 40-percent foreign share limit on common shares.

“The SEC has apparently unlawfully neglected (its statutory duty) based on the 2010 General Information Sheet (GIS) that respondent PLDT submitted” to the commission, the tribunal said. In that GIS, foreigners own 64.27 percent of the common shares, whereas Filipinos own only 37.3 percent of PLDT’s common shares.

In its ruling, the Court said that it is the common shares, which exercise control over the company, that should be construed as capital. It struck down the supposed definition of capital as common and preferred shares—a definition that PLDT insisted on. With the inclusion of the preferred shares in the computation of capital, PLDT would not be in violation of the foreign shareholdings’ limit.

Accordingly, the Supreme Court directed the SEC, “to impose the appropriate sanctions under the law” for the violation of the Constitution. This section mandates the Filipinization of public utilities. It provides: “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 60 percent of whose capital is owned by such citizens.”

In chastising the SEC, the tribunal said that the commission is vested with the “power and function to suspend or revoke, after proper notice and hearing, the franchise or certificate of registration of corporations, partnerships or associations upon any of the ground provided by law.”

The 40-page decision, concurred in by nine other justices, explained fully the intent of the framers of the Constitution which is to ensure “a self-reliant and independent national economy effectively controlled by Filipinos.” This effective control should be reckoned based on the ownership of common shares, and not common plus preferred shares.

“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 accords to Filipinos the control of public utilities and other nationalized industries.

“A broad definition (which includes even non-voting preferred shares) unjustifiably disregards who owns the all-important voting stock, which necessarily equates to control of the public utility,” the high court said.

It is the common stock alone that should be construed as capital, the Supreme Court emphasized, “lest an abnormality occurs.”

“We shall illustrate the glaring anomaly to giving a broad definition to the term ‘capital’,” the Court explained. “Let us assume that a corporation has 100 common shares owned by foreigners and 1 million non-voting preferred shares owned by Filipinos, with both classes of shares having a par value of P1 per share. Under the broad definition of the term ‘capital,’ such corporation would be compliant with the 40-percent constitutional limit on foreign equity of public utilities since the overwhelming majority, or more than 99.99 percent of the total outstanding capital stock is Filipino-owned.

“This is absolutely absurd,” the Court said as it stressed that under this example, only the foreigners holding the common shares have voting rights in the election of directors, even if they hold only 100 common shares. “Even with such a minuscule shareholding, the foreigners ‘exercise control’ over the corporation,” the Court said.

“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,” the tribunal said.

“It also renders illusory the State policy of an independent national economy effectively controlled by Filipinos,” it added.