1

Nationality of Corporations

EN BANC[G.R. No. L-6055. June 12, 1953. ]THE PEOPLE OF THE PHILIPPINES, Plaintiff-Appellee, v. WILLIAM H. QUASHA, Defendant-Appellant. Jose P. Laurel for appellant and William H. Quasha in his own behalf. Solicitor General Juan R. Liwag and Assistant Solicitor General Francisco Carreon for Appellee.

SYLLABUS1. CONSTITUTIONAL LAW; CORPORATIONS; PUBLIC UTILITIES; MERE FORMATION OF PUBLIC UTILITY CORPORATION WITHOUT THE REQUISITE FILIPINO CAPITAL NOT PROHIBITED. — The Constitution does not prohibit the mere formation of a public utility corporation without the required proportion of Filipino capital. What it does prohibit is the granting of a franchise or other form of authorization for the operation of a public utility to a corporation already in existence but without the requisite proportion of Filipino capital (sec. 8, Art. XIV of the Constitution). 

2. ID.; ID.; ID.; DUTY OF REVEALING THE OWNERSHIP OF THE CAPITAL OF A CORPORATION. — If the Constitution does not prohibit the mere formation of a public utility corporation with alien capital, then how could the accused be charged with having wrongfully intended to circumvent that fundamental law by not disclosing in the articles of incorporation that one of the incorporators, a Filipino, was a mere trustee of his American co-incorporators and that for that reason the subscribed capital stock of the corporation was wholly American? For the mere formation of the corporation such disclosure was not essential, and the Corporation Law does not require it. The accused was, therefore, under no obligation to make it. In the absence of such obligation and of the alleged wrongful intent on the part of the accused, he cannot legally be convicted of the crime of falsification for having allegedly perverted the truth in a narration of facts. 

3. FALSIFICATION; FALSE NARRATION FOR NOT REVEALING A CERTAIN FACT, NOT PUNISHABLE IF THERE IS NO LEGAL OBLIGATION TO DISCLOSE THE TRUTH. — It is essential to the commission of this crime that the perversion of truth in a narration of facts must be made with the wrongful intent of injuring a third person and even if such wrongful intent is proven, still the untruthful statement will not constitute criminal falsification if there is no legal obligation on the part of the narrator to disclose the truth. (U. S. v. Reyes, 1 Phil., 341; U. S. v. Lopez, 15 Phil., 515.) Wrongful intent to injure a third person and obligation on the part of the narrator to disclose the truth are thus essential to a conviction for the crime of falsification under articles 171(4) and 172(1) of the Revised Penal Code.

D E C I S I O NREYES, J.:William H. Quasha, a member of the Philippine bar, was charged in the Court of First Instance of Manila with the crime of falsification of a public and commercial document in that, having been entrusted with the preparation and registration of the articles of incorporation of the Pacific Airways Corporation, a domestic corporation organized for the purpose of engaging in business as a common carrier, he caused it to appear in said articles of incorporation that one Arsenio Baylon, a Filipino citizen, had subscribed to and was the owner of 60.005 per cent of the subscribed capital stock of the corporation when in reality, as the accused well knew, such was not the ease, the truth being that the owners of the portion of the capital stock subscribed to by Baylon and the money paid thereon were American citizens whose names did not appear in the articles of incorporation, and that the purpose for making this false statement was to circumvent the constitutional mandate that no corporation shall be authorized to operate as a public utility in the Philippines unless 60 per cent of its capital stock is owned by Filipinos. 

Found guilty after trial and sentenced to a term of imprisonment and a fine, the accused has appealed to this Court. 

The essential facts are not in dispute. On November 4, 1946, the Pacific Airways Corporation registered its articles of incorporation

with the Securities and Exchange Commission. The articles were prepared and the registration was effected by the accused, who was in fact the organizer of the corporation. The articles stated that the primary purpose of the corporation was to carry on the business of a common carrier by air, land or water; that its capital stock was P1,000,000, represented by 9,000 preferred and 100,000 common shares, each preferred share being of the par value of P100 and entitled to 1/3 vote and each common share, of the par value of P1 and entitled to one vote; that the amount of capital stock actually subscribed was P200,000, and the names of the subscribers were Arsenio Baylon, Eruin E. Shannahan, Albert W. Onstott, James O’Bannon, Denzel J. Cavin, and William H. Quasha, the first being a Filipino and the other five all Americans; that Baylon’s subscription was for 1,145 preferred shares, of the total value of P114,500, and for 6,500 common shares, of the total par value of P6,500, while the aggregate subscriptions of the American subscribers were for 200 preferred shares, of the total par value of P20,000, and 59,000 common shares, of the total par value of P59,000; and that Baylon and the American subscribers had already paid 25 per cent of their respective subscriptions. Ostensibly the owner of, or subscriber to, 60.005 per cent of the subscribed capital stock of the corporation, Baylon nevertheless did not have the controlling vote because of the difference in voting power between the preferred shares and the common shares. Still, with the capital structure as it was, the articles of incorporation were accepted for registration and a certificate of incorporation was issued by the Securities and Exchange Commission. 

There is no question that Baylon actually subscribed to 60.005 per cent of the subscribed capital stock of the corporation. But it is admitted that the money paid on his subscription did not belong to him but to the American subscribers to the corporate stock. In explanation, the accused testified, without contradiction, that in the process of organization Baylon was made a trustee for the American incorporators, and that the reason for making Baylon such trustee was as follows:jgc:chanrobles.com.ph

"Q. According to this articles of incorporation Arsenio Baylon subscribed to 1,135 preferred shares with a total value of P1,135. Do you know how that came to be?

"A. Yes. 

The people who were desirous of forming the corporation, whose names are listed on page 7 of this certified copy came to my house, Messrs. Shannahan, Onstott, O’Bannon, Caven, Perry and Anastasakas one evening. There was considerable difficulty to get them all together at one time because they were pilots. They had difficulty in deciding what their respective share holdings would be. Onstott had invested a certain amount of money in airplane surplus property and they had obtained a considerable amount of money on those planes and as I recall they were desirous of getting a corporation formed right away. And they wanted to have their respective share holdings resolved at a later date. They stated that they could get together but they feel that they had no time to settle their respective share holdings. We discussed the matter and finally it was decided that the best way to handle the thing was not to put the shares in the name of anyone of the interested parties and to have someone act as trustee for their respective share holdings. So we looked around for a trustee. And he said ’Is there anybody in particular whom you trust?’ And I said ’There are a lot of people whom I trust.’ He said, ’Is there someone around whom we could get right away?’ I said, ’There is Arsenio. He was my boy during the liberation and he cared for me when I was sick and I said I consider him my friend.’ So they said ’Well make him our trustee.’ ’You can do that’, I said. They all knew Arsenio. He is a very kind man and that was what was done. That is how it came about."cralaw virtua1aw library

Defendant is accused under article 172, paragraph 1, in connection with article 171, paragraph 4, of the Revised Penal Code, which read:jgc:chanrobles.com.ph

"ART. 171. Falsification by public officer, employee or notary or ecclesiastic minister. — The penalty of prision mayor and a fine not to exceed 5,000 pesos shall be imposed upon any public officer, employee, or notary who, taking advantage of his official position, shall falsify a document by committing any of the following acts:chanrob1es virtual 1aw library

2

x       x       x"4. Making untruthful statements in a narration of facts."cralaw virtua1aw library

"ART. 172. Falsification by private individuals and use of falsified documents. — The penalty of prision correccional in its medium and maximum periods and a fine of not more than 5,000 pesos shall be imposed upon:chanrob1es virtual 1aw libraryx       x       x

"1. Any private individual who shall commit any of the falsifications enumerated in the next preceding article in any public or official document or letter of exchange or any other kind of commercial document."cralaw virtua1aw library

Commenting on the above provisions, Justice Albert, in his well- known work on the Revised Penal Code (new edition, pp. 407-408), observes, on the authority of U. S. v. Reyes, (1 Phil., 341), that the perversion of truth in the narration of fact must be made with the wrongful intent of injuring a third person; and on the authority of U. S. v. Lopez (15 Phil., 515), the same author further maintains that even if such wrongful intent is proven, still the untruthful statement will not constitute the crime of falsification if there is no legal obligation on the part of the narrator to disclose the truth. Wrongful intent to injure a third person and obligation on the part of the narrator to disclose the truth are thus essential to a conviction for the crime of falsification under the above articles of the Revised Penal Code. 

Now, as we see it, the falsification imputed to the accused in the present case consists in not disclosing in the articles of incorporation that Baylon was a mere trustee (or dummy as the prosecution chooses to call him) of his American co-incorporators, thus giving the impression that Baylon was the owner of the shares subscribed to by him which, as above stated, amount to 60.005 per cent of the subscribed capital stock. This, in the opinion of the trial court, is a malicious perversion of the truth made with the wrongful intent of circumventing section 8, Article XIV of the Constitution, which 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 other entities organized under the laws of the Philippines, sixty per centum of the capital of which is owned by citizens of the Philippines . . ." Plausible though it may appear at first glance, this opinion loses validity once it is noted that it is predicated on the erroneous assumption that the constitutional provision just quoted was meant to prohibit the mere formation of a public utility corporation without 60 per cent of its capital being owned by Filipinos, a mistaken belief which has induced the lower court to conclude that the accused was under obligation to disclose the whole truth about the nationality of the subscribed capital stock of the corporation by revealing that Baylon was a mere trustee or dummy of his American co-incorporators, and that in not making such disclosure dependant’s intention was to circumvent the Constitution to the detriment of the public interests. Contrary to the lower court’s assumption, the Constitution does not prohibit the mere formation of a public utility corporation without the required proportion of Filipino capital. What it does prohibit is the granting of a franchise or other form of authorization for the operation of a public utility to a corporation already in existence but without the requisite proportion of Filipino capital. This is obvious from the context, for the constitutional provision in question qualifies the terms "franchise", "certificate" or "any other form of authorization" with the phrase "for the operation of a public utility," thereby making it clear that the franchise meant is not the "primary franchise" that invests a body of men with corporate existence but the "secondary franchise" or the privilege to operate as a public utility after the corporation has already come into being. 

If the Constitution does not prohibit the mere formation of a public utility corporation with alien capital, then how could the accused be charged with having wrongfully intended to circumvent that fundamental law by not revealing in the articles of incorporation that Baylon was a mere trustee of his American co-incorporators and that for that reason the subscribed capital stock of the corporation was wholly American? For the mere formation of the corporation such revelation was not essential, and the Corporation Law does not require it. Defendant was, therefore, under no obligation to make it. In the absence of such obligation and of the

alleged wrongful intent, defendant cannot be legally convicted of the crime with which he is charged. 

It is urged, however, that the formation of the corporation with 60 per cent of its subscribed capital stock appearing in the name of Baylon was an indispensable preparatory step to the subversion of the constitutional prohibition and the laws implementing the policy expressed therein. This view is not correct. For a corporation to be entitled to operate a public utility it is not necessary that it be organized with 60 per cent of its capital owned by Filipinos from the start. A corporation formed with capital that is entirely alien may subsequently change the nationality of its capital through transfer of shares to Filipino citizens. Conversely, a corporation originally formed with Filipino capital may subsequently change the national status of said capital thru transfers of shares to foreigners. What need is there then for a corporation that intends to operate a public utility to have, at the time of its formation, 60 per cent of its capital owned by Filipinos alone? That condition may at any time be attained thru the necessary transfers of stocks. The moment for determining whether a corporation is entitled to operate as a public utility is when it applies for a franchise, certificate, or any other form of authorization for that purpose. And that can only be done after the corporation has already come into being and not while it is still being formed. And at that moment, the corporation must show that it has complied not only with the requirement of the Constitution as to the nationality of its capital, but also with the requirements of the Civil Aviation Law if it is a common carrier by air, the Revised Administrative Code if it is a common carrier by water, and the Public Service Law if it is a common carrier by land or other kind of public service. 

Equally untenable is the suggestion that defendant should at least be held guilty of an "impossible crime" under article 59 of the Revised Penal Code. It not being possible to suppose that defendant had intended to commit a crime for the simple reason that the alleged constitutional prohibition which he is charged with having tried to circumvent does not exist, conviction under that article is out of the question. 

The foregoing considerations cannot but lead to the conclusion that the defendant cannot be held guilty of the crime charged. The majority of the court, however, are also of the opinion that, even supposing that the act imputed to the defendant constituted falsification at the time it was perpetrated, still with the approval of the Parity Amendment to the Constitution in March, 1947, which placed Americans on the same footing as Filipino citizens with respect to the right to operate public utilities in the Philippines, thus doing away with the prohibition in section 8, Article XIV of the Constitution in so far as American citizens are concerned, the said act has ceased to be an offense within the meaning of the law, so that defendant can no longer be held criminally liable therefor. 

In view of the foregoing, the judgment appealed from is reversed and the defendant William H. Quasha acquitted, with costs de oficio. 

Paras, C.J., Pablo, Bengzon, Padilla, Tuason, Jugo, Bautista Angelo and Labrador, JJ., concur.

3

EN BANC

G.R. No. 176579               June 28, 2011

WILSON P. GAMBOA, Petitioner, 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 EXCHANGE COMMISSION, and PRESIDENT FRANCIS LIM OF THE PHILIPPINE STOCK EXCHANGE, Respondents.PABLITO V. SANIDAD and ARNO V. SANIDAD, Petitioners-in-Intervention.

D E C I S I O N

CARPIO, J.:

The Case

This is an original petition for prohibition, injunction, declaratory relief and declaration of nullity of the sale of shares of stock of Philippine Telecommunications Investment Corporation (PTIC) by the government of the Republic of the Philippines to Metro Pacific Assets Holdings, Inc. (MPAH), an affiliate of First Pacific Company Limited (First Pacific).

The Antecedents

The facts, according to petitioner Wilson P. Gamboa, a stockholder of Philippine Long Distance Telephone Company (PLDT), are as follows:1

On 28 November 1928, the Philippine Legislature enacted Act No. 3436 which granted PLDT a franchise and the right to engage in telecommunications business. In 1969, General Telephone and Electronics Corporation (GTE), an American company and a major PLDT stockholder, sold 26 percent of the outstanding common shares of PLDT to PTIC. In 1977, Prime Holdings, Inc. (PHI) was incorporated by several persons, including Roland Gapud and Jose Campos, Jr. Subsequently, PHI became the owner of 111,415 shares of stock of PTIC by virtue of three Deeds of Assignment executed by PTIC stockholders Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the 111,415 shares of stock of PTIC held by PHI were sequestered by the Presidential Commission on Good Government (PCGG). The 111,415 PTIC shares, which represent about 46.125 percent of the outstanding capital stock of PTIC, were later declared by this Court to be owned by the Republic of the Philippines.2

In 1999, First Pacific, a Bermuda-registered, Hong Kong-based investment firm, acquired the remaining 54 percent of the outstanding capital stock of PTIC. On 20 November 2006, the Inter-Agency Privatization Council (IPC) of the Philippine Government announced that it would sell the 111,415 PTIC shares, or 46.125 percent of the outstanding capital stock of PTIC, through a public bidding to be conducted on 4 December 2006. Subsequently, the public bidding was reset to 8 December 2006, and only two bidders, Parallax Venture Fund XXVII (Parallax) and Pan-Asia Presidio Capital, submitted their bids. Parallax won with a bid of P25.6 billion or US$510 million.

Thereafter, First Pacific announced that it would exercise its right of first refusal as a PTIC stockholder and buy the 111,415 PTIC

shares by matching the bid price of Parallax. However, First Pacific failed to do so by the 1 February 2007 deadline set by IPC and instead, yielded its right to PTIC itself which was then given by IPC until 2 March 2007 to buy the PTIC shares. On 14 February 2007, First Pacific, through its subsidiary, MPAH, entered into a Conditional Sale and Purchase Agreement of the 111,415 PTIC shares, or 46.125 percent of the outstanding capital stock of PTIC, with the Philippine Government for the price of P25,217,556,000 or US$510,580,189. The sale was completed on 28 February 2007.

Since PTIC is a stockholder of PLDT, the sale by the Philippine Government of 46.125 percent of PTIC shares is actually an indirect sale of 12 million shares or about 6.3 percent of the outstanding common shares of PLDT. With the sale, First Pacific’s common shareholdings in PLDT increased from 30.7 percent to 37 percent, thereby increasing the common shareholdings of foreigners in PLDT to about 81.47 percent. This 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 percent.3

On the other hand, public respondents Finance Secretary Margarito B. Teves, Undersecretary John P. Sevilla, and PCGG Commissioner Ricardo Abcede allege the following relevant facts:

On 9 November 1967, PTIC was incorporated and had since engaged in the business of investment holdings. PTIC held 26,034,263 PLDT common shares, or 13.847 percent of the total PLDT outstanding common shares. PHI, on the other hand, was incorporated in 1977, and became the owner of 111,415 PTIC shares or 46.125 percent of the outstanding capital stock of PTIC by virtue of three Deeds of Assignment executed by Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the 111,415 PTIC shares held by PHI were sequestered by the PCGG, and subsequently declared by this Court as part of the ill-gotten wealth of former President Ferdinand Marcos. The sequestered PTIC shares were reconveyed to the Republic of the Philippines in accordance with this Court’s decision4 which became final and executory on 8 August 2006.

The Philippine Government decided to sell the 111,415 PTIC shares, which represent 6.4 percent of the outstanding common shares of stock of PLDT, and designated the Inter-Agency Privatization Council (IPC), composed of the Department of Finance and the PCGG, as the disposing entity. An invitation to bid was published in seven different newspapers from 13 to 24 November 2006. On 20 November 2006, a pre-bid conference was held, and the original deadline for bidding scheduled on 4 December 2006 was reset to 8 December 2006. The extension was published in nine different newspapers.

During the 8 December 2006 bidding, Parallax Capital Management LP emerged as the highest bidder with a bid of P25,217,556,000. The government notified First Pacific, the majority owner of PTIC shares, of the bidding results and gave First Pacific until 1 February 2007 to exercise its right of first refusal in accordance with PTIC’s Articles of Incorporation. First Pacific announced its intention to match Parallax’s bid.

On 31 January 2007, the House of Representatives (HR) Committee on Good Government conducted a public hearing on the particulars of the then impending sale of the 111,415 PTIC shares. Respondents Teves and Sevilla were among those who attended the public hearing. The HR Committee Report No. 2270 concluded that: (a) the auction of the government’s 111,415 PTIC shares bore due diligence, transparency and conformity with existing legal procedures; and (b) First Pacific’s intended acquisition of the government’s 111,415 PTIC shares resulting in First Pacific’s 100% ownership of PTIC will not violate the 40 percent constitutional limit on foreign ownership of a public utility since PTIC holds only 13.847 percent of the total outstanding common shares of PLDT.5 On 28 February 2007, First Pacific completed the acquisition of the 111,415 shares of stock of PTIC.

4

Respondent Manuel V. Pangilinan admits the following facts: (a) the IPC conducted a public bidding for the sale of 111,415 PTIC shares or 46 percent of the outstanding capital stock of PTIC (the remaining 54 percent of PTIC shares was already owned by First Pacific and its affiliates); (b) Parallax offered the highest bid amounting toP25,217,556,000; (c) pursuant to the right of first refusal in favor of PTIC and its shareholders granted in PTIC’s Articles of Incorporation, MPAH, a First Pacific affiliate, exercised its right of first refusal by matching the highest bid offered for PTIC shares on 13 February 2007; and (d) on 28 February 2007, the sale was consummated when MPAH paid IPC P25,217,556,000 and the government delivered the certificates for the 111,415 PTIC shares. Respondent Pangilinan denies the other allegations of facts of petitioner.

On 28 February 2007, petitioner filed the instant petition for prohibition, injunction, declaratory relief, and declaration of nullity of sale of the 111,415 PTIC shares. Petitioner claims, among others, that the sale of the 111,415 PTIC shares would result in an increase in First Pacific’s common shareholdings in PLDT from 30.7 percent to 37 percent, and this, combined with Japanese NTT DoCoMo’s common shareholdings in PLDT, would result to a total foreign common shareholdings in PLDT of 51.56 percent which is over the 40 percent constitutional limit.6 Petitioner asserts:

If and when the sale is completed, First Pacific’s equity in PLDT will go up from 30.7 percent to 37.0 percent of its common – or voting- stockholdings, x x x. Hence, the consummation of the sale will put the two largest foreign investors in PLDT – First Pacific and Japan’s NTT DoCoMo, which is the world’s largest wireless telecommunications firm, owning 51.56 percent of PLDT common equity. x x x With the completion of the sale, data culled from the official website of the New York Stock Exchange (www.nyse.com) showed that those foreign entities, which own at least five percent of common equity, will collectively own 81.47 percent of PLDT’s common equity. x x x

x x x as the annual disclosure reports, also referred to as Form 20-K reports x x x which PLDT submitted to the New York Stock Exchange for the period 2003-2005, revealed that First Pacific and several other foreign entities breached the constitutional limit of 40 percent ownership as early as 2003. x x x"7

Petitioner raises the following issues: (1) whether the consummation of the then impending sale of 111,415 PTIC shares to First Pacific violates the constitutional limit on foreign ownership of a public utility; (2) whether public respondents committed grave abuse of discretion in allowing the sale of the 111,415 PTIC shares to First Pacific; and (3) whether the sale of common shares to foreigners in excess of 40 percent of the entire subscribed common capital stock violates the constitutional limit on foreign ownership of a public utility.8

On 13 August 2007, Pablito V. Sanidad and Arno V. Sanidad filed a Motion for Leave to Intervene and Admit Attached Petition-in-Intervention. In the Resolution of 28 August 2007, the Court granted the motion and noted the Petition-in-Intervention.

Petitioners-in-intervention "join petitioner Wilson Gamboa x x x in seeking, among others, to enjoin and/or nullify the sale by respondents of the 111,415 PTIC shares to First Pacific or assignee." Petitioners-in-intervention claim that, as PLDT subscribers, they have a "stake in the outcome of the controversy x x x where the Philippine Government is completing the sale of government owned assets in [PLDT], unquestionably a public utility, in violation of the nationality restrictions of the Philippine Constitution."

The Issue

This Court is not a trier of facts. Factual questions such as those raised by petitioner,9 which indisputably demand a thorough examination of the evidence of the parties, are generally beyond this Court’s jurisdiction. Adhering to this well-settled principle, 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.

The Ruling of the Court

The petition is partly meritorious.

Petition for declaratory relief treated as petition for mandamus

At the outset, petitioner is faced with a procedural barrier. Among the remedies petitioner seeks, only the petition for prohibition is within the original jurisdiction of this court, which however is not exclusive but is concurrent with the Regional Trial Court and the Court of Appeals. The actions for declaratory relief,10 injunction, and annulment of sale are not embraced within the original jurisdiction of the Supreme Court. On this ground alone, the petition could have been dismissed outright.

While direct resort to this Court may be justified in a petition for prohibition,11 the Court shall nevertheless refrain from discussing the grounds in support of the petition for prohibition since on 28 February 2007, the questioned sale was consummated when MPAH paid IPC P25,217,556,000 and the government delivered the certificates for the 111,415 PTIC shares.

However, since the threshold and purely legal issue on the definition of the term "capital" in Section 11, Article XII of the Constitution has far-reaching implications to the national economy, the Court treats the petition for declaratory relief as one for mandamus.12

In Salvacion v. Central Bank of the Philippines,13 the Court treated the petition for declaratory relief as one for mandamus considering the grave injustice that would result in the interpretation of a banking law. In that case, which involved the crime of rape committed by a foreign tourist against a Filipino minor and the execution of the final judgment in the civil case for damages on the tourist’s dollar deposit with a local bank, the Court declared Section 113 of Central Bank Circular No. 960, exempting foreign currency deposits from attachment, garnishment or any other order or process of any court, inapplicable due to the peculiar circumstances of the case. The Court held that "injustice would result especially to a citizen aggrieved by a foreign guest like accused x x x" that would "negate Article 10 of the Civil Code which provides that ‘in case of doubt in the interpretation or application of laws, it is presumed that the lawmaking body intended right and justice to prevail.’" The Court therefore required respondents Central Bank of the Philippines, the local bank, and the accused to comply with the writ of execution issued in the civil case for damages and to release the dollar deposit of the accused to satisfy the judgment.

In Alliance of Government Workers v. Minister of Labor,14 the Court similarly brushed aside the procedural infirmity of the petition for declaratory relief and treated the same as one for mandamus. In Alliance, the issue was whether the government unlawfully excluded petitioners, who were government employees, from the enjoyment of rights to which they were entitled under the law. Specifically, the question was: "Are the branches, agencies, subdivisions, and instrumentalities of the Government, including government owned or controlled corporations included among the four ‘employers’ under Presidential Decree No. 851 which are required to pay their employees x x x a thirteenth (13th) month pay x x x ?" The Constitutional principle involved therein affected all government employees, clearly justifying a relaxation of the technical rules of procedure, and certainly requiring the interpretation of the assailed presidential decree.

In short, it is well-settled that this Court may treat a petition for declaratory relief as one for mandamus if the issue involved has far-reaching implications. As this Court held in Salvacion:

5

The Court has no original and exclusive jurisdiction over a petition for declaratory relief. However, exceptions to this rule have been recognized. Thus, where the petition has far-reaching implications and raises questions that should be resolved, it may be treated as one for mandamus.15 (Emphasis supplied)

In the present case, petitioner seeks primarily the interpretation of the term "capital" in Section 11, Article XII of the Constitution. He prays that this Court declare that the term "capital" refers to common shares only, and that such shares constitute "the sole basis in determining foreign equity in a public utility." Petitioner further asks this Court to declare any ruling inconsistent with such interpretation unconstitutional.

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 national economy. Indeed, if ever there is a legal issue that has far-reaching implications to the entire nation, and to future generations of Filipinos, it is the threshhold legal issue presented in this case.

The Court first encountered the issue on the definition of the term "capital" in Section 11, Article XII of the Constitution in the case of Fernandez v. Cojuangco, docketed as G.R. No. 157360.16 That case involved the same public utility (PLDT) and substantially the same private respondents. Despite the importance and novelty of the constitutional issue raised therein and despite the fact that the petition involved a purely legal question, the Court declined to resolve the case on the merits, and instead denied the same for disregarding the hierarchy of courts.17There, petitioner Fernandez assailed on a pure question of law the Regional Trial Court’s Decision of 21 February 2003 via a petition for review under Rule 45. The Court’s Resolution, denying the petition, became final on 21 December 2004.

The instant petition therefore presents the Court with another opportunity to finally settle this purely legal issuewhich is of transcendental importance to the national economy and a fundamental requirement to a faithful adherence to our Constitution. The Court must forthwith seize such opportunity, not only for the benefit of the litigants, but more significantly for the benefit of the entire Filipino people, to ensure, in the words of the Constitution, "a self-reliant and independent national economy effectively controlled by Filipinos."18 Besides, in the light of vague and confusing positions taken by government agencies on this purely legal issue, present and future foreign investors in this country deserve, as a matter of basic fairness, a categorical ruling from this Court on the extent of their participation in the capital of public utilities and other nationalized businesses.

Despite its far-reaching implications to the national economy, this purely legal issue has remained unresolved for over 75 years since the 1935 Constitution. There is no reason for this Court to evade this ever recurring fundamental issue and delay again defining the term "capital," which appears not only in Section 11, Article XII of the Constitution, but also in Section 2, Article XII on co-production and joint venture agreements for the development of our natural resources,19 in Section 7, Article XII on ownership of private lands,20 in Section 10, Article XII on the reservation of certain investments to Filipino citizens,21 in Section 4(2), Article XIV on the ownership of educational institutions,22 and in Section 11(2), Article XVI on the ownership of advertising companies.23

Petitioner has locus standi

There is no dispute that petitioner is a stockholder of PLDT. As such, he has the right to question the subject sale, which he claims to violate the nationality requirement prescribed in Section 11, Article XII of the Constitution. If the sale indeed violates the Constitution, then there is a possibility that PLDT’s franchise could be revoked, a dire consequence directly affecting petitioner’s interest as a stockholder.

More importantly, there is no question that the instant petition raises matters of transcendental importance to the public. The fundamental and threshold legal issue in this case, involving the national economy and the economic welfare of the Filipino people, far outweighs any perceived impediment in the legal personality of the petitioner to bring this action.

In Chavez v. PCGG,24 the Court upheld the right of a citizen to bring a suit on matters of transcendental importance to the public, thus:

In Tañada v. Tuvera, the Court asserted that when the issue concerns a public right and the object of mandamus is to obtain the enforcement of a public duty, the people are regarded as the real parties in interest; and because it is sufficient that petitioner is a citizen and as such is interested in the execution of the laws, he need not show that he has any legal or special interest in the result of the action. In the aforesaid case, the petitioners sought to enforce their right to be informed on matters of public concern, a right then recognized in Section 6, Article IV of the 1973 Constitution, in connection with the rule that laws in order to be valid and enforceable must be published in the Official Gazette or otherwise effectively promulgated. In ruling for the petitioners’ legal standing, the Court declared that the right they sought to be enforced ‘is a public right recognized by no less than the fundamental law of the land.’

Legaspi v. Civil Service Commission, while reiterating Tañada, further declared that ‘when a mandamus proceeding involves the assertion of a public right, the requirement of personal interest is satisfied by the mere fact that petitioner is a citizen and, therefore, part of the general ‘public’ which possesses the right.’

Further, in Albano v. Reyes, we said that while expenditure of public funds may not have been involved under the questioned contract for the development, management and operation of the Manila International Container Terminal, ‘public interest [was] definitely involved considering the important role [of the subject contract] . . . in the economic development of the country and the magnitude of the financial consideration involved.’ We concluded that, as a consequence, the disclosure provision in the Constitution would constitute sufficient authority for upholding the petitioner’s standing. (Emphasis supplied)

Clearly, since the instant petition, brought by a citizen, involves matters of transcendental public importance, the petitioner has the requisite locus standi.

Definition of the Term "Capital" inSection 11, Article XII of the 1987 Constitution

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 above provision substantially reiterates Section 5, Article XIV of the 1973 Constitution, thus:

6

Section 5. 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 the capital of which 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 National Assembly when the public interest 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 the capital thereof. (Emphasis supplied)

The foregoing provision in the 1973 Constitution reproduced Section 8, Article XIV of the 1935 Constitution, viz:

Section 8. 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 other entities organized under the laws of the Philippines sixty per centum of the capital of which is owned by citizens of the Philippines, nor shall such franchise, certificate, or authorization be exclusive in character or for a longer period than fifty years. No franchise or right shall be granted to any individual, firm, or corporation, except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress when the public interest so requires. (Emphasis supplied)

Father Joaquin G. Bernas, S.J., a leading member of the 1986 Constitutional Commission, reminds us that the Filipinization provision in the 1987 Constitution is one of the products of the spirit of nationalism which gripped the 1935 Constitutional Convention.25 The 1987 Constitution "provides for the Filipinization of public utilities by requiring that any form of authorization for the operation of public utilities should be granted only 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.’ The provision is [an express] recognition of the sensitive and vital position of public utilities both in the national economy and for national security."26 The evident purpose of the citizenship requirement is to prevent aliens from assuming control of public utilities, which may be inimical to the national interest.27 This specific provision explicitly reserves to Filipino citizens control of public utilities, pursuant to an overriding economic goal of the 1987 Constitution: to "conserve and develop our patrimony"28 and ensure "a self-reliant and independent national economy effectively controlled by Filipinos."29

Any citizen or juridical entity desiring to operate a public utility must therefore meet the minimum nationality requirement prescribed in Section 11, Article XII of the Constitution. Hence, for a corporation to be granted authority to operate a public utility, at least 60 percent of its "capital" must be owned by Filipino citizens.

The crux of the controversy is the definition of the term "capital." Does the term "capital" in Section 11, Article XII of the Constitution refer to common shares or to the total outstanding capital stock (combined total of common and non-voting preferred shares)?

Petitioner submits that the 40 percent foreign equity limitation in domestic public utilities refers only to common shares because such shares are entitled to vote and it is through voting that control over a corporation is exercised. Petitioner posits that the term "capital" in Section 11, Article XII of the Constitution refers to "the ownership of common capital stock subscribed and outstanding, which class of shares alone, under the corporate set-up of PLDT, can vote and elect members of the board of directors." It is undisputed that PLDT’s non-voting preferred shares are held mostly by Filipino citizens.30 This arose from Presidential Decree No. 217,31 issued on 16 June 1973 by then President Ferdinand Marcos, requiring every applicant of a PLDT

telephone line to subscribe to non-voting preferred shares to pay for the investment cost of installing the telephone line.32

Petitioners-in-intervention basically reiterate petitioner’s arguments and adopt petitioner’s definition of the term "capital."33 Petitioners-in-intervention allege that "the approximate foreign ownership of common capital stock of PLDT x x x already amounts to at least 63.54% of the total outstanding common stock," which means that foreigners exercise significant control over PLDT, patently violating the 40 percent foreign equity limitation in public utilities prescribed by the Constitution.

Respondents, on the other hand, do not offer any definition of the term "capital" in Section 11, Article XII of the Constitution. More importantly, private respondents Nazareno and Pangilinan of PLDT do not dispute that more than 40 percent of the common shares of PLDT are held by foreigners.

In particular, respondent Nazareno’s Memorandum, consisting of 73 pages, harps mainly on the procedural infirmities of the petition and the supposed violation of the due process rights of the "affected foreign common shareholders." Respondent Nazareno does not deny petitioner’s allegation of foreigners’ dominating the common shareholdings of PLDT. Nazareno stressed mainly that the petition "seeks to divest foreign common shareholders purportedly exceeding 40% of the total common shareholdings in PLDT of their ownership over their shares." Thus, "the foreign natural and juridical PLDT shareholders must be impleaded in this suit so that they can be heard."34 Essentially, Nazareno invokes denial of due process on behalf of the foreign common shareholders.

While Nazareno does not introduce any definition of the term "capital," he states that "among the factual assertions that need to be established to counter petitioner’s allegations is the uniform interpretation by government agencies (such as the SEC), institutions and corporations (such as the Philippine National Oil Company-Energy Development Corporation or PNOC-EDC) of including both preferred shares and common shares in "controlling interest" in view of testing compliance with the 40% constitutional limitation on foreign ownership in public utilities."35

Similarly, respondent Manuel V. Pangilinan does not define the term "capital" in Section 11, Article XII of the Constitution. Neither does he refute petitioner’s claim of foreigners holding more than 40 percent of PLDT’s common shares. Instead, respondent Pangilinan focuses on the procedural flaws of the petition and the alleged violation of the due process rights of foreigners. Respondent Pangilinan emphasizes in his Memorandum (1) the absence of this Court’s jurisdiction over the petition; (2) petitioner’s lack of standing; (3) mootness of the petition; (4) non-availability of declaratory relief; and (5) the denial of due process rights. Moreover, respondent Pangilinan alleges that the issue should be whether "owners of shares in PLDT as well as owners of shares in companies holding shares in PLDT may be required to relinquish their shares in PLDT and in those companies without any law requiring them to surrender their shares and also without notice and trial."

Respondent Pangilinan further asserts that "Section 11, [Article XII of the Constitution] imposes no nationality requirement on the shareholders of the utility company as a condition for keeping their shares in the utility company." According to him, "Section 11 does not authorize taking one person’s property (the shareholder’s stock in the utility company) on the basis of another party’s alleged failure to satisfy a requirement that is a condition only for that other party’s retention of another piece of property (the utility company being at least 60% Filipino-owned to keep its franchise)."36

The OSG, representing public respondents Secretary Margarito Teves, Undersecretary John P. Sevilla, Commissioner Ricardo Abcede, and Chairman Fe Barin, is likewise silent on the definition of the term "capital." In its Memorandum37 dated 24 September 2007, the OSG also limits its discussion on the supposed procedural defects of the petition, i.e. lack of standing, lack of jurisdiction, non-inclusion of interested parties, and lack of basis

7

for injunction. The OSG does not present any definition or interpretation of the term "capital" in Section 11, Article XII of the Constitution. The OSG contends that "the petition actually partakes of a collateral attack on PLDT’s franchise as a public utility," which in effect requires a "full-blown trial where all the parties in interest are given their day in court."38

Respondent Francisco Ed Lim, impleaded as President and Chief Executive Officer of the Philippine Stock Exchange (PSE), does not also define the term "capital" and seeks the dismissal of the petition on the following grounds: (1) failure to state a cause of action against Lim; (2) the PSE allegedly implemented its rules and required all listed companies, including PLDT, to make proper and timely disclosures; and (3) the reliefs prayed for in the petition would adversely impact the stock market.

In the earlier case of Fernandez v. Cojuangco, petitioner Fernandez who claimed to be a stockholder of record of PLDT, contended that the term "capital" in the 1987 Constitution refers to shares entitled to vote or the common shares. Fernandez explained thus:

The forty percent (40%) foreign equity limitation in public utilities prescribed by the Constitution refers to ownership of shares of stock entitled to vote, i.e., common shares, considering that it is through voting that control is being exercised. x x x

Obviously, the intent of the framers of the Constitution in imposing limitations and restrictions on fully nationalized and partially nationalized activities is for Filipino nationals to be always in control of the corporation undertaking said activities. Otherwise, if the Trial Court’s ruling upholding respondents’ arguments were to be given credence, it would be possible for the ownership structure of a public utility corporation to be divided into one percent (1%) common stocks and ninety-nine percent (99%) preferred stocks. Following the Trial Court’s ruling adopting respondents’ arguments, the common shares can be owned entirely by foreigners thus creating an absurd situation wherein foreigners, who are supposed to be minority shareholders, control the public utility corporation.

x x x x

Thus, the 40% foreign ownership limitation should be interpreted to apply to both the beneficial ownership and the controlling interest.

x x x x

Clearly, therefore, the forty percent (40%) foreign equity limitation in public utilities prescribed by the Constitution refers to ownership of shares of stock entitled to vote, i.e., common shares. Furthermore, ownership of record of shares will not suffice but it must be shown that the legal and beneficial ownership rests in the hands of Filipino citizens. Consequently, in the case of petitioner PLDT, since it is already admitted that the voting interests of foreigners which would gain entry to petitioner PLDT by the acquisition of SMART shares through the Questioned Transactions is equivalent to 82.99%, and the nominee arrangements between the foreign principals and the Filipino owners is likewise admitted, there is, therefore, a violation of Section 11, Article XII of the Constitution.

Parenthetically, the Opinions dated February 15, 1988 and April 14, 1987 cited by the Trial Court to support the proposition that the meaning of the word "capital" as used in Section 11, Article XII of the Constitution allegedly refers to the sum total of the shares subscribed and paid-in by the shareholder and it allegedly is immaterial how the stock is classified, whether as common or preferred, cannot stand in the face of a clear legislative policy as stated in the FIA which took effect in 1991 or way after said opinions were rendered, and as clarified by the above-quoted Amendments. In this regard, suffice it to state that as between the law and an opinion rendered by an administrative agency, the law indubitably prevails. Moreover, said Opinions are merely advisory and cannot prevail over the clear intent of the framers of the Constitution.

In the same vein, the SEC’s construction of Section 11, Article XII of the Constitution is at best merely advisory for it is the courts that finally determine what a law means.39

On the other hand, respondents therein, Antonio O. Cojuangco, Manuel V. Pangilinan, Carlos A. Arellano, Helen Y. Dee, Magdangal B. Elma, Mariles Cacho-Romulo, Fr. Bienvenido F. Nebres, Ray C. Espinosa, Napoleon L. Nazareno, Albert F. Del Rosario, and Orlando B. Vea, argued that the term "capital" in Section 11, Article XII of the Constitution includes preferred shares since the Constitution does not distinguish among classes of stock, thus:

16. The Constitution applies its foreign ownership limitation on the corporation’s "capital," without distinction as to classes of shares. x x x

In this connection, the Corporation Code – which was already in force at the time the present (1987) Constitution was drafted – defined outstanding capital stock as follows:

Section 137. Outstanding capital stock defined. – The term "outstanding capital stock", as used in this Code, means the total shares of stock issued under binding subscription agreements to subscribers or stockholders, whether or not fully or partially paid, except treasury shares.

Section 137 of the Corporation Code also does not distinguish between common and preferred shares, nor exclude either class of shares, in determining the outstanding capital stock (the "capital") of a corporation. Consequently, petitioner’s suggestion to reckon PLDT’s foreign equity only on the basis of PLDT’s outstanding common shares is without legal basis. The language of the Constitution should be understood in the sense it has in common use.

x x x x

17. But even assuming that resort to the proceedings of the Constitutional Commission is necessary, there is nothing in the Record of the Constitutional Commission (Vol. III) – which petitioner misleadingly cited in the Petition x x x – which supports petitioner’s view that only common shares should form the basis for computing a public utility’s foreign equity.

x x x x

18. In addition, the SEC – the government agency primarily responsible for implementing the Corporation Code, and which also has the responsibility of ensuring compliance with the Constitution’s foreign equity restrictions as regards nationalized activities x x x – has categorically ruled that both common and preferred shares are properly considered in determining outstanding capital stock and the nationality composition thereof.40

We agree with petitioner and petitioners-in-intervention. 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,41 and not to the total outstanding capital stock comprising both common and non-voting preferred shares.

The Corporation Code of the Philippines42 classifies shares as common or preferred, thus:

Sec. 6. Classification of shares. - The shares of stock of stock corporations may be divided into classes or series of shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of incorporation: Provided, That no share may be deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares, unless otherwise provided in this Code: Provided, further, That there shall always be a class or series of shares which have complete voting rights. Any or all of the shares or series of shares may have a par value or have no par value as may be provided for in the articles of

8

incorporation: Provided, however, That banks, trust companies, insurance companies, public utilities, and building and loan associations shall not be permitted to issue no-par value shares of stock.

Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the corporation in case of liquidation and in the distribution of dividends, or such other preferences as may be stated in the articles of incorporation which are not violative of the provisions of this Code: Provided, That preferred shares of stock may be issued only with a stated par value. The Board of Directors, where authorized in the articles of incorporation, may fix the terms and conditions of preferred shares of stock or any series thereof: Provided, That such terms and conditions shall be effective upon the filing of a certificate thereof with the Securities and Exchange Commission.

Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto: Provided; That shares without par value may not be issued for a consideration less than the value of five (P5.00) pesos per share: Provided, further, That the entire consideration received by the corporation for its no-par value shares shall be treated as capital and shall not be available for distribution as dividends.

A corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal requirements.

Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be equal in all respects to every other share.

Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such shares shall nevertheless be entitled to vote on the following matters:

1. Amendment of the articles of incorporation;2. Adoption and amendment of by-laws;3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property;4. Incurring, creating or increasing bonded indebtedness;5. Increase or decrease of capital stock;6. Merger or consolidation of the corporation with another corporation or other corporations;7. Investment of corporate funds in another corporation or business in accordance with this Code; and8. Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights.

Indisputably, one of the rights of a stockholder is the right to participate in the control or management of the corporation.43 This is exercised through his vote in the election of directors because it is the board of directors that controls or manages the corporation.44 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.45 In fact, under the Corporation Code only preferred or redeemable shares can be deprived of the right to vote.46 Common shares cannot be deprived of the right to vote in any corporate meeting, and any provision in the articles of incorporation restricting the right of common shareholders to vote is invalid.47

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.

This interpretation is consistent with the intent of the framers of the Constitution to place in the hands of Filipino citizens the control and management of public utilities. As revealed in the deliberations of the Constitutional Commission, "capital" refers to the voting stock or controlling interest of a corporation, to wit:

MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign equity; namely, 60-40 in Section 3, 60-40 in Section 9 and 2/3-1/3 in Section 15.

MR. VILLEGAS. That is right.

MR. NOLLEDO. In teaching law, we are always faced with this question: "Where do we base the equity requirement, is it on the authorized capital stock, on the subscribed capital stock, or on the paid-up capital stock of a corporation"? Will the Committee please enlighten me on this?

MR. VILLEGAS. We have just had a long discussion with the members of the team from the UP Law Center who provided us a draft. The phrase that is contained here which we adopted from the UP draft is "60 percent of voting stock."

MR. NOLLEDO. That must be based on the subscribed capital stock, because unless declared delinquent, unpaid capital stock shall be entitled to vote.

MR. VILLEGAS. That is right.

MR. NOLLEDO. Thank you.

With respect to an investment by one corporation in another corporation, say, a corporation with 60-40 percent equity invests in another corporation which is permitted by the Corporation Code, does the Committee adopt the grandfather rule?

MR. VILLEGAS. Yes, that is the understanding of the Committee.MR. NOLLEDO. Therefore, we need additional Filipino capital?MR. VILLEGAS. Yes.48

x x x xMR. AZCUNA. May I be clarified as to that portion that was accepted by the Committee.MR. VILLEGAS. The portion accepted by the Committee is the deletion of the phrase "voting stock or controlling interest."MR. AZCUNA. Hence, without the Davide amendment, the committee report would read: "corporations or associations at least sixty percent of whose CAPITAL is owned by such citizens."MR. VILLEGAS. Yes.MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60 percent of the capital to be owned by citizens.MR. VILLEGAS. That is right.

MR. AZCUNA. But the control can be with the foreigners even if they are the minority. Let us say 40 percent of the capital is owned by them, but it is the voting capital, whereas, the Filipinos own the nonvoting shares. So we can have a situation where the corporation is controlled by foreigners despite being the minority because they have the voting capital. That is the anomaly that would result here.

MR. BENGZON. No, the reason we eliminated the word "stock" as stated in the 1973 and 1935 Constitutions is that according to Commissioner Rodrigo, there are associations that do not have stocks. That is why we say "CAPITAL."

9

MR. AZCUNA. We should not eliminate the phrase "controlling interest."

MR. BENGZON. In the case of stock corporations, it is assumed.49 (Emphasis supplied)

Thus, 60 percent of the "capital" assumes, or should result in, "controlling interest" in the corporation. Reinforcing this interpretation of the term "capital," as referring to controlling interest or shares entitled to vote, is the definition of a "Philippine national" in the Foreign Investments Act of 1991,50 to wit:

SEC. 3. Definitions. - As used in this Act:

a. The term "Philippine national" shall mean a citizen of the Philippines; or a domestic partnership or association wholly owned by citizens of the Philippines; or a corporation organized under the laws of the Philippines of which at least sixty percent (60%) of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines; or a corporation organized abroad and registered as doing business in the Philippines under the Corporation Code of which one hundred percent (100%) of the capital stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty percent (60%) of the fund will accrue to the benefit of Philippine nationals: Provided, That where a corporation and its non-Filipino stockholders own stocks in a Securities and Exchange Commission (SEC) registered enterprise, at least sixty percent (60%) of the capital stock outstanding and entitled to vote of each of both corporations must be owned and held by citizens of the Philippines and at least sixty percent (60%) of the members of the Board of Directors of each of both corporations must be citizens of the Philippines, in order that the corporation, shall be considered a "Philippine national." (Emphasis supplied)

In explaining the definition of a "Philippine national," the Implementing Rules and Regulations of the Foreign Investments Act of 1991 provide:

b. "Philippine national" shall mean a citizen of the Philippines or a domestic partnership or association wholly owned by the citizens of the Philippines; or a corporation organized under the laws of the Philippines of which at least sixty percent [60%] of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines; or a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty percent [60%] of the fund will accrue to the benefit of the Philippine nationals; Provided, that where a corporation its non-Filipino stockholders own stocks in a Securities and Exchange Commission [SEC] registered enterprise, at least sixty percent [60%] of the capital stock outstanding and entitled to vote of both corporations must be owned and held by citizens of the Philippines and at least sixty percent [60%] of the members of the Board of Directors of each of both corporation must be citizens of the Philippines, in order that the corporation shall be considered a Philippine national. The control test shall be applied for this purpose.

Compliance with the required Filipino ownership of a corporation shall be determined on the basis of outstanding capital stock whether fully paid or not, but only such stocks which are generally entitled to vote are considered.

For stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate voting rights is essential. Thus, stocks, the voting rights of which have been assigned or transferred to aliens cannot be considered held by Philippine citizens or Philippine nationals.

Individuals or juridical entities not meeting the aforementioned qualifications are considered as non-Philippine nationals. (Emphasis supplied)

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]."

Under Section 10, Article XII of the Constitution, Congress may "reserve to citizens of the Philippines or to corporations or associations at least sixty per centum of whose capital is owned by such citizens, or such higher percentage as Congress may prescribe, certain areas of investments." Thus, in numerous laws Congress has reserved certain areas of investments to Filipino citizens or to corporations at least sixty percent of the "capital" of which is owned by Filipino citizens. Some of these laws are: (1) Regulation of Award of Government Contracts or R.A. No. 5183; (2) Philippine Inventors Incentives Act or R.A. No. 3850; (3) Magna Carta for Micro, Small and Medium Enterprises or R.A. No. 6977; (4) Philippine Overseas Shipping Development Act or R.A. No. 7471; (5) Domestic Shipping Development Act of 2004 or R.A. No. 9295; (6) Philippine Technology Transfer Act of 2009 or R.A. No. 10055; and (7) Ship Mortgage Decree or P.D. No. 1521. Hence, the term "capital" in Section 11, Article XII of the Constitution is also used in the same context in numerous laws reserving certain areas of investments to Filipino citizens.

To construe broadly the term "capital" as the total outstanding capital stock, including both common and non-votingpreferred 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 economyeffectively 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.

Holders of PLDT preferred shares are explicitly denied of the right to vote in the election of directors. PLDT’s Articles of Incorporation expressly state that "the holders of Serial Preferred Stock shall not be entitled to vote at any meeting of the stockholders for the election of directors or for any other purpose or otherwise participate in any action taken by the corporation or its stockholders, or to receive notice of any meeting of stockholders."51

10

On the other hand, holders of common shares are granted the exclusive right to vote in the election of directors. PLDT’s Articles of Incorporation52 state that "each holder of Common Capital Stock shall have one vote in respect of each share of such stock held by him on all matters voted upon by the stockholders, and the holders of Common Capital Stock shall have the exclusive right to vote for the election of directors and for all other purposes."53

In short, only holders of common shares can vote in the election of directors, 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 PLDT’s 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 PLDT’s 2010 General Information Sheet (GIS),54 which is a document required to be submitted annually to the Securities and Exchange Commission,55 foreigners hold 120,046,690 common shares of PLDT whereas Filipinos hold only 66,750,622 common shares.56 In other words, foreigners hold 64.27% of the total number of PLDT’s 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.

Moreover, the Dividend Declarations of PLDT for 2009,57 as submitted to the SEC, shows that per share the SIP58preferred shares earn a pittance in dividends compared to the common shares. PLDT declared dividends for the common shares at P70.00 per share, while the declared dividends for the preferred shares amounted to a measlyP1.00 per share.59 So the preferred shares not only cannot vote in the election of directors, they also have very little and obviously negligible dividend earning capacity compared to common shares.

As shown in PLDT’s 2010 GIS,60 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.61 Worse, preferred shares constitute 77.85% of the authorized capital stock of PLDT while common shares constitute only 22.15%.62 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 State’s 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 soleright to vote in the election of directors, and thus exercise control over PLDT; (2) Filipinos own only 35.73% of PLDT’s 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;63 (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 ofP2,328.00 per share,64 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,65 is a glaring confirmation by the market that control and beneficial ownership of PLDT rest with the common shares, not with the preferred shares.

Indisputably, construing the term "capital" in Section 11, Article XII of the Constitution to include both voting and non-voting shares will result in the abject surrender of our telecommunications industry to foreigners, amounting to a clear abdication of the State’s constitutional duty to limit control of public utilities to Filipino citizens. Such an interpretation certainly runs counter to the constitutional provision reserving certain areas of investment to Filipino citizens, such as the exploitation of natural resources as well as the ownership of land, educational institutions and advertising businesses. The Court should never open to foreign control what the Constitution has expressly reserved to Filipinos for that would be a betrayal of the Constitution and of the national interest. The Court must perform its solemn duty to defend and uphold the intent and letter of the Constitution to ensure, in the words of the Constitution, "a self-reliant and independent national economy effectively controlled by Filipinos."

Section 11, Article XII of the Constitution, like other provisions of the Constitution expressly reserving to Filipinosspecific areas of investment, such as the development of natural resources and ownership of land, educational institutions and advertising business, is self-executing. There is no need for legislation to implement these self-executing provisions of the Constitution. The rationale why these constitutional provisions are self-executing was explained in Manila Prince Hotel v. GSIS,66 thus:

x x x Hence, unless it is expressly provided that a legislative act is necessary to enforce a constitutional mandate, the presumption now is that all provisions of the constitution are self-executing. If the constitutional provisions are treated as requiring legislation instead of self-executing, the legislature would have the power to ignore and practically nullify the mandate of the fundamental law. This can be cataclysmic. That is why the prevailing view is, as it has always been, that —

. . . in case of doubt, the Constitution should be considered self-executing rather than non-self-executing. . . .Unless the contrary is clearly intended, the provisions of the Constitution should be considered self-executing, as a contrary rule would give the legislature discretion to determine when, or whether, they shall be effective. These provisions would be subordinated to the will of the lawmaking body, which could make them entirely meaningless by simply refusing to pass the needed implementing statute. (Emphasis supplied)

In Manila Prince Hotel, even the Dissenting Opinion of then Associate Justice Reynato S. Puno, later Chief Justice, agreed that constitutional provisions are presumed to be self-executing. Justice Puno stated:

Courts as a rule consider the provisions of the Constitution as self-executing, rather than as requiring future legislation for their enforcement. The reason is not difficult to discern. For if they are not treated as self-executing, the mandate of the fundamental law ratified by the sovereign people can be

11

easily ignored and nullified by Congress. Suffused with wisdom of the ages is the unyielding rule that legislative actions may give breath to constitutional rights but congressional inaction should not suffocate them.

Thus, we have treated as self-executing the provisions in the Bill of Rights on arrests, searches and seizures, the rights of a person under custodial investigation, the rights of an accused, and the privilege against self-incrimination. It is recognized that legislation is unnecessary to enable courts to effectuate constitutional provisions guaranteeing the fundamental rights of life, liberty and the protection of property. The same treatment is accorded to constitutional provisions forbidding the taking or damaging of property for public use without just compensation. (Emphasis supplied)

Thus, in numerous cases,67 this Court, even in the absence of implementing legislation, applied directly the provisions of the 1935, 1973 and 1987 Constitutions limiting land ownership to Filipinos. In Soriano v. Ong Hoo,68this Court ruled:

x x x As the Constitution is silent as to the effects or consequences of a sale by a citizen of his land to an alien, and as both the citizen and the alien have violated the law, none of them should have a recourse against the other, and it should only be the State that should be allowed to intervene and determine what is to be done with the property subject of the violation. We have said that what the State should do or could do in such matters is a matter of public policy, entirely beyond the scope of judicial authority. (Dinglasan, et al. vs. Lee Bun Ting, et al., 6 G. R. No. L-5996, June 27, 1956.) While the legislature has not definitely decided what policy should be followed in cases of violations against the constitutional prohibition, courts of justice cannot go beyond by declaring the disposition to be null and void as violative of the Constitution. x x x (Emphasis supplied)

To treat Section 11, Article XII of the Constitution as not self-executing would mean that since the 1935 Constitution, or over the last 75 years, not one of the constitutional provisions expressly reserving specific areas of investments to corporations, at least 60 percent of the "capital" of which is owned by Filipinos, was enforceable. In short, the framers of the 1935, 1973 and 1987 Constitutions miserably failed to effectively reserve to Filipinos specific areas of investment, like the operation by corporations of public utilities, the exploitation by corporations of mineral resources, the ownership by corporations of real estate, and the ownership of educational institutions. All the legislatures that convened since 1935 also miserably failed to enact legislations to implement these vital constitutional provisions that determine who will effectively control the national economy, Filipinos or foreigners. This Court cannot allow such an absurd interpretation of the Constitution.

This Court has held that the SEC "has both regulatory and adjudicative functions."69 Under its regulatory functions, the SEC can be compelled by mandamus to perform its statutory duty when it unlawfully neglects to perform the same. Under its adjudicative or quasi-judicial functions, the SEC can be also be compelled by mandamus to hear and decide a possible violation of any law it administers or enforces when it is mandated by law to investigate such violation.1awphi1

Under Section 17(4)70 of the Corporation Code, the SEC has the regulatory function to reject or disapprove the Articles of Incorporation of any corporation where "the required percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been complied with as required by existing laws or the Constitution." Thus, the SEC is the government agency tasked with the statutory duty to enforce the nationality requirement prescribed in Section 11, Article XII of the Constitution on the ownership of public utilities. This Court, in a petition for declaratory relief that is treated as a petition for mandamus as in the present case, can direct the SEC to perform its statutory duty under the law, a duty that the SEC has apparently unlawfully neglected to do based on the 2010 GIS that respondent PLDT submitted to the SEC.

Under Section 5(m) of the Securities Regulation Code,71 the SEC 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 grounds provided by law." The SEC is mandated under Section 5(d) of the same Code with the "power and function" to "investigate x x x the activities of persons to ensure compliance" with the laws and regulations that SEC administers or enforces. The GIS that all corporations are required to submit to SEC annually should put the SEC on guard against violations of the nationality requirement prescribed in the Constitution and existing laws. This Court can compel the SEC, in a petition for declaratory relief that is treated as a petition for mandamus as in the present case, to hear and decide a possible violation of Section 11, Article XII of the Constitution in view of the ownership structure of PLDT’s voting shares, as admitted by respondents and as stated in PLDT’s 2010 GIS that PLDT submitted to SEC.

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.

SO ORDERED.

ANTONIO T. CARPIOAssociate Justice

12

G.R. No. 176579               October 9, 2012

HEIRS OF WILSON P. GAMBOA,* Petitioners, vs.FINANCE SECRETARYMARGARITO B. TEVES, FINANCE UNDERSECRETARYJOHN 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.

PABLITO V. SANIDAD and ARNO V. SANIDAD, Petitioner-in-Intervention.

R E S O L U T I O N

CARPIO, J.:

This resolves the motions for reconsideration of the 28 June 2011 Decision filed by (1) the Philippine Stock Exchange's (PSE) President, 1 (2) Manuel V. Pangilinan (Pangilinan),2 (3) Napoleon L. Nazareno (Nazareno ),3and ( 4) the Securities and Exchange Commission (SEC)4 (collectively, movants ).

The Office of the Solicitor General (OSG) initially filed a motion for reconsideration on behalfofthe SEC,5 assailing the 28 June 2011 Decision. However, it subsequently filed a Consolidated Comment on behalf of the State,6declaring expressly that it agrees with the Court's definition of the term "capital" in Section 11, Article XII of the Constitution. During the Oral Arguments on 26 June 2012, the OSG reiterated its position consistent with the Court's 28 June 2011 Decision.

We deny the motions for reconsideration.

I.Far-reaching implications of the legal issue justifytreatment of petition for declaratory relief as one for mandamus.

As we emphatically stated in the 28 June 2011 Decision, 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. Indeed, if ever there is a legal issue that has far-reaching implications to the entire nation, and to future generations of Filipinos, it is the threshold legal issue presented in this case.

Contrary to Pangilinan’s narrow view, the serious economic consequences resulting in the interpretation of the term "capital" in Section 11, Article XII of the Constitution undoubtedly demand an immediate adjudication of this issue. Simply put, the far-reaching implications of this issue justify the treatment of the petition as one for mandamus.7

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. Moreover, the same issue could be raised by appellant in an appropriate action. Thus, in Luzon Stevedoring the Court deemed it necessary to finally dispose of the case for the guidance of all concerned, despite the apparent procedural flaw in the petition.

The circumstances surrounding the present case, such as the supposed procedural defect of the petition and the pivotal legal issue involved, resemble those in Luzon Stevedoring. Consequently, in the interest of substantial justice and faithful adherence to the Constitution, we opted to resolve this case for the guidance of the public and all concerned parties.

II.No change of any long-standing rule;thus, no redefinition of the term "capital."

Movants 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. In fact, movants claim that the SEC, which is the administrative agency tasked to enforce the 60-40 ownership requirement in favor of Filipino citizens in the Constitution and various statutes, has consistently adopted this particular definition in its numerous opinions. Movants point out that with the 28 June 2011 Decision, the Court in effect introduced a "new" definition or "midstream redefinition"9 of the term "capital" in Section 11, Article XII of the Constitution.

This is egregious error.

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.

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. There is no basis whatsoever to the claim that the SEC and the DOJ have consistently and uniformly adopted a definition of the term "capital" contrary to the definition that this Court adopted in its 28 June 2011 Decision.

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 beunconstitutional 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. This ownership structure is remarkably similar to the current ownership structure of PLDT. Minister Mendoza ruled:

x x x x

13

Thus, the Filipino group still owns sixty (60%) of the entire subscribed capital stock (common and preferred) while the Japanese investors control sixty percent (60%) of the common (voting) shares.

It is your position that x x x since Section 9, Article XIV of the Constitution uses the word "capital," which is construed "to include both preferred and common shares" and "that where the law does not distinguish, the courts shall not distinguish."

x x x x

In light of the foregoing jurisprudence, it is my opinion that the stock-swap transaction in question may not be constitutionally upheld. While it may be ordinary corporate practice to classify corporate shares into common voting shares and preferred non-voting shares, any arrangement which attempts to defeat the constitutional purpose should be eschewed. Thus, the resultant equity arrangement which would place ownership of 60%11 of the common (voting) shares in the Japanese group, while retaining 60% of the total percentage of common and preferred shares in Filipino hands would amount to circumvention of the principle of control by Philippine stockholders that is implicit in the 60% Philippine nationality requirement in the Constitution.(Emphasis supplied)

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."

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. The Opinion states:

Applying the foregoing, particularly the Control Test, MLRC is deemed as a Philippine national because: (1) sixty percent (60%) of its outstanding capital stock entitled to vote is owned by a Philippine national, the Trustee; and (2) at least sixty percent (60%) of the ERF will accrue to the benefit of Philippine nationals. Still pursuant to the Control Test, MLRC’s investment in 60% of BFDC’s outstanding capital stock entitled to vote shall be deemed as of Philippine nationality, thereby qualifying BFDC to own private land.

Further, under, and for purposes of, the FIA, MLRC and BFDC are both Philippine nationals, considering that: (1) sixty percent (60%) of their respective outstanding capital stock entitled to voteis owned by a Philippine national (i.e., by the Trustee, in the case of MLRC; and by MLRC, in the case of BFDC); and (2) at least 60% of their respective board of directors are Filipino citizens. (Boldfacing and italicization supplied)

Clearly, these DOJ and SEC opinions are compatible with the Court’s interpretation of the 60-40 ownership requirement in favor of Filipino citizens mandated by the Constitution for certain economic activities. At the same time, these opinions highlight the conflicting, contradictory, and inconsistent positions taken by the DOJ and the SEC on the definition of the term "capital" found in the economic provisions of the Constitution.

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. Thus:

4.6. The Commission may, for purposes of efficiency, delegate any of its functions to any department or office of the Commission, an individual Commissioner or staff member of the Commission exceptits review or appellate authority and its power to adopt, alter and supplement any rule or regulation.

The Commission may review upon its own initiative or upon the petition of any interested party any action of any department or office, individual Commissioner, or staff member of the Commission.

SEC. 5. Powers and Functions of the Commission.- 5.1. The Commission shall act with transparency and shall have the powers and functions provided by this Code, Presidential Decree No. 902-A, the Corporation Code, the Investment Houses Law, the Financing Company Act and other existing laws. Pursuant thereto the Commission shall have, among others, the following powers and functions:

x x x x

(g) Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions and provide guidance on and supervise compliance with such rules, regulations and orders;

x x x x (Emphasis supplied)

Thus, the act of the individual Commissioners or legal officers of the SEC in issuing opinions that have the effect of SEC rules or regulations is ultra vires. Under Sections 4.6 and 5.1(g) of the Code, only the SEC en banc can "issue opinions" that have the force and effect of rules or regulations. Section 4.6 of the Code bars the SEC en banc from delegating to any individual Commissioner or staff the power to adopt rules or regulations. In short, any opinion of individual Commissioners or SEC legal officers does not constitute a rule or regulation of the SEC.

The SEC admits during the Oral Arguments that only the SEC en banc, and not any of its individual commissioners or legal staff, is empowered to issue opinions which have the same binding effect as SEC rules and regulations, thus:

JUSTICE CARPIO:

So, under the law, it is the Commission En Banc that can issue an

SEC Opinion, correct?

COMMISSIONER GAITE:13

That’s correct, Your Honor.

JUSTICE CARPIO:

Can the Commission En Banc delegate this function to an SEC officer?

COMMISSIONER GAITE:

Yes, Your Honor, we have delegated it to the General Counsel.

JUSTICE CARPIO:

It can be delegated. What cannot be delegated by the Commission En Banc to a commissioner or an individual employee of the Commission?

14

COMMISSIONER GAITE:

Novel opinions that [have] to be decided by the En Banc...

JUSTICE CARPIO:

What cannot be delegated, among others, is the power to adopt or amend rules and regulations, correct?

COMMISSIONER GAITE:

That’s correct, Your Honor.

JUSTICE CARPIO:

So, you combine the two (2), the SEC officer, if delegated that power, can issue an opinion but that opinion does not constitute a rule or regulation, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

So, all of these opinions that you mentioned they are not rules and regulations, correct?

COMMISSIONER GAITE:

They are not rules and regulations.

JUSTICE CARPIO:

If they are not rules and regulations, they apply only to that particular situation and will not constitute a precedent, correct?

COMMISSIONER GAITE:

Yes, Your Honor.14 (Emphasis supplied)

Significantly, the SEC en banc, which is the collegial body statutorily empowered to issue rules and opinions on behalf of the SEC, has adopted even the Grandfather Rule in determining compliance with 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.

Compliance with the constitutional limitation(s) on engaging in nationalized activities must be determined by ascertaining if 60% of the investing corporation’s 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, the very essence of the Grandfather Rule.

Lastly, it was the intent of the framers of the 1987 Constitution to adopt the Grandfather Rule. In one of the discussions on what is now Article XII of the present Constitution, the framers made the following exchange:

MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign equity; namely, 60-40 in Section 3, 60-40 in Section 9, and 2/3-1/3 in Section 15.

MR. VILLEGAS. That is right.

MR. NOLLEDO. In teaching law, we are always faced with the question: ‘Where do we base the equity requirement, is it on the authorized capital stock, on the subscribed capital stock, or on the paid-up capital stock of a corporation’? Will the Committee please enlighten me on this?

MR. VILLEGAS. We have just had a long discussion with the members of the team from the UP Law Center who provided us a draft. The phrase that is contained here which we adopted from the UP draft is ‘60 percent of voting stock.’

MR. NOLLEDO. That must be based on the subscribed capital stock, because unless declared delinquent, unpaid capital stock shall be entitled to vote.

MR. VILLEGAS. That is right.

MR. NOLLEDO. Thank you. With respect to an investment by one corporation in another corporation, say, a corporation with 60-40 percent equity invests in another corporation which is permitted by the Corporation Code, does the Committee adopt the grandfather rule?

MR. VILLEGAS. Yes, that is the understanding of the Committee.

MR. NOLLEDO. Therefore, we need additional Filipino capital?

MR. VILLEGAS. Yes. (Boldfacing and underscoring supplied; italicization in the original)

This SEC en banc ruling conforms to our 28 June 2011 Decision 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. Thus, in our 28 June 2011 Decision we stated:

Mere legal title is insufficient to meet the 60 percent Filipinoowned "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]." (Emphasis supplied)

Both the Voting Control Test and the Beneficial Ownership Test must be applied to determine whether a corporation is a "Philippine national."

The interpretation by legal officers of the SEC of the term "capital," embodied in various opinions which respondents relied upon, is merely preliminary and an opinion only of such officers. To repeat, any such opinion does not constitute an SEC rule or regulation. In fact, many of these opinions contain a disclaimer which expressly states: "x x x the foregoing opinion is based solely on facts disclosed in your query and relevant only to the particular issue raised therein and shall not be used in the nature of a standing rule binding upon the Commission in other cases whether of similar or dissimilar

15

circumstances."16 Thus, the opinions clearly make a caveat that they do not constitute binding precedents on any one, not even on the SEC itself.

Likewise, the opinions of the SEC en banc, as well as of the DOJ, interpreting the law are neither conclusive nor controlling and thus, do not bind the Court. It is hornbook doctrine that any interpretation of the law that administrative or quasi-judicial agencies make is only preliminary, never conclusive on the Court. The power to make a final interpretation of the law, in this case the term "capital" in Section 11, Article XII of the 1987 Constitution, lies with this Court, not with any other government entity.

In his motion for reconsideration, the PSE President cites the cases of National Telecommunications Commission v. Court of Appeals17 and Philippine Long Distance Telephone Company v. National Telecommunications Commission18 in arguing that the Court has already defined the term "capital" in Section 11, Article XII of the 1987 Constitution.19

The PSE President is grossly mistaken. In both cases of National Telecommunications v. Court of Appeals20 andPhilippine Long Distance Telephone Company v. National Telecommunications Commission,21 the Court did not define the term "capital" as found in Section 11, Article XII of the 1987 Constitution. In fact, these two cases never mentioned, discussed or cited Section 11, Article XII of the Constitution or any of its economic provisions,and thus cannot serve as precedent in the interpretation of Section 11, Article XII of the Constitution. These two cases dealt solely with the determination of the correct regulatory fees under Section 40(e) and (f) of the Public Service Act, to wit:

(e) For annual reimbursement of the expenses incurred by the Commission in the supervision of other public services and/or in the regulation or fixing of their rates, twenty centavos for each one hundred pesos or fraction thereof, of the capital stock subscribed or paid, or if no shares have been issued, of the capital invested, or of the property and equipment whichever is higher.

(f) For the issue or increase of capital stock, twenty centavos for each one hundred pesos or fraction thereof, of the increased capital. (Emphasis supplied)

The Court’s interpretation in these two cases of the terms "capital stock subscribed or paid," "capital stock" and "capital" does not pertain to, and cannot control, the definition of the term "capital" as used in Section 11, Article XII of the Constitution, or any of the economic provisions of the Constitution where the term "capital" is found. The definition of the term "capital" found in the Constitution must not be taken out of context. A careful reading of these two cases reveals that the terms "capital stock subscribed or paid," "capital stock" and "capital" were defined solely to determine the basis for computing the supervision and regulation fees under Section 40(e) and (f) of the Public Service Act.

III.Filipinization of Public Utilities

The Preamble of the 1987 Constitution, as the prologue of the supreme law of the land, embodies the ideals that the Constitution intends to achieve.22 The Preamble reads:

We, the sovereign Filipino people, imploring the aid of Almighty God, in order to build a just and humane society, and establish a Government that shall embody our ideals and aspirations, promote the common good, conserve and develop our patrimony, and secure to ourselves and our posterity, the blessings of independence and democracy under the rule of law and a regime of truth, justice, freedom, love, equality, and peace, do ordain and promulgate this Constitution. (Emphasis supplied)

Consistent with these ideals, Section 19, Article II of the 1987 Constitution declares as State policy the development of a national economy "effectively controlled" by Filipinos:

Section 19. The State shall develop a self-reliant and independent national economy effectively controlled by Filipinos.

Fortifying the State policy of a Filipino-controlled economy, the Constitution decrees:

Section 10. The Congress shall, upon recommendation of the economic and planning agency, when the national interest dictates, reserve to citizens of the Philippines or to corporations or associations at least sixty per centum of whose capital is owned by such citizens, or such higher percentage as Congress may prescribe, certain areas of investments. The Congress shall enact measures that will encourage the formation and operation of enterprises whose capital is wholly owned by Filipinos.

In the grant of rights, privileges, and concessions covering the national economy and patrimony, the State shall give preference to qualified Filipinos.

The State shall regulate and exercise authority over foreign investments within its national jurisdiction and in accordance with its national goals and priorities.23

Under Section 10, Article XII of the 1987 Constitution, Congress may "reserve to citizens of the Philippines or to corporations or associations at least sixty per centum of whose capital is owned by such citizens, or such higher percentage as Congress may prescribe, certain areas of investments." Thus, in numerous laws Congress has reserved certain areas of investments to Filipino citizens or to corporations at least sixty percent of the "capital" of which is owned by Filipino citizens. Some of these laws are: (1) Regulation of Award of Government Contracts or R.A. No. 5183; (2) Philippine Inventors Incentives Act or R.A. No. 3850; (3) Magna Carta for Micro, Small and Medium Enterprises or R.A. No. 6977; (4) Philippine Overseas Shipping Development Act or R.A. No. 7471; (5) Domestic Shipping Development Act of 2004 or R.A. No. 9295; (6) Philippine Technology Transfer Act of 2009 or R.A. No. 10055; and (7) Ship Mortgage Decree or P.D. No. 1521.

With respect to public utilities, the 1987 Constitution specifically ordains:

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)

This provision, which mandates the Filipinization of public utilities, requires that any form of authorization for the operation of public utilities shall be granted only 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." "The provision is [an express] recognition of the sensitive and vital position of public utilities both in the national economy and for national security."24

The 1987 Constitution reserves the ownership and operation of public utilities exclusively to (1) Filipino citizens, or (2) corporations or associations at least 60 percent of whose "capital" is owned by Filipino citizens. Hence, in the case of individuals, only Filipino citizens can validly own and operate a public utility. In the case of corporations or associations, at least 60 percent of their "capital" must be owned by Filipino citizens. In other words, under Section 11, Article XII of the 1987

16

Constitution, to own and operate a public utility a corporation’s capital must at least be 60 percent owned by Philippine nationals.

IV.Definition of "Philippine National"

Pursuant to the express mandate of Section 11, Article XII of the 1987 Constitution, Congress enacted Republic Act No. 7042 or the Foreign Investments Act of 1991 (FIA), as amended, which defined a "Philippine national" as follows:

SEC. 3. Definitions. - As used in this Act:

a. The term "Philippine national" shall mean a citizen of the Philippines; or a domestic partnership or association wholly owned by citizens of the Philippines; or a corporation organized under the laws of the Philippines of which at least sixty percent (60%) of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines; or a corporation organized abroad and registered as doing business in the Philippines under the Corporation Code of which one hundred percent (100%) of the capital stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty percent (60%) of the fund will accrue to the benefit of Philippine nationals: Provided, That where a corporation and its non-Filipino stockholders own stocks in a Securities and Exchange Commission (SEC) registered enterprise, at least sixty percent (60%) of the capital stock outstanding and entitled to vote of each of both corporations must be owned and held by citizens of the Philippines and at least sixty percent (60%) of the members of the Board of Directors of each of both corporations must be citizens of the Philippines, in order that the corporation, shall be considered a "Philippine national." (Boldfacing, italicization and underscoring supplied)

Thus, the FIA clearly and unequivocally defines a "Philippine national" as a Philippine citizen, or a domestic corporation at least "60% of the capital stock outstanding and entitled to vote" is owned by Philippine citizens.

The definition of a "Philippine national" in the FIA reiterated the meaning of such term as provided in its predecessor statute, Executive Order No. 226 or the Omnibus Investments Code of 1987,25 which was issued by then President Corazon C. Aquino. Article 15 of this Code states:

Article 15. "Philippine national" shall mean a citizen of the Philippines or a diplomatic partnership or association wholly-owned by citizens of the Philippines; or a corporation organized under the laws of the Philippines of which at least sixty per cent (60%) of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines; or a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty per cent (60%) of the fund will accrue to the benefit of Philippine nationals: Provided, That where a corporation and its non-Filipino stockholders own stock in a registered enterprise, at least sixty per cent (60%) of the capital stock outstanding and entitled to vote of both corporations must be owned and held by the citizens of the Philippines and at least sixty per cent (60%) of the members of the Board of Directors of both corporations must be citizens of the Philippines in order that the corporation shall be considered a Philippine national. (Boldfacing, italicization and underscoring supplied)

Under Article 48(3)26 of the Omnibus Investments Code of 1987, "no corporation x x x which is not a ‘Philippine national’ x x x shall do business

x x x in the Philippines x x x without first securing from the Board of Investments a written certificate to the effect that such business or economic activity x x x would not conflict with the Constitution or laws of the Philippines."27Thus, a "non-Philippine national" cannot own and operate a reserved economic activity

like a public utility. This means, of course, that only a "Philippine national" can own and operate a public utility.

In turn, the definition of a "Philippine national" under Article 15 of the Omnibus Investments Code of 1987 was a reiteration of the meaning of such term as provided in Article 14 of the Omnibus Investments Code of 1981,28 to wit:

Article 14. "Philippine national" shall mean a citizen of the Philippines; or a domestic partnership or association wholly owned by citizens of the Philippines; or a corporation organized under the laws of the Philippines of which at least sixty per cent (60%) of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines; or a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty per cent (60%) of the fund will accrue to the benefit of Philippine nationals: Provided, That where a corporation and its non-Filipino stockholders own stock in a registered enterprise, at least sixty per cent (60%) of the capital stock outstanding and entitled to vote of both corporations must be owned and held by the citizens of the Philippines and at least sixty per cent (60%) of the members of the Board of Directors of both corporations must be citizens of the Philippines in order that the corporation shall be considered a Philippine national. (Boldfacing, italicization and underscoring supplied)

Under Article 69(3) of the Omnibus Investments Code of 1981, "no corporation x x x which is not a ‘Philippine national’ x x x shall do business x x x in the Philippines x x x without first securing a written certificate from the Board of Investments to the effect that such business or economic activity x x x would not conflict with the Constitution or laws of the Philippines."29 Thus, a "non-Philippine national" cannot own and operate a reserved economic activity like a public utility. Again, this means that only a "Philippine national" can own and operate a public utility.

Prior to the Omnibus Investments Code of 1981, Republic Act No. 518630 or the Investment Incentives Act, which took effect on 16 September 1967, contained a similar definition of a "Philippine national," to wit:

(f) "Philippine National" shall mean a citizen of the Philippines; or a partnership or association wholly owned by citizens of the Philippines; or a corporation organized under the laws of the Philippines of which at least sixty per cent of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines; or a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine National and at least sixty per cent of the fund will accrue to the benefit of Philippine Nationals: Provided, That where a corporation and its non-Filipino stockholders own stock in a registered enterprise, at least sixty per cent of the capital stock outstanding and entitled to vote of both corporations must be owned and held by the citizens of the Philippines and at least sixty per cent of the members of the Board of Directors of both corporations must be citizens of the Philippines in order that the corporation shall be considered a Philippine National. (Boldfacing, italicization and underscoring supplied)

Under Section 3 of Republic Act No. 5455 or the Foreign Business Regulations Act, which took effect on 30 September 1968, if the investment in a domestic enterprise by non-Philippine nationals exceeds 30% of its outstanding capital stock, such enterprise must obtain prior approval from the Board of Investments before accepting such investment. Such approval shall not be granted if the investment "would conflict with existing constitutional provisions and laws regulating the degree of required ownership by Philippine nationals in the enterprise."31 A "non-Philippine national" cannot own and operate a reserved economic activity like a public utility. Again, this means that only a "Philippine national" can own and operate a public utility.

The FIA, like all its predecessor statutes, clearly defines a "Philippine national" as a Filipino citizen, or adomestic corporation "at least sixty percent (60%) of the capital stock outstanding and entitled to vote" is owned by Filipino citizens. A domestic corporation is a "Philippine national" only if at

17

least 60% of its voting stock is owned by Filipino citizens. This definition of a "Philippine national" is crucial in the present case because the FIA reiterates and clarifies Section 11, Article XII of the 1987 Constitution, which limits the ownership and operation of public utilities to Filipino citizens or to corporations or associations at least 60% Filipino-owned.

The FIA is the basic law governing foreign investments in the Philippines, irrespective of the nature of business and area of investment. The FIA spells out the procedures by which non-Philippine nationals can invest in the Philippines. Among the key features of this law is the concept of a negative list or the Foreign Investments Negative List.32 Section 8 of the law states:

SEC. 8. List of Investment Areas Reserved to Philippine Nationals [Foreign Investment Negative List]. - The Foreign Investment Negative List shall have two 2 component lists: A and B:

a. List A shall enumerate the areas of activities reserved to Philippine nationals by mandate of the Constitution and specific laws.

b. List B shall contain the areas of activities and enterprises regulated pursuant to law:

1. which are defense-related activities, requiring prior clearance and authorization from the Department of National Defense [DND] to engage in such activity, such as the manufacture, repair, storage and/or distribution of firearms, ammunition, lethal weapons, military ordinance, explosives, pyrotechnics and similar materials; unless such manufacturing or repair activity is specifically authorized, with a substantial export component, to a non-Philippine national by the Secretary of National Defense; or

2. which have implications on public health and morals, such as the manufacture and distribution of dangerous drugs; all forms of gambling; nightclubs, bars, beer houses, dance halls, sauna and steam bathhouses and massage clinics. (Boldfacing, underscoring and italicization supplied)

Section 8 of the FIA enumerates the investment areas "reserved to Philippine nationals." Foreign Investment Negative List A consists of "areas of activities reserved to Philippine nationals by mandate of the Constitution and specific laws," where foreign equity participation in any enterprise shall be limited to the maximum percentage expressly prescribed by the Constitution and other specific laws. In short, to own and operate a public utility in the Philippines one must be a "Philippine national" as defined in the FIA. The FIA is abundant notice to foreign investors to what extent they can invest in public utilities in the Philippines.

To repeat, among the areas of investment covered by the Foreign Investment Negative List A is the ownership and operation of public utilities, which the Constitution expressly reserves to Filipino citizens and to corporations at least 60% owned by Filipino citizens. In other words, Negative List A of the FIA reserves the ownership and operation of public utilities only to "Philippine nationals," defined in Section 3(a) of the FIA as "(1) a citizen of the Philippines; x x x or (3) a corporation organized under the laws of the Philippines of which at least sixty percent (60%) of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines; or (4) a corporation organized abroad and registered as doing business in the Philippines under the Corporation Code of which one hundred percent (100%) of the capital stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty percent (60%) of the fund will accrue to the benefit of Philippine nationals."

Clearly, from the effectivity of the Investment Incentives Act of 1967 to the adoption of the Omnibus Investments Code of 1981, to the enactment of the Omnibus Investments Code of 1987, and to the passage of the present Foreign Investments Act of 1991,

or for more than four decades, the statutory definition of the term "Philippine national" has been uniform and consistent: it means a Filipino citizen, or a domestic corporation at least 60% of the voting stock is owned by Filipinos. Likewise, these same statutes have uniformly and consistently required that only "Philippine nationals" could own and operate public utilities in the Philippines. The following exchange during the Oral Arguments is revealing:

JUSTICE CARPIO:

Counsel, I have some questions. You are aware of the Foreign Investments Act of 1991, x x x? And the FIA of 1991 took effect in 1991, correct? That’s over twenty (20) years ago, correct?

COMMISSIONER GAITE:Correct, Your Honor.

JUSTICE CARPIO:And Section 8 of the Foreign Investments Act of 1991 states that []only Philippine nationals can own and operate public utilities[], correct?

COMMISSIONER GAITE:Yes, Your Honor.

JUSTICE CARPIO:And the same Foreign Investments Act of 1991 defines a "Philippine national" either as a citizen of the Philippines, or if it is a corporation at least sixty percent (60%) of the voting stock is owned by citizens of the Philippines, correct?

COMMISSIONER GAITE:Correct, Your Honor.

JUSTICE CARPIO:And, you are also aware that under the predecessor law of the Foreign Investments Act of 1991, the Omnibus Investments Act of 1987, the same provisions apply: x x x only Philippine nationals can own and operate a public utility and the Philippine national, if it is a corporation, x x x sixty percent (60%) of the capital stock of that corporation must be owned by citizens of the Philippines, correct?

COMMISSIONER GAITE:Correct, Your Honor.

JUSTICE CARPIO:And even prior to the Omnibus Investments Act of 1987, under the Omnibus Investments Act of 1981, the same rules apply: x x x only a Philippine national can own and operate a public utility and a Philippine national, if it is a corporation, sixty percent (60%) of its x x x voting stock, must be owned by citizens of the Philippines, correct?

COMMISSIONER GAITE:Correct, Your Honor.

JUSTICE CARPIO:And even prior to that, under [the]1967 Investments Incentives Act and the Foreign Company Act of 1968, the same rules applied, correct?

COMMISSIONER GAITE:Correct, Your Honor.

JUSTICE CARPIO:So, for the last four (4) decades, x x x, the law has been very consistent – only a Philippine national can own and operate a public utility, and a Philippine national, if it is a corporation, x x x at least sixty percent (60%) of the voting stock must be owned by citizens of the Philippines, correct?

COMMISSIONER GAITE:Correct, Your Honor.33 (Emphasis supplied)

Government agencies like the SEC cannot simply ignore Sections 3(a) and 8 of the FIA which categorically prescribe that certain economic activities, like the ownership and operation of public utilities, are reserved to corporations "at least sixty percent (60%) of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines." Foreign Investment Negative List A refers to "activities reserved to Philippine nationals by mandate of the Constitution and specific laws." The FIA is the basic statute regulating foreign investments in the Philippines. Government agencies tasked with regulating or monitoring foreign investments, as well as counsels of foreign

18

investors, should start with the FIA in determining to what extent a particular foreign investment is allowed in the Philippines. Foreign investors and their counsels who ignore the FIA do so at their own peril. Foreign investors and their counsels who rely on opinions of SEC legal officers that obviously contradict the FIA do so also at their own peril.

Occasional opinions of SEC legal officers that obviously contradict the FIA should immediately raise a red flag. There are already numerous opinions of SEC legal officers that cite the definition of a "Philippine national" in Section 3(a) of the FIA in determining whether a particular corporation is qualified to own and operate a nationalized or partially nationalized business in the Philippines. This shows that SEC legal officers are not only aware of, but also rely on and invoke, the provisions of the FIA in ascertaining the eligibility of a corporation to engage in partially nationalized industries. The following are some of such opinions:

1. Opinion of 23 March 1993, addressed to Mr. Francis F. How;2. Opinion of 14 April 1993, addressed to Director Angeles T. Wong of the Philippine Overseas Employment Administration;3. Opinion of 23 November 1993, addressed to Messrs. Dominador Almeda and Renato S. Calma;4. Opinion of 7 December 1993, addressed to Roco Bunag Kapunan Migallos & Jardeleza;5. SEC Opinion No. 49-04, addressed to Romulo Mabanta Buenaventura Sayoc & De Los Angeles;6. SEC-OGC Opinion No. 17-07, addressed to Mr. Reynaldo G. David; and7. SEC-OGC Opinion No. 03-08, addressed to Attys. Ruby Rose J. Yusi and Rudyard S. Arbolado.

The SEC legal officers’ occasional but blatant disregard of the definition of the term "Philippine national" in the FIA signifies their lack of integrity and competence in resolving issues on the 60-40 ownership requirement in favor of Filipino citizens in Section 11, Article XII of the Constitution.

The PSE President argues that the term "Philippine national" defined in the FIA should be limited and interpreted to refer to corporations seeking to avail of tax and fiscal incentives under investment incentives laws and cannot be equated with the term "capital" in Section 11, Article XII of the 1987 Constitution. Pangilinan similarly contends that the FIA and its predecessor statutes do not apply to "companies which have not registered and obtained special incentives under the schemes established by those laws."

Both are desperately grasping at straws. The FIA does not grant tax or fiscal incentives to any enterprise. Tax and fiscal incentives to investments are granted separately under the Omnibus Investments Code of 1987, not under the FIA. In fact, the FIA expressly repealed Articles 44 to 56 of Book II of the Omnibus Investments Code of 1987, which articles previously regulated foreign investments in nationalized or partially nationalized industries.

The FIA is the applicable law regulating foreign investments in nationalized or partially nationalized industries. There is nothing in the FIA, or even in the Omnibus Investments Code of 1987 or its predecessor statutes, that states, expressly or impliedly, that the FIA or its predecessor statutes do not apply to enterprises not availing of tax and fiscal incentives under the Code. The FIA and its predecessor statutes apply to investments in all domestic enterprises, whether or not such enterprises enjoy tax and fiscal incentives under the Omnibus Investments Code of 1987 or its predecessor statutes. The reason is quite obvious – mere non-availment of tax and fiscal incentives by a non-Philippine national cannot exempt it from Section 11, Article XII of the Constitution regulating foreign investments in public utilities. In fact, the Board of Investments’ Primer on Investment Policies in the Philippines,34 which is given out to foreign investors, provides:

PART III. FOREIGN INVESTMENTS WITHOUT INCENTIVES

Investors who do not seek incentives and/or whose chosen activities do not qualify for incentives, (i.e., the activity is not listed in the IPP, and they are not exporting at least 70% of their production) may go ahead and make the investments without seeking incentives. They only have to be guided by the Foreign Investments Negative List (FINL).

The FINL clearly defines investment areas requiring at least 60% Filipino ownership. All other areas outside of this list are fully open to foreign investors. (Emphasis supplied)

V.Right to elect directors, coupled with beneficial ownership,translates to effective control.

The 28 June 2011 Decision declares that the 60 percent Filipino ownership required by 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. To repeat, we held:

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]." (Emphasis supplied)

This is consistent with Section 3 of the FIA which provides that where 100% of the capital stock is held by "a trustee of funds for pension or other employee retirement or separation benefits," the trustee is a Philippine national if "at least sixty percent (60%) of the fund will accrue to the benefit of Philippine nationals." Likewise, Section 1(b) of the Implementing Rules of the FIA provides that "for stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate voting rights, is essential."

Since the constitutional requirement of at least 60 percent Filipino ownership applies not only to voting control of the corporation but also to the beneficial ownership of the corporation, it is therefore imperative that such requirement apply uniformly and across the board to all classes of shares, regardless of nomenclature and category, comprising the capital of a corporation. Under the Corporation Code, capital stock35 consists of all classes of shares issued to stockholders, that is, common shares as well as preferred shares, which may have different rights, privileges or restrictions as stated in the articles of incorporation.36

The Corporation Code allows denial of the right to vote to preferred and redeemable shares, but disallows denial of the right to vote in specific corporate matters. Thus, common shares have the right to vote in the election of directors, while preferred shares may be denied such right. Nonetheless, preferred shares, even if denied the right to vote in the election of directors, are entitled to vote on the following corporate matters: (1) amendment of articles of incorporation; (2) increase and decrease of capital stock; (3) incurring, creating or increasing bonded indebtedness; (4) sale, lease, mortgage or other disposition of substantially all corporate assets; (5) investment of funds in another business or corporation or for a purpose other than the primary purpose for which the corporation was organized; (6) adoption, amendment and repeal of by-laws; (7) merger and consolidation; and (8) dissolution of corporation.37

Since a specific class of shares may have rights and privileges or restrictions different from the rest of the shares in a corporation, the 60-40 ownership requirement in favor of Filipino citizens in Section 11, Article XII of the Constitution must apply not only to shares with voting rights but also to shares without voting rights. Preferred shares, denied the right to vote in the election of directors, are anyway still entitled to vote on the eight specific

19

corporate matters mentioned above. Thus, if a corporation, engaged in a partially nationalized industry, issues a mixture of common and preferred non-voting shares, at least 60 percent of the common shares and at least 60 percent of the preferred non-voting shares must be owned by Filipinos. Of course, if a corporation issues only a single class of shares, at least 60 percent of such shares must necessarily be owned by Filipinos. In short, the 60-40 ownership requirement in favor of Filipino citizens must apply separately to each class of shares, whether common, preferred non-voting, preferred voting or any other class of shares. This uniform application of the 60-40 ownership requirement in favor of Filipino citizens clearly breathes life to the constitutional command that the ownership and operation of public utilities shall be reserved exclusively to corporations at least 60 percent of whose capital is Filipino-owned. Applying uniformly the 60-40 ownership requirement in favor of Filipino citizens to each class of shares, regardless of differences in voting rights, privileges and restrictions, guarantees effective Filipino control of public utilities, as mandated by the Constitution.

Moreover, such uniform application to each class of shares insures that the "controlling interest" in public utilities always lies in the hands of Filipino citizens. This addresses and extinguishes Pangilinan’s worry that foreigners, owning most of the non-voting shares, will exercise greater control over fundamental corporate matters requiring two-thirds or majority vote of all shareholders.

VI.Intent of the framers of the Constitution

While Justice Velasco quoted in his Dissenting Opinion38 a portion of the deliberations of the Constitutional Commission to support his claim that the term "capital" refers to the total outstanding shares of stock, whether voting or non-voting, the following excerpts of the deliberations reveal otherwise. It is clear from the following exchange that the term "capital" refers to controlling interest of a corporation, thus:

MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign equity; namely, 60-40 in Section 3, 60-40 in Section 9 and 2/3-1/3 in Section 15.

MR. VILLEGAS. That is right.

MR. NOLLEDO. In teaching law, we are always faced with this question: "Where do we base the equity requirement, is it on the authorized capital stock, on the subscribed capital stock, or on the paid-up capital stock of a corporation"? Will the Committee please enlighten me on this?

MR. VILLEGAS. We have just had a long discussion with the members of the team from the UP Law Center who provided us a draft. The phrase that is contained here which we adopted from the UP draft is "60 percent of voting stock."

MR. NOLLEDO. That must be based on the subscribed capital stock, because unless declared delinquent, unpaid capital stock shall be entitled to vote.

MR. VILLEGAS. That is right.

MR. NOLLEDO. Thank you.

With respect to an investment by one corporation in another corporation, say, a corporation with 60-40 percent equity invests in another corporation which is permitted by the Corporation Code, does the Committee adopt the grandfather rule?

MR. VILLEGAS. Yes, that is the understanding of the Committee.MR. NOLLEDO. Therefore, we need additional Filipino capital?MR. VILLEGAS. Yes.39

x x x xMR. AZCUNA. May I be clarified as to that portion that was accepted by the Committee.

MR. VILLEGAS. The portion accepted by the Committee is the deletion of the phrase "voting stock or controlling interest."MR. AZCUNA. Hence, without the Davide amendment, the committee report would read: "corporations or associations at least sixty percent of whose CAPITAL is owned by such citizens."MR. VILLEGAS. Yes.MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60 percent of the capital to be owned by citizens.MR. VILLEGAS. That is right.MR. AZCUNA. But the control can be with the foreigners even if they are the minority. Let us say 40 percent of the capital is owned by them, but it is the voting capital, whereas, the Filipinos own the nonvoting shares. So we can have a situation where the corporation is controlled by foreigners despite being the minority because they have the voting capital. That is the anomaly that would result here.MR. BENGZON. No, the reason we eliminated the word "stock" as stated in the 1973 and 1935 Constitutions is that according to Commissioner Rodrigo, there are associations that do not have stocks. That is why we say "CAPITAL."MR. AZCUNA. We should not eliminate the phrase "controlling interest."MR. BENGZON. In the case of stock corporations, it is assumed.40 (Boldfacing and underscoring supplied)

Thus, 60 percent of the "capital" assumes, or should result in, a "controlling interest" in the corporation.

The use of the term "capital" was intended to replace the word "stock" because associations without stocks can operate public utilities as long as they meet the 60-40 ownership requirement in favor of Filipino citizens prescribed in Section 11, Article XII of the Constitution. However, this did not change the intent of the framers of the Constitution to reserve exclusively to Philippine nationals the "controlling interest" in public utilities.

During the drafting of the 1935 Constitution, economic protectionism was "the battle-cry of the nationalists in the Convention."41 The same battle-cry resulted in the nationalization of the public utilities.42 This is also the same intent of the framers of the 1987 Constitution who adopted the exact formulation embodied in the 1935 and 1973 Constitutions on foreign equity limitations in partially nationalized industries.

The OSG, in its own behalf and as counsel for the State,43 agrees fully with the Court’s interpretation of the term "capital." In its Consolidated Comment, the OSG explains that the deletion of the phrase "controlling interest" and replacement of the word "stock" with the term "capital" were intended specifically to extend the scope of the entities qualified to operate public utilities to include associations without stocks. The framers’ omission of the phrase "controlling interest" did not mean the inclusion of all shares of stock, whether voting or non-voting. The OSG reiterated essentially the Court’s declaration that the Constitution reserved exclusively to Philippine nationals the ownership and operation of public utilities consistent with the State’s policy to "develop a self-reliant and independent national economy effectively controlled by Filipinos."

As we held in our 28 June 2011 Decision, to construe broadly the term "capital" as the total outstanding capital stock, treated as a single class regardless of the actual classification of 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." We illustrated the glaring anomaly which would result in defining the term "capital" as the total outstanding capital stock of a corporation, treated as a single class of shares regardless of the actual classification of shares, to wit:

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 (P 1.00) 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

20

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. x x x

Further, even if foreigners who own more than forty percent of the voting shares elect an all-Filipino board of directors, this situation does not guarantee Filipino control and does not in any way cure the violation of the Constitution. The independence of the Filipino board members so elected by such foreign shareholders is highly doubtful. As the OSG pointed out, quoting Justice George Sutherland’s words in Humphrey’s Executor v. US,44 "x x x it is quite evident that one who holds his office only during the pleasure of another cannot be depended upon to maintain an attitude of independence against the latter’s will." Allowing foreign shareholders to elect a controlling majority of the board, even if all the directors are Filipinos, grossly circumvents the letter and intent of the Constitution and defeats the very purpose of our nationalization laws.

VII.Last sentence of Section 11, Article XII of the Constitution

The last sentence of Section 11, Article XII of the 1987 Constitution reads:

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.

During the Oral Arguments, the OSG emphasized that there was never a question on the intent of the framers of the Constitution to limit foreign ownership, and assure majority Filipino ownership and control of public utilities. The OSG argued, "while the delegates disagreed as to the percentage threshold to adopt, x x x the records show they clearly understood that Filipino control of the public utility corporation can only be and is obtained only through the election of a majority of the members of the board."

Indeed, the only point of contention during the deliberations of the Constitutional Commission on 23 August 1986 was the extent of majority Filipino control of public utilities. This is evident from the following exchange:

THE PRESIDENT. Commissioner Jamir is recognized.

MR. JAMIR. Madam President, my proposed amendment on lines 20 and 21 is to delete the phrase "two thirds of whose voting stock or controlling interest," and instead substitute the words "SIXTY PERCENT OF WHOSE CAPITAL" so that the sentence will read: "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 PERCENT OF WHOSE CAPITAL is owned by such citizens."

x x x x

THE PRESIDENT: Will Commissioner Jamir first explain?

MR. JAMIR. Yes, in this Article on National Economy and Patrimony, there were two previous sections in which we fixed the Filipino equity to 60 percent as against 40 percent for foreigners. It is only in this Section 15 with respect to public utilities that the committee proposal was increased to two-thirds. I think it would

be better to harmonize this provision by providing that even in the case of public utilities, the minimum equity for Filipino citizens should be 60 percent.

MR. ROMULO. Madam President.

THE PRESIDENT. Commissioner Romulo is recognized.

MR. ROMULO. My reason for supporting the amendment is based on the discussions I have had with representatives of the Filipino majority owners of the international record carriers, and the subsequent memoranda they submitted to me. x x x

Their second point is that under the Corporation Code, the management and control of a corporation is vested in the board of directors, not in the officers but in the board of directors. The officers are only agents of the board. And they believe that with 60 percent of the equity, the Filipino majority stockholders undeniably control the board. Only on important corporate acts can the 40-percent foreign equity exercise a veto, x x x.

x x x x45

MS. ROSARIO BRAID. Madam President.

THE PRESIDENT. Commissioner Rosario Braid is recognized.

MS. ROSARIO BRAID. Yes, in the interest of equal time, may I also read from a memorandum by the spokesman of the Philippine Chamber of Communications on why they would like to maintain the present equity, I am referring to the 66 2/3. They would prefer to have a 75-25 ratio but would settle for 66 2/3. x x x

x x x x

THE PRESIDENT. Just to clarify, would Commissioner Rosario Braid support the proposal of two-thirds rather than the 60 percent?

MS. ROSARIO BRAID. I have added a clause that will put management in the hands of Filipino citizens.

x x x x46

While they had differing views on the percentage of Filipino ownership of capital, it is clear that the framers of the Constitution intended public utilities to be majority Filipino-owned and controlled. To ensure that Filipinos control public utilities, the framers of the Constitution approved, as additional safeguard, the inclusion of the last sentence of Section 11, Article XII of the Constitution commanding that "[t]he 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." In other words, the last sentence of Section 11, Article XII of the Constitution mandates that (1) the participation of foreign investors in the governing body of the corporation or association shall be limited to their proportionate share in the capital of such entity; and (2) all officers of the corporation or association must be Filipino citizens.

Commissioner Rosario Braid proposed the inclusion of the phrase requiring the managing officers of the corporation or association to be Filipino citizens specifically to prevent management contracts, which were designed primarily to circumvent the Filipinization of public utilities, and to assure Filipino control of public utilities, thus:

MS. ROSARIO BRAID. x x x They also like to suggest that we amend this provision by adding a phrase which states: "THE MANAGEMENT BODY OF EVERY CORPORATION OR ASSOCIATION SHALL IN ALL CASES BE CONTROLLED BY CITIZENS OF THE PHILIPPINES." I have with me their position paper.

THE PRESIDENT. The Commissioner may proceed.

21

MS. ROSARIO BRAID. The three major international record carriers in the Philippines, which Commissioner Romulo mentioned – Philippine Global Communications, Eastern Telecommunications, Globe Mackay Cable – are 40-percent owned by foreign multinational companies and 60-percent owned by their respective Filipino partners. All three, however, also have management contracts with these foreign companies – Philcom with RCA, ETPI with Cable and Wireless PLC, and GMCR with ITT. Up to the present time, the general managers of these carriers are foreigners. While the foreigners in these common carriers are only minority owners, the foreign multinationals are the ones managing and controlling their operations by virtue of their management contracts and by virtue of their strength in the governing bodies of these carriers.47

x x x x

MR. OPLE. I think a number of us have agreed to ask Commissioner Rosario Braid to propose an amendment with respect to the operating management of public utilities, and in this amendment, we are associated with Fr. Bernas, Commissioners Nieva and Rodrigo. Commissioner Rosario Braid will state this amendment now.

Thank you.MS. ROSARIO BRAID. Madam President.THE PRESIDENT. This is still on Section 15.MS. ROSARIO BRAID. Yes.MR. VILLEGAS. Yes, Madam President.x x x xMS. ROSARIO BRAID. Madam President, I propose a new section to read: ‘THE MANAGEMENT BODY OF EVERY CORPORATION OR ASSOCIATION SHALL IN ALL CASES BE CONTROLLED BY CITIZENS OF THE PHILIPPINES."This will prevent management contracts and assure control by Filipino citizens. Will the committee assure us that this amendment will insure that past activities such as management contracts will no longer be possible under this amendment?x x x xFR. BERNAS. Madam President.THE PRESIDENT. Commissioner Bernas is recognized.FR. BERNAS. Will the committee accept a reformulation of the first part?MR. BENGZON. Let us hear it.FR. BERNAS. The reformulation will be essentially the formula of the 1973 Constitution which reads: "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING BODY OF ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE SHARE IN THE CAPITAL THEREOF AND..."MR. VILLEGAS. "ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH CORPORATIONS AND ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES."MR. BENGZON. Will Commissioner Bernas read the whole thing again?FR. BERNAS. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING BODY OF ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE SHARE IN THE CAPITAL THEREOF..." I do not have the rest of the copy.MR. BENGZON. "AND ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH CORPORATIONS OR ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES." Is that correct?MR. VILLEGAS. Yes.MR. BENGZON. Madam President, I think that was said in a more elegant language. We accept the amendment. Is that all right with Commissioner Rosario Braid?MS. ROSARIO BRAID. Yes.x x x xMR. DE LOS REYES. The governing body refers to the board of directors and trustees.MR. VILLEGAS. That is right.MR. BENGZON. Yes, the governing body refers to the board of directors.MR. REGALADO. It is accepted.MR. RAMA. The body is now ready to vote, Madam President.VOTINGx x x xThe results show 29 votes in favor and none against; so the proposed amendment is approved.

x x x xTHE PRESIDENT. All right. Can we proceed now to vote on Section 15?MR. RAMA. Yes, Madam President.THE PRESIDENT. Will the chairman of the committee please read Section 15?

MR. VILLEGAS. The entire Section 15, as amended, reads: "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." May I request Commissioner Bengzon to please continue reading.

MR. BENGZON. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING BODY OF ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE SHARE IN THE CAPITAL THEREOF AND ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH CORPORATIONS OR ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES."

MR. VILLEGAS. "NOR SHALL SUCH FRANCHISE, CERTIFICATE OR AUTHORIZATION BE EXCLUSIVE IN CHARACTER OR FOR A PERIOD LONGER THAN TWENTY-FIVE YEARS RENEWABLE FOR NOT MORE THAN TWENTY-FIVE 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 Congress when the common good so requires. The State shall encourage equity participation in public utilities by the general public."

VOTING

x x x x

The results show 29 votes in favor and 4 against; Section 15, as amended, is approved.48 (Emphasis supplied)

The last sentence of Section 11, Article XII of the 1987 Constitution, particularly the provision on the limited participation of foreign investors in the governing body of public utilities, is a reiteration of the last sentence of Section 5, Article XIV of the 1973 Constitution,49 signifying its importance in reserving ownership and control of public utilities to Filipino citizens.

VIII.The undisputed facts

There is no dispute, and respondents do not claim the contrary, that (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 foreigners control PLDT; (2) Filipinos own only 35.73% of PLDT’s common shares, constituting a minority of the voting stock, and thus Filipinos do not control 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;50 (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%.

Despite the foregoing facts, the Court did not decide, and in fact refrained from ruling on the question of whether PLDT violated the 60-40 ownership requirement in favor of Filipino citizens in Section 11, Article XII of the 1987 Constitution. Such question indisputably calls for a presentation and determination of evidence through a hearing, which is generally outside the province of the Court’s jurisdiction, but well within the SEC’s statutory powers. Thus, for obvious reasons, the Court limited its decision on the purely legal and threshold issue on the definition of the term "capital" in Section 11, Article XII of the Constitution and directed the SEC to apply such definition in determining the exact percentage of foreign ownership in PLDT.

22

IX.PLDT is not an indispensable party;SEC is impleaded in this case.

In his petition, Gamboa prays, among others:

x x x x

5. For the Honorable Court to issue a declaratory relief that ownership of common or voting shares is the sole basis in determining foreign equity in a public utility and that any other government rulings, opinions, and regulations inconsistent with this declaratory relief be declared unconstitutional and a violation of the intent and spirit of the 1987 Constitution;

6. For the Honorable Court to declare null and void all sales of common stocks to foreigners in excess of 40 percent of the total subscribed common shareholdings; and

7. For the Honorable Court to direct the Securities and Exchange Commission and Philippine Stock Exchange to require PLDT to make a public disclosure of all of its foreign shareholdings and their actual and real beneficial owners.

Other relief(s) just and equitable are likewise prayed for. (Emphasis supplied)

As can be gleaned from his prayer, Gamboa clearly asks this Court to compel the SEC to perform its statutory duty to investigate whether "the required percentage of ownership of the capital stock to be owned by citizens of the Philippines has been complied with [by PLDT] as required by x x x the Constitution."51 Such plea clearly negates SEC’s argument that it was not impleaded.

Granting that only the SEC Chairman was impleaded in this case, the Court has ample powers to order the SEC’s compliance with its directive contained in the 28 June 2011 Decision in view of the far-reaching implications of this case. In Domingo v. Scheer,52 the Court dispensed with the amendment of the pleadings to implead the Bureau of Customs considering (1) the unique backdrop of the case; (2) the utmost need to avoid further delays; and (3) the issue of public interest involved. The Court held:

The Court may be curing the defect in this case by adding the BOC as party-petitioner. The petition should not be dismissed because the second action would only be a repetition of the first. InSalvador, et al., v. Court of Appeals, et al., we held that this Court has full powers, apart from that power and authority which is inherent, to amend the processes, pleadings, proceedings and decisions by substituting as party-plaintiff the real party-in-interest. The Court has the power to avoid delay in the disposition of this case, to order its amendment as to implead the BOC as party-respondent. Indeed, it may no longer be necessary to do so taking into account the unique backdrop in this case, involving as it does an issue of public interest. After all, the Office of the Solicitor General has represented the petitioner in the instant proceedings, as well as in the appellate court, and maintained the validity of the deportation order and of the BOC’s Omnibus Resolution. It cannot, thus, be claimed by the State that the BOC was not afforded its day in court, simply because only the petitioner, the Chairperson of the BOC, was the respondent in the CA, and the petitioner in the instant recourse. In Alonso v. Villamor, we had the occasion to state:

There is nothing sacred about processes or pleadings, their forms or contents. Their sole purpose is to facilitate the application of justice to the rival claims of contending parties. They were created, not to hinder and delay, but to facilitate and promote, the administration of justice. They do not constitute the thing itself, which courts are always striving to secure to litigants. They are designed as the means best adapted to obtain that thing. In other words, they are a means to an end. When they lose the character of the one and become the other, the administration of justice is at fault and courts are

correspondingly remiss in the performance of their obvious duty.53 (Emphasis supplied)

In any event, the SEC has expressly manifested54 that it will abide by the Court’s decision and defer to the Court’s definition of the term "capital" in Section 11, Article XII of the Constitution. Further, the SEC entered its special appearance in this case and argued during the Oral Arguments, indicating its submission to the Court’s jurisdiction. It is clear, therefore, that there exists no legal impediment against the proper and immediate implementation of the Court’s directive to the SEC.

PLDT is an indispensable party only insofar as the other issues, particularly the factual questions, are concerned. In other words, PLDT must be impleaded in order to fully resolve the issues on (1) whether the sale of 111,415 PTIC shares to First Pacific violates the constitutional limit on foreign ownership of PLDT; (2) whether the sale of common shares to foreigners exceeded the 40 percent limit on foreign equity in PLDT; and (3) whether the total percentage of the PLDT common shares with voting rights complies with the 60-40 ownership requirement in favor of Filipino citizens under the Constitution for the ownership and operation of PLDT. These issues indisputably call for an examination of the parties’ respective evidence, and thus are clearly within the jurisdiction of the SEC. In short, PLDT must be impleaded, and must necessarily be heard, in the proceedings before the SEC where the factual issues will be thoroughly threshed out and resolved.

Notably, the foregoing issues were left untouched by the Court. The Court did not rule on the factual issues raised by Gamboa, except the single and purely legal issue on the definition of the term "capital" in Section 11, Article XII of the Constitution. The Court confined the resolution of the instant case to this threshold legal issue in deference to the fact-finding power of the SEC.

Needless to state, the Court can validly, properly, and fully dispose of the fundamental legal issue in this case even without the participation of PLDT since defining the term "capital" in Section 11, Article XII of the Constitution does not, in any way, depend on whether PLDT was impleaded. Simply put, PLDT is not indispensable for a complete resolution of the purely legal question in this case.55 In fact, the Court, by treating the petition as one for mandamus,56 merely directed the SEC to apply the Court’s definition of the term "capital" in Section 11, Article XII of the Constitution in determining whether PLDT committed any violation of the said constitutional provision. The dispositive portion of the Court’s ruling is addressed not to PLDT but solely to the SEC, which is the administrative agency tasked to enforce the 60-40 ownership requirement in favor of Filipino citizens in Section 11, Article XII of the Constitution.

Since the Court limited its resolution on the purely legal issue on the definition of the term "capital" in Section 11, Article XII of the 1987 Constitution, and directed the SEC to investigate any violation by PLDT of the 60-40 ownership requirement in favor of Filipino citizens under the Constitution,57 there is no deprivation of PLDT’s property or denial of PLDT’s right to due process, contrary to Pangilinan and Nazareno’s misimpression. Due process will be afforded to PLDT when it presents proof to the SEC that it complies, as it claims here, with Section 11, Article XII of the Constitution.

X.Foreign Investments in the Philippines

Movants fear that the 28 June 2011 Decision would spell disaster to our economy, as it may result in a sudden flight of existing foreign investors to "friendlier" countries and simultaneously deterring new foreign investors to our country. In particular, the PSE claims that the 28 June 2011 Decision may result in the following: (1) loss of more than P 630 billion in foreign investments in PSE-listed shares; (2) massive decrease in foreign trading transactions; (3) lower PSE Composite Index; and (4) local investors not investing in PSE-listed shares.58

23

Dr. Bernardo M. Villegas, one of the amici curiae in the Oral Arguments, shared movants’ apprehension. Without providing specific details, he pointed out the depressing state of the Philippine economy compared to our neighboring countries which boast of growing economies. Further, Dr. Villegas explained that the solution to our economic woes is for the government to "take-over" strategic industries, such as the public utilities sector, thus:

JUSTICE CARPIO:

I would like also to get from you Dr. Villegas if you have additional information on whether this high FDI59 countries in East Asia have allowed foreigners x x x control [of] their public utilities, so that we can compare apples with apples.

DR. VILLEGAS:

Correct, but let me just make a comment. When these neighbors of ours find an industry strategic, their solution is not to "Filipinize" or "Vietnamize" or "Singaporize." Their solution is to make sure that those industries are in the hands of state enterprises. So, in these countries, nationalization means the government takes over. And because their governments are competent and honest enough to the public, that is the solution. x x x 60 (Emphasis supplied)

If government ownership of public utilities is the solution, then foreign investments in our public utilities serve no purpose. Obviously, there can never be foreign investments in public utilities if, as Dr. Villegas claims, the "solution is to make sure that those industries are in the hands of state enterprises." Dr. Villegas’s argument that foreign investments in telecommunication companies like PLDT are badly needed to save our ailing economy contradicts his own theory that the solution is for government to take over these companies. Dr. Villegas is barking up the wrong tree since State ownership of public utilities and foreign investments in such industries are diametrically opposed concepts, which cannot possibly be reconciled.

In any event, the experience of our neighboring countries cannot be used as argument to decide the present case differently for two reasons. First, the governments of our neighboring countries have, as claimed by Dr. Villegas, taken over ownership and control of their strategic public utilities like the telecommunications industry. Second, our Constitution has specific provisions limiting foreign ownership in public utilities which the Court is sworn to uphold regardless of the experience of our neighboring countries.

In our jurisdiction, the Constitution expressly reserves the ownership and operation of public utilities to Filipino citizens, or corporations or associations at least 60 percent of whose capital belongs to Filipinos. Following Dr. Villegas’s claim, the Philippines appears to be more liberal in allowing foreign investors to own 40 percent of public utilities, unlike in other Asian countries whose governments own and operate such industries.

XI.Prospective Application of Sanctions

In its Motion for Partial Reconsideration, the SEC sought to clarify the reckoning period of the application and imposition of appropriate sanctions against PLDT if found violating Section 11, Article XII of the Constitution.1avvphi1

As discussed, the Court has directed the SEC to investigate and determine whether PLDT violated Section 11, Article XII of the Constitution. Thus, 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, once the 28 June 2011 Decision becomes final, 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. Under prevailing jurisprudence, public utilities that fail to comply with the nationality requirement under

Section 11, Article XII and the FIA can cure their deficiencies prior to the start of the administrative case or investigation.61

XII.Final Word

The Constitution expressly declares as State policy the development of an economy "effectively controlled" by Filipinos. Consistent with such State policy, the Constitution explicitly reserves the ownership and operation of public utilities to Philippine nationals, who are defined in the Foreign Investments Act of 1991 as Filipino citizens, or corporations or associations at least 60 percent of whose capital with voting rights belongs to Filipinos. The FIA’s implementing rules explain that "[f]or stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate voting rights is essential." In effect, the FIA clarifies, reiterates and confirms the interpretation that the term "capital" in Section 11, Article XII of the 1987 Constitution refers to shares with voting rights, as well as with full beneficial ownership. This is precisely because the right to vote in the election of directors, coupled with full beneficial ownership of stocks, translates to effective control of a corporation.

Any other construction of the term "capital" in Section 11, Article XII of the Constitution contravenes the letter and intent of the Constitution. Any other meaning of the term "capital" openly invites alien domination of economic activities reserved exclusively to Philippine nationals. Therefore, respondents’ interpretation will ultimately result in handing over effective control of our national economy to foreigners in patent violation of the Constitution, making Filipinos second-class citizens in their own country.

Filipinos have only to remind themselves of how this country was exploited under the Parity Amendment, which gave Americans the same rights as Filipinos in the exploitation of natural resources, and in the ownership and control of public utilities, in the Philippines. To do this the 1935 Constitution, which contained the same 60 percent Filipino ownership and control requirement as the present 1987 Constitution, had to be amended to give Americans parity rights with Filipinos. There was bitter opposition to the Parity Amendment62 and many Filipinos eagerly awaited its expiration. In late 1968, PLDT was one of the American-controlled public utilities that became Filipino-controlled when the controlling American stockholders divested in anticipation of the expiration of the Parity Amendment on 3 July 1974.63 No economic suicide happened when control of public utilities and mining corporations passed to Filipinos’ hands upon expiration of the Parity Amendment.

Movants’ interpretation of the term "capital" would bring us back to the same evils spawned by the Parity Amendment, effectively giving foreigners parity rights with Filipinos, but this time even without any amendment to the present Constitution. Worse, movants’ interpretation opens up our national economy toeffective control not only by Americans but also by all foreigners, be they Indonesians, Malaysians or Chinese, even in the absence of reciprocal treaty arrangements. At least the Parity Amendment, as implemented by the Laurel-Langley Agreement, gave the capital-starved Filipinos theoretical parity – the same rights as Americans to exploit natural resources, and to own and control public utilities, in the United States of America. Here, movants’ interpretation would effectively mean a unilateral opening up of our national economy to all foreigners, without any reciprocal arrangements. That would mean that Indonesians, Malaysians and Chinese nationals could effectively control our mining companies and public utilities while Filipinos, even if they have the capital, could not control similar corporations in these countries.

The 1935, 1973 and 1987 Constitutions have the same 60 percent Filipino ownership and control requirement for public utilities like PLOT. Any deviation from this requirement necessitates an amendment to the Constitution as exemplified by the Parity Amendment. This Court has no power to amend the Constitution

24

for its power and duty is only to faithfully apply and interpret the Constitution.

WHEREFORE, we DENY the motions for reconsideration WITH FINALITY. No further pleadings shall be entertained.

SO ORDERED.

ANTONIO T. CARPIOAssociate Justice

DISSENTING OPINION

VELASCO, JR., J.:

Before Us are separate motions for recon~ideration of the Court's June 28, 2011 Decision, 1 which partially granted the petition for prohibition, injunction and declaratory relief interposed by Wilson P. Gamboa (petitioner or Gamboa). Very simply, the Court held that the term "capital" appearing in Section 11, Article XII of the 1987 Constitution refers only to common shares or shares of stock entitled to vote in the election of the members of the board of directors of a public utility, and not to the total outstanding capital stock.

Respondents Manuel V. Pangilinan (Pangilinan) and Napoleon L.Nazare no (Nazareno) separately moved for reconsideration on procedural and substantive grounds, but reserved their main arguments against the majority's holding on the meaning of "capital." The Office of the Solicitor General (OSG), which initially representL:d the Securities and Exchange Commission (SEC), also requested recon~itkratiun even as it manifested agreement with the majority's construal ct' the \Vord "capital." Unable to join the OSG's stand on the determinative issue of capital, the SEC sought leave to join the fray on its mvn. fn its Jtdotion to Admit A1anifestation and Omnibus Motion, the SEC stated that the OSG’s position on said issue does not reflect its own and in fact diverges from what the Commission has consistently adopted prior to this case. And because the decision in question has a penalty component which it is tasked to impose, SEC requested clarification as to when the reckoning period of application of the appropriate sanctions may be imposed on Philippine Long Distance Telephone Company (PLDT) in case the SEC determines that it has violated Sec. 11, Art. XII of the Constitution.

To the foregoing motions, the main petitioner, now deceased, filed his Comment and/or Opposition to Motions for Reconsideration.

Acting on the various motions and comment, the Court conducted and heard the parties in oral arguments on April 17 and June 26, 2012.

After considering the parties’ positions as articulated during the oral arguments and in their pleadings and respective memoranda, I vote to grant reconsideration. This disposition is consistent with my dissent, on procedural and substantive grounds, to the June 28, 2011 majority Decision.

Conspectus

The core issue is the meaning of the word "capital" in the opening sentence of Sec. 11, Art. XII of the 1987 Constitution which reads:

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.)

For an easier comprehension of the two contrasting positions on the contentious meaning of the word "capital," as found in the first sentence of the aforequoted provision, allow me to present a brief comparative analysis showing the dissimilarities.

The majority, in the June 28, 2011 Decision, as reiterated in the draft resolution, is of the view that the word "capital" in the first sentence of Sec. 11, Art. XII refers to common shares or voting shares only; thus limiting foreign ownership of such shares to 40%. The rationale, as stated in the basic ponencia, is that this interpretation ensures that control of the Board of Directors stays in the hands of Filipinos, since foreigners can only own a maximum of 40% of said shares and, accordingly, can only elect the equivalent percentage of directors. As a necessary corollary, Filipino stockholders can always elect 60% of the Board of Directors which, to the majority, translates to control over the corporation.

The opposite view is that the word "capital" in the first sentence refers to the entire capital stock of the corporation or both voting and non-voting shares and NOT solely to common shares. From this standpoint, 60% control over the capital stock or the stockholders owning both voting and non-voting shares is assured to Filipinos and, as a consequence, over corporate matters voted upon and decisions reached during stockholders’ meetings. On the other hand, the last sentence of Sec. 11, Art. XII, with the word "capital" embedded in it, is the provision that ensures Filipino control over the Board of Directors and its decisions.

To resolve the conflicting interpretations of the word "capital," the first sentence of Sec. 11, Art. XII must be read and considered in conjunction with the last sentence of said Sec. 11 which prescribes that "the participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its capital." After all, it is an established principle in constitutional construction that provisions in the Constitution must be harmonized.

It has been made very clear during the oral arguments and even by the parties’ written submissions that control by Filipinos over the public utility enterprise exists on three (3) levels, namely:

1. Sixty percent (60%) control of Filipinos over the capital stock which covers both voting and non-voting shares and inevitably over the stockholders. This level of control is embodied in the first sentence of Sec. 11, Art. XII which reads:

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 x x x.

The word "capital" in the above provision refers to capital stock or both voting and non-voting shares. Sixty percent (60%) control over the capital stock translates to control by Filipinos over almost all decisions by the stockholders during stockholders’ meetings including ratification of the decisions and acts of the Board of Directors. During said meetings, voting and even non-voting shares are entitled to vote. The exercise by non-voting shares of voting rights over major corporate decisions is expressly provided in Sec. 6 of the Corporation Code which reads:

Sec. 6. x x x x

25

Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such shares shall nevertheless be entitled to vote on the following matters:

1. Amendment of the articles of incorporation;2. Adoption and amendment of by-laws;3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property;4. Incurring, creating or increasing bonded indebtedness;5. Increase or decrease of capital stock;6. Merger or consolidation of the corporation with another corporation or other corporations;7. Investment of corporate funds in another corporation or business in accordance with this Code; and8. Dissolution of the corporation.

Construing the word "capital" in the first sentence of Sec. 11, Art. XII of the Constitution as capital stock would ensure Filipino control over the public utility with respect to major corporate decisions. If we adopt the view espoused by Justice Carpio that the word "capital" means only common shares or voting shares, then foreigners can own even up to 100% of the non-voting shares. In such a situation, foreigners may very well exercise control over all major corporate decisions as their ownership of the nonvoting shares remains unfettered by the 40% cap laid down in the first sentence of Sec. 11, Art. XII. This will spawn an even greater anomaly because it would give the foreigners the opportunity to acquire ownership of the net assets of the corporation upon its dissolution to include what the Constitution enjoins––land ownership possibly through dummy corporations. With the view of Justice Carpio, Filipinos will definitely lose control over major corporate decisions which are decided by stockholders owning the majority of the non-voting shares.

2. Sixty percent (60%) control by Filipinos over the common shares or voting shares and necessarily over the Board of Directors of the public utility. Control on this level is guaranteed by the last sentence of Sec. 11, Art. XII which reads:

The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its "capital" x x x.

In its ordinary signification, "participation" connotes "the action or state of taking part with others in an activity."2This participation in its decision-making function can only be the right to elect board directors. Hence, the last sentence of Sec. 11, Art. XII of the Constitution effectively restricts the right of foreigners to elect directors to the board in proportion to the limit on their total shareholdings. Since the first part of Sec. 11, Art. XII of the Constitution specifies a 40% limit of foreign ownership in the total capital of the public utility corporation, then the rights of foreigners to be elected to the board of directors, is likewise limited to 40 percent. If the foreign ownership of common shares is lower than 40%, the participation of foreigners is limited to their proportionate share in the capital stock.

In the highly hypothetical public utility corporation with 100 common shares and 1,000,000 preferred non-voting shares, or a total of 1,000,100 shares cited in the June 28, 2011 Decision, foreigners can thus only own up to 400,040 shares of the corporation, consisting of the maximum 40 (out of the 100) voting shares and 400,000 non-voting shares. And, assuming a 10- member board, the foreigners can elect only 4 members of the boardusing the 40 voting shares they are allowed to own.

Following, in fine, the dictates of Sec. 11, Art. XII, as couched, the foreign shareholders’ right to elect members of the governing board of a given public utility corporation is proportional only to their right to hold a part of the total shareholdings of that entity. Since foreigners can only own, in the maximum, up to 40% of the total shareholdings of the company, then their voting entitlement as to the numerical composition of the board would depend on the level of their shareholding in relation to the capital stock, but in no case shall it exceed the 40% threshold.

Contrary to the view of Justice Carpio that the objective behind the first sentence of Sec. 11, Art. XII is to ensure control of Filipinos over the Board of Directors by limiting foreign ownership of the common shares or voting shares up to 40%, it is actually the first part of the aforequoted last sentence of Sec. 11, Art. XII that limits the rights of foreigners to elect not more than 40% of the board seats thus ensuring a clear majority in the Board of Directors to Filipinos. If we follow the line of reasoning of Justice Carpio on the meaning of the word "capital" in the first sentence, then there is no need for the framers of the Constitution to incorporate the last sentence in Sec. 11, Art. XII on the 40% maximum participation of the foreigners in the Board of Directors. The last sentence would be a useless redundancy, a situation doubtless unintended by the framers of the Constitution. A construction that renders a part of the law or Constitution being construed superfluous is an aberration,3 for it is at all times presumed that each word used in the law is intentional and has a particular and special role in the approximation of the policy sought to be attained, ut magis valeat quam pereat.

3. The third level of control proceeds from the requirement tucked in the second part of the ultimate sentence that "all the executive and managing officers of the corporation must be citizens of the Philippines." This assures full Filipino control, at all times, over the management of the public utility.

To summarize, the Constitution, as enacted, establishes not just one but a three-tiered control-enhancing-and-locking mechanism in Sec. 11, Article XII to ensure that Filipinos will always have full beneficial ownership and control of public utility corporations:

1. 40% ceiling on foreign ownership in the capital stock that ensures sixty percent (60%) Filipino control over the capital stock which covers both voting and non-voting shares. As a consequence, Filipino control over the stockholders is assured. (First sentence of Sec. 11, Art. XII). Thus, foreigners can own only up to 40% of the capital stock.

2. 40% ceiling on the right of foreigners to elect board directors that guarantees sixty percent (60%) Filipino control over the Board of Directors. (First part of last sentence of Sec. 11, Art. XII).

3. Reservation to Filipino citizens of the executive and managing officers, regardless of the level of alien equity ownership to secure total Filipino control over the management of the public utility enterprise (Second part of last sentence of Sec. 11, Art. XII). Thus, all executive and managing officers must be Filipinos.

Discussion

Undoubtedly there is a clash of conflicting opinions as to what "capital" in the first sentence of Sec. 11, Art. XII means. The majority says it refers only to common or voting shares. The minority says it includes both voting and non-voting shares. A resort to constitutional construction is unavoidable.

It is settled though that the "primary source from which to ascertain constitutional intent or purpose is the language of the constitution itself."4 To this end, the words used by the Constitution should as much as possible be understood in their ordinary meaning as the Constitution is not a lawyer’s document.5 This approach, otherwise known as the verba legis rule, should be applied save where technical terms are employed.6

The plain meaning of "capital" in the firstsentence of Sec. 11, Art. XII of the Constitutionincludes both voting and non-voting shares

J.M. Tuason & Co., Inc. v. Land Tenure Administration illustrates the verba legis rule. There, the Court cautions against departing from the commonly understood meaning of ordinary words used in the Constitution, viz.:

26

We look to the language of the document itself in our search for its meaning. We do not of course stop there, but that is where we begin. It is to be assumed that the words in which constitutional provisions are couched express the objective sought to be attained. They are to be given their ordinary meaning except where technical terms are employed in which case the significance thus attached to them prevails. As the Constitution is not primarily a lawyer's document, it being essential for the rule of law to obtain that it should ever be present in the people's consciousness, its language as much as possible should be understood in the sense they have in common use. What it says according to the text of the provision to be construed compels acceptance and negates the power of the courts to alter it, based on the postulate that the framers and the people mean what they say. Thus, there are cases where the need for construction is reduced to a minimum.7 (Emphasis supplied.)

The primary reason for the verba legis approach, as pointed out by Fr. Joaquin Bernas during the June 26, 2012 arguments, is that the people who ratified the Constitution voted on their understanding of the word capital in its everyday meaning. Fr. Bernas elucidated thus:

x x x Over the years, from the 1935 to the 1973 and finally even under the 1987 Constitution, the prevailing practice has been to base the 60-40 proportion on total outstanding capital stock, that is, the combined total of common and non-voting preferred shares. This is what occasioned the case under consideration.

What is the constitutional relevance of this continuing practice? I suggest that it is relevant for determining what the people in the street voted for when they ratified the Constitution. When the draft of a Constitution is presented to the people for ratification, what the people vote on is not the debates in the constituent body but the text of the draft. Concretely, what the electorate voted on was their understanding of the word capital in its everyday meaning they encounter in daily life.We cannot attribute to the voters a jurist’s sophisticated meaning of capital and its breakdown into common and preferred. What they vote on is what they see. Nor do they vote on what the drafters saw as assumed meaning, to use Bengzon’s explanation. In the language of the sophisticates, whatvoters in a plebiscite vote on is verba legis and not anima legis about which trained jurists debate.

What then does it make of the contemporary understanding by SEC etc. Is the contemporary understanding unconstitutional or constitutional? I hesitate to characterize it as constitutional or unconstitutional. I would merely characterize it as popular. What I mean is it reflects the common understanding of the ordinary populi, common but incomplete.8 (Emphasis supplied.)

"Capital" in the first sentence of Sec. 11, Art. XII must then be accorded a meaning accepted, understood, and used by an ordinary person not versed in the technicalities of law. As defined in a non-legal dictionary, capital stock or capital is ordinarily taken to mean "the outstanding shares of a joint stock company considered as an aggregate"9 or "the ownership element of a corporation divided into shares and represented by certificates."10

The term "capital" includes all the outstanding shares of a company that represent "the proprietary claim in a business."11 It does not distinguish based on the voting feature of the stocks but refers to all shares, be they voting or non-voting. Neither is the term limited to the management aspect of the corporation but clearly refers to the separate aspect of ownership of the corporate shares thereby encompassing all shares representing the equity of the corporation.

This plain meaning, as understood, accepted, and used in ordinary parlance, hews with the definition given by Black who equates capital to capital stock12 and defines it as "the total number of shares of stock that a corporation may issue under its charter or articles of incorporation, including both common stock and preferred stock."13 This meaning is also reflected in legal commentaries on the Corporation Code. The respected commentator Ruben E. Agpalo defines "capital" as the "money,

property or means contributed by stockholders for the business or enterprise for which the corporation was formed and generally implies that such money or property or means have been contributed in payment for stock issued to the contributors."14 Meanwhile, "capital stock" is "the aggregate of the shares actually subscribed [or] the amount subscribed and paid-in and upon which the corporation is to conduct its operations, or the amount paid-in by its stockholders in money, property or services with which it is to conduct its business."15

This definition has been echoed by numerous other experts in the field of corporation law. Dean Villanueva wrote, thus:

In defining the relationship between the corporation and its stockholders, the capital stock represents the proportional standing of the stockholders with respect to the corporation and corporate matters, such as their rights to vote and to receive dividends.

In financial terms, the capital stock of the corporation as reflected in the financial statement of the corporation represents the financial or proprietary claims of the stockholders to the net assets of the corporation upon dissolution. In addition, the capital stock represents the totality of the portion of the corporation’s assets and receivables which are covered by the trust fund doctrine and provide for the amount of assets and receivables of the corporation which are deemed protected for the benefit of the corporate creditors and from which the corporation cannot declare any dividends. 16(Emphasis supplied.)

Similarly, renowned author Hector S. de Leon defines "capital" and "capital stock" in the following manner:

Capital is used broadly to indicate the entire property or assets of the corporation. It includes the amount invested by the stockholders plus the undistributed earnings less losses and expenses. In the strict sense, the term refers to that portion of the net assets paid by the stockholders as consideration for the shares issued to them, which is utilized for the prosecution of the business of the corporation. It includes all balances or instalments due the corporation for shares of stock sold by it and all unpaid subscription for shares.

x x x x

The term is also used synonymously with the words "capital stock," as meaning the amount subscribed and paid-in and upon which the corporation is to conduct its operation (11 Fletcher Cyc. Corp., p. 15 [1986 ed.]) and it is immaterial how the stock is classified, whether as common or preferred.17 (Emphasis and underscoring supplied.)

Hence, following the verba legis approach, I see no reason to stray away from what appears to be a common and settled acceptation of the word "capital," given that, as used in the constitutional provision in question, it stands unqualified by any restrictive or expansive word as to reasonably justify a distinction or a delimitation of the meaning of the word. Ubi lex non distinguit nos distinguere debemus, when the law does not distinguish, we must not distinguish.18 Using this plain meaning of "capital" within the context of Sec. 11, Art. XII, foreigners are entitled to own not more than 40% of the outstanding capital stock, which would include both voting and non-voting shares.

Extraneous aids to ferret out constitutional intent

When the seeming ambiguity on the meaning of "capital" cannot be threshed out by looking at the language of the Constitution, then resort to extraneous aids has become imperative. The Court can utilize the following extraneous aids, to wit: (1) proceedings of the convention; (2) changes in phraseology; (3) history or realities existing at the time of the adoption of the Constitution; (4) prior laws and judicial decisions; (5) contemporaneous construction; and (6) consequences of alternative interpretations.19 I submit that all these aids of constitutional construction affirm that the

27

only acceptable construction of "capital" in the first sentence of Sec. 11, Art. XII of the 1987 Constitution is that it refers to all shares of a corporation, both voting and non-voting.

Deliberations of the Constitutional Commissionof 1986 demonstrate that capital means bothvoting and non-voting shares (1st extrinsic aid)

The proceedings of the 1986 Constitutional Commission that drafted the 1987 Constitution were accurately recorded in the Records of the Constitutional Commission.

To bring to light the true meaning of the word "capital" in the first line of Sec. 11, Art. XII, one must peruse, dissect and analyze the entire deliberations of the Constitutional Commission pertinent to the article on national economy and patrimony, as quoted below:

August 13, 1986, Wednesday

PROPOSED RESOLUTION NO. 496

RESOLUTION TO INCORPORATE IN THE NEW CONSTITUTION AN ARTICLE ON NATIONAL ECONOMY AND PATRIMONY

Be it resolved as it is hereby resolved by the Constitutional Commission in session assembled, To incorporate the National Economy and Patrimony of the new Constitution, the following provisions:

ARTICLE____NATIONAL ECONOMY AND PATRIMONY

SECTION 1. The State shall develop a self-reliant and independent national economy. x x x

x x x x

SEC. 3. x x x The exploration, development, and utilization of natural resources shall be under the full control and supervision of the State. Such activities may be directly undertaken by the State, or it may enter into co-production, joint venture, production-sharing agreements with Filipino citizens orcorporations or associations at least sixty percent of whose voting stock or controlling interest is owned by such citizens. x x x

x x x x

SEC. 9. The Congress shall reserve to citizens of the Philippines or to corporations or associations at least sixty per cent of whose voting stock or controlling interest is owned by such citizens or such higher percentage as Congress may prescribe, certain areas of investments when the national interest so dictates.

x x x x

SEC. 15. 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 two-thirds of whose voting stock or controlling interest is owned by such citizens. Neither shall any such franchise or right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by Congress when the common good so requires. The State shall encourage equity participation in public utilities by the general public. (Origin of Sec. 11, Article XII)

x x x x

MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign equity; namely, 60-40 in Section 3, 60-40 in Section 9, and 2/3-1/3 in Section 15.

MR. VILLEGAS. That is right.

MR. NOLLEDO. In teaching law, we are always faced with this question: "Where do we base the equity requirement, is it on the authorized capital stock, on the subscribed capital stock, or on the paid-up capital stock of a corporation?" Will the Committee please enlighten me on this?

MR. VILLEGAS. We have just had a long discussion with the members of the team from the UP Law Center who provided us a draft. The phrase that is contained here which we adopted from the UP draft is "60 percent of voting stock."

MR. NOLLEDO. That must be based on the subscribed capital stock, because unless declared delinquent, unpaid capital stock shall be entitled to vote.

MR. VILLEGAS. That is right.

MR. NOLLEDO. Thank you.

With respect to an investment by one corporation in another corporation, say, a corporation with 60-40 percent equity invests in another corporation which is permitted by the Corporation Code, does the Committee adopt the grandfather rule?

MR. VILLEGAS. Yes, that is the understanding of the Committee.

MR. NOLLEDO. Therefore, we need additional Filipino capital?

MR. VILLEGAS. Yes.20

August 14, 1986, Thursday

MR. FOZ. Mr. Vice-President, in Sections 3 and 9, the provision on equity is both 60 percent, but I notice that this is now different from the provision in the 1973 Constitution in that the basis for the equity provision is voting stock or controlling interest instead of the usual capital percentage as provided for in the 1973 Constitution. We would like to know what the difference would be between the previous and the proposed provisions regarding equity interest.

MR. VILLEGAS. Commissioner Suarez will answer that.

MR. SUAREZ. Thank you.

As a matter of fact, this particular portion is still being reviewed by this Committee. In Section 1, Article XIII of the 1935 Constitution, the wording is that the percentage should be based on the capital which is owned by such citizens. In the proposed draft, this phrase was proposed: "voting stock or controlling interest." This was a plan submitted by the UP Law Center.

Three days ago, we had an early morning breakfast conference with the members of the UP Law Center and precisely, we were seeking clarification regarding the difference. We would have three criteria to go by: One would be based on capital, which is capital stock of the corporation, authorized, subscribed or paid up, as employed under the 1935 and the 1973 Constitution. The idea behind the introduction of the phrase "voting stock or controlling interest" was precisely to avoid the perpetration of dummies, Filipino dummies of multinationals. It is theoretically possible that a situation may develop where these multinational interests would not really be only 40 percent but will extend beyond that in the matter of voting because they could enter into what is known as a voting trust or voting agreement with the rest of the stockholders and, therefore, notwithstanding the fact that on record their capital extent is only up to 40-percent interest in the corporation, actually, they would be managing and controlling the entire company. That is why the UP Law Center members suggested that we utilize the words "voting interest" which would preclude multinational control in the matter of voting, independent of the capital structure of the corporation. And then they also added the phrase "controlling interest" which up to now they have not been able to successfully define the exact meaning of. But they mentioned the situation where theoretically the board would be

28

controlled by these multinationals, such that instead of, say, three Filipino directors out of five, there would be three foreign directors and, therefore, they would be controlling the management of the company with foreign interest. That is why they volunteered to flesh out this particular portion which was submitted by them, but up to now, they have not come up with a constructive rephrasing of this portion. And as far as I am concerned, I am not speaking in behalf of the Committee, I would feel more comfortable if we go back to the wording of the 1935 and the 1973 Constitution, that is to say, the 60-40 percentage could be based on the capital stock of the corporation.

MR. FOZ. I understand that that was the same view of Dean Carale who does not agree with the others on this panel at the UP Law Center regarding the percentage of the ratio.MR. SUAREZ. That is right. Dean Carale shares my sentiment about this matter.MR. BENGZON. I also share the sentiment of Commissioner Suarez in that respect. So there are already two in the Committee who want to go back to the wording of the 1935 and the 1973 Constitution.21

August 15, 1986, FridayMR. MAAMBONG. I ask that Commissioner Treñas be recognized for an amendment on line 14.THE PRESIDENT. Commissioner Treñas is recognized.MR. TREÑAS. Madam President, may I propose an amendment on line 14 of Section 3 by deleting therefrom "whose voting stock and controlling interest." And in lieu thereof, insert the CAPITAL so the line should read: "associations at least sixty percent of the CAPITAL is owned by such citizens.MR. VILLEGAS. We accept the amendment.MR. TREÑAS. Thank you.THE PRESIDENT. The amendment of Commissioner Treñas on line 14 has been accepted by the Committee.Is there any objection? (Silence) The Chair hears none; the amendment is approved.x x x xTHE PRESIDENT. Commissioner Suarez is recognized.MR. SUAREZ. Thank you, Madam President.Two points actually are being raised by Commissioner Davide’s proposed amendment. One has reference to the percentage of holdings and the other one is the basis for that percentage. Would the body have any objection if we split it into two portions because there may be several Commissioners who would be willing to accept the Commissioner’s proposal on capital stock in contradistinction to a voting stock for controlling interest?MR. VILLEGAS. The proposal has been accepted already.MR. DAVIDE. Yes, but it was 60 percent.MR. VILLEGAS. That is right.MR. SUAREZ. So, it is now 60 percent as against wholly owned?MR. DAVIDE. Yes.MR. SUAREZ. Is the Commissioner not insisting on the voting capital stock because that was already accepted by the Committee?MR. DAVIDE. Would it mean that it would be 100-percent voting capital stock?MR. SUAREZ. No, under the Commissioner’s proposal it is just "CAPITAL" not "stock."MR. DAVIDE. No, I want it to be very clear. What is the alternative proposal of the Committee? How shall it read?MR. SUAREZ. It will only read something like: "the CAPITAL OF WHICH IS FULLY owned."MR. VILLEGAS. Let me read lines 12 to 14 which state:… enter into co-production, joint venture, production sharing agreements with Filipino citizens or corporations or associations at least 60 percent of whose CAPITAL is owned by such citizens.We are going back to the 1935 and 1973 formulations.MR. DAVIDE. I cannot accept the proposal because the word CAPITAL should not really be the guiding principle. It is the ownership of the corporation. It may be voting or not voting, but that is not the guiding principle.MR. SUAREZ. So, the Commissioner is insisting on the use of the term "CAPITAL STOCK"?MR. DAVIDE. Yes, to be followed by the phrase "WHOLLY owned."MR. SUAREZ. Yes, but we are only concentrating on the first point – "CAPITAL STOCK" or merely "CAPITAL."MR. DAVIDE. CAPITAL STOCK?MR. SUAREZ. Yes, it is "CAPITAL STOCK."

SUSPENSION OF SESSIONAt 4:42 p.m., the session was resumed.THE PRESIDENT. The session is resumed.Commissioner Davide is to clarify his point.MR. VILLEGAS. Yes, Commissioner Davide has accepted the word "CAPITAL" in place of "voting stock or controlling interest." This is an amendment already accepted by the Committee.We would like to call for a vote on 100-percent Filipino versus 60- percent Filipino.MR. ALONTO. Is it 60 percent?MR. VILLEGAS. Sixty percent, yes.MR. GASCON. Madam President, shall we vote on the proposed amendment of Commissioner Davide of "ONE HUNDRED PERCENT?"MR. VILLEGAS. Yes.MR. GASCON. Assuming that it is lost, that does not prejudice any other Commissioner to make any recommendations on other percentages?MR. VILLEGAS. I would suggest that we vote on "sixty," which is indicated in the committee report.MR. GASCON. It is the amendment of Commissioner Davide that we should vote on, not the committee report.MR. VILLEGAS. Yes, it is all right.MR. AZCUNA. Madam President.THE PRESIDENT. Commissioner Azcuna is recognized.MR. AZCUNA. May I be clarified as to that portion that was accepted by the Committee?MR. VILLEGAS. The portion accepted by the Committee is the deletion of the phrase "voting stock or controlling interest."MR. AZCUNA. Hence, without the Davide amendment, the committee report would read: "corporations or associations at least sixty percent of whose CAPITAL is owned by such citizens."MR. VILLEGAS. Yes.MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60 percent of the capital to be owned by citizens?MR. VILLEGAS. That is right.MR. AZCUNA. But the control can be with the foreigners even if they are the minority. Let us say 40 percent of the capital is owned by them, but it is the voting capital, whereas, the Filipinos own the nonvoting shares. So we can have a situation where the corporation is controlled by foreigners despite being the minority because they have the voting capital. That is the anomaly that would result there.MR. BENGZON. No, the reason we eliminated the word "stock" as stated in the 1973 and 1935 Constitutions is that according to Commissioner Rodrigo, there are associations that do not have stocks. That is why we say "CAPITAL."MR. AZCUNA. We should not eliminate the phrase "controlling interest."MR. BENGZON. In the case of stock corporations, it is assumed.MR. AZCUNA. Yes, but what I mean is that the control should be with the Filipinos.MR. BENGZON. Yes, that is understood.MR. AZCUNA. Yes, because if we just say "sixty percent of whose capital is owned by the Filipinos," the capital may be voting or nonvoting.MR. BENGZON. That is correct.MR. AZCUNA. My concern is the situation where there is a voting stock. It is a stock corporation. What the Committee requires is that 60 percent of the capital should be owned by Filipinos. But that would not assure control because that 60 percent may be non-voting.MS. AQUINO. Madam President.MR. ROMULO. May we vote on the percentage first?THE PRESIDENT. Before we vote on this, we want to be clarified first.MS. AQUINO. Madam President.THE PRESIDENT. Commissioner Aquino is recognized.MS. AQUINO. I would suggest that we vote on the Davide amendment which is 100-percent capital, and if it is voted down, then we refer to the original draft which is "capital stock" not just "capital."MR. AZCUNA. The phrase "controlling interest" is an important consideration.THE PRESIDENT. Let us proceed to vote then.MR. PADILLA. Madam President.

29

THE PRESIDENT. The Vice-President, Commissioner Padilla, is recognized.MR. PADILLA. The Treñas amendment has already been approved. The only one left is the Davide amendment which is substituting the "sixty percent" to "WHOLLY owned by Filipinos." (The Treñas amendment deleted the phrase "whose voting stocks and controlling interest" and inserted the word "capital." It approved the phrase "associations at least sixty percent of the CAPITAL is owned by such citizens.)(see page 16)Madam President, I am against the proposed amendment of Commissioner Davide because that is an ideal situation where domestic capital is available for the exploration, development and utilization of these natural resources, especially minerals, petroleum and other mineral oils. These are not only risky business but they also involve substantial capital. Obviously, it is an ideal situation but it is not practical. And if we adopt the 100-percent capital of Filipino citizens, I am afraid that these natural resources, particularly these minerals and oil, et cetera, may remain hidden in our lands, or in other offshore places without anyone being able to explore, develop or utilize them. If it were possible to have a 100-percent Filipino capital, I would prefer that rather than the 60 percent, but if we adopt the 100 percent, my fear is that we will never be able to explore, develop and utilize our natural resources because we do not have the domestic resources for that.MR. DAVIDE. Madam President, may I be allowed to react?THE PRESIDENT. Commissioner Davide is recognized.MR. DAVIDE. I am very glad that Commissioner Padilla emphasized minerals, petroleum and mineral oils. The Commission has just approved the possible foreign entry into the development, exploration and utilization of these minerals, petroleum and other mineral oils by virtue of the Jamir amendment. I voted in favour of the Jamir amendment because it will eventually give way to vesting in exclusively Filipino citizens and corporations wholly owned by Filipino citizens the right to utilize the other natural resources. This means that as a matter of policy, natural resources should be utilized and exploited only by Filipino citizens or corporations wholly owned by such citizens. But by virtue of the Jamir amendment, since we feel that Filipino capital may not be enough for the development and utilization of minerals, petroleum and other mineral oils, the President can enter into service contracts with foreign corporations precisely for the development and utilization of such resources. And so, there is nothing to fear that we will stagnate in the development of minerals, petroleum, and mineral oils because we now allow service contracts. It is, therefore, with more reason that at this time we must provide for a 100-percent Filipinization generally to all natural resources.MR. VILLEGAS. I think we are ready to vote, Madam President.THE PRESIDENT. The Acting Floor Leader is recognized.MR. MAAMBONG. Madam President, we ask that the matter be put to a vote.THE PRESIDENT. Will Commissioner Davide please read lines 14 and 15 with his amendment.MR. DAVIDE. Lines 14 and 15, Section 3, as amended, will read: "associations whose CAPITAL stock is WHOLLY owned by such citizens."VOTINGTHE PRESIDENT. As many as are in favour of this proposed amendment of Commissioner Davide on lines 14 and 15 of Section 3, please raise their hand. (Few Members raised their hand.)As many as are against the amendment, please raise their hand. (Several Members raised their hand.)The results show 16 votes in favour and 22 against; the amendment is lost.MR. MAAMBONG. Madam President, I ask that Commissioner Davide be recognized once more for further amendments.THE PRESIDENT. Commissioner Davide is recognized.MR. DAVIDE. Thank you, Madam President.This is just an insertion of a new paragraph between lines 24 and 25 of Section 3 of the same page. It will read as follows: THE GOVERNING AND MANAGING BOARDS OF SUCH CORPORATIONS SHALL BE VESTED EXCLUSIVELY IN CITIZENS OF THE PHILIPPINES.MR. VILLEGAS. Which corporations is the Commissioner referring to?MR. DAVIDE. This refers to corporations 60 percent of whose capital is owned by such citizens.MR. VILLEGAS. Again the amendment will read…

MR. DAVIDE. "THE GOVERNING AND MANAGING BODIES OF SUCH CORPORATIONS SHALL BE VESTED EXCLUSIVELY IN CITIZENS OF THE PHILIPPINES."REV. RIGOS. Madam President.THE PRESIDENT. Commissioner Rigos is recognized.REV. RIGOS. I wonder if Commissioner Davide would agree to put that sentence immediately after "citizens" on line 15.MR. ROMULO. May I ask a question. Presumably, it is 60-40?MR. DAVIDE. Yes.MR. ROMULO. What about the 40 percent? Would they not be entitled to a proportionate seat in the board?MR. DAVIDE. Under my proposal, they should not be allowed to sit in the board.MR. ROMULO. Then the Commissioner is really proposing 100 percent which is the opposite way?MR. DAVIDE. Not necessarily, because if 40 percent of the capital stock will be owned by aliens who may sit in the board, they can still exercise their right as ordinary stockholders and can submit the necessary proposal for, say, a policy to be undertaken by the board.MR. ROMULO. But that is part of the stockholder’s right – to sit in the board of directors.MR. DAVIDE. That may be allowed but this is a very unusual and abnormal situation so the Constitution itself can prohibit them to sit in the board.

MR. ROMULO. But it would be pointless to allow them 40 percent when they cannot sit in the board nor have a say in the management of the company. Likewise, that would be extraordinary because both the 1935 and the 1973 Constitutions allowed not only the 40 percent but commensurately they were represented in the board and management only to the extent of their equity interest, which is 40 percent. The management of a company is lodged in the board; so if the 60 percent, which is composed of Filipinos, controls the board, then the Filipino part has control of the company.

I think it is rather unfair to say: "You may have 40 percent of the company, but that is all. You cannot manage, you cannot sit in the board." That would discourage investments. Then it is like having a one hundredpercent ownership; I mean, either we allow a 60-40 with full rights to the 40 percent, limited as it is as to a minority, or we do not allow them at all. This means if it is allowed; we cannot have it both ways.

MR. DAVIDE. The aliens cannot also have everything. While they may be given entry into subscriptions of the capital stock of the corporation, it does not necessarily follow that they cannot be deprived of the right of membership in the managing or in the governing board of a particular corporation. But it will not totally deprive them of a say because they can still exercise the ordinary rights of stockholders. They can submit their proposal and they can be heard.

MR. ROMULO. Yes, but they have no vote. That is like being represented in the Congress but not being allowed to vote like our old resident Commissioners in the United States. They can be heard; they can be seen but they cannot vote.

MR. DAVIDE. If that was allowed under that situation, why can we not do it now in respect to our natural resources? This is a very critical and delicate issue.

MR. ROMULO. Precisely, we used to complain how unfair that was. One can be seen and heard but he cannot vote.

MR. DAVIDE. We know that under the corporation law, we have the rights of the minority stockholders. They can be heard. As a matter of fact, they can probably allow a proxy to vote for them and, therefore, they still retain that specific prerogative to participate just like what we did in the Article on Social Justice.

MR. ROMULO. That would encourage dummies if we give them proxies.

MR. DAVIDE. As a matter of fact, when it comes to encouraging dummies, by allowing 40-percent ownership to come in we will

30

expect the proliferation of corporations actually owned by aliens using dummies.

MR. ROMULO. No, because 40 percent is a substantial and fair share and, therefore, the bona fide foreign investor is satisfied with that proportion. He does not have to look for dummies. In fact, that is what assures a genuine investment if we give a foreign investor the 40 percent and all the rights that go with it. Otherwise, we are either discouraging the investment altogether or we are encouraging circumvention. Let us be fair. If it is 60-40, then we give him the right, limited as to his minority position.

MR. MAAMBONG. Madam President, the body would like to know the position of the Committee so that we can put the matter to a vote.

MR. VILLEGAS. The Committee does not accept the amendment.

THE PRESIDENT. The Committee does not accept.

Will Commissioner Davide insist on his amendment?

MR. DAVIDE. We request a vote.

THE PRESIDENT. Will Commissioner Davide state his proposed amendment again?

MR. DAVIDE. The proposed amendment would be the insertion of a new paragraph to Section 3, between lines 24 and 25, page 2, which reads: "THE GOVERNING AND MANAGING BODIES OF SUCH CORPORATIONS SHALL BE VESTED EXCLUSIVELY IN CITIZENS OF THE PHILIPPINES."

MR. PADILLA. Madam President.

THE PRESIDENT. Commissioner Padilla is recognized.

MR. PADILLA. Madam President, may I just say that this Section 3 speaks of "co-production, joint venture, production sharing agreements with Filipino citizens." If the foreign share of, say, 40 percent will not be represented in the board or in management, I wonder if there would be any foreign investor who will accept putting capital but without any voice in management. I think that might make the provision on "coproduction, joint venture and production sharing" illusory.

VOTING

THE PRESIDENT. If the Chair is not mistaken, that was the same point expressed by Commissioner Romulo, a member of the Committee.

As many as are in favour of the Davide amendment, please raise their hand. (Few Members raised their hand.)

As many as are against, please raise their hand. (Several Members raised their hand.)

As many as are abstaining, please raise their hand. (One Member raised his hand.)

x x x x

THE PRESIDENT. Commissioner Garcia is recognized.

MR. GARCIA. My amendment is on Section 3, the same item which Commissioner Davide tried to amend. It is basically on the share of 60 percent. I would like to propose that we raise the 60 percent to SEVENTY-FIVE PERCENT so the line would read: "SEVENTY-FIVE PERCENT of whose CAPITAL is owned by such citizens."

THE PRESIDENT. What does the Committee say?

SUSPENSION OF SESSION

MR. VILLEGAS. The Committee insists on staying with the 60 percent – 60-40.Madam President, may we ask for a suspension of the session.THE PRESIDENT. The session is suspended.It was 5:07 p.m.RESUMPTION OF SESSIONAt 5:31 p.m., the session was resumed.THE PRESIDENT. The session is resumed.MR. SARMIENTO. Madam President.THE PRESIDENT. The Acting Floor Leader, Commissioner Sarmiento, is recognized.MR. SARMIENTO: Commissioner Garcia still has the floor. May I ask that he be recognized.THE PRESIDENT. Commissioner Garcia is recognized.MR. GARCIA. Thank you very much, Madam President.

I would like to propose the following amendment on Section 3, line 14 on page 2. I propose to change the word "sixty" to SEVENTY-FIVE. So, this will read: "or it may enter into co-production, joint venture, production sharing agreements with Filipino citizens or corporations or associations at least SEVENTY-FIVE percent of whose CAPITAL stock or controlling interest is owned by such citizens."

MR. VILLEGAS. This is just a correction. I think Commissioner Azcuna is not insisting on the retention of the phrase "controlling interest," so we will retain "CAPITAL" to go back really to the 1935 and 1973 formulations.

MR. BENNAGEN. May I suggest that we retain the phrase "controlling interest"?

MR. VILLEGAS. Yes, we will retain it. (The statement of Commissioner Villegas is possibly erroneous considering his consistent statement, especially during the oral arguments, that the Constitutional Commission rejected the UP Proposal to use the phrase "controlling interest.")

THE PRESIDENT. Are we now ready to vote?

MR. SARMIENTO. Yes, Madam President.

VOTING

THE PRESIDENT. As many as are in favour of the proposed amendment of Commissioner Garcia for "SEVENTY-FIVE" percent, please raise their hand. (Few Members raised their hand.)

As many as are against the amendment, please raise their hand. (Several Members raised their hand.)

As many as are abstaining, please raise their hand. (One Member raised his hand.)

The results show 16 votes in favour, 18 against and 1 abstention; the Garcia amendment is lost.

MR. SARMIENTO. Madam President, may I ask that Commissioner Foz be recognized.

THE PRESIDENT. Commissioner Foz is recognized.

MR. FOZ. After losing by only two votes, I suppose that this next proposal will finally get the vote of the majority. The amendment is to provide for at least TWO-THIRDS.

MR. SUAREZ. It is equivalent to 66 2/3.

THE PRESIDENT. Will the Commissioner repeat?

31

MR. FOZ. I propose "TWO-THIRDS of whose CAPITAL is owned by such citizens." Madam President, we are referring to the same provision to which the previous amendments have been suggested. First, we called for a 100-percent ownership; and then, second, we called for a 75-percent ownership by Filipino citizens.

So my proposal is to provide for at least TWO-THIRDS of the capital to be owned by Filipino citizens. I would like to call the attention of the body that the same ratio or equity requirement is provided in the case of public utilities. And if we are willing to provide such equity requirements in the case of public utilities, we should at least likewise provide the same equity ratio in the case of natural resources.

MR. VILLEGAS. Commissioner Romulo will respond.

MR. ROMULO. I just want to point out that there is an amendment here filed to also reduce the ratio in Section 15 to 60-40.

MR. PADILLA. Madam President.

THE PRESIDENT. Commissioner Padilla is recognized.

MR. PADILLA. The 60 percent which appears in the committee report has been repeatedly upheld in various votings. One proposal was whole – 100 percent; another one was 75 percent and now it is 66 2/3 percent. Is not the decision of this Commission in voting to uphold the percentage in the committee report already a decision on this issue?

MR. FOZ. Our amendment has been previously brought to the attention of the body.

MR. VILLEGAS. The Committee does not accept the Commissioner’s amendment. This has been discussed fully and, with only one-third of the vote, it is like having nothing at all in decision-making. It can be completely vetoed.

MR. RODRIGO. Madam President.

THE PRESIDENT. Commissioner Rodrigo is recognized.

MR. RODRIGO. This is an extraordinary suggestion. But considering the circumstances that the proposals from the 100 percent to 75 percent lost, and now it went down to 66 2/3 percent, we might go down to 65 percent next time. So I suggest that we vote between 66 2/3 and 60 percent. Which does the body want? Then that should be the end of it; otherwise, this is ridiculous. After this, if the 66 2/3 percent will lose, then somebody can say: "Well, how about 65 percent?"

THE PRESIDENT. The Chair was made to understand that Commissioner Foz’ proposal is the last proposal on this particular line. Will Commissioner Foz restate his proposal?

MR. FOZ. My proposal is "TWO-THIRDS of whose CAPITAL or controlling interest is owned by such citizens."

VOTING

THE PRESIDENT. We now put Commissioner Foz’ amendment to a vote.

As many as are in favour of the amendment of Commissioner Foz, please raise their hand. (Few Members raised their hand.)

As many as are against, please raise their hand. (Several Members raised their hand.)

The results show 17 votes in favour, 20 against, and not abstention; the amendment is lost.22

x x x x

August 22, 1986, Friday

THE PRESIDENT. Commissioner Nolledo is recognized.

MR. NOLLEDO. Thank you, Madam President.

I would like to propound some questions to the chairman and members of the committee. I have here a copy of the approved provisions on Article on the National Economy and Patrimony. On page 2, the first two lines are with respect to the Filipino and foreign equity and I said: "At least sixty percent of whose capital or controlling interest is owned by such citizens."

I notice that this provision was amended by Commissioner Davide by changing "voting stocks" to "CAPITAL," but I still notice that there appears the term "controlling interest" which seems to refer to assocaitions other than corporations and it is merely 50 percent plus one percent which is less than 60 percent. Besides, the wordings may indicate that the 60 percent may be based not only on capital but also on controlling interest; it could mean 60 percent or 51 percent.

Before I propound the final question, I would like to make a comment in relation to Section 15 since they are related to each other. I notice that in Section 15, there still appears the phrase "voting stock or controlling interest." The term "voting stocks" as the basis of the Filipino equity means that if 60 percent of the voting stocks belong to Filipinos, foreigners may now own more than 40 percent of the capital as long as the 40 percent or the excess thereof will cover nonvoting stock. This is aside from the fact that under the Corporation Code, even nonvoting shares can vote on certain instances. Control over investments may cover aspects of management and participation in the fruits of production or exploitation.

So, I hope the committee will consider favorably my recommendation that instead of using "controlling interests," we just use "CAPITAL" uniformly in cases where foreign equity is permitted by law, because the purpose is really to help the Filipinos in the exploitation of natural resources and in the operation of public utilities. I know the committee, at its own instance, can make the amendment.

What does the committee say?

MR. VILLEGAS. We completely agree with the Commissioner’s views. Actually, it was really an oversight. We did decide on the word "CAPITAL." I think it was the opinion of the majority that the phrase "controlling interest" is ambiguous.

So, we do accept the Commissioner’s proposal to eliminate the phrase "or controlling interest" in all the provisions that talk about foreign participation.

MR. NOLLEDO. Not only in Section 3, but also with respect to Section 15.

Thank you very much.

MR. MAAMBONG. Madam President.

THE PRESIDENT. Commissioner Maambong is recognized.

MR. MAAMBONG. In view of the manifestation of the committee, I would like to be clarified on the use of the word "CAPITAL."

MR. VILLEGAS. Yes, that was the word used in the 1973 and 1935 Constitutions.

32

MR. MAAMBONG. Let us delimit ourselves to that word "CAPITAL". In the Corporation Law, if I remember correctly, we have three types of capital: the authorized capital stock, the subscribed capital stock and the paid-up capital stock.

The authorized capital stock could be interpreted as the capital of the corporation itself because that is the totality of the investment of the corporation as stated in the articles of incorporation. When we refer to 60 percent, are we referring to the authorized capital stock or the paid-up capital stock since the determinant as to who owns the corporation, as far as equity is concerned, is the subscription of the person?

I think we should delimit ourselves also to what we mean by 60 percent. Are we referring to the authorized capital stock or to the subscribed capital stock, because the determination, as I said, on the controlling interest of a corporation is based on the subscribed capital stock? I would like a reply on that.

MR. VILLEGAS. Commissioner Suarez, a member of the committee, would like to answer that.

THE PRESIDENT. Commissioner Suarez is recognized.

MR. SUAREZ. Thank you, Madam President.

We stated this because there might be a misunderstanding regarding the interpretation of the term "CAPITAL" as now used as the basis for the percentage of foreign investments in appropriate instances and the interpretation attributed to the word is that it should be based on the paidup capital. We eliminated the use the phrase "voting stock or controlling interest" because that is only used in connection with the matter of voting. As a matter of fact, in the declaration of dividends for private corporations, it is usually based on the paid-up capitalization.

So, what is really the dominant factor to be considered in matters of determining the 60-40 percentage should really be the paid-up capital of the corporation.

MR. MAAMBONG. I would like to get clarification on this. If I remember my corporation law correctly, we usually use a determinant in order to find out what the ratio of ownership is, not really on the paid-up capital stock but on the subscribed capital stock.

For example, if the whole authorized capital stock of the corporation is P 1 million, if the subscription is 60 percent of P 1 million which is P 600,000, then that is supposed to be the determinant whether there is a sharing of 60 percent of Filipinos or not. It is not really on the paid-up capital because once a person subscribes to a capital stock then whether that capital stock is paid up or not, does not really matter, as far as the books of the corporation are concerned. The subscribed capital stock is supposed to be owned by the person who makes the subscription. There are so many laws on how to collect the delinquency and so on.

I view of the Commissioner’s answer, I would like to know whether he is determined to put on the record that in order to determine the 60-40 percent sharing, we have to determine whether we will use a determinant which is the subscribed capital stock or the paid-up capital stock.

MR SUAREZ. We are principally concerned about the interpretation which would be attached to it; that is, it should be limited to authorized capital stock, not to subscribed capital stock.

I will give the Commissioner an illustration of what he is explaining to the Commission.

MR. MAAMBONG. Yes, thank you.

MR. SUAREZ. Let us say the authorized capital stock is P 1 million. Under the present rules in the Securities and Exchange Commission, at least 25 percent of that amount must be subscribed and at least 25 percent of this subscribed capital must be paid up.

Now, let us discuss the basis of 60-40. To illustrate the matter further, let us say that 60 percent of the subscriptions would be allocated to Filipinos and 40 percent of the subscribed capital would be held by foreigners. Then we come to the paid-up capitalization. Under the present rules in the Securities and Exchange Commission, a foreign corporation is supposed to subscribe to a 40-percent share which must be fully paid up.

On the other hand, the 60 percent allocated to Filipinos need not be paid up. However, at least 25 percent of the subscription must be paid up for purposes of complying with the Corporation Law. We can illustrate the matter further by saying that the compliance of 25 percent paid-up of the subscribed capital would be fulfilled by the full payment of the 40 percent by the foreigners.

So, we have a situation where the Filipino percentage of 60 may not even comply with the 25-percent requirement because of the totality due to the fully payment of the 40-percent of the foreign investors, the payment of 25 percent paid-up on the subscription would have been considered fulfilled. That is exactly what we are trying to avoid.

MR. MAAMBONG I appreciate very much the explanation but I wonder if the committee would subscribe to that view because I will stick to my thinking that in the computation of the 60-40 ratio, the basis should be on the subscription. If the subscription is being done by 60 percent Filipinos, whether it is paid-up or not and the subscription is accepted by the corporation, I think that is the proper determinant. If we base the 60-40 on the paid-up capital stock, we have a problem here where the 40 percent is fully paid up and the 60 percent is not fully paid up – this may be contrary to the provisions of the Constitution. So I would like to ask for the proper advisement from the Committee as to what should be the proper interpretation because this will cause havoc on the interpretation of our Corporation Law.

MR. ROMULO. Madam President.

THE PRESIDENT. Commissioner Romulo is recognized.

MR. ROMULO. We go by the established rule which I believe is uniformly held. It is based on the subscribed capital. I know only of one possible exception and that is where the bylaws prohibit the subscriber from voting. But that is a very rare provision in bylaws. Otherwise, my information and belief is that it is based on the subscribed capital.

MR. MAAMBONG. It is, therefore, the understanding of this Member that the Commissioner is somewhat revising the answer of Commissioner Suarez to that extent?

MR. ROMULO. No, I do not think we contradict each other. He is talking really of the instance where the subscriber is a non-resident and, therefore, must fully pay. That is how I understand his position.

MR. MAAMBONG. My understanding is that in the computation of the 60-40 sharing under the present formulation, the determinant is the paid-up capital stock to which I disagree.

MR. ROMULO. At least, from my point of view, it is the subscribed capital stock.

MR. MAAMBONG. Then that is clarified.23

x x x x

August 23, 1986, Saturday

33

MS. ROSARIO BRAID. Madam President, I propose a new section to read: "THE MANAGEMENT BODY OF EVERY CORPORATION OR ASSOCIATION SHALL IN ALL CASES BE CONTROLLED BY CITIZENS OF THE PHILIPPINES."

This will prevent management contracts and assure control by Filipino citizens. Will the committee assure us that this amendment will insure that past activities such as management contracts will no longer be possible under this amendment?

MR. ROMULO. Madam President, if I may reply.

THE PRESIDENT. Commissioner Romulo is recognized.

MR. ROMULO. May I ask the proponent to read the amendment again.

MS. ROSARIO BRAID. The amendment reads: "THE MANAGEMENT BODY OF EVERY CORPORATION OR ASSOCIATION SHALL IN ALL CASES BE CONTROLLED BY CITIZENS OF THE PHILIPPINES."

MR. DE LOS REYES. Madam President, will Commissioner Rosario Braid agree to a reformulation of her amendment for it to be more comprehensive and all-embracing?

THE PRESIDENT. Commissioner de los Reyes is recognized.

MR. DE LOS REYES. This is an amendment I submitted to the committee which reads: "MAJORITY OF THE DIRECTORS OR TRUSTEES AND ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH CORPORATION OR ASSOCIATION MUST BE CITIZENS OF THE PHILIPPINES."

This amendment is more direct because it refers to particular officers to be all-Filipino citizens.

MR. BENGZON. Madam President.

THE PRESIDENT. Commissioner Bengzon is recognized.

MR. BENGZON. The committee sitting out here accepts the amendment of Commissioner de los Reyes which subsumes the amendment of Commissioner Rosario Braid.

THE PRESIDENT. So this will be a joint amendment now of Commissioners Rosario Braid, de los Reyes and others.

MR. REGALADO. Madam President, I join in that amendment with the request that it will be the last sentence of Section 15 because we intend to put an anterior amendment. However, that particular sentence which subsumes also the proposal of Commissioner Rosario Braid can just be placed as the last sentence of the article.

THE PRESIDENT. Is that acceptable to the committee?MR. VILLEGAS. Yes, Madam President.MS. ROSARIO BRAID. Thank you.MR. RAMA, The body is now ready to vote on the amendment.FR. BERNAS. Madam President.THE PRESIDENT. Commissioner Bernas is recognized.FR. BERNAS. Will the committee accept a reformulation of the first part?MR. BENGZON. Let us hear it.

FR. BERNAS. The reformulation will be essentially the formula of the 1973 Constitution which reads: "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING BODY OF ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE SHARE IN THE CAPITAL THEREOF AND…"

MR. VILLEGAS. "ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH CORPORATIONS AND ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES."

MR. BENGZON. Will Commissioner Bernas read the whole thing again?

FR. BERNAS. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING BODY OF ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE SHARE IN THE CAPITAL THEREOF…" I do not have the rest of the copy.

MR. BENGZON. "AND ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH CORPORATIONS OR ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES." Is that correct?

MR. VILLEGAS. Yes.

MR. BENGZON. Madam President, I think that was said in a more elegant language. We accept the amendment. Is that all right with Commissioner Rosario Braid?

MS. ROSARIO BRAID. Yes.

THE PRESIDENT. The original authors of this amendment are Commissioners Rosario Braid, de los Reyes, Regalado, Natividad, Guingona and Fr. Bernas.

MR. DE LOS REYES. The governing body refers to the board of directors and trustees.

MR. VILLEGAS. That is right.

MR. BENGZON. Yes, the governing body refers to the board of directors.

MR. REGALADO. It is accepted.

MR. RAMA. The body is now ready to vote, Madam President.

VOTING

THE PRESIDENT. As many as are in favour of this proposed amendment which should be the last sentence of Section 15 and has been accepted by the committee, pleas raise their hand. (All Members raised their hand.)

As many as are against, please raise their hand. (No Member raised his hand.)

The results show 29 votes in favour and none against; so the proposed amendment is approved.24

It can be concluded that the view advanced by Justice Carpio is incorrect as the deliberations easily reveal thatthe intent of the framers was not to limit the definition of the word "capital" as meaning voting shares/stocks.

The majority in the original decision reproduced the CONCOM deliberations held on August 13 and August 15, 1986, but neglected to quote the other pertinent portions of the deliberations that would have shed light on the true intent of the framers of the Constitution.

It is conceded that Proposed Resolution No. 496 on the language of what would be Art. XII of the Constitution contained the phrase "voting stock or controlling interest," viz:

PROPOSED RESOLUTION NO. 496

RESOLUTION TO INCORPORATE IN THE NEW CONSTITUTION AN ARTICLE ON NATIONAL ECONOMY AND PATRIMONY

Be it resolved as it is hereby resolved by the Constitutional Commission in session assembled, To incorporate the National

34

Economy and Patrimony of the new Constitution, the following provisions:

ARTICLE____NATIONAL ECONOMY AND PATRIMONY

x x x x

SEC. 15. 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 two-thirds of whose voting stock or controlling interest is owned by such citizens. Neither shall any such franchise or right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by Congress when the common good so requires. The State shall encourage equity participation in public utilities by the general public.25 (This became Sec. 11, Art. XII)(Emphasis supplied.)

The aforequoted deliberations disclose that the Commission eventually and unequivocally decided to use "capital," which refers to the capital stock of the corporation, "as was employed in the 1935 and 1973 Constitution," instead of the proposed "voting stock or controlling interest" as the basis for the percentage of ownership allowed to foreigners. The following exchanges among Commissioners Foz, Suarez and Bengzon reflect this decision, but the majority opinion in the June 28, 2011 Decision left their statements out:

MR. FOZ. Mr. Vice-President, in Sections 3 and 9,26 the provision on equity is both 60 percent, but I notice that this is now different from the provision in the 1973 Constitution in that the basis for the equity provision is voting stock or controlling interest instead of the usual capital percentage as provided for in the 1973 Constitution. We would like to know what the difference would be between the previous and the proposed provisions regarding equity interest.

x x x x

MR. SUAREZ. x x x As a matter of fact, this particular portion is still being reviewed x x x. In Section 1, Article XIII of the 1935 Constitution, the wording is that the percentage should be based on the capital which is owned by such citizens. In the proposed draft, this phrase was proposed: "voting stock or controlling interest." This was a plan submitted by the UP Law Center.

x x x We would have three criteria to go by: One would be based on capital, which is capital stock of the corporation, authorized, subscribed or paid up, as employed under the 1935 and the 1973 Constitution. The idea behind the introduction of the phrase "voting stock or controlling interest" was precisely to avoid the perpetration of dummies, Filipino dummies of multinationals. It is theoretically possible that a situation may develop where these multinational interests would not really be only 40 percent but will extend beyond that in the matter of voting because they could enter into what is known as a voting trust or voting agreement with the rest of the stockholders and, therefore, notwithstanding the fact that on record their capital extent is only up to 40- percent interest in the corporation, actually, they would be managing and controlling the entire company. That is why the UP Law Center members suggested that we utilize the words "voting interest" which would preclude multinational control in the matter of voting, independent of the capital structure of the corporation. And then they also added the phrase "controlling interest" which up to now they have not been able to successfully define the exact meaning of. x x x And as far as I am concerned, I am not speaking in behalf of the Committee, I would feel more comfortable if we go back to the wording ofthe 1935 and the 1973 Constitution, that is to say, the 60-40 percentage could be based on the capital stock of the corporation.

x x x x

MR. BENGZON. I also share the sentiment of Commissioner Suarez in that respect. So there are already two in the Committee who want to go back to the wording of the 1935 and the 1973 Constitution.27

In fact, in another portion of the CONCOM deliberations conveniently glossed over by the June 28, 2011 Decision, then Commissioner Davide strongly resisted the retention of the term "capital" as used in the 1935 and 1973 Constitution on the ground that the term refers to both voting and nonvoting. Eventually, however, he came around to accept the use of "CAPITAL" along with the majority of the members of the Committee on Natural Economy and Patrimony in the afternoon session held on August 15, 1986:

MR. TREÑAS. x x x may I propose an amendment on line 14 of Section 3 by deleting therefrom "whose voting stock and controlling interest." And in lieu thereof, insert the CAPITAL so the line should read: "associations at least sixty percent of the CAPITAL is owned by such citizens.

MR. VILLEGAS. We accept the amendment.

MR. TREÑAS. Thank you.

THE PRESIDENT. The amendment of Commissioner Treñas on line 14 has been accepted by the Committee.

Is there any objection? (Silence) The Chair hears none; the amendment is approved.28

x x x x

MR. SUAREZ. x x x Two points are being raised by Commissioner Davide’s proposed amendment. One has reference to the percentage of holdings and the other one is the basis for the percentage x x x x Is the Commissioner not insisting on the voting capital stock because that was already accepted by the Committee?

MR. DAVIDE. Would it mean that it would be 100-percent voting capital stock?

MR. SUAREZ. No, under the Commissioner’s proposal it is just "CAPITAL" not "stock."

MR. DAVIDE. No, I want it to be very clear. What is the alternative proposal of the Committee? How shall it read?

MR. SUAREZ. It will only read something like: "the CAPITAL OF WHICH IS FULLY owned."

MR. VILLEGAS. Let me read lines 12 to 14 which state:

… enter into co-production, joint venture, production sharing agreements with Filipino citizens or corporations or associations at least 60 percent of whose CAPITAL is owned by such citizens.

We are going back to the 1935 and 1973 formulations.

MR. DAVIDE. I cannot accept the proposal because the word CAPITAL should not really be the guiding principle. It is the ownership of the corporation. It may be voting or not voting, but that is not the guiding principle.

x x x x

THE PRESIDENT…. Commissioner Davide is to clarify his point.

MR. VILLEGAS. Yes, Commissioner Davide has accepted the word "CAPITAL" in place of "voting stock or controlling interest." This is an amendment already accepted by the Committee.29

35

The above exchange precedes the clarifications made by then Commissioner Azcuna, which were cited in the June 28, 2011 Decision. Moreover, the statements made subsequent to the portion quoted in the June 28, 2011 Decision emphasize the CONCOM’s awareness of the plain meaning of the term "capital" without the qualification espoused in the majority’s decision:

MR. AZCUNA. May I be clarified as to [what] was accepted x x x.

MR. VILLEGAS. The portion accepted by the Committee is the deletion of the phrase "voting stock or controlling interest."

MR. AZCUNA. Hence, without the Davide amendment, the committee report would read: "corporations or associations at least sixty percent of whose CAPITAL is owned by such citizens."

MR. VILLEGAS. Yes.

MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60 percent of the capital to be owned by citizens?

MR. VILLEGAS. That is right.

MR. AZCUNA. But the control can be with the foreigners even if they are the minority. Let us say 40 percent of the capital is owned by them, but it is the voting capital, whereas, the Filipinos own the nonvoting shares. So we can have a situation where the corporation is controlled by foreigners despite being the minority because they have the voting capital. That is the anomaly that would result here.

MR. BENGZON. No, the reason we eliminated the word "stock" as stated in the 1973 and 1935 Constitutions is that xxx there are associations that do not have stocks. That is why we say "CAPITAL."

MR. AZCUNA. We should not eliminate the phrase "controlling interest."

MR. BENGZON. In the case of stock corporation, it is assumed.

MR. AZCUNA. Yes, but what I mean is that the control should be with the Filipinos.

MR. BENGZON. Yes, that is understood.

MR. AZCUNA. Yes, because if we just say "sixty percent of whose capital is owned by the Filipinos," the capital may be voting or non-voting.

MR. BENGZON. That is correct.30

More importantly, on the very same August 15, 1986 session, Commissioner Azcuna no longer insisted on retaining the delimiting phrase "controlling interest":

MR. GARCIA. Thank you very much, Madam President.

I would like to propose the following amendment on Section 3, line 14 on page 2. I propose to change the word "sixty" to SEVENTY-FIVE. So, this will read: "or it may enter into co-production, joint venture, production sharing agreements with Filipino citizens or corporations or associations at least SEVENTY-FIVE percent of whose CAPITAL stock or controlling interest is owned by such citizens."

MR. VILLEGAS. This is just a correction. I think Commissioner Azcuna is not insisting on the retention of the phrase "controlling interest," so we will retain "CAPITAL" to go back really to the 1935 and 1973 formulations.31 (Emphasis supplied.)

The later deliberations held on August 22, 1986 further underscore the framers’ true intent to include both voting and non-voting shares as coming within the pale of the word "capital." The UP Law Center attempted to limit the scope of the word along the line then and now adopted by the majority, but, as can be gleaned from the following discussion, the framers opted not to adopt the proposal of the UP Law Center to add the more protectionist phrase "voting stock or controlling interest":

MR. NOLLEDO. x x x I would like to propound some questions xxx. I have here a copy of the approved provisions on Article on the National Economy and Patrimony. x x x

I notice that this provision was amended by Commissioner Davide by changing "voting stocks" to "CAPITAL," but I still notice that there appears the term "controlling interest" x x x. Besides, the wordings may indicate that the 60 percent may be based not only on capital but also on controlling interest; it could mean 60 percent or 51 percent.

Before I propound the final question, I would like to make a comment in relation to Section 15 since they are related to each other. I notice that in Section 15, there still appears the phrase "voting stock or controlling interest." The term "voting stocks" as the basis of the Filipino equity means that if 60 percent of the voting stocks belong to Filipinos, foreigners may now own more than 40 percent of the capital as long as the 40 percent or the excess thereof will cover nonvoting stock. This is aside from the fact that under the Corporation Code, even nonvoting shares can vote on certain instances.Control over investments may cover aspects of management and participation in the fruits of production or exploitation.

So, I hope the committee will consider favorably my recommendation that instead of using "controlling interests," we just use "CAPITAL" uniformly in cases where foreign equity is permitted by law, because the purpose is really to help the Filipinos in the exploitation of natural resources and in the operation of public utilities. x x x

What does the committee say?

MR. VILLEGAS. We completely agree with the Commissioner’s views. Actually, it was really an oversight. We did decide on the word "CAPITAL." I think it was the opinion of the majority that the phrase "controlling interest" is ambiguous.

So, we do accept the Commissioner’s proposal to eliminate the phrase "or controlling interest" in all the provisions that talk about foreign participation.

MR. NOLLEDO. Not only in Section 3, but also with respect to Section 15.32 (Emphasis supplied.)

In fact, on the very same day of deliberations, the Commissioners clarified that the proper and more specific "interpretation" that should be attached to the word "capital" is that it refers to the "subscribed capital," a corporate concept defined as "that portion of the authorized capital stock that is covered by subscription agreements whether fully paid or not"33 and refers to both voting and non-voting shares:

MR. MAAMBONG. x x x I would like to be clarified on the use of the word "CAPITAL."

MR. VILLEGAS. Yes, that was the word used in the 1973 and the 1935 Constitutions.

MR. MAAMBONG. Let us delimit ourselves to that word "CAPITAL." In the Corporation Law, if I remember correctly, we have three types of capital: the authorized capital stock, the subscribed capital stock and the paid-up capital stock.

x x x x

36

I would like to get clarification on this. If I remember my corporation law correctly, we usually use a determinant in order to find out what the ratio of ownership is, not really on the paid-up capital stock but on the subscribe capital stock.

x x x x

x x x I would like to know whether (Commissioner Suarez) is determined to put on the record that in order to determine the 60-40 percent sharing, we have to determine whether we will use a determinant which is the subscribed capital stock or the paid-up capital stock.

MR. SUAREZ. We are principally concerned about the interpretation which would be attached to it, that is, it should be limited to authorized capital stock, not to subscribed capital stock.

I will give the Commissioner an illustration of what he is explaining to the Commission.

x x x x

Let us say authorized capital stock is P 1 million. Under the present rules in the [SEC], at least 25 percent of that amount must be subscribed and at least 25 percent of this subscribed capital must be paid up.

Now, let us discuss the basis of 60-40. To illustrate the matter further, let us say that 60 percent of the subscriptions would be allocated to Filipinos and 40 percent of the subscribed capital stock would be held by foreigners. Then we come to the paid-up capitalization. Under the present rules in the [SEC], a foreign corporation is supposed to subscribe to 40-percent share which must be fully paid up.

On the other hand, the 60 percent allocated to Filipinos need not be paid up. However, at least 25 percent of the subscription must be paid up for purposes of complying with the Corporation Law. We can illustrate the matter further by saying that the compliance of 25 percent paid-up of the subscribed capital would be fulfilled by the full payment of the 40 percent by the foreigners.

So, we have a situation where the Filipino percentage of 60 may not even comply with the 25-percent requirement because of the totality due to the full payment of the 40-percent of the foreign investors, the payment of 25 percent paid-up on the subscription would have been considered fulfilled. That is exactly what we are trying to avoid.

MR. MAAMBONG. I appreciate very much the explanation but I wonder if the committee would subscribe to that view because I will stick to my thinking that in the computation of the 60-40 ratio, the basis should be on the subscription. x x x

x x x x

MR. ROMULO. We go by the established rule which I believe is uniformly held. It is based on the subscribed capital. x x x

x x x x

I do not think that we contradict each other. (Commisioner Suarez) is talking really of the instance where the subscriber is a non-resident and, therefore, must fully pay. That is how I understand his position.

MR. MAAMBONG. My understanding is that in the computation of the 60-40 sharing under the present formulation, the determinant is the paid-up capital stock to which I disagree.

MR . ROMULO. At least, from my point of view, it is the subscribed capital stock."34

Clearly, while the concept of voting capital as the norm to determine the 60-40 Filipino-alien ratio was initially debated upon as a result of the proposal to use "at least two-thirds of whose voting stock or controlling interest is owned by such citizens,"35 in what would eventually be Sec. 11, Art. XII of the Constitution, that proposal was eventually discarded. And nowhere in the records of the CONCOM can it be deduced that the idea of full ownership of voting stocks presently parlayed by the majority was earnestly, if at all, considered. In fact, the framers decided that the term "capital," as used in the 1935 and 1973 Constitutions, should be properly interpreted as the "subscribed capital," which, again, does not distinguish stocks based on their board-membership voting features.

Indeed, the phrase "voting stock or controlling interest" was suggested for and in fact deliberated, but was similarly dropped in the approved draft provisions on National Economy and Patrimony, particularly in what would become Sections 236 and 10,37 Article XII of the 1987 Constitution. However, the framers expressed preference to the formulation of the provision in question in the 1935 and 1973 Constitutions, both of which employed the word "capital" alone. This was very apparent in the aforementioned deliberations and affirmed by amicus curiae Dr. Bernardo Villegas, Chair of the Committee on the National Economy and Patrimony in charge of drafting Section 11 and the rest of Article XII of the Constitution. During the June 26, 2012 oral arguments, Dr. Villegas manifested that:

x x x Justice Abad was right. [If i]t was not in the minds of the Commissioners to define capital broadly, these additional provisions would be meaningless. And it would have been really more or less expressing some kind of a contradiction in terms. So, that is why I was pleasantly surprised that one of the most pro-Filipino members of the Commission, Atty. Jose Suarez, who actually voted "NO" to the entire Constitution has only said, was one of the first to insist, during one of the plenary sessions that we should reject the UP Law Center recommendation. In his words, I quote "I would feel more comfortable if we go back to the wording of the 1935 and 1970 Constitutions that is to say the 60-40 percentage could be based on the capital stock of the corporation." The final motion was made by Commissioner Efren Treñas, in the same plenary session when he moved, "Madam President, may I propose an amendment on line 14 of Section 3 by deleting therefrom ‘whose voting stock and controlling interest’ and in lieu thereof, insert capital, so the line should read: "associations of at least sixty percent (60%) of the capital is owned by such citizens." After I accepted the amendment since I was the chairman of the National Economy Committee, in the name of the Committee, the President of the Commission asked for any objection. When no one objected, the President solemnly announced that the amendment had been approved by the Plenary. It is clear, therefore, that in the minds of the Commissioners the word "capital" in Section 11 of Article XII refers, not to voting stock, but to total subscribed capital, both common and preferred.38(Emphasis supplied.)

There was no change in phraseology from the 1935 and1973 Constitutions, or a transitory provision that signalssuch change, with respect to foreign ownership in publicutility corporations (2nd extrinsic aid)

If the framers wanted the word "capital" to mean voting capital stock, their terminology would have certainly been unmistakably limiting as to leave no doubt about their intention. But the framers consciously and purposely excluded restrictive phrases, such as "voting stocks" or "controlling interest," in the approved final draft, the proposal of the UP Law Center, Commissioner Davide and Commissioner Azcuna notwithstanding. Instead, they retained "capital" as "used in the 1935 and 1973 Constitutions."39 There was, therefore, a conscious design to avoid stringent words that would limit the meaning of "capital" in a sense insisted upon by the majority. Cassus omissus pro omisso habendus est––a person, object, or thing omitted must have been omitted intentionally. More importantly, by using the word "capital," the intent of the framers of the Constitution was to include all types of shares, whether voting or nonvoting, within the ambit of the word.

37

History or realities or circumstances prevailing during thedrafting of the Constitution validate the adoption of the plainmeaning of "Capital" (3rd extrinsic aid)

This plain, non-exclusive interpretation of "capital" also comes to light considering the economic backdrop of the 1986 CONCOM when the country was still starting to rebuild the financial markets and regain the foreign investors’ confidence following the changes caused by the toppling of the Martial Law regime. As previously pointed out, the Court, in construing the Constitution, must take into consideration the aims of its framers and the evils they wished to avoid and address. In Civil Liberties Union v. Executive Secretary,40 We held:

A foolproof yardstick in constitutional construction is the intention underlying the provision under consideration. Thus, it has been held that the Court in construing a Constitution should bear in mind the object sought to be accomplished by its adoption, and the evils, if any, sought to be prevented or remedied. A doubtful provision will be examined in the light of the history of the times, and the condition and circumstances under which the Constitution was framed. The object is to ascertain the reason which induced the framers of the Constitution to enact the particular provision and the purpose sought to be accomplished thereby, in order to construe the whole as to make the words consonant to that reason and calculated to effect that purpose. (Emphasis supplied.)

It is, thus, proper to revisit the circumstances prevailing during the drafting period. In an astute observation of the economic realities in 1986, quoted by respondent Pangilinan, University of the Philippines School of Economics Professor Dr. Emmanuel S. de Dios examined the nation’s dire need for foreign investments and foreign exchange during the time when the framers deliberated on what would eventually be the National Economy and Patrimony provisions of the Constitution:

The period immediately after the 1986 EDSA Revolution is well known to have witnessed the country’s deepest economic crisis since the Second World War. Official data readily show this period was characterised by the highest unemployment, highest interest rates, and largest contractions in output the Philippine economy experienced in the postwar period. At the start of the Aquino administration in 1986, total output had already contracted by more than seven percent annually for two consecutive years (1984 and 1985), inflation was running at an average of 35 percent, unemployment more than 11 percent, and the currency devalued by 35 percent.

The proximate reason for this was the moratorium on foreigndebt payments the country had called in late 1983, effectively cutting off the country’s access to international credit markets (for a deeper contemporary analysis of what led to the debt crisis, see de Dios 1984). The country therefore had to subsist only on its current earnings from exports, which meant there was a critical shortage of foreign exchange. Imports especially of capital goods and intermediate goods therefore had to be drastically curtailed x x x.

For the same reasons, obviously, new foreign investments were unlikely to be forthcoming. This is recorded by Bautista 2003:158, who writes:

Long-term capital inflows have been rising at double-digit rates since 1980, except during 1986-1990, a time of great political and economic uncertainty following the period of martial law under President Marcos.

The foreign-exchange controls then effectively in place will have made importing inputs difficult for new enterprises, particularly foreign investors (especially Japanese) interested in relocating some of theirexport-oriented but import-dependent operations to the Philippines. x x x The same foreign-exchange restrictions would have made the freedom to remit profits a dicey affairs. Finally, however, the period was also characterised by extreme

political uncertainty, which did not cease even after the Marcos regime was toppled.41 x x x

Surely, it was far from the minds of the framers to alienate and disenfranchise foreign investors by imposing an indirect restriction that only exacerbates the dichotomy between management and ownership without the actual guarantee of giving control and protection to the Filipino investors. Instead, it can be fairly assumed that the framers intended to avoid further economic meltdown and so chose to attract foreign investors by allowing them to 40% equity ownership of the entirety of the corporate shareholdings but, wisely, imposing limits on their participation in the governing body to ensure that the effective control and ultimate economic benefits still remained with the Filipino shareholders.

Judicial decisions and prior laws use and/or treat"capital" as "capital stock" (4th extrinsic aid)

That the term "capital" in Sec. 11, Art. XII is equivalent to "capital stock," which encompasses all classes of shares regardless of their nomenclature or voting capacity, is easily determined by a review of various laws passed prior to the ratification of the 1987 Constitution. In 1936, for instance, the Public Service Act42 established the nationality requirement for corporations that may be granted the authority to operate a "public service,"43 which include most of the present-day public utilities, by referring to the paid-up "capital stock" of a corporation, viz:

Sec. 16. Proceedings of the Commission, upon notice and hearing. – The Commission shall have power, upon proper notice and hearing in accordance with the rules and provisions of this Act, subject to the limitations and exceptions mentioned and saving provisions to the contrary:

(a) To issue certificates which shall be known as certificates of public convenience, authorizing the operation of public service within the Philippines whenever the Commission finds that the operation of the public service proposed and the authorization to do business will promote the public interest in a proper and suitable manner. Provided, That thereafter, certificates of public convenience and certificates of public convenience and necessity will be granted only tocitizens of the Philippines or of the United States or to corporations, co-partnerships, associations or joint-stock companies constituted and organized under the laws of the Philippines; Provided, That sixty per centum of the stock or paid-up capital of any such corporations, co-partnership, association or joint-stock company must belong entirely to citizens of the Philippines or of the United States: Provided, further, That no such certificates shall be issued for a period of more than fifty years. (Emphasis supplied.)

The heading of Sec. 2 of Commonwealth Act No. (CA) 108, or the Anti-Dummy Law, which was approved on October 30, 1936, similarly conveys the idea that the term "capital" is equivalent to "capital stock"44:

Section 2. Simulation of minimum capital stock — In all cases in which a constitutional or legal provision requires that, in order that a corporation or association may exercise or enjoy a right, franchise or privilege, not less than a certain per centum of its capital must be owned by citizens of the Philippines or of any other specific country, it shall be unlawful to falsely simulate the existence of such minimum stock or capital as owned by such citizens, for the purpose of evading said provision. The president or managers and directors or trustees of corporations or associations convicted of a violation of this section shall be punished by imprisonment of not less than five nor more than fifteen years, and by a fine not less than the value of the right, franchise or privilege, enjoyed or acquired in violation of the provisions hereof but in no case less than five thousand pesos.45 (Emphasis and underscoring supplied.)

38

Pursuant to these legislative acts and under the aegis of the Constitutional nationality requirement of public utilities then in force, Congress granted various franchises upon the understanding that the "capital stock" of the grantee is at least 60% Filipino. In 1964, Congress, via Republic Act No. (RA) 4147,46 granted Filipinas Orient Airway, Inc. a legislative franchise to operate an air carrier upon the understanding that its "capital stock" was 60% percent Filipino-owned. Section 14 of RA 4147, provided:

Sec. 14. This franchise is granted with the understanding that the grantee is a corporation sixty per cent of the capital stock of which is the bona fide property of citizens of the Philippines and that the interest of such citizens in its capital stock or in the capital of the Company with which it may merge shall at no time be allowed to fall below such percentage, under the penalty of the cancellation of this franchise. (Emphasis and underscoring supplied.)

The grant of a public utility franchise to Air Manila. Inc. to establish and maintain air transport in the country a year later pursuant to RA 450147 contained exactly the same Filipino capitalization requirement imposed in RA 4147:

Sec. 14. This franchise is granted with the understanding that the grantee is a corporation, sixty per cent of the capital stock of which is owned or the bona fide property of citizens of the Philippinesand that the interest of such citizens in its capital stock or in the capital of the company with which it may merge shall at no time be allowed to fall below such percentage, under the penalty of the cancellation of this franchise. (Emphasis and underscoring supplied.)

In like manner, RA 5514,48 which granted a franchise to the Philippine Communications Satellite Corporation in 1969, required of the grantee to execute management contracts only with corporations whose "capital or capital stock" are at least 60% Filipino:

Sec. 9. The grantee shall not lease, transfer, grant the usufruct of, sell or assign this franchise to any person or entity, except any branch or instrumentality of the Government, without the previous approval of the Congress of the Philippines: Provided, That the grantee may enter into management contract with any person or entity, with the approval of the President of the Philippines: Provided, further, That such person or entity with whom the grantee may enter into management contract shall be a citizen of the Philippines and in case of an entity or a corporation, at least sixty per centum of the capital or capital stock of which is owned by citizens of the Philippines. (Emphasis supplied.)

In 1968, RA 5207,49 otherwise known as the "Atomic Energy Regulatory Act of 1968," considered a corporation sixty percent of whose capital stock as domestic:

Sec. 9. Citizenship Requirement. No license to acquire, own, or operate any atomic energy facility shall be issued to an alien, or any corporation or other entity which is owned or controlled by an alien, a foreign corporation, or a foreign government.

For purposes of this Act, a corporation or entity is not owned or controlled by an alien, a foreign corporation of a foreign government if at least sixty percent (60%) of its capital stock is owned by Filipino citizens. (Emphasis supplied.)

Anent pertinent judicial decisions, this Court has used the very same definition of capital as equivalent to the entire capital stockholdings in a corporation in resolving various other issues. In National Telecommunications Commission v. Court of Appeals,50 this Court, thus, held:

The term "capital" and other terms used to describe the capital structure of a corporation are of universal acceptance, and their usages have long been established in jurisprudence. Briefly,capital refers to the value of the property or assets of a corporation. The capital subscribed

is the total amount of the capital that persons (subscribers or shareholders) have agreed to take and pay for, which need not necessarily be, and can be more than, the par value of the shares. In fine, it is the amount that the corporation receives, inclusive of the premiums if any, in consideration of the original issuance of the shares. In the case of stock dividends, it is the amount that the corporation transfers from its surplus profit account to its capital account. It is the same amount that can loosely be termed as the "trust fund" of the corporation. The "Trust Fund" doctrine considers this subscribed capital as a trust fund for the payment of the debts of the corporation, to which the creditors may look for satisfaction. Until the liquidation of the corporation, no part of the subscribed capital may be returned or released to the stockholder (except in the redemption of redeemable shares) without violating this principle. Thus, dividends must never impair the subscribed capital; subscription commitments cannot be condoned or remitted; nor can the corporation buy its own shares using the subscribed capital as the consideration therefor.51

This is similar to the holding in Banco Filipino v. Monetary Board52 where the Court treated the term "capital" as including both common and preferred stock, which are usually deprived of voting rights:

It is clear from the law that a solvent bank is one in which its assets exceed its liabilities. It is a basic accounting principle that assets are composed of liabilities and capital. The term "assets" includes capital and surplus" (Exley v. Harris, 267 p. 970, 973, 126 Kan., 302). On the other hand, the term "capital" includes common and preferred stock, surplus reserves, surplus and undivided profits. (Manual of Examination Procedures, Report of Examination on Department of Commercial and Savings Banks, p. 3-C). If valuation reserves would be deducted from these items, the result would merely be the networth or the unimpaired capital and surplus of the bank applying Sec. 5 of RA 337 but not the total financial condition of the bank.

In Commissioner of Internal Revenue v. Court of Appeals,53 the Court alluded to the doctrine of equality of shares in resolving the issue therein and held that all shares comprise the capital stock of a corporation:

A common stock represents the residual ownership interest in the corporation. It is a basic class of stock ordinarily and usually issued without extraordinary rights or privileges and entitles the shareholder to a pro rata division of profits. Preferred stocks are those which entitle the shareholder to some priority on dividends and asset distribution. Both shares are part of the corporation’s capital stock. Both stockholders are no different from ordinary investors who take on the same investment risks. Preferred and common shareholders participate in the same venture, willing to share in the profit and losses of the enterprise. Moreover, under the doctrine of equality of shares --- all stocks issued by the corporation are presumed equal with the same privileges and liabilities, provided that the Articles of Incorporation is silent on such differences.54 (Emphasis supplied.)

The SEC has reflected the popular contemporaneousconstruction of capital in computing the nationalityrequirement based on the total capital stock, not onlythe voting stock, of a corporation (5th extrinsic aid)

The SEC has confirmed that, as an institution, it has always interpreted and applied the 40% maximum foreignownership limit for public utilities to the total capital stock, and not just its total voting stock.

In its July 29, 2011 Manifestation and Omnibus Motion, the SEC reaffirmed its longstanding practice and history of enforcement of the 40% maximum foreign ownership limit for public utilities, viz:

5. The Commission respectfully submits that it has always performed its duty under Section 17(4) of the Corporation Code to enforce the foreign equity restrictions under Section 11, Article XII of the Constitution on the ownership of public utilities.

39

x x x x

8. Thus, in determining compliance with the Constitutional restrictions on foreign equity, the Commission consistently construed and applied the term "capital" in its commonly accepted usage, that is – the sum total of the shares subscribed irrespective of their nomenclature and whether or not they are voting or non-voting (Emphasis supplied).

9. This commonly accepted usage of the term ‘capital’ is based on persuasive authorities such as the widely esteemed Fletcher Cyclopedia of the Law of Private Corporations, and doctrines from American Jurisprudence. To illustrate, in its Opinion dated February 15, 1988 addresses to Gozon, Fernandez, Defensor and Associates, the Commission discussed how the term ‘capital’ is commonly used:

"Anent thereto, please be informed that the term ‘capital’ as applied to corporations, refers to the money, property or means contributed by stockholders as the form or basis for the business or enterprise for which the corporation was formed and generally implies that such money or property or means have been contributed in payment for stock issued to the contributors. (United Grocers, Ltd. v. United States F. Supp. 834, cited in 11 Fletcher, Cyc. Corp., 1986, rev. vol., sec. 5080 at 18). As further ruled by the court, ‘capital of a corporation is the fund or other property, actually or potentially in its possession, derived or to be derived from the sale by it of shares of its stock or his exchange by it for property other than money. This fund includes not only money or other property received by the corporation for shares of stock but all balances of purchase money, or instalments, due the corporation for shares of stock sold by it, and all unpaid subscriptions for shares.’" (Williams v. Brownstein, 1F. 2d 470, cited in 11 Fletcher, Cyc. Corp., 1058 rev. vol., sec. 5080, p. 21).

The term ‘capital’ is also used synonymously with the words ‘capital stock’, as meaning the amount subscribed and paidin and upon which the corporation is to conduct its operation. (11 Fletcher, Cyc. Corp. 1986, rev. vol., sec. 5080 at 15). And, as held by the court in Haggard v. Lexington Utilities Co., (260 Ky 251, 84 SW 2d 84, cited in 11 Fletcher, Cyc. Corp., 1958 rev. vol., sec. 5079 at 17), ‘The capital stock of a corporation is the amount paidin by its stockholders in money, property or services with which it is to conduct its business, and it is immaterial how the stock is classified, whether as common or preferred.’

The Commission, in a previous opinion, ruled that the term ‘capital’ denotes the sum total of the shares subscribed and paid by the shareholders or served to be paid, irrespective of their nomenclature. (Letter to Supreme Technotronics Corporation, dated April 14, 1987)." (Emphasis ours)

10. Further, in adopting this common usage of the term ‘capital,’ the Commission believed in good faith and with sound reasons that it was consistent with the intent and purpose of the Constitution. In an Opinion dated 27 December 1995 addressed to Joaquin Cunanan & Co. the Commission observed that:

"To construe the 60-40% equity requirement as merely based on the voting shares, disregarding the preferred non-voting share, not on the total outstanding subscribed capital stock, would give rise to a situation where the actual foreign interest would not really be only 40% but may extend beyond that because they could also own even the entire preferred non-voting shares. In this situation, Filipinos may have the control in the operation of the corporation by way of voting rights, but have no effective ownership of the corporate assets which includes lands, because the actual Filipino equity constitutes only a minority of the entire outstanding capital stock. Therefore, in essence, the company, although controlled by Filipinos, is beneficially owned by foreigners since the actual ownership of at least 60% of the entire outstanding capital stocks would be in the hands of foreigners. Allowing this situation would open the floodgates to circumvention of the intent of the law to make the Filipinos the principal beneficiaries in the ownership of alienable lands." (Emphasis ours)

11. The foregoing settled principles and esteemed authorities relied upon by the Commission show that its interpretation of the term ‘capital’ is reasonable.

12. And, it is well settled that courts must give due deference to an administrative agency’s reasonable interpretation of the statute it enforces.55

It should be borne in mind that the SEC is the government agency invested with the jurisdiction to determine at the first instance the observance by a public utility of the constitutional nationality requirement prescribed vis-à-vis the ownership of public utilities56 and to interpret legislative acts, like the FIA. The rationale behind the doctrine of primary jurisdiction lies on the postulate that such administrative agency has the "special knowledge, experience and tools to determine technical and intricate matters of fact…"57 Thus, the determination of the SEC is afforded great respect by other executive agencies, like the Department of Justice (DOJ),58 and by the courts.

Verily, when asked as early as 1988– "Would it be legal for foreigners to own in a public utility entity more than 40% of the common shares but not more than 40% of the total outstanding capital stock which would include both common and non-voting preferred shares?" –the SEC, citing Fletcher, invariably answered in the affirmative, whether the poser was made in light of the present or previous Constitutions:

The pertinent provision of the Philippine Constitution under Article XII, Section 7, reads in part thus:

"No franchise, certificate, or any 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. . ." x x x

The issue raised on your letter zeroes in on the meaning of the word "capital" as used in the above constitutional provision. Anent thereto, please be informed that the term "capital" as applied to corporations, refers to the money, property or means contributed by stockholders as the form or basis for the business or enterprise for which the corporation was formed and generally implies that such money or property or means have been contributed in payment for stock issued to the contributors. (United Grocers, Ltd. v. United States F. Supp. 834, cited in 11 Fletcher, Cyc. Corp., 1986, rev. vol., sec. 5080 at 18). As further ruled by the court, "capital of a corporation is the fund or other property, actually or potentially in its possession, derived or to be derived from the sale by it of shares of its stock or his exchange by it for property other than money. This fund includes not only money or other property received by the corporation for shares of stock but all balances of purchase money, or installments, due the corporation for shares of stock sold by it, and all unpaid subscriptions for shares." (Williams v. Brownstein, 1F. 2d 470, cited in 11 Fletcher, Cyc. Corp., 1058 rev. vol., sec. 5080, p. 21).

The term "capital" is also used synonymously with the words "capital stock", as meaning the amount subscribed and paid-in and upon which the corporation is to conduct its operation. (11 Fletcher, Cyc. Corp. 1986, rev. vol., sec. 5080 at 15). And, as held by the court in Haggard v. Lexington Utilities Co., (260 Ky 251, 84 SW 2d 84, cited in 11 Fletcher, Cyc. Corp., 1958 rev. vol., sec. 5079 at 17), "The capital stock of a corporation is the amount paid-in by its stockholders in money, property or services with which it is to conduct its business, and it is immaterial how the stock is classified, whether as common or preferred."

The Commission, in a previous opinion, ruled that the term ‘capital’ denotes the sum total of the shares subscribed and paid by the shareholders or served to be paid, irrespective of their nomenclature. (Letter to Supreme Technotronics Corporation, dated April 14, 1987). Hence, your query is answered in the affirmative.59 (Emphasis supplied.)

40

As it were, the SEC has held on the same positive response long before the 1987 Constitution came into effect, a matter of fact which has received due acknowledgment from this Court. In People v. Quasha,60 a case decided under the 1935 Constitution, this Court narrated that in 1946 the SEC approved the incorporation of a common carrier, a public utility, where Filipinos, while not holding the controlling vote, owned the majority of the capital, viz:

The essential facts are not in dispute. On November 4, 1946, the Pacific Airways Corporation registered its articles of incorporation with the [SEC]. The articles were prepared and the registration was effected by the accused, who was in fact the organizer of the corporation. The articles stated that the primary purpose of the corporation was to carry on the business of a common carrier by air, land, or water, that its capital stock was P 1,000,000, represented by 9,000 preferred and 100,000 common shares, each preferred share being of the par value of P 100 and entitled to 1/3 vote and each common share, of the par value of P 1 and entitled to one vote; that the amount of capital stock actually subscribed was P 200,000, and the names of the subscriber were Arsenio Baylon, Eruin E. Shannahan, Albert W. Onstott, James O’bannon, Denzel J. Cavin, and William H. Quasha,the first being a Filipino and the other five all Americans; that Baylon’s subscription was for 1,145 preferred shares, of the total value of P 114,500 and 6,500 common shares, of the total par value of P6,500, while the aggregate subscriptions of the American subscribers were for 200 preferred shares, of the total par value of P 20,000 and 59,000 common shares, of the total par value of P 59,000; and that Baylon and the American subscribers had already paid 25 percent of their respective subscriptions. Ostensibly the owner of, or subscriber to, 60.005 per cent of the subscribed capital stock of the corporation, Baylon, did not have the controlling vote because of the difference in voting power between the preferred shares and the common shares. Still, with the capital structure as it was, the articles of incorporation were accepted for registration and a certificate of incorporation was issued by the [SEC]. (Emphasis supplied.)

The SEC has, through the years, stood by this interpretation. In an Opinion dated November 21, 1989, the SEC held that the basis of the computation for the nationality requirement is the total outstanding capital stock, to wit:

As to the basis of computation of the 60-40 percentage nationality requirement under existing laws (whether it should be based on the number of shares or the aggregate amount in pesos of the par value of the shares), the following definitions of corporate terms are worth mentioning.

"The term capital stock signifies the aggregate of the shares actually subscribed". (11 Fletcher, Cyc. Corps. (1971 Rev. Vol.) sec. 5082, citing Goodnow v. American Writing Paper Co., 73 NJ Eq. 692, 69 A 1014 aff'g 72 NJ Eq. 645, 66 A, 607).

"Capital stock means the capital subscribed (the share capital)". (Ibid., emphasis supplied).

"In its primary sense a share of stock is simply one of the proportionate integers or units, the sum of which constitutes the capital stock of corporation. (Fletcher, sec. 5083).

The equitable interest of the shareholder in the property of the corporation is represented by the term stock, and the extent of his interest is described by the term shares. The expression shares of stock when qualified by words indicating number and ownership expresses the extent of the owner's interest in the corporate property (Ibid, Sec. 5083, emphasis supplied).

Likewise, in all provisions of the Corporation Code the stockholders’ right to vote and receive dividends is always determined and based on the "outstanding capital stock", defined as follows:

"SECTION 137. Outstanding capital stock defined. — The term "outstanding capital stock" as used in this Code, means the total shares of stock issued to subscribers or stockholders, whether or not fully or partially paid (as long as there is a binding subscription agreement, except treasury shares."

The computation, therefore, should be based on the total outstanding capital stock, irrespective of the amount of the par value of the shares.

Then came SEC-OGC Opinion No. 08-14 dated June 02, 2008:

The instant query now centers on whether both voting and nonvoting shares are included in the computation of the required percentage of Filipino equity, As a rule, the 1987 Constitution does not distinguish between voting and non-voting shares with regard to the computation of the percentage interest by Filipinos and non-Filipinos in a company. In other words, non-voting shares should be included in the computation of the foreign ownership limit for domestic corporation. This was the rule applied [in SEC Opinion No. 04-30 x x x It was opined therein that the ownership of the shares of stock of a corporation is based on the total outstanding or subscribed/issued capital stock regardless of whether they are classified as common voting shares or preferred shares without voting rights. This is in line with the policy of the State to develop an independent national economy effectively controlled by Filipinos. x x x (Emphasis added.)

The SEC again echoed the same interpretation in an Opinion issued last April 19, 2011 wherein it stated, thus:

This is, thus, the general rule, such that when the provision merely uses the term "capital" without qualification (as in Section 11, Article XII of the 1987 Constitution, which deals with equity structure in a public utility company), the same should be interpreted to refer to the sum total of the outstanding capital stock, irrespective of the nomenclature or classification as common, preferred, voting or non-voting.61

The above construal is in harmony with the letter and spirit of Sec. 11, Art. XII of the Constitution and its counterpart provisions in the 1935 and 1973 Constitution and, thus, is entitled to respectful consideration. As the Court declared in Philippine Global Communications, Inc. v. Relova:62

x x x As far back as In re Allen, (2 Phil. 630) a 1903 decision, Justice McDonough, as ponente, cited this excerpt from the leading American case of Pennoyer v. McConnaughy, decided in 1891: "The principle that the contemporaneous construction of a statute by the executive officers of the government, whose duty it is to execute it, is entitled to great respect, and should ordinarily control the construction of the statute by the courts, is so firmly embedded in our jurisprudence that no authorities need be cited to support it.’ x x x There was a paraphrase by Justice Malcolm of such a pronouncement in Molina v. Rafferty, (37 Phil. 545) a 1918 decision:" Courts will and should respect the contemporaneous construction placed upon a statute by the executive officers whose duty it is to enforce it, and unless such interpretation is clearly erroneous will ordinarily be controlled thereby. (Ibid, 555) Since then, such a doctrine has been reiterated in numerous decisions.63(Emphasis supplied.)

Laxamana v. Baltazar64 restates this long-standing dictum: "[w]here a statute has received a contemporaneous and practical interpretation and the statute as interpreted is re-enacted, the practical interpretation is accorded greater weight than it ordinarily receives, and is regarded as presumptively the correct interpretation of the law. The rule here is based upon the theory that the legislature is acquainted with the contemporaneous interpretation of a statute, especially when made by an administrative body or executive officers charged with the duty of administering or enforcing the law, and therefore impliedly adopts the interpretation upon re-enactment."65 Hence, it can be safely assumed that the framers, in the course of deliberating the 1987 Constitution, knew of the adverted SEC interpretation.

41

Parenthetically, it is immaterial whether the SEC opinion was rendered by the banc or by the SEC-Office of the General Counsel (OGC) considering that the latter has been given the authority to issue opinions on the laws that the SEC implements under SEC-EXS. Res. No. 106, Series of 2002.66 The conferment does not violate Sec. 4.667of the Securities and Regulation Code (SRC) that proscribes the non-delegation of the legislative rule making power of the SEC, which is in the nature of subordinate legislation. As may be noted, the same Sec. 4.6 does not mention the SEC’s power to issue interpretative "opinions and provide guidance on and supervise compliance with such rules,"68 which is incidental to the SEC’s enforcement functions. A legislative rule and an interpretative rule are two different concepts and the distinction between the two is established in administrative law.69 Hence, the various opinions issued by the SEC-OGC deserve as much respect as the opinions issued by the SEC en banc.

Nonetheless, the esteemed ponente posits that the SEC, contrary to its claim, has been less than consistent in its construal of "capital." During the oral arguments, he drew attention to various SEC Opinions, nine (9) to be precise, that purportedly consider "capital" as referring only to voting stocks.

Refuting this position, the SEC in its Memorandum dated July 25, 2012 explained in some detail that the Commission has been consistent in applying the term "capital" to the total outstanding capital stock, whether voting or non-voting. The SEC Opinions referred to by Justice Carpio, which cited the provisions of the FIA, is not, however, pertinent or decisive of the issue on the meaning of "capital." The said SEC Memorandum states:

During the oral arguments held on 26 June 2012, the SEC was directed to explain nine (9) of its Opinions in relation to the definition of "capital" as used in Section 11, Article XII of the Constitution, namely: (1) Opinion dated 3 March 1993 for Mr. Francis F. How; (2) Opinion dated 14 April 1993 for Director Angeles T. Wong; (3) Opinion dated 23 November 1993 for Mssrs. Dominador Almeda and Renato S. Calma; (4) Opinion dated 7 December 1993 for Roco Buñag Kapunan Migallos & Jardeleza Law Offices; (5) Opinion dated 22 December 2004 for Romulo Mabanta Buenaventura Sayoc & De Los Angeles; (6) Opinion dated 27 September 2007 for Reynaldo G. David; (7) Opinion dated 28 November 2007 for Santiago & Santiago law Offices; (8) Opinion dated 15 January 2008 for Attys. Ruby Rose J. Yusi and Rudyard S. Arbolado; and (9) Opinion dated 18 August 2010 for Castillo Laman Tan Pantaleon & San Jose.

x x x x

With due respect, the issue of whether "capital" refers to outstanding capital stock or only voting stocks was never raised in the requests for these opinions. In fact, the definition of "capital" could not have been a relevant and/or a material issue in some of these opinions because the common and preferred shares involved have the same voting rights. Also, some Opinions mentioned the FIA to emphasize that the said law mandates the application of the Control Test. Moreover, these Opinions state they are based solely on the facts disclosed and relevant only to the issues raised therein.

For one, the Opinion dated 3 March 1993 for Mr. Francis F. How does not discuss whether "capital" refers to total outstanding capital stock or only voting stocks. Instead, it talks about the application of the Control test in a mining corporation by looking into the nationality of its investors. The FIA is not mentioned to provide a definition of "capital," but to explain the nationality requirement pertinent to investors of a mining corporation.

The Opinion dated 14 April 1993 for Dir. Angeles T. Wong also does not define "capital" as referring to total outstanding capital or only to voting shares, but talks about the application of the Control Test x x x. The FIA is again mentioned only to explain the nationality required of investors of a corporation engaged in overseas recruitment.

The Opinion dated 23 November 1993 for Mssrs. Dominador Almeda and Renato S. Calmadistinguishes between the nationality of a corporation as an investing entity and the nationality of a corporation as an investee corporation. The FIA is mentioned only in the discussion of the nationality of the investors of a corporation owning land in the Philippines, composed of a trustee for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty percent (60%) of the fund will accrue to the benefit of Philippine nationals, and another domestic corporation which is 100% foreign owned.

Unlike the Decision rendered by this Honorable Court on 28 June 2011, the Opinion dated 07 December 1993 for Roco Buñag Kapunan Migallos & Jardeleza does not parley on the issue of the proper interpretation of "capital" because it is not a relevant and/or a material issue in this opinion xxx. The FIA is mentioned only to explain the application of the control test. Note, however, that manufacturing fertilizer is neither a nationalized or partly nationalized activity, which is another reason why this Opinion has no relevance in this case.

The Opinion dated 22 December 2004 for Romulo Mabanta Buenaventura Sayoc & De Los Angeles focuses on the nationality of the investors of a corporation that will acquire land wherein one of the investors is a foundation. It confirms the view that the test for compliance with the nationality requirement is based on the total outstanding capital stock irrespective of the amount of the par value of shares. The FIA is used merely to justify the application of the Control Test as adopted in the Department of Justice Opinion, No. 18, Series of 1989, dated 19 January 1989m viz –

x x x x

The Opinion dated 27 September 2007 for Mr. Reynaldo G. David, likewise, does not discuss whether "capital" refers to total outstanding capital stock or only to voting stocks, but rather whether the Control Test is applicable in determining the nationality of the proposed corporate bidder or buyer of PNOC-EDC shares. x x x The FIA was cited only to emphasize that the said law mandates the application of the Control Test.

The Opinion dated 28 November 2007 for Santiago & Santiago Law Offices maintains and supports the position of the Commission that Section 11, Article XII of the Constitution makes no distinction between common and preferred shares, thus, both shares should be included in the computation of the foreign equity cap for domestic corporations. Simply put, the total outstanding capital stock, without regard to how the shares are classified, should be used as the basis in determining the compliance by public utilities with the nationality requirement as provided for in Section 11, Article XII of the Constitution. Notably, all shares of the subject corporation, Pilipinas First, have voting rights, whether common or preferred. Hence, the issue on whether "capital" refers to total outstanding capital stock or only to voting stocks has no relevance in this Opinion.

In the same way, the Opinion dated 15 January 2008 for Attys. Ruby Rose J. Yusi and Rudyard S. Arbolada never discussed whether "capital" refers to outstanding capital stock or only to voting stocks, but rather whether the Control Test is applicable or not. The FIA was used merely to justify the application of the Control Test. More importantly, the term "capital" could not have been relevant and/or material issue in this Opinion because the common and preferred shares involved have the same voting rights.

The Opinion dated 18 August 2010 for Castillo Laman Tan Pantaleon & San Jose reiterates that the test for compliance with the nationality requirement is based on the total outstanding capital stock, irrespective of the amount of the par value of the shares. The FIA is mentioned only to explain the application of the Control Test and the Grandfather Rule in a corporation owning land in the Philippines

42

by looking into the nationality of its investors. (Emphasis supplied).70

In view of the foregoing, it is submitted that the long-established interpretation and mode of computing by the SEC of the total capital stock strongly recognize the intent of the framers of the Constitution to allow access to much-needed foreign investments confined to 40% of the capital stock of public utilities.

Consequences of alternative interpretation: mischievouseffects of the construction proposed in the petition andsustained in the June 28, 2011 Decision. (6th extrinsic aid)

Filipino shareholders will notcontrol the fundamental corporatematters nor own the majorityeconomic benefits of the publicutility corporation.

Indeed, if the Court persists in adhering to the rationale underlying the majority’s original interpretation of "capital" found in the first sentence of Section 11, Article XII, We may perhaps be allowing Filipinos to direct and control the daily business of our public utilities, but would irrevocably and injudiciously deprive them of effective "control" over the major and equally important corporate decisions and the eventual beneficial ownership of the corporate assets that could include, among others, claim over our soil––our land. This undermines the clear textual commitment under the Constitution that reserves ownership of disposable lands to Filipino citizens. The interplay of the ensuing provisions of Article XII is unmistakable:

SECTION 2. All lands of the public domain x x x forests or timber, wildlife, flora and fauna, and other natural resources are owned by the State. With the exception of agricultural lands, all other natural resources shall not be alienated. The exploration, development, and utilization of natural resources shall be under the full control and supervision of the State. x x x

x x x x

SECTION 3. Lands of the public domain are classified into agricultural, forest or timber, mineral lands, and national parks. Agricultural lands of the public domain may be further classified by law according to the uses which they may be devoted. Alienable lands of the public domain shall be limited to agricultural lands. Private corporations or associations may not hold such alienable lands except by lease, for a period not exceeding twenty-five years, renewable for not more than twenty-five years, and not to exceed one thousand hectares in area. Citizens of the Philippines may lease not more than five hundred hectares, or acquire not more than twelve hectares thereof by purchase, homestead or grant.

x x x x

SECTION 7. Save in cases of hereditary succession, no private lands shall be transferred or conveyed except to individuals, corporations or associations qualified to acquire or hold lands of the public domain. (Emphasis supplied.)

Consider the hypothetical case presented in the original ponencia:

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 (P 1.00) 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.

Albeit trying not to appear to, the majority actually finds fault in the wisdom of, or motive behind, the provision in question through "highly unlikely scenarios of clinical extremes," to borrow from Veterans Federation Party v. COMELEC.71 It is submitted that the flip side of the ponencia’s hypothetical illustration, which will be exhaustively elucidated in this opinion, is more anomalous and prejudicial to Filipino interests.

For instance, let us suppose that the authorized capital stock of a public utility corporation is divided into 100 common shares and 1,000,000 non-voting preferred shares. Since, according to the Court’s June 28, 2011 Decision, the word "capital" in Sec. 11, Art. XII refers only to the voting shares, then the 40% cap on foreign ownership applies only to the 100 common shares. Foreigners can, therefore, own 100% of the 1,000,000 nonvoting preferred shares. But then again, the ponencia continues, at least, the "control" rests with the Filipinos because the 60% Filipino-owned common shares will necessarily ordain the majority in the governing body of the public utility corporation, the board of directors/trustees. Hence, Filipinos are assured of control over the day-to-day activities of the public utility corporation.

Let us, however, take this corporate scenario a little bit farther and consider the irresistible implications of changes and circumstances that are inevitable and common in the business world. Consider the simple matter of a possible investment of corporate funds in another corporation or business, or a merger of the public utility corporation, or a possible dissolution of the public utility corporation. Who has the "control" over these vital and important corporate matters? The last paragraph of Sec. 6 of the Corporation Code provides:

Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code,the holders of such (non-voting) shares shall nevertheless be entitled to vote on the following matters:

1. Amendment of the articles of incorporation;2. Adoption and amendment of by-laws;3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property;4. Incurring, creating or increasing bonded indebtedness;5. Increase or decrease of capital stock;6. Merger or consolidation of the corporation with another corporation or other corporations;7. Investment of corporate funds in another corporation or business in accordance with this Code; and8. Dissolution of the corporation."(Emphasis and underscoring supplied.)

In our hypothetical case, all 1,000,100 (voting and non-voting) shares are entitled to vote in cases involving fundamental and major changes in the corporate structure, such as those listed in Sec. 6 of the Corporation Code. Hence, with only 60 out of the 1,000,100 shares in the hands of the Filipino shareholders, control is definitely in the hands of the foreigners. The foreigners can opt to invest in other businesses and corporations, increase its bonded indebtedness, and even dissolve the public utility corporation against the interest of the Filipino holders of the majority voting shares. This cannot plausibly be the constitutional intent.

Consider further a situation where the majority holders of the total outstanding capital stock, both voting and non-voting, decide to dissolve our hypothetical public utility corporation. Who will eventually acquire the beneficial ownership of the corporate assets upon dissolution and liquidation? Note that Sec. 122 of the Corporation Code states:

Section 122. Corporate liquidation.–Every corporation whose charter expires by its own limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall nevertheless be continued as a body corporate for three (3) years… to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the business for which it was established.

43

At any time during said three (3) years, the corporation is authorized and empowered to convey all of its property to trustees for the benefit of stockholders, members, creditors, and other persons in interest. From and after any such conveyance by the corporation of its property in trust for the benefit of its stockholders, members, creditors and others in interest, all interest which the corporation had in the property terminates, the legal interest vests in the trustees, and the beneficial interest in the stockholders, members , creditors or other persons in interest. (Emphasis and underscoring supplied.)

Clearly then, the bulk of the assets of our imaginary public utility corporation, which may include private lands, will go to the beneficial ownership of the foreigners who can hold up to 40 out of the 100 common shares and the entire 1,000,000 preferred non-voting shares of the corporation. These foreign shareholders will enjoy the bulk of the proceeds of the sale of the corporate lands, or worse, exercise control over these lands behind the façade of corporations nominally owned by Filipino shareholders. Bluntly, while the Constitution expressly prohibits the transfer of land to aliens, foreign stockholders may resort to schemes or arrangements where such land will be conveyed to their dummies or nominees. Is this not circumvention, if not an outright violation, of the fundamental Constitutional tenet that only Filipinos can own Philippine land?

A construction of "capital" as referring to the total shareholdings of the company is an acknowledgment of the existence of numerous corporate control-enhancing mechanisms, besides ownership of voting rights, that limits the proportion between the separate and distinct concepts of economic right to the cash flow of the corporationand the right to corporate control (hence, they are also referred to as proportionality-limiting measures). This corporate reality is reflected in SRC Rule 3(E) of the Amended Implementing Rules and Regulations (IRR) of the SRC and Sec. 3(g) of The Real Estate Investment Trust Act (REIT) of 2009,72 which both provide that control can exist regardless of ownership of voting shares. The SRC IRR states:

Control is the power to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. Control is presumed to exist when the parent owns, directly or indirectly through subsidiaries, more than one half of the voting power of an enterprise unless, in exceptional circumstances, it can be clearly demonstrated that such ownership does not constitute control.Control also exists even when the parent owns one half or less of the voting power of an enterprise when there is:

i. Power over more than one half of the voting rights by virtue of an agreement with other investors;ii. Power to govern the financial and operating policies of the enterprise under a statute or anagreement;iii. Power to appoint or remove the majority of the members of the board of directors or equivalent governing body;iv. Power to cast the majority of votes at meetings of the board of directors or equivalent governing body. (Emphasis and underscoring supplied.)

As shown above, ownership of voting shares or power alone without economic control of the company does not necessarily equate to corporate control. A shareholder’s agreement can effectively clip the voting power of a shareholder holding voting shares. In the same way, a voting right ceiling, which is "a restriction prohibiting shareholders to vote above a certain threshold irrespective of the number of voting shares they hold,"73 can limit the control that may be exerted by a person who owns voting stocks but who does not have a substantial economic interest over the company. So also does the use of financial derivatives with attached conditions to ensure the acquisition of corporate control separately from the ownership of voting shares, or the use ofsupermajority provisions in the bylaws and articles of incorporation or association. Indeed, there are innumerable ways and means, both explicit and implicit, by which the control of a corporation can be attained and retained even with very limited

voting shares, i.e.., there are a number of ways by which control can be disproportionately increased compared to ownership74 so long as economic rights over the majority of the assets and equity of the corporation are maintained.

Hence, if We follow the construction of "capital" in Sec. 11, Art. XII stated in the ponencia of June 28, 2011 and turn a blind eye to these realities of the business world, this Court may have veritably put a limit on the foreign ownership of common shares but have indirectly allowed foreigners to acquire greater economic right to the cash flow of public utility corporations, which is a leverage to bargain for far greater control through the various enhancing mechanisms or proportionality-limiting measures available in the business world.

In our extremely hypothetical public utility corporation with the equity structure as thus described, since the majority recognized only the 100 common shares as the "capital" referred to in the Constitution, the entire economic right to the cash flow arising from the 1,000,000 non-voting preferred shares can be acquired by foreigners. With this economic power, the foreign holders of the minority common shares will, as they easily can, bargain with the holders of the majority common shares for more corporate control in order to protect their economic interest and reduce their economic risk in the public utility corporation. For instance, they can easily demand the right to cast the majority of votes during the meeting of the board of directors. After all, money commands control.

The court cannot, and ought not, accept as correct a holding that routinely disregards legal and practical considerations as significant as above indicated. Committing an error is bad enough, persisting in it is worse.

Foreigners can be owners of fullynationalized industries

Lest it be overlooked, "capital" is an oft-used term in the Constitution and various legislative acts that regulate corporate entities. Hence, the meaning assigned to it within the context of a constitutional provision limiting foreign ownership in corporations can affect corporations whose ownership is reserved to Filipinos, or whose foreign equity is limited by law pursuant to Sec. 10, Art. XII of the Constitution which states:

SECTION 10. The Congress shall, upon recommendation of the economic and planning agency, when the national interest dictates, reserve to citizens of the Philippines or to corporations or associations at least sixty per centum of whose capital is owned by such citizens, or such higher percentage as Congress may prescribe, certain areas of investments. The Congress shall enact measures that will encourage the formation and operation of enterprises whose capital is wholly owned by Filipinos. (Emphasis supplied).

For instance, Republic Act No. 7042, also known as the Foreign Investments Act of 199175 (FIA), provides for the formation of a Regular Foreign Investment Negative List (RFINL) covering investment areas/activities that are partially or entirely reserved to Filipinos. The 8th RFINL76 provides that "No Foreign Equity" is allowed in the following areas of investments/activities:

1. Mass Media except recording (Article XVI, Section 1 of the Constitution and Presidential Memorandum dated May 4, 1994);

2. Practice of all professions (Article XII, Section 14 of the Constitution and Section 1, RA 5181);77

3. Retail trade enterprises with paid-up capital of less than $2,500,000 (Section 5, RA 8762);

4. Cooperatives (Chapter III, Article 26, RA 6938);

5. Private Security Agencies (Section 4, RA 5487);

6. Small-scale Mining (Section 3, RA 7076)

44

7. Utilization of Marine Resources in archipelagic waters, territorial sea, and exclusive economic zone as well as small scale utilization of natural resources in rivers, lakes, bays, and lagoons (Article XII, Section 2 of the Constitution);

8. Ownership, operation and management of cockpits (Section 5, PD 449);

9. Manufacture, repair, stockpiling and/or distribution of nuclear weapons (Article II, Section 8 of the Constitution);

10. Manufacture, repair, stockpiling and/or distribution of biological, chemical and radiological weapons and anti-personnel mines (Various treaties to which the Philippines is a signatory and conventions supported by the Philippines);

11. Manufacture of fire crackers and other pyrotechnic devices (Section 5, RA 7183).

If the construction of "capital," as espoused by the June 28, 2011 Decision, were to be sustained, the reservation of the full ownership of corporations in the foregoing industries to Filipinos could easily be negated by the simple expedience of issuing and making available non-voting shares to foreigners. After all, these non-voting shares do not, following the June 28, 2011 Decision, form part of the "capital" of these supposedly fully nationalized industries. Consequently, while Filipinos can occupy all of the seats in the board of directors of corporations in fully nationalized industries, it is possible for foreigners to own the majority of the equity of the corporations through "non-voting" shares, which are nonetheless allowed to determine fundamental corporate matters recognized in Sec. 6 of the Corporation Code. Filipinos may therefore be unwittingly deprived of the "effective" ownership of corporations supposedly reserved to them by the Constitution and various laws.

The Foreign Investments Act of 1991 doesnot qualify or restrict the meaning of "capital"in Sec. 11, Art. XII of the Constitution.

Nonetheless, Justice Carpio parlays the thesis that the FIA, and its predecessors, the Investments Incentives Act of 1967 ("1967 IIA"),78 Omnibus Investments Code of 1981 ("1981 OIC"),79 and the Omnibus Incentives Code of 1987 ("1987 OIC"),80 (collectively, "Investment Incentives Laws") more particularly their definition of the term "Philippine National," constitutes a good guide for ascertaining the intent behind the use of the term "capital" in Sec. 11, Art. XII—that it refers only to voting shares of public utility corporations.

I cannot share this posture. The Constitution may only be amended through the procedure outlined in the basic document itself.81 An amendment cannot, therefore, be made through the expedience of a legislative action that diagonally opposes the clear provisions of the Constitution.

Indeed, the constitutional intent on the equity prescribed by Sec. 11, Art. XII cannot plausibly be fleshed out by a look through the prism of economic statutes passed after the adoption of the Constitution, such as the cited FIA, the Magna Carta for Micro, Small and Medium Industries (Republic Act No. 6977) and other kindred laws envisaged to Filipinize certain areas of investment. It should be the other way around. Surely, the definition of a "Philippine National" in the FIA, or for that matter, the 1987 OIC82 could not have influenced the minds of the 1986 CONCOM or the people when they ratified the Constitution. As heretofore discussed, the primary source whence to ascertain constitutional intent or purpose is the constitutional text, or, to be more precise, the language of the provision itself,83 as inquiry on any controversy arising out of a constitutional provision ought to start and end as much as possible with the provision itself.84 Legislative enactments on commerce, trade and national economy must be so construed, when appropriate, to determine whether the purpose underlying them is in accord with the policies and objectives laid out in the Constitution. Surely, a law cannot validly broaden or restrict the thrust of a constitutional provision unless expressly sanctioned by the Constitution itself. And the

Court may not read into the Constitution an intent or purpose that is not there. Any attempt to enlarge the breadth of constitutional limitations beyond what its provision dictates should be stricken down.

In fact, it is obvious from the FIA itself that its framers deemed it necessary to qualify the term "capital" with the phrase "stock outstanding and entitled to vote" in defining a "Philippine National" in Sec. 3(a). This only supports the construal that the term "capital," standing alone as in Sec. 11, Art. XII of the Constitution, applies to all shares, whether classified as voting or non-voting, and this is the interpretation in harmony with the Constitution.

In passing the FIA, the legislature could not have plausibly intended to restrict the 40% foreign ownership limit imposed by the Constitution on all capital stock to only voting stock. Precisely, Congress enacted the FIA to liberalize the laws on foreign investments. Such intent is at once apparent in the very title of the statute, i.e., "An Act to Promote Foreign Investments," and the policy: "attract, promote and welcome productive investments from foreign individuals, partnerships, corporations, and government,"85 expresses the same.

The Senate, through then Senator Vicente Paterno, categorically stated that the FIA is aimed at "liberalizing foreign investments"86 because "Filipino investment is not going to be enough [and] we need the support and the assistance of foreign investors x x x."87 The senator made clear that "the term ‘Philippine national’" means either Filipino citizens or enterprises of which the "total Filipino ownership" is 60 percent or greater, thus:

Senator Paterno. May I first say that the term "Philippine national" means either Filipino citizens or enterprises of which the total Filipino ownership is 60 percent or greater. In other words, we are not excluding foreign participation in domestic market enterprises with total assets of less than P 25 million. We are merely limiting foreign participation to not more than 40 percent in this definition.88

Even granting, arguendo, that the definition of a "Philippine National" in the FIA was lifted from the Investment Incentives Laws issued in 1967, 1981, and 1987 that defined "Philippine National" as a corporation 60% of whose voting stocks is owned by Filipino citizens, such definition does not limit or qualify the nationality requirement prescribed for public utility corporations by Sec. 11, Art. XII of the 1987 Constitution. The latter does not refer to the definition of a "Philippine National." Instead, Sec. 11, Art. XII reiterates the use of the unqualified term "capital" in the 1935 and 1973 Constitutions. In fact, neither the 1973 Constitutional Convention nor the 1986 CONCOM alluded to the Investment Incentives Laws in their deliberations on the nationality requirement of public utility corporations. With the unequivocal rejection of the UP Law Center proposal to use the qualifying "voting stock or controlling interest," the non-consideration of the Investment Incentives Laws means that these laws are not pertinent to the issue of the Filipino-foreign capital ratio in public utility corporations.

Besides, none of the Investment Incentives Laws defining a "Philippine National" has sought to expand or modify the definition of "capital," as used in the Constitutions then existing. The definition of a "Philippine National" in these laws was, to stress, only intended to identify the corporations qualified for registration to avail of the incentives prescribed therein. The definition was not meant to find context outside the scope of the various Investment Incentives Laws, much less to modify a nationality requirement set by the then existing Constitution. This much is obvious in the very heading of the first of these Investment Incentives Laws, 1967 IIA :

SECTION 3. Definition of Terms. - For purposes of this Act:

x x x x

45

(f) "Philippine National" shall mean a citizen of the Philippines; or a partnership or association wholly owned by citizens of the Philippines; or a corporation organized and existing under the laws of the Philippines of which at least sixty per cent of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines xxxx (Emphasis and underscoring supplied.)

Indeed, the definition of a "Philippine National" in the FIA cannot apply to the ownership structure of enterprises applying for, and those granted, a franchise to operate as a public utility under Sec. 11, Art. XII of the Constitution. As aptly observed by the SEC, the definition of a "Philippine National" provided in the FIA refers only to a corporation that is permitted to invest in an enterprise as a Philippine citizen (investorcorporation). The FIA does not prescribe the equity ownership structure of the enterprise granted the franchise or the power to operate in a fully or partially nationalized industry (investee-corporation). This is apparent from the FIA itself, which also defines the act of an "investment" and "foreign investment":

Section 3. Definitions. – As used in this Act:

a) The term "Philippine national" shall mean a citizen of the Philippines, or a domestic partnership or association wholly owned by citizens of the Philippines; or a corporation organized under the laws of the Philippines of which at least sixty percent [60%] of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines x x x

b) The term "investment" shall mean equity participation in any enterprise organized or existing the laws of the Philippines;

c) The term "foreign investment" shall mean as equity investment made by a non-Philippine national in the form of foreign exchange and/or other assets actually transferred to the Philippines and duly registered with the Central Bank which shall assess and appraise the value of such assets other than foreign exchange.

In fact, Sec. 7 of the FIA, as amended, allows aliens or non-Philippine nationals to own an enterprise up to the extent provided by the Constitution, existing laws or the FINL:

Sec. 7. Foreign investments in domestic market enterprises. – Non- Philippine nationals may own up to one hundred percent [100%] of domestic market enterprises unless foreign ownership therein is prohibited or limited by the Constitution and existing laws or the Foreign Investment Negative List under Section 8 hereof. (Emphasis supplied.)

Hence, pursuant to the Eight Regular FINL, List A, the foreign "equity" is up to 40% in enterprises engaged in the operation and management of public utilities while the remaining 60% of the "equity" is reserved to Filipino citizens and "Philippine Nationals" as defined in Sec. 3(a) of the FIA. Notably, the term "equity" refers to the "ownershipinterest in… a business"89 or a "share in a publicly traded company,"90 and not to the "controlling" or "management" interest in a company. It necessarily includes all and every share in a corporation, whether voting or non-voting.

Again, We must recognize the distinction of the separate concepts of "ownership" and "control" in modern corporate governance in order to realize the intent of the framers of our Constitution to reserve for Filipinos the ultimate and all-encompassing control of public utility entities from their daily administration to the acts of ownership enumerated in Sec. 6 of the Corporation Code.91 As elucidated, by equating the word "capital" in Sec. 11, Art. XII to the limited aspect of the right to control the composition of the board of directors, the Court could very well be depriving Filipinos of the majority economic interest in the public utility corporation and, thus, the effective control and ownership of such corporation.

The Court has no jurisdiction over PLDT and foreignstockholders who are indispensable parties in interest

More importantly, this Court cannot apply a new doctrine adopted in a precedent-setting decision to parties that have never been given the chance to present their own views on the substantive and factual issues involved in the precedent-setting case.

To recall, the instant controversy arose out of an original petition filed in February 2007 for, among others,declaratory relief on Sec. 11, Art. XII of the 1987 Constitution "to clarify the intent of the Constitutional Commission that crafted the 1987 Constitution to determine the very nature of such limitation on foreign ownership."92

The petition impleaded the following personalities as the respondents: (1) Margarito B. Teves, then Secretary of Finance and Chair of the Privatization Council; (2) John P. Sevilla, then undersecretary for privatization of the Department of Finance; (3) Ricardo Abcede, commissioner of the Presidential Commission on Good Government; (4) Anthoni Salim, chair of First Pacific Co. Ltd. and director of Metro Pacific Asset Holdings, Inc. (MPAH); (5) Manuel V. Pangilinan, chairman of the board of PLDT; (6) Napoleon L. Nazareno, the president of PLDT; (7) Fe Barin (Barin), then chair of the SEC; and (8) Francis Lim (Lim), then president of the PSE.

Notably, neither PLDT itself nor any of its stockholders were named as respondents in the petition, albeit it sought from the Court the following main reliefs:

5. x x x to issue a declaratory relief that ownership of common or voting shares is the sole basis in determining foreign equity in a public utility and that any other government rulings, opinions, and regulations inconsistent with this declaratory relief be declared as unconstitutional and a violation of the intent and spirit of the 1987 Constitution;

6. x x x to declare null and void all sales of common stocks to foreigners in excess of 40 percent of the total subscribed common shareholdings; and

7. x x x to direct the [SEC] and [PSE] to require PLDT to make a public disclosure of all of its foreign shareholdings and their actual and real beneficial owners."

Clearly, the petition seeks a judgment that can adversely affect PLDT and its foreign shareholders. If this Court were to accommodate the petition’s prayer, as the majority did in the June 28, 2011 Decision and proposes to do presently, PLDT stands to lose its franchise, while the foreign stockholders will be compelled to divest their voting shares in excess of 40% of PLDT’s voting stock, if any, even at a loss. It cannot, therefore, be gainsaid that PLDT and its foreign shareholders are indispensable parties to the instant case under the terms of Secs. 2 and 7, Rule 3 of the Rules of Civil Procedure, which read:

Section 2. Parties in interest.–Every action must be prosecuted and defended in the name of the real party in interest. All persons having an interest in the subject of the action and in obtaining the relief demanded shall be joined as plaintiffs. All persons who claim an interest in the controversy or the subject thereof adverse to the plaintiff, or who are necessary to a complete determination or settlement of the questions involved therein, shall be joined as defendants.

x x x x

Section 7. Compulsory joinder of indispensable parties.– Parties in interest without whom no final determination can be had of an action shall be joined either as plaintiffs or defendants.

Yet, again, PLDT and its foreign shareholders have not been given notice of this petition to appear before, much less heard by, this Court. Nonetheless, the majority has allowed such irregularity in contravention of the settled jurisprudence that an action cannot proceed unless indispensable parties are joined93 since the non-joinder of these indispensable parties deprives the court the jurisdiction to issue a decision binding on the indispensable

46

parties that have not been joined or impleaded. In other words, if an indispensable party is not impleaded, any personal judgment would have no effectiveness94 as to them for the tribunal’s want of jurisdiction.

In Arcelona v. Court of Appeals,95 We explained that the basic notions of due process require the observance of this rule that refuses the effectivity of a decision that was rendered despite the non-joinder of indispensable parties:

Basic considerations of due process, however, impel a similar holding in cases involving jurisdiction over the persons of indispensable parties which a court must acquire before it can validly pronounce judgments personal to said defendants. Courts acquire jurisdiction over a party plaintiff upon the filing of the complaint. On the other hand, jurisdiction over the person of a party defendant is assured upon the service of summons in the manner required by law or otherwise by his voluntary appearance. As a rule, if a defendant has not been summoned, the court acquires no jurisdiction over his person, and a personal judgment rendered against such defendant is null and void. A decision that is null and void for want of jurisdiction on the part of the trial court is not a decision in the contemplation of law and, hence, it can never become final and executory.

Rule 3, Section 7 of the Rules of Court, defines indispensable parties as parties-in-interest without whom there can be no final determination of an action. As such, they must be joined either as plaintiffs or as defendants. The general rule with reference to the making of parties in a civil action requires, of course, the joinder of all necessary parties where possible, and the joinder of all indispensable parties under any and all conditions, their presence being a sine qua non for the exercise of judicial power. It is precisely "when an indispensable party is not before the court (that) the action should be dismissed." The absence of an indispensable party renders all subsequent actions of the court null and void for want of authority to act, not only as to the absent parties but even as to those present.96

Hence, the June 28, 2011 Decision having been rendered in a case where the indispensable parties have not been impleaded, much less summoned or heard, cannot be given any effect and is, thus, null and void. Ergo, the assailed June 28, 2011 Decision is virtually a useless judgment, at least insofar as it tends to penalize PLDT and its foreign stockholders. It cannot bind and affect PLDT and the foreign stockholders or be enforced and executed against them. It is settled that courts of law "should not render judgments which cannot be enforced by any process known to the law,"97 hence, this Court should have refused to give cognizance to the petition.

The ineffectivity caused by the non-joinder of the indispensable parties, the deprivation of their day in court, and the denial of their right to due process, cannot be cured by the sophistic expedience of naming PLDT in the fallo of the decision as a respondent. The dispositive portion of the June 28, 2011 Decision all the more only highlights the unenforceability of the majority’s disposition and serves as an implied admission of this Court’s lack of jurisdiction over the persons of PLDT and its foreign stockholders when it did not directly order the latter to dispose the common shares in excess of the 40% limit. Instead, it took the circuitous route of ordering the SEC, in the fallo of the assailed decision, "to apply this definition of the term ‘capital’ in determining the extent of allowable ownership in respondent PLDT and, if there is a violation of Sec. 11, Art. XII of the Constitution, to impose the appropriate sanctions under the law."98

Clearly, since PLDT and the foreign stockholders were not impleaded as indispensable parties to the case, the majority would want to indirectly execute its decision which it could not execute directly. The Court may be criticized for violating the very rules it promulgated and for trenching the provisions of Sec. 5, Art. VIII of the Constitution, which defines the powers and jurisdiction of this Court.

It is apropos to stress, as a reminder, that the Rules of Court is not a mere body of technical rules that can be disregarded at will whenever convenient. It forms an integral part of the basic notion of fair play as expressed in this Constitutional caveat: "No person shall be deprived of life, liberty or property without due process of law,"99and obliges this Court, as well as other courts and tribunals, to hear a person first before rendering a judgment for or against him. As Daniel Webster explained, "due process of law is more clearly intended the general law, a law which hears before it condemns; which proceeds upon enquiry, and renders judgment only after trial."100 The principle of due process of law "contemplates notice and opportunity to be heard before judgment is rendered, affecting one’s person or property."101 Thus, this Court has stressed the strict observance of the following requisites of procedural due process in judicial proceedings in order to comply with this honored principle:

(1) There must be a court or tribunal clothed with judicial power to hear and determine the matter before it;

(2) Jurisdiction must be lawfully acquired over the person of the defendant or over the property which is the subject of the proceedings;

(3) The defendant must be given an opportunity to be heard; and

(4) Judgment must be rendered upon lawful hearing.102

Apparently, not one of these requisites has been complied with before the June 28, 2011 Decision was rendered. Instead, PLDT and its foreign stockholders were not given their day in court, even when they stand to lose their properties, their shares, and even the franchise to operate as a public utility. This stands counter to our discussion in Agabon v. NLRC,103 where We emphasized that the principle of due process comports with the simplest notions of what is fair and just:

To be sure, the Due Process Clause in Article III, Section 1 of the Constitution embodies a system of rights based on moral principles so deeply imbedded in the traditions and feelings of our people as to be deemed fundamental to a civilized society as conceived by our entire history. Due process is that which comports with the deepest notions of what is fair and right and just. It is a constitutional restraint on the legislative as well as on the executive and judicial powers of the government provided by the Bill of Rights.104

Parenthetically, the present petition partakes of a collateral attack on PLDT’s franchise as a public utility. Giving due course to the recourse is contrary to the Court’s ruling in PLDT v. National Telecommunications Commission,105 where We declared a franchise to be a property right that can only be questioned in a direct proceeding.106 Worse, the June 28, 2011 Decision facilitates and guarantees the success of that unlawful attack by allowing it to be undertaken in the absence of PLDT.

The Philippine Government is barred by estoppel fromordering foreign investors to divest voting sharesin public utilities in excess of the 40 percent cap

The Philippine government’s act of pushing for and approving the sale of the PTIC shares, which is equivalent to 12 million PLDT common shares, to foreign investors precludes it from asserting that the purchase violates the Constitutional limit on foreign ownership of public utilities so that the foreign investors must now divest the common PLDT shares bought. The elementary principle that a person is prevented from going back on his own act or representation to the prejudice of another who relied thereon107 finds application in the present case.

Art. 1431 of the Civil Code provides that an "admission or representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against a person relying thereon." This rule is supported by Section 2(a) of Rule 131 of the Rules of Court on the burden of proof and presumptions, which states:

47

Section 2. Conclusive presumptions. – The following are instances of conclusive presumptions:

(a) Whenever a party has, by his own declaration, act, or omission, intentionally and deliberately led another to believe a particular thing true, and to act upon such belief, he cannot, in any litigation arising out of such declaration, act or omission, be permitted to falsify it.

The government cannot plausibly hide behind the mantle of its general immunity to resist the application of this equitable principle for "the rule on non-estoppel of the government is not designed to perpetrate an injustice."108Hence, this Court has allowed several exceptions to the rule on the government’s non-estoppel. As succinctly explained in Republic of the Philippines v. Court of Appeals:109

The general rule is that the State cannot be put in estoppel by the mistakes or errors of its officials or agents. However, like all general rules, this is also subject to exceptions, viz.:

"Estoppel against the public are little favored. They should not be invoked except in rare and unusual circumstances and may not be invoked where they would operate to defeat the effective operation of a policy adopted to protect the public. They must be applied with circumspection and should be applied only in those special cases where the interests of justice clearly require it. Nevertheless, the government must not be allowed to deal dishonorably or capriciously with its citizens, and must not play an ignoble part or do a shabby thing; and subject to limitations . . ., the doctrine of equitable estoppel may be invoked against public authorities as well as against private individuals."

In Republic v. Sandiganbayan, the government, in its effort to recover ill-gotten wealth, tried to skirt the application of estoppel against it by invoking a specific constitutional provision. The Court countered:

"We agree with the statement that the State is immune from estoppel, but this concept is understood to refer to acts and mistakes of its officials especially those which are irregular (Sharp International Marketing vs. Court of Appeals, 201 SCRA 299; 306 1991; Republic v. Aquino, 120 SCRA 186 1983), which peculiar circumstances are absent in the case at bar. Although the State's right of action to recover ill-gotten wealth is not vulnerable to estoppel[;] it is non sequitur to suggest that a contract, freely and in good faith executed between the parties thereto is susceptible to disturbance ad infinitum. A different interpretation will lead to the absurd scenario of permitting a party to unilaterally jettison a compromise agreement which is supposed to have the authority of res judicata (Article 2037, New Civil Code), and like any other contract, has the force of law between parties thereto (Article 1159, New Civil Code; Hernaez vs. Kao, 17 SCRA 296 1966; 6 Padilla, Civil Code Annotated, 7th ed., 1987, p. 711; 3 Aquino, Civil Code, 1990 ed., p. 463) . . ."

The Court further declared that "(t)he real office of the equitable norm of estoppel is limited to supply[ing] deficiency in the law, but it should not supplant positive law."110 (Emphasis supplied.)

Similarly, in Ramos v. Central Bank of the Philippines,111 this Court berated the government for reneging on its representations and urged it to keep its word, viz:

Even in the absence of contract, the record plainly shows that the CB [Central Bank] made express representations to petitioners herein that it would support the OBM [Overseas Bank of Manila], and avoid its liquidation if the petitioners would execute (a) the Voting Trust Agreement turning over the management of OBM to the CB or its nominees, and (b) mortgage or assign their properties to the Central Bank to cover the overdraft balance of OBM. The petitioners having complied with these conditions and parted with value to the profit of the CB (which thus acquired additional security for its own advances), the CB may not now renege on its representations and liquidate the OBM, to the

detriment of its stockholders, depositors and other creditors, under the rule of promissory estoppel (19 Am. Jur., pages 657-658; 28 Am. Jur. 2d, 656-657; Ed. Note, 115 ALR, 157).

"The broad general rule to the effect that a promise to do or not to do something in the future does not work an estoppel must be qualified, since there are numerous cases in which an estoppel has been predicated on promises or assurances as to future conduct. The doctrine of ‘promissory estoppel’ is by no means new, although the name has been adopted only in comparatively recent years. According to that doctrine, an estoppel may arise from the making of a promise even though without consideration, if it was intended that the promise should be relied upon and in fact it was relied upon, and if a refusal to enforce it would be virtually to sanction the perpetration of fraud or would result in other injustice. In this respect, the reliance by the promises is generally evidenced by action or forbearance on his part, and the idea has been expressed that such action or forbearance would reasonably have been expected by the promisor. Mere omission by the promisee to do whatever the promisor promised to do has been held insufficient ‘forbearance’ to give rise to a promissory estoppel." (19 Am. Jur., loc. cit.)

The exception established in the foregoing cases is particularly appropriate presently since the "indirect" sale of PLDT common shares to foreign investors partook of a propriety business transaction of the government which was not undertaken as an incident to any of its governmental functions. Accordingly, the government, by concluding the sale, has descended to the level of an ordinary citizen and stripped itself of the vestiges of immunity that is available in the performance of governmental acts.112

Ergo, the government is vulnerable to, and cannot hold off, the application of the principle of estoppel that the foreign investors can very well invoke in case they are compelled to divest the voting shares they have previously acquired through the inducement of no less the government. In other words, the government is precluded from penalizing these alien investors for an act performed upon its guarantee, through its facilities, and with its imprimatur.

Under the "fair and equitable treatment" clause of our bilateralinvestment treaties and fair trade agreements, foreign investorshave the right to rely on the same legal framework existing at thetime they made their investments

Not only is the government put in estoppel by its acts and representations during the sale of the PTIC shares to MPAH, it is likewise bound by its guarantees in the Bilateral Investment Treaties (BITs) and Free Trade Agreements (FTAs) with other countries.

To date, the Philippines has concluded numerous BITs and FTAs to encourage and facilitate foreign direct investments in the country. These BITs and FTAs invariably contain guarantees calculated to ensure the safety and stability of these foreign investments. Foremost of these is the commitment to give fair and equitable treatment (FET) to the foreign investors and investments in the country.

Take for instance the BIT concluded between the Philippines and China,113 Article 3(1) thereof provides that "investments and activities associated with such investments of investors of either Contracting Party shall be accorded equitable treatment and shall enjoy protection in the territory of the other Contracting Party."114 The same assurance is in the Agreement on Investment of the Framework Agreement on Comprehensive Economic Cooperation Between the Association of Southeast Asian Nations and the People’s Republic of China (ASEAN-China Investment Agreement)115 where the Philippines assured Chinese investors that the country "shall accord to [them] fair and equitable treatment and full protection and security."116 In the same manner, the Philippines agreed to "accord investments [made by Japanese investors] treatment in accordance with international law, including fair and equitable treatment and full protection

48

and security"117 in the Agreement between the Republic of the Philippines and Japan for Economic Partnership (JPEPA).118

Similar provisions are found in the ASEAN Comprehensive Investment Agreement (ACIA)119 and the BITs concluded by the Philippines with, among others, the Argentine Republic,120 Australia,121 Austria,122Bangladesh,123 Belgium,124 Cambodia,125 Canada,126 Chile,127 the Czech Republic,128 Denmark,129 Finland,130France,131 Germany,132 India,133 Indonesia,134 Iran,135 Italy,136 Mongolia,137 Myanmar,138 Netherlands,1

39Pakistan,140 Portuguese Republic,141 Romania,142 Russia,143 Saudi Arabia,144 Spain,145 Sweden,146Switzerland,147 Thailand,148 Turkey,149 United Kingdom,150 and Vietnam.151

Explaining the FET as a standard concordant with the rule of law, Professor Vandevelde wrote that it requires the host county to treat foreign investments with consistency, security, non-discrimination and reasonableness:

The thesis is that the awards issued to date implicitly have interpreted the fair and equitable treatment standard as requiring treatment in accordance with the concept of the rule of law. That is, the concept of legality is the unifying theory behind the fair and equitable treatment standard.

x x x x

Thus, international arbitral awards interpreting the fair and equitable treatment standard have incorporated the substantive and procedural principles of the rule of law into that standard. The fair and equitable treatment standard in BITs has been interpreted as requiring that covered investment or investors receive treatment that is reasonable, consistent, non-discriminatory, transparent, and in accordance with due process. As will be seen, these principles explain virtually all of the awards applying the fair and equitable treatment standard. No award is inconsistent with this theory of the standard.

Understanding fair and equitable treatment as legality is consistent with the purposes of the BITs. BITs essentially are instruments that impose legal restraints on the treatment of covered investments and investors by host states. The very essence of a BIT is a partial subordination of the sovereign's power to the legal constraints of the treaty. Further, individual BIT provisions are themselves a reflection of the principles of the rule of law. (Emphasis and underscoring supplied.)152

On the requirement of consistency, the International Centre for the Settlement of Investment Disputes (ICSID) explained in Tecnicas Medioambientales Tecmed S.A. v. The united Mexican States153 that the host country must maintain a stable and predictable legal and business environment to accord a fair and equitable treatment to foreign investors.

153. The Arbitral Tribunal finds that the commitment of fair and equitable treatment included in Article 4(1) of the Agreement is an expression and part of the bona fide principle recognized in international law, although bad faith from the State is not required for its violation:

To the modern eye, what is unfair or inequitable need not equate with the outrageous or the egregious. In particular, a State may treat foreign investment unfairly and inequitably without necessarily acting in bad faith.

154. The Arbitral Tribunal considers that this provision of the Agreement, in light of the good faith principle established by international law, requires the Contracting Parties to provide to international investments treatment that does not affect the basic expectations that were taken into account by the foreign investor to make the investment. The foreign investor expects the host State to act in a consistent manner, free from ambiguity and totally transparently in its relations with the foreign investor, so that it may know beforehand any and all rules and regulations that will govern its investments, as well as the

goals of the relevant policies and administrative practices or directives, to be able to plan its investment and comply with such regulations. Any and all State actions conforming to such criteria should relate not only to the guidelines, directives or requirements issued, or the resolutions approved thereunder, but also to the goals underlying such regulations. The foreign investor also expects the host State to act consistently, i.e. without arbitrarily revoking any preexisting decisions or permits issued by the State that were relied upon by the investor to assume its commitments as well as to plan and launch its commercial and business activities. The investor also expects the State to use the legal instruments that govern the actions of the investor or the investment in conformity with the function usually assigned to such instruments, and not to deprive the investor of its investment without the required compensation. In fact, failure by the host State to comply with such pattern of conduct with respect to the foreign investor or its investments affects the investor’s ability to measure the treatment and protection awarded by the host State and to determine whether the actions of the host State conform to the fair and equitable treatment principle. Therefore, compliance by the host State with such pattern of conduct is closely related to the above-mentioned principle, to the actual chances of enforcing such principle, and to excluding the possibility that state action be characterized as arbitrary; i.e. as presenting insufficiencies that would be recognized "…by any reasonable and impartial man," or, although not in violation of specific regulations, as being contrary to the law because:

...(it) shocks, or at least surprises, a sense of juridical propriety. (Emphasis and underscoring supplied added.)

The Philippines, therefore, cannot, without so much as a notice of policy shift, alter and change the legal and business environment in which the foreign investments in the country were made in the first place. These investors obviously made the decision to come in after studying the country’s legal framework-its restrictions and incentives––and so, as a matter of fairness, they must be accorded the right to expect that the same legal climate and the same substantive set of rules will remain during the period of their investments.

The representation that foreigners can invest up to 40% of the entirety of the total stockholdings, and not just the voting shares, of a public utility corporation is an implied covenant that the Philippines cannot renege without violating the FET guarantee. Especially in this case where the Philippines made specific commitments to countries like Japan and China that their investing nationals can own up to 40% of the equity of a public utility like a telecommunications corporation. In the table contained in Schedule 1(B), Annex 6 of the JPEPA, the Philippines categorically represented that Japanese investors’ entry into the Philippine telecommunications industry, specifically corporations offering "voice telephone services," is subject to only the following requirements and conditions:

A. Franchise from Congress of the Philippines

B. Certificate of Public Convenience and Necessity (CPCN) from the National Telecommunications Commission

C. Foreign equity is permitted up to 40 percent.

D. x x x154 (Emphasis supplied.)

The same representation is made in the Philippines’ Schedule of Specific Commitments appended to the ASEAN-China Agreement on Trade in Services.155

Further, as previously pointed out, it was the Philippine government that pushed for and approved the sale of the 111,415 PTIC shares to MPAH, thereby indirectly transferring the ownership of 6.3 percent of the outstanding common shares of PLDT, to a foreign firm and so increasing the foreign voting shareholding in PLDT. Hence, the presence of good faith may not

49

be convincingly argued in favour of the Philippine government in a suit for violation of its FET guarantee.

In fact, it has been held that a bona fide change in policy by a branch of government does not excuse compliance with the FET obligations. In Occidental Exploration and Production Company (OEPC) v. the Republic of Ecuador,156 the United Nations Commission on International Trade Law (UNCITRAL) ruled that Ecuador violated the US/Ecuador BIT by denying OEPC fair and equitable treatment when it failed to provide a predictable framework for its investment planning. Ruling thus, the tribunal cited Ecuador’s change in tax law and its tax authority’s unsatisfactory and vague response to OEPC’s consulta, viz:

183. x x x The stability of the legal and business framework is thus an essential element of fair and equitable treatment.

184. The tribunal must note in this context that the framework under which the investment was made and operates has been changed in an important manner by actions adopted by [the Ecuadorian tax authority]. … The clarifications that OEPC sought on the applicability of VAT by means of "consulta" made to [the Ecuadorian tax authority] received a wholly unsatisfactory and thoroughly vague answer. The tax law was changed without providing any clarity abut its meaning and extend and the practice and regulations were also inconsistent with such changes.

185. Various arbitral tribunals have recently insisted on the need for this stability. The tribunal inMetalcad held that the Respondent "failed to ensure a transparent and predictable framework for Metalcad’s business planning and investment. The totality of these circumstances demonstrate a lack of orderly process and timely disposition in relation to an investor of a Party acting in the expectation that it would be treated fairly and justly…" x x x

186. It is quite clear from the record of this case and from the events discussed in this Final Award that such requirements were not met by Ecuador. Moreover, this is an objective requirement that does not depend on whether the Respondent has proceeded in good faith or not.

187. The Tribunal accordingly holds that the Respondent has breached its obligations to accord fair and equitable treatment under Article II (3)

(a) of the Treaty. x x x

x x x x

191. The relevant question for international law in this discussion is not whether there is an obligation to refund VAT, which is the point on which the parties have argued most intensely, but rather whether the legal and business framework meets the requirements of stability and predictability under international law. It was earlier concluded that there is not a VAT refund obligation under international law, except in the specific case of the Andean Community Law, which provides for the option of either compensation or refund, but there is certainly an obligation not to alter the legal and business environment in which the investment has been made. In this case it is the latter question that triggers a treatment that is not fair and equitable. (Emphasis supplied.)

To maintain the FET guarantee contained in the various BITs and FTAs concluded by the country and avert a deluge of investor suits before the ICSID, the UNCITRAL or other fora, any decision of this court that tends to drastically alter the foreign investors’ basic expectations when they made their investments, taking into account the consistent SEC Opinions and the executive and legislative branches’ Specific Commitments, must be applied prospectively.

This Court cannot turn oblivious to the fact that if We diverge from the prospectivity rule and implement the resolution on the present issue immediately and, without giving due deference to

the foreign investors’ rights to due process and the equal protection of the laws, compel the foreign stockholders to divest their voting shares against their wishes at prices lower than the acquisition costs, these foreign investors may very well shy away from Philippine stocks and avoid investing in the Philippines. Not to mention, the validity of the franchise granted to PLDT and similarly situated public utilities will be put under a cloud of doubt. Such uncertainty and the unfair treatment of foreign investors who merely relied in good faith on the policies, rules and regulations of the PSE and the SEC will likely upset the volatile capital market as it would have a negative impact on the value of these companies that will discourage investors, both local and foreign, from purchasing their shares. In which case, foreign direct investments (FDIs) in the country (which already lags behind our Asian neighbors) will take a nosedive. Indeed, it cannot be gainsaid that a sudden and unexpected deviation from the accepted and consistent construction of the term "capital" will create a domino effect that may cripple our capital markets.

Therefore, in applying the new comprehensive interpretation of Sec. 11, Art. XII of the Constitution, the current voting shares of the foreign investors in public utilities in excess of the 40% capital shall be maintained and honored. Otherwise the due process guarantee under the Constitution and the long established precepts of justice, equity and fair play would be impaired.

Prospective application of new laws or changes in interpretation

The June 28, 2011 Decision construed "capital" in the first sentence of Section 11, Article XII of the Constitution as "full beneficial ownership of 60 percent of the outstanding capital stocks coupled with 60 percent of the voting rights." In the Resolution denying the motions for reconsideration, it further amplified the scope of the word "capital" by clarifying that "the 60- 40 ownership requirement in favor of Filipino citizens must apply separately to each class of shares whether common, preferred, preferred voting or any other class of shares." This is a radical departure from the clear intent of the framers of the 1987 Constitution and the long established interpretation ascribed to said word by the Securities and Exchange Commission—that "capital" in the first sentence of Sec. 11, Art. XII means capital stock or BOTH voting and non-voting shares. The recent interpretation enunciated in the June 28, 2011 and in the Resolution at hand can only be applied PROSPECTIVELY. It cannot be applied retroactively to corporations such as PLDT and its investors such as its shareholders who have all along relied on the consistent reading of "capital" by SEC and the Philippine government to apply it to a public utility’s total capital stock.

Lex prospicit, non respicit – "laws have no retroactive effect unless the contrary is provided."157 As a necessary corollary, judicial rulings should not be accorded retroactive effect since "judicial decisions applying or interpreting the laws or the Constitution shall form part of the legal system of the Philippines."158 It has been the constant holding of the Court that a judicial decision setting a new doctrine or principle ("precedent-setting decision") shall not retroactively apply to parties who relied in good faith on the principles and doctrines standing prior to the promulgation thereof ("old principles/doctrines"), especially when a retroactive application of the precedent-setting decision would impair the rights and obligations of the parties. So it is that as early as 1940, the Court has refused to apply the new doctrine of jus sanguinis to persons who relied in good faith on the principle of jus soli adopted inRoa v. Collector of Customs.159 Similarly, in Co v. Court of Appeals,160 the Court sustained petitioner Co’s bona fide reliance on the Minister of Justice’s Opinion dated December 15, 1981 that the delivery of a "rubber" check as guarantee for an obligation is not a punishable offense despite the Court’s pronouncement on September 21, 1987 in Que v. People that Batas Pambansa Blg. (BP) 22 nonetheless covers a check issued to guarantee the payment of an obligation. In so ruling, the Court quoted various decisions applying precedent-setting decisions prospectively. We held:

Judicial decisions applying or interpreting the laws or the Constitution shall form a part of the legal system of the Philippines," according to Article 8 of the Civil Code. "Laws

50

shall have no retroactive effect, unless the contrary is provided," declares Article 4 of the same Code, a declaration that is echoed by Article 22 of the Revised Penal Code: "Penal laws shall have a retroactive effect insofar as they favor the person guilty of a felony, who is not a habitual criminal . . ."

x x x x

The principle of prospectivity has also been applied to judicial decisions which, "although in themselves not laws, are nevertheless evidence of what the laws mean, . . . (this being) the reason why under Article 8 of the New Civil Code, 'Judicial decisions applying or interpreting the laws or the Constitution shall form a part of the legal system . . .' "

So did this Court hold, for example, in Peo. v. Jabinal, 55 SCRA 607, 611:

x x x x

So, too, did the Court rule in Spouses Gauvain and Bernardita Benzonan v. Court of Appeals, et al.(G.R. No. 97973) and Development Bank of the Philippines v. Court of Appeals, et al. (G.R. No 97998), Jan. 27, 1992, 205 SCRA 515, 527-528:

x x x x

A compelling rationalization of the prospectivity principle of judicial decisions is well set forth in the oft-cited case of Chicot County Drainage Dist. v. Baxter States Bank, 308 US 371, 374 1940. The Chicot doctrine advocates the imperative necessity to take account of the actual existence of a statute prior to its nullification, as an operative fact negating acceptance of "a principle of absolute retroactive invalidity."

x x x x

Much earlier, in De Agbayani v. PNB, 38 SCRA 429 xxx the Court made substantially the same observations…

x x x x

Again, treating of the effect that should be given to its decision in Olaguer v. Military Commission No 34, — declaring invalid criminal proceedings conducted during the martial law regime against civilians, which had resulted in the conviction and incarceration of numerous persons — this Court, in Tan vs. Barrios, 190 SCRA 686, at p. 700, ruled as follows:

"In the interest of justice and consistency, we hold that Olaguer should, in principle, be applied prospectively only to future cases and cases still ongoing or not yet final when that decision was promulgated. x x x"

It would seem, then, that the weight of authority is decidedly in favor of the proposition that the Court’s decision of September 21, 1987 in Que v. People, 154 SCRA 160 (1987) — i.e., that a check issued merely to guarantee the performance of an obligation is nevertheless covered by B.P. Blg. 22 — should not be given retrospective effect to the prejudice of the petitioner and other persons similarly situated, who relied on the official opinion of the Minister of Justice that such a check did not fall within the scope of B.P. Blg. 22. (Emphasis supplied).

Indeed, pursuant to the doctrine of prospectivity, new doctrines and principles must be applied only to acts and events transpiring after the precedent-setting judicial decision, and not to those that occurred and were caused by persons who relied on the "old" doctrine and acted on the faith thereof.

Not content with changing the rule in the middle of the game, the majority, in the June 28, 2011 Decision, went a little further by ordering respondent SEC Chairperson "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." This may be viewed as unreasonable and arbitrary. The Court in the challenged June 28, 2011 Decision already made a finding that foreigners hold 64.27% of the total number of PLDT common shares while Filipinos hold only 35.73%.161 In this factual setting, PLDT will, as clear as day, face sanctions since its present capital structure is presently in breach of the rule on the 40% cap on foreign ownership of voting shares even without need of a SEC investigation.

In answering the SEC’s query regarding the proper period of application and imposition of appropriate sanctions against PLDT, Justice Carpio tersely stated that "once the 28 June 2011 Decision becomes final, the SEC shall impose the appropriate sanctions only if it finds after due hearing that, at the start of the administrative cases or investigation, there is an existing violation of Sec. 11, Art. XII of the Constitution."162 As basis therefor, Justice Carpio cited Halili v. Court of Appeals163 and United Church Board for World Ministries (UCBWM) v. Sebastian.164However, these cases do not provide a jurisprudential foundation to this mandate that may very well deprive PLDT foreign shareholders of their voting shares. In fact, UCBWM v. Sebastian respected the voluntary transfer in a will by an American of his shares of stocks in a land-holding corporation. In the same manner, Halili v. Court of Appeals sustained as valid the waiver by an alien of her right of inheritance over a piece of land in favour of her son. Nowhere in these cases did this Court order the involuntary dispossession of corporate stocks by alien stockholders. At most, these two cases only recognized the principle validating the transfer of land to an alien who, after the transfer, subsequently becomes a Philippine citizen or transfers the land to a Filipino citizen. They do not encompass the situation that will eventually ensue after the investigation conducted by the SEC in accordance with the June 28, 2011 and the present resolution. They do not justify the compulsory deprivation of voting shares in public utility corporations from foreign stockholders who had legally acquired these stocks in the first instance.

The abrupt application of the construction of Sec. 11, Art. XII of the Constitution to foreigners currently holding voting shares in a public utility corporation is not only constitutionally problematic; it is likewise replete with pragmatic difficulties that could hinder the real-world translation of this Court’s Resolution. Although apparently benevolent, the majority’s concession to allow "public utilities that fail to comply with the nationality requirement under Section 11, Article XII and the FIA [to] cure their deficiencies prior to the start of the administrative case or investigation"165 could indirectly occasion a compulsory deprivation of the public utilities’ foreign stockholders of their voting shares. Certainly, these public utilities must immediately pare down their foreign-owned voting shares to avoid the imposable sanctions. This holds true especially for PLDT whose 64.27% of its common voting shares are foreign-subscribed and held. PLDT is, therefore, forced to immediately deprive, or at the very least, dilute the property rights of their foreign stockholders before the commencement of the administrative proceedings, which would be a mere farce considering the transparency of the public utility from the onset.

Even with the chance granted to the public utilities to remedy their supposed deficiency, the nebulous time-frame given by the majority, i.e., "prior to the start of the administrative case or investigation,"166 may very well prove too short for these public utilities to raise the necessary amount of money to increase the number of their authorized capital stock in order to dilute the property rights of their foreign stockholders holding voting shares.167 Similarly, if they induce their foreign stockholders to transfer the excess voting shares to qualified Philippine nationals, this period before the filing of the administrative may not be sufficient for these stockholders to find Philippine nationals willing to purchase these voting shares at the market price. This Court cannot ignore the fact that the voting shares of Philippine public utilities like PLDT are listed and sold at large in foreign capital markets. Hence, foreigners who have previously purchased their voting shares in these markets will not have a ready Philippine market to immediately transfer their shares. More than likely,

51

these foreign stockholders will be forced to sell their voting shares at a loss to the few Philippine nationals with money to spare, or the public utility itself will be constrained to acquire these voting shares to the prejudice of its retained earnings.168

Whatever means the public utilities choose to employ in order to cut down the foreign stockholdings of voting shares, it is necessary to determine who among the foreign stockholders of these public utilities must bear the burden of unloading the voting shares or the dilution of their property rights. In a situation like this, there is at present no settled rule on who should be deprived of their property rights. Will it be the foreign stockholders who bought the latest issuances? Or the first foreign stockholders of the public utility corporations? This issue cannot be realistically settled within the time-frame given by the majority without raising more disputes. With these loose ends, the majority cannot penalize the public utilities if they should fail to comply with the directive of complying with the "nationality requirement under Section 11, Article XII and the FIA" within the unreasonably nebulous and limited period "prior to the start of the administrative case or investigation."169

In the light of the new pronouncement of the Court that public utilities that fail to comply with the nationality requirement under Section 11, Article XII of the Constitution CAN CURE THEIR DEFICIENCIES prior to the start of the administrative case or investigation, I submit that affected companies like PLDT should be given reasonable time to undertake the necessary measures to make their respective capital structure compliant, and the SEC, as the regulatory authority, should come up with the appropriate guidelines on the process and supervise the same. SEC should likewise adopt the necessary rules and regulations to implement the prospective compliance by all affected companies with the new ruling regarding the interpretation of the provision in question. Such rules and regulations must respect the due process rights of all affected corporations and define a reasonable period for them to comply with the June 28, 2011 Decision.

A final note.

Year in and year out, the government’s trade managers attend economic summits courting businessmen to invest in the country, doubtless promising them a playing field where the rules are friendly as they are predictable. So it would appear odd if a branch of government would make business life complicated for investors who are already here. Indeed, stability and predictability are the key pillars on which our legal system must be founded and run to guarantee a business environment conducive to the country’s sustainable economic growth. Hence, it behoves this Court to respect the basic expectations taken into account by the investors at the time they made the investments. In other words, it is the duty of this Court to stand guard against any untoward change of the rules in the middle of the game.

I, therefore, vote to GRANT the motions for reconsideration and accordingly REVERSE and SET ASIDE the June 28, 2011 Decision. The Court should declare that the word "capital" in the first sentence of Section 11, Article Xll of the 1987 Constitution means the entire capital stock or both voting and non-voting shares.

Since the June 28, 2011 Decision was however sustained, I submit that said decision should take effect only on the date of its finality and should be applied prospectively.

PLDT should be given time to umkrtake the nec~ssary meast1res to make its capital structure compliant, and th~ Securities and Exchange Commission should formulalc appropriate guidelines and supervise the process. Said Commission should also adopt ruks and regulations to implement the prospective compliance by all affected companies with the new ruling on the interpretation of Sec. 11, Art. XII of the Constitution. Such rules and regulations must respect the due process rights of all affected corporations and provide a reasonable period for them to com pi y with the June 28, 2011 Decision. The rights of foreigners over the voting shares they presently own in excess of 40% of said shares should, in the meantime, be respected. PRESBITERO J. VELASCO, JR.Associate Justice

52

G.R. No. 195580               April 21, 2014

NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND DEVELOPMENT, INC., and MCARTHUR MINING, INC., Petitioners, vs.REDMONT CONSOLIDATED MINES CORP., Respondent.

D E C I S I O N

VELASCO, JR., J.:

Before this Court is a Petition for Review on Certiorari under Rule 45 filed by Narra Nickel and Mining Development Corp. (Narra), Tesoro Mining and Development, Inc. (Tesoro), and McArthur Mining Inc. (McArthur), which seeks to reverse the October 1, 2010 Decision1 and the February 15, 2011 Resolution of the Court of Appeals (CA).

The Facts

Sometime in December 2006, respondent Redmont Consolidated Mines Corp. (Redmont), a domestic corporation organized and existing under Philippine laws, took interest in mining and exploring certain areas of the province of Palawan. After inquiring with the Department of Environment and Natural Resources (DENR), it learned that the areas where it wanted to undertake exploration and mining activities where already covered by Mineral Production Sharing Agreement (MPSA) applications of petitioners Narra, Tesoro and McArthur.

Petitioner McArthur, through its predecessor-in-interest Sara Marie Mining, Inc. (SMMI), filed an application for an MPSA and Exploration Permit (EP) with the Mines and Geo-Sciences Bureau (MGB), Region IV-B, Office of the Department of Environment and Natural Resources (DENR).

Subsequently, SMMI was issued MPSA-AMA-IVB-153 covering an area of over 1,782 hectares in Barangay Sumbiling, Municipality of Bataraza, Province of Palawan and EPA-IVB-44 which includes an area of 3,720 hectares in Barangay Malatagao, Bataraza, Palawan. The MPSA and EP were then transferred to Madridejos Mining Corporation (MMC) and, on November 6, 2006, assigned to petitioner McArthur.2

Petitioner Narra acquired its MPSA from Alpha Resources and Development Corporation and Patricia Louise Mining & Development Corporation (PLMDC) which previously filed an application for an MPSA with the MGB, Region IV-B, DENR on January 6, 1992. Through the said application, the DENR issued MPSA-IV-1-12 covering an area of 3.277 hectares in barangays Calategas and San Isidro, Municipality of Narra, Palawan. Subsequently, PLMDC conveyed, transferred and/or assigned its rights and interests over the MPSA application in favor of Narra.

Another MPSA application of SMMI was filed with the DENR Region IV-B, labeled as MPSA-AMA-IVB-154 (formerly EPA-IVB-47) over 3,402 hectares in Barangays Malinao and Princesa Urduja, Municipality of Narra, Province of Palawan. SMMI subsequently conveyed, transferred and assigned its rights and interest over the said MPSA application to Tesoro.

On January 2, 2007, Redmont filed before the Panel of Arbitrators (POA) of the DENR three (3) separate petitions for the denial of petitioners’ applications for MPSA designated as AMA-IVB-153, AMA-IVB-154 and MPSA IV-1-12.

In the petitions, Redmont alleged that at least 60% of the capital stock of McArthur, Tesoro and Narra are owned and controlled by MBMI Resources, Inc. (MBMI), a 100% Canadian corporation. Redmont reasoned that since MBMI is a considerable stockholder of petitioners, it was the driving force behind petitioners’ filing of the MPSAs over the areas covered by applications since it knows that it can only participate in mining activities through corporations which are deemed Filipino citizens. Redmont argued

that given that petitioners’ capital stocks were mostly owned by MBMI, they were likewise disqualified from engaging in mining activities through MPSAs, which are reserved only for Filipino citizens.

In their Answers, petitioners averred that they were qualified persons under Section 3(aq) of Republic Act No. (RA) 7942 or the Philippine Mining Act of 1995 which provided:

Sec. 3 Definition of Terms. As used in and for purposes of this Act, the following terms, whether in singular or plural, shall mean:

x x x x

(aq) "Qualified person" means any citizen of the Philippines with capacity to contract, or a corporation, partnership, association, or cooperative organized or authorized for the purpose of engaging in mining, with technical and financial capability to undertake mineral resources development and duly registered in accordance with law at least sixty per cent (60%) of the capital of which is owned by citizens of the Philippines: Provided, That a legally organized foreign-owned corporation shall be deemed a qualified person for purposes of granting an exploration permit, financial or technical assistance agreement or mineral processing permit.

Additionally, they stated that their nationality as applicants is immaterial because they also applied for Financial or Technical Assistance Agreements (FTAA) denominated as AFTA-IVB-09 for McArthur, AFTA-IVB-08 for Tesoro and AFTA-IVB-07 for Narra, which are granted to foreign-owned corporations. Nevertheless, they claimed that the issue on nationality should not be raised since McArthur, Tesoro and Narra are in fact Philippine Nationals as 60% of their capital is owned by citizens of the Philippines. They asserted that though MBMI owns 40% of the shares of PLMC (which owns 5,997 shares of Narra),3 40% of the shares of MMC (which owns 5,997 shares of McArthur)4and 40% of the shares of SLMC (which, in turn, owns 5,997 shares of Tesoro),5 the shares of MBMI will not make it the owner of at least 60% of the capital stock of each of petitioners. They added that the best tool used in determining the nationality of a corporation is the "control test," embodied in Sec. 3 of RA 7042 or the Foreign Investments Act of 1991. They also claimed that the POA of DENR did not have jurisdiction over the issues in Redmont’s petition since they are not enumerated in Sec. 77 of RA 7942. Finally, they stressed that Redmont has no personality to sue them because it has no pending claim or application over the areas applied for by petitioners.

On December 14, 2007, the POA issued a Resolution disqualifying petitioners from gaining MPSAs. It held:

[I]t is clearly established that respondents are not qualified applicants to engage in mining activities. On the other hand, [Redmont] having filed its own applications for an EPA over the areas earlier covered by the MPSA application of respondents may be considered if and when they are qualified under the law. The violation of the requirements for the issuance and/or grant of permits over mining areas is clearly established thus, there is reason to believe that the cancellation and/or revocation of permits already issued under the premises is in order and open the areas covered to other qualified applicants.

x x x x

WHEREFORE, the Panel of Arbitrators finds the Respondents, McArthur Mining Inc., Tesoro Mining and Development, Inc., and Narra Nickel Mining and Development Corp. as, DISQUALIFIED for being considered as Foreign Corporations. Their Mineral Production Sharing Agreement (MPSA) are hereby x x x DECLARED NULL AND VOID.6

The POA considered petitioners as foreign corporations being "effectively controlled" by MBMI, a 100% Canadian company and declared their MPSAs null and void. In the same Resolution, it gave due course to Redmont’s EPAs. Thereafter, on February 7,

53

2008, the POA issued an Order7 denying the Motion for Reconsideration filed by petitioners.

Aggrieved by the Resolution and Order of the POA, McArthur and Tesoro filed a joint Notice of Appeal8 and Memorandum of Appeal9 with the Mines Adjudication Board (MAB) while Narra separately filed its Notice of Appeal10 and Memorandum of Appeal.11

In their respective memorandum, petitioners emphasized that they are qualified persons under the law. Also, through a letter, they informed the MAB that they had their individual MPSA applications converted to FTAAs. McArthur’s FTAA was denominated as AFTA-IVB-0912 on May 2007, while Tesoro’s MPSA application was converted to AFTA-IVB-0813 on May 28, 2007, and Narra’s FTAA was converted to AFTA-IVB-0714 on March 30, 2006.

Pending the resolution of the appeal filed by petitioners with the MAB, Redmont filed a Complaint15 with the Securities and Exchange Commission (SEC), seeking the revocation of the certificates for registration of petitioners on the ground that they are foreign-owned or controlled corporations engaged in mining in violation of Philippine laws. Thereafter, Redmont filed on September 1, 2008 a Manifestation and Motion to Suspend Proceeding before the MAB praying for the suspension of the proceedings on the appeals filed by McArthur, Tesoro and Narra.

Subsequently, on September 8, 2008, Redmont filed before the Regional Trial Court of Quezon City, Branch 92 (RTC) a Complaint16 for injunction with application for issuance of a temporary restraining order (TRO) and/or writ of preliminary injunction, docketed as Civil Case No. 08-63379. Redmont prayed for the deferral of the MAB proceedings pending the resolution of the Complaint before the SEC.

But before the RTC can resolve Redmont’s Complaint and applications for injunctive reliefs, the MAB issued an Order on September 10, 2008, finding the appeal meritorious. It held:

WHEREFORE, in view of the foregoing, the Mines Adjudication Board hereby REVERSES and SETS ASIDE the Resolution dated 14 December 2007 of the Panel of Arbitrators of Region IV-B (MIMAROPA) in POA-DENR Case Nos. 2001-01, 2007-02 and 2007-03, and its Order dated 07 February 2008 denying the Motions for Reconsideration of the Appellants. The Petition filed by Redmont Consolidated Mines Corporation on 02 January 2007 is hereby ordered DISMISSED.17

Belatedly, on September 16, 2008, the RTC issued an Order18 granting Redmont’s application for a TRO and setting the case for hearing the prayer for the issuance of a writ of preliminary injunction on September 19, 2008.

Meanwhile, on September 22, 2008, Redmont filed a Motion for Reconsideration19 of the September 10, 2008 Order of the MAB. Subsequently, it filed a Supplemental Motion for Reconsideration20 on September 29, 2008.

Before the MAB could resolve Redmont’s Motion for Reconsideration and Supplemental Motion for Reconsideration, Redmont filed before the RTC a Supplemental Complaint21 in Civil Case No. 08-63379.

On October 6, 2008, the RTC issued an Order22 granting the issuance of a writ of preliminary injunction enjoining the MAB from finally disposing of the appeals of petitioners and from resolving Redmont’s Motion for Reconsideration and Supplement Motion for Reconsideration of the MAB’s September 10, 2008 Resolution.

On July 1, 2009, however, the MAB issued a second Order denying Redmont’s Motion for Reconsideration and Supplemental Motion for Reconsideration and resolving the appeals filed by petitioners.

Hence, the petition for review filed by Redmont before the CA, assailing the Orders issued by the MAB. On October 1, 2010, the CA rendered a Decision, the dispositive of which reads:

WHEREFORE, the Petition is PARTIALLY GRANTED. The assailed Orders, dated September 10, 2008 and July 1, 2009 of the Mining Adjudication Board are reversed and set aside. The findings of the Panel of Arbitrators of the Department of Environment and Natural Resources that respondents McArthur, Tesoro and Narra are foreign corporations is upheld and, therefore, the rejection of their applications for Mineral Product Sharing Agreement should be recommended to the Secretary of the DENR.

With respect to the applications of respondents McArthur, Tesoro and Narra for Financial or Technical Assistance Agreement (FTAA) or conversion of their MPSA applications to FTAA, the matter for its rejection or approval is left for determination by the Secretary of the DENR and the President of the Republic of the Philippines.

SO ORDERED.23

In a Resolution dated February 15, 2011, the CA denied the Motion for Reconsideration filed by petitioners.

After a careful review of the records, the CA found that there was doubt as to the nationality of petitioners when it realized that petitioners had a common major investor, MBMI, a corporation composed of 100% Canadians. Pursuant to the first sentence of paragraph 7 of Department of Justice (DOJ) Opinion No. 020, Series of 2005, adopting the 1967 SEC Rules which implemented the requirement of the Constitution and other laws pertaining to the exploitation of natural resources, the CA used the "grandfather rule" to determine the nationality of petitioners. It provided:

Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality, but if the percentage of Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as of Philippine nationality. Thus, if 100,000 shares are registered in the name of a corporation or partnership at least 60% of the capital stock or capital, respectively, of which belong to Filipino citizens, all of the shares shall be recorded as owned by Filipinos. But if less than 60%, or say, 50% of the capital stock or capital of the corporation or partnership, respectively, belongs to Filipino citizens, only 50,000 shares shall be recorded as belonging to aliens.24 (emphasis supplied)

In determining the nationality of petitioners, the CA looked into their corporate structures and their corresponding common shareholders. Using the grandfather rule, the CA discovered that MBMI in effect owned majority of the common stocks of the petitioners as well as at least 60% equity interest of other majority shareholders of petitioners through joint venture agreements. The CA found that through a "web of corporate layering, it is clear that one common controlling investor in all mining corporations involved x x x is MBMI."25 Thus, it concluded that petitioners McArthur, Tesoro and Narra are also in partnership with, or privies-in-interest of, MBMI.

Furthermore, the CA viewed the conversion of the MPSA applications of petitioners into FTAA applications suspicious in nature and, as a consequence, it recommended the rejection of petitioners’ MPSA applications by the Secretary of the DENR.

With regard to the settlement of disputes over rights to mining areas, the CA pointed out that the POA has jurisdiction over them and that it also has the power to determine the of nationality of petitioners as a prerequisite of the Constitution prior the conferring of rights to "co-production, joint venture or production-sharing agreements" of the state to mining rights. However, it also stated that the POA’s jurisdiction is limited only to the resolution of the dispute and not on the approval or rejection of the MPSAs. It stipulated that only the Secretary of the DENR is vested with the power to approve or reject applications for MPSA.

Finally, the CA upheld the findings of the POA in its December 14, 2007 Resolution which considered petitioners McArthur, Tesoro and Narra as foreign corporations. Nevertheless, the CA

54

determined that the POA’s declaration that the MPSAs of McArthur, Tesoro and Narra are void is highly improper.

While the petition was pending with the CA, Redmont filed with the Office of the President (OP) a petition dated May 7, 2010 seeking the cancellation of petitioners’ FTAAs. The OP rendered a Decision26 on April 6, 2011, wherein it canceled and revoked petitioners’ FTAAs for violating and circumventing the "Constitution x x x[,] the Small Scale Mining Law and Environmental Compliance Certificate as well as Sections 3 and 8 of the Foreign Investment Act and E.O. 584."27 The OP, in affirming the cancellation of the issued FTAAs, agreed with Redmont stating that petitioners committed violations against the abovementioned laws and failed to submit evidence to negate them. The Decision further quoted the December 14, 2007 Order of the POA focusing on the alleged misrepresentation and claims made by petitioners of being domestic or Filipino corporations and the admitted continued mining operation of PMDC using their locally secured Small Scale Mining Permit inside the area earlier applied for an MPSA application which was eventually transferred to Narra. It also agreed with the POA’s estimation that the filing of the FTAA applications by petitioners is a clear admission that they are "not capable of conducting a large scale mining operation and that they need the financial and technical assistance of a foreign entity in their operation, that is why they sought the participation of MBMI Resources, Inc."28 The Decision further quoted:

The filing of the FTAA application on June 15, 2007, during the pendency of the case only demonstrate the violations and lack of qualification of the respondent corporations to engage in mining. The filing of the FTAA application conversion which is allowed foreign corporation of the earlier MPSA is an admission that indeed the respondent is not Filipino but rather of foreign nationality who is disqualified under the laws. Corporate documents of MBMI Resources, Inc. furnished its stockholders in their head office in Canada suggest that they are conducting operation only through their local counterparts.29

The Motion for Reconsideration of the Decision was further denied by the OP in a Resolution30 dated July 6, 2011. Petitioners then filed a Petition for Review on Certiorari of the OP’s Decision and Resolution with the CA, docketed as CA-G.R. SP No. 120409. In the CA Decision dated February 29, 2012, the CA affirmed the Decision and Resolution of the OP. Thereafter, petitioners appealed the same CA decision to this Court which is now pending with a different division.

Thus, the instant petition for review against the October 1, 2010 Decision of the CA. Petitioners put forth the following errors of the CA:

I.

The Court of Appeals erred when it did not dismiss the case for mootness despite the fact that the subject matter of the controversy, the MPSA Applications, have already been converted into FTAA applications and that the same have already been granted.II.The Court of Appeals erred when it did not dismiss the case for lack of jurisdiction considering that the Panel of Arbitrators has no jurisdiction to determine the nationality of Narra, Tesoro and McArthur.III.The Court of Appeals erred when it did not dismiss the case on account of Redmont’s willful forum shopping.IV.The Court of Appeals’ ruling that Narra, Tesoro and McArthur are foreign corporations based on the "Grandfather Rule" is contrary to law, particularly the express mandate of the Foreign Investments Act of 1991, as amended, and the FIA Rules.V.The Court of Appeals erred when it applied the exceptions to the res inter alios acta rule.VI.The Court of Appeals erred when it concluded that the conversion of the MPSA Applications into FTAA Applications were of

"suspicious nature" as the same is based on mere conjectures and surmises without any shred of evidence to show the same.31

We find the petition to be without merit.

This case not moot and academic

The claim of petitioners that the CA erred in not rendering the instant case as moot is without merit.

Basically, a case is said to be moot and/or academic when it "ceases to present a justiciable controversy by virtue of supervening events, so that a declaration thereon would be of no practical use or value."32 Thus, the courts "generally decline jurisdiction over the case or dismiss it on the ground of mootness."33

The "mootness" principle, however, does accept certain exceptions and the mere raising of an issue of "mootness" will not deter the courts from trying a case when there is a valid reason to do so. In David v. Macapagal-Arroyo (David), the Court provided four instances where courts can decide an otherwise moot case, thus:

1.) There is a grave violation of the Constitution;

2.) The exceptional character of the situation and paramount public interest is involved;

3.) When constitutional issue raised requires formulation of controlling principles to guide the bench, the bar, and the public; and

4.) The case is capable of repetition yet evading review.34

All of the exceptions stated above are present in the instant case. We of this Court note that a grave violation of the Constitution, specifically Section 2 of Article XII, is being committed by a foreign corporation right under our country’s nose through a myriad of corporate layering under different, allegedly, Filipino corporations. The intricate corporate layering utilized by the Canadian company, MBMI, is of exceptional character and involves paramount public interest since it undeniably affects the exploitation of our Country’s natural resources. The corresponding actions of petitioners during the lifetime and existence of the instant case raise questions as what principle is to be applied to cases with similar issues. No definite ruling on such principle has been pronounced by the Court; hence, the disposition of the issues or errors in the instant case will serve as a guide "to the bench, the bar and the public."35 Finally, the instant case is capable of repetition yet evading review, since the Canadian company, MBMI, can keep on utilizing dummy Filipino corporations through various schemes of corporate layering and conversion of applications to skirt the constitutional prohibition against foreign mining in Philippine soil.

Conversion of MPSA applications to FTAA applications

We shall discuss the first error in conjunction with the sixth error presented by petitioners since both involve the conversion of MPSA applications to FTAA applications. Petitioners propound that the CA erred in ruling against them since the questioned MPSA applications were already converted into FTAA applications; thus, the issue on the prohibition relating to MPSA applications of foreign mining corporations is academic. Also, petitioners would want us to correct the CA’s finding which deemed the aforementioned conversions of applications as suspicious in nature, since it is based on mere conjectures and surmises and not supported with evidence.

We disagree.

The CA’s analysis of the actions of petitioners after the case was filed against them by respondent is on point. The changing of applications by petitioners from one type to another just because

55

a case was filed against them, in truth, would raise not a few sceptics’ eyebrows. What is the reason for such conversion? Did the said conversion not stem from the case challenging their citizenship and to have the case dismissed against them for being "moot"? It is quite obvious that it is petitioners’ strategy to have the case dismissed against them for being "moot."

Consider the history of this case and how petitioners responded to every action done by the court or appropriate government agency: on January 2, 2007, Redmont filed three separate petitions for denial of the MPSA applications of petitioners before the POA. On June 15, 2007, petitioners filed a conversion of their MPSA applications to FTAAs. The POA, in its December 14, 2007 Resolution, observed this suspect change of applications while the case was pending before it and held:

The filing of the Financial or Technical Assistance Agreement application is a clear admission that the respondents are not capable of conducting a large scale mining operation and that they need the financial and technical assistance of a foreign entity in their operation that is why they sought the participation of MBMI Resources, Inc. The participation of MBMI in the corporation only proves the fact that it is the Canadian company that will provide the finances and the resources to operate the mining areas for the greater benefit and interest of the same and not the Filipino stockholders who only have a less substantial financial stake in the corporation.

x x x x

x x x The filing of the FTAA application on June 15, 2007, during the pendency of the case only demonstrate the violations and lack of qualification of the respondent corporations to engage in mining. The filing of the FTAA application conversion which is allowed foreign corporation of the earlier MPSA is an admission that indeed the respondent is not Filipino but rather of foreign nationality who is disqualified under the laws. Corporate documents of MBMI Resources, Inc. furnished its stockholders in their head office in Canada suggest that they are conducting operation only through their local counterparts.36

On October 1, 2010, the CA rendered a Decision which partially granted the petition, reversing and setting aside the September 10, 2008 and July 1, 2009 Orders of the MAB. In the said Decision, the CA upheld the findings of the POA of the DENR that the herein petitioners are in fact foreign corporations thus a recommendation of the rejection of their MPSA applications were recommended to the Secretary of the DENR. With respect to the FTAA applications or conversion of the MPSA applications to FTAAs, the CA deferred the matter for the determination of the Secretary of the DENR and the President of the Republic of the Philippines.37

In their Motion for Reconsideration dated October 26, 2010, petitioners prayed for the dismissal of the petition asserting that on April 5, 2010, then President Gloria Macapagal-Arroyo signed and issued in their favor FTAA No. 05-2010-IVB, which rendered the petition moot and academic. However, the CA, in a Resolution dated February 15, 2011 denied their motion for being a mere "rehash of their claims and defenses."38 Standing firm on its Decision, the CA affirmed the ruling that petitioners are, in fact, foreign corporations. On April 5, 2011, petitioners elevated the case to us via a Petition for Review on Certiorari under Rule 45, questioning the Decision of the CA. Interestingly, the OP rendered a Decision dated April 6, 2011, a day after this petition for review was filed, cancelling and revoking the FTAAs, quoting the Order of the POA and stating that petitioners are foreign corporations since they needed the financial strength of MBMI, Inc. in order to conduct large scale mining operations. The OP Decision also based the cancellation on the misrepresentation of facts and the violation of the "Small Scale Mining Law and Environmental Compliance Certificate as well as Sections 3 and 8 of the Foreign Investment Act and E.O. 584."39 On July 6, 2011, the OP issued a Resolution, denying the Motion for Reconsideration filed by the petitioners.

Respondent Redmont, in its Comment dated October 10, 2011, made known to the Court the fact of the OP’s Decision and

Resolution. In their Reply, petitioners chose to ignore the OP Decision and continued to reuse their old arguments claiming that they were granted FTAAs and, thus, the case was moot. Petitioners filed a Manifestation and Submission dated October 19, 2012,40 wherein they asserted that the present petition is moot since, in a remarkable turn of events, MBMI was able to sell/assign all its shares/interest in the "holding companies" to DMCI Mining Corporation (DMCI), a Filipino corporation and, in effect, making their respective corporations fully-Filipino owned.

Again, it is quite evident that petitioners have been trying to have this case dismissed for being "moot." Their final act, wherein MBMI was able to allegedly sell/assign all its shares and interest in the petitioner "holding companies" to DMCI, only proves that they were in fact not Filipino corporations from the start. The recent divesting of interest by MBMI will not change the stand of this Court with respect to the nationality of petitioners prior the suspicious change in their corporate structures. The new documents filed by petitioners are factual evidence that this Court has no power to verify.

The only thing clear and proved in this Court is the fact that the OP declared that petitioner corporations have violated several mining laws and made misrepresentations and falsehood in their applications for FTAA which lead to the revocation of the said FTAAs, demonstrating that petitioners are not beyond going against or around the law using shifty actions and strategies. Thus, in this instance, we can say that their claim of mootness is moot in itself because their defense of conversion of MPSAs to FTAAs has been discredited by the OP Decision.

Grandfather test

The main issue in this case is centered on the issue of petitioners’ nationality, whether Filipino or foreign. In their previous petitions, they had been adamant in insisting that they were Filipino corporations, until they submitted their Manifestation and Submission dated October 19, 2012 where they stated the alleged change of corporate ownership to reflect their Filipino ownership. Thus, there is a need to determine the nationality of petitioner corporations.

Basically, there are two acknowledged tests in determining the nationality of a corporation: the control test and the grandfather rule. Paragraph 7 of DOJ Opinion No. 020, Series of 2005, adopting the 1967 SEC Rules which implemented the requirement of the Constitution and other laws pertaining to the controlling interests in enterprises engaged in the exploitation of natural resources owned by Filipino citizens, provides:

Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality, but if the percentage of Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as of Philippine nationality. Thus, if 100,000 shares are registered in the name of a corporation or partnership at least 60% of the capital stock or capital, respectively, of which belong to Filipino citizens, all of the shares shall be recorded as owned by Filipinos. But if less than 60%, or say, 50% of the capital stock or capital of the corporation or partnership, respectively, belongs to Filipino citizens, only 50,000 shares shall be counted as owned by Filipinos and the other 50,000 shall be recorded as belonging to aliens.

The first part of paragraph 7, DOJ Opinion No. 020, stating "shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality," pertains to the control test or the liberal rule. On the other hand, the second part of the DOJ Opinion which provides, "if the percentage of the Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as Philippine nationality," pertains to the stricter, more stringent grandfather rule.

56

Prior to this recent change of events, petitioners were constant in advocating the application of the "control test" under RA 7042, as amended by RA 8179, otherwise known as the Foreign Investments Act (FIA), rather than using the stricter grandfather rule. The pertinent provision under Sec. 3 of the FIA provides:

SECTION 3. Definitions. - As used in this Act:

a.) The term Philippine national shall mean a citizen of the Philippines; or a domestic partnership or association wholly owned by the citizens of the Philippines; a corporation organized under the laws of the Philippines of which at least sixty percent (60%) of the capital stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty percent (60%) of the fund will accrue to the benefit of Philippine nationals: Provided, That were a corporation and its non-Filipino stockholders own stocks in a Securities and Exchange Commission (SEC) registered enterprise, at least sixty percent (60%) of the capital stock outstanding and entitled to vote of each of both corporations must be owned and held by citizens of the Philippines and at least sixty percent (60%) of the members of the Board of Directors, in order that the corporation shall be considered a Philippine national. (emphasis supplied)

The grandfather rule, petitioners reasoned, has no leg to stand on in the instant case since the definition of a "Philippine National" under Sec. 3 of the FIA does not provide for it. They further claim that the grandfather rule "has been abandoned and is no longer the applicable rule."41 They also opined that the last portion of Sec. 3 of the FIA admits the application of a "corporate layering" scheme of corporations. Petitioners claim that the clear and unambiguous wordings of the statute preclude the court from construing it and prevent the court’s use of discretion in applying the law. They said that the plain, literal meaning of the statute meant the application of the control test is obligatory.

We disagree. "Corporate layering" is admittedly allowed by the FIA; but if it is used to circumvent the Constitution and pertinent laws, then it becomes illegal. Further, the pronouncement of petitioners that the grandfather rule has already been abandoned must be discredited for lack of basis.

Art. XII, Sec. 2 of the Constitution provides:

Sec. 2. All lands of the public domain, waters, minerals, coal, petroleum and other mineral oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural resources are owned by the State. With the exception of agricultural lands, all other natural resources shall not be alienated. The exploration, development, and utilization of natural resources shall be under the full control and supervision of the State. The State may directly undertake such activities, or it may enter into co-production, joint venture or production-sharing agreements with Filipino citizens, or corporations or associations at least sixty per centum of whose capital is owned by such citizens. Such agreements may be for a period not exceeding twenty-five years, renewable for not more than twenty-five years, and under such terms and conditions as may be provided by law.

x x x x

The President may enter into agreements with Foreign-owned corporations involving either technical or financial assistance for large-scale exploration, development, and utilization of minerals, petroleum, and other mineral oils according to the general terms and conditions provided by law, based on real contributions to the economic growth and general welfare of the country. In such agreements, the State shall promote the development and use of local scientific and technical resources. (emphasis supplied)

The emphasized portion of Sec. 2 which focuses on the State entering into different types of agreements for the exploration, development, and utilization of natural resources with entities who are deemed Filipino due to 60 percent ownership of capital is pertinent to this case, since the issues are centered on the

utilization of our country’s natural resources or specifically, mining. Thus, there is a need to ascertain the nationality of petitioners since, as the Constitution so provides, such agreements are only allowed corporations or associations "at least 60 percent of such capital is owned by such citizens." The deliberations in the Records of the 1986 Constitutional Commission shed light on how a citizenship of a corporation will be determined:

Mr. BENNAGEN: Did I hear right that the Chairman’s interpretation of an independent national economy is freedom from undue foreign control? What is the meaning of undue foreign control?

MR. VILLEGAS: Undue foreign control is foreign control which sacrifices national sovereignty and the welfare of the Filipino in the economic sphere.

MR. BENNAGEN: Why does it have to be qualified still with the word "undue"? Why not simply freedom from foreign control? I think that is the meaning of independence, because as phrased, it still allows for foreign control.

MR. VILLEGAS: It will now depend on the interpretation because if, for example, we retain the 60/40 possibility in the cultivation of natural resources, 40 percent involves some control; not total control, but some control.

MR. BENNAGEN: In any case, I think in due time we will propose some amendments.

MR. VILLEGAS: Yes. But we will be open to improvement of the phraseology.

Mr. BENNAGEN: Yes.

Thank you, Mr. Vice-President.

x x x x

MR. NOLLEDO: In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign equity; namely, 60-40 in Section 3, 60-40 in Section 9, and 2/3-1/3 in Section 15.

MR. VILLEGAS: That is right.

MR. NOLLEDO: In teaching law, we are always faced with the question: ‘Where do we base the equity requirement, is it on the authorized capital stock, on the subscribed capital stock, or on the paid-up capital stock of a corporation’? Will the Committee please enlighten me on this?

MR. VILLEGAS: We have just had a long discussion with the members of the team from the UP Law Center who provided us with a draft. The phrase that is contained here which we adopted from the UP draft is ‘60 percent of the voting stock.’

MR. NOLLEDO: That must be based on the subscribed capital stock, because unless declared delinquent, unpaid capital stock shall be entitled to vote.

MR. VILLEGAS: That is right.

MR. NOLLEDO: Thank you.

With respect to an investment by one corporation in another corporation, say, a corporation with 60-40 percent equity invests in another corporation which is permitted by the Corporation Code, does the Committee adopt the grandfather rule?

MR. VILLEGAS: Yes, that is the understanding of the Committee.

MR. NOLLEDO: Therefore, we need additional Filipino capital?

MR. VILLEGAS: Yes.42 (emphasis supplied)

57

It is apparent that it is the intention of the framers of the Constitution to apply the grandfather rule in cases where corporate layering is present.

Elementary in statutory construction is when there is conflict between the Constitution and a statute, the Constitution will prevail. In this instance, specifically pertaining to the provisions under Art. XII of the Constitution on National Economy and Patrimony, Sec. 3 of the FIA will have no place of application. As decreed by the honorable framers of our Constitution, the grandfather rule prevails and must be applied.

Likewise, paragraph 7, DOJ Opinion No. 020, Series of 2005 provides:

The above-quoted SEC Rules provide for the manner of calculating the Filipino interest in a corporation for purposes, among others, of determining compliance with nationality requirements (the ‘Investee Corporation’). Such manner of computation is necessary since the shares in the Investee Corporation may be owned both by individual stockholders (‘Investing Individuals’) and by corporations and partnerships (‘Investing Corporation’). The said rules thus provide for the determination of nationality depending on the ownership of the Investee Corporation and, in certain instances, the Investing Corporation.

Under the above-quoted SEC Rules, there are two cases in determining the nationality of the Investee Corporation. The first case is the ‘liberal rule’, later coined by the SEC as the Control Test in its 30 May 1990 Opinion, and pertains to the portion in said Paragraph 7 of the 1967 SEC Rules which states, ‘(s)hares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality.’ Under the liberal Control Test, there is no need to further trace the ownership of the 60% (or more) Filipino stockholdings of the Investing Corporation since a corporation which is at least 60% Filipino-owned is considered as Filipino.

The second case is the Strict Rule or the Grandfather Rule Proper and pertains to the portion in said Paragraph 7 of the 1967 SEC Rules which states, "but if the percentage of Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as of Philippine nationality." Under the Strict Rule or Grandfather Rule Proper, the combined totals in the Investing Corporation and the Investee Corporation must be traced (i.e., "grandfathered") to determine the total percentage of Filipino ownership.

Moreover, the ultimate Filipino ownership of the shares must first be traced to the level of the Investing Corporation and added to the shares directly owned in the Investee Corporation x x x.

x x x x

In other words, based on the said SEC Rule and DOJ Opinion, the Grandfather Rule or the second part of the SEC Rule applies only when the 60-40 Filipino-foreign equity ownership is in doubt (i.e., in cases where the joint venture corporation with Filipino and foreign stockholders with less than 60% Filipino stockholdings [or 59%] invests in other joint venture corporation which is either 60-40% Filipino-alien or the 59% less Filipino). Stated differently, where the 60-40 Filipino- foreign equity ownership is not in doubt, the Grandfather Rule will not apply. (emphasis supplied)

After a scrutiny of the evidence extant on record, the Court finds that this case calls for the application of the grandfather rule since, as ruled by the POA and affirmed by the OP, doubt prevails and persists in the corporate ownership of petitioners. Also, as found by the CA, doubt is present in the 60-40 Filipino equity ownership of petitioners Narra, McArthur and Tesoro, since their common investor, the 100% Canadian corporation––MBMI, funded them. However, petitioners also claim that there is "doubt" only when the stockholdings of Filipinos are less than 60%.43

The assertion of petitioners that "doubt" only exists when the stockholdings are less than 60% fails to convince this Court. DOJ

Opinion No. 20, which petitioners quoted in their petition, only made an example of an instance where "doubt" as to the ownership of the corporation exists. It would be ludicrous to limit the application of the said word only to the instances where the stockholdings of non-Filipino stockholders are more than 40% of the total stockholdings in a corporation. The corporations interested in circumventing our laws would clearly strive to have "60% Filipino Ownership" at face value. It would be senseless for these applying corporations to state in their respective articles of incorporation that they have less than 60% Filipino stockholders since the applications will be denied instantly. Thus, various corporate schemes and layerings are utilized to circumvent the application of the Constitution.

Obviously, the instant case presents a situation which exhibits a scheme employed by stockholders to circumvent the law, creating a cloud of doubt in the Court’s mind. To determine, therefore, the actual participation, direct or indirect, of MBMI, the grandfather rule must be used.

McArthur Mining, Inc.

To establish the actual ownership, interest or participation of MBMI in each of petitioners’ corporate structure, they have to be "grandfathered."

As previously discussed, McArthur acquired its MPSA application from MMC, which acquired its application from SMMI. McArthur has a capital stock of ten million pesos (PhP 10,000,000) divided into 10,000 common shares at one thousand pesos (PhP 1,000) per share, subscribed to by the following:44

Interestingly, looking at the corporate structure of MMC, we take note that it has a similar structure and composition as McArthur. In fact, it would seem that MBMI is also a major investor and "controls"45 MBMI and also, similar nominal shareholders were present, i.e. Fernando B. Esguerra (Esguerra), Lauro L. Salazar (Salazar), Michael T. Mason (Mason) and Kenneth Cawkell (Cawkell):

Madridejos Mining Corporation

Name Nationali Numb Amount Amount

Name Nationality

Number of Shares

Amount Subscribed

Amount Paid

Madridejos MiningCorporation

Filipino 5,997 PhP 5,997,000.00

PhP 825,000.00

MBMI Resources, Inc.

Canadian 3,998 PhP 3,998,000.0

PhP 1,878,174.60

Lauro L. Salazar

Filipino 1 PhP 1,000.00

PhP 1,000.00

Fernando B. Esguerra

Filipino 1 PhP 1,000.00

PhP 1,000.00

Manuel A. Agcaoili

Filipino 1 PhP 1,000.00

PhP 1,000.00

Michael T. Mason

American 1 PhP 1,000.00

PhP 1,000.00

Kenneth Cawkell

Canadian 1 PhP 1,000.00

PhP 1,000.00

Total 10,000 PhP 10,000,000.00

PhP 2,708,174.60(emphasis supplied)

58

ty er of Shares

Subscribed Paid

Olympic Mines &

Development

Corp.

Filipino 6,663 PhP 6,663,000.00

PhP 0

MBMI Resources,

Inc.

Canadian 3,331 PhP 3,331,000.00

PhP 2,803,900.00

Amanti Limson

Filipino 1 PhP 1,000.00

PhP 1,000.00

Fernando B.

Esguerra

Filipino 1 PhP 1,000.00

PhP 1,000.00

Lauro Salazar

Filipino 1 PhP 1,000.00

PhP 1,000.00

Emmanuel G.

Hernando

Filipino 1 PhP 1,000.00

PhP 1,000.00

Michael T. Mason

American 1 PhP 1,000.00

PhP 1,000.00

Kenneth Cawkell

Canadian 1 PhP 1,000.00

PhP 1,000.00

Total 10,000 PhP 10,000,000.00

PhP 2,809,900.00

Noticeably, Olympic Mines & Development Corporation (Olympic) did not pay any amount with respect to the number of shares they subscribed to in the corporation, which is quite absurd since Olympic is the major stockholder in MMC. MBMI’s 2006 Annual Report sheds light on why Olympic failed to pay any amount with respect to the number of shares it subscribed to. It states that Olympic entered into joint venture agreements with several Philippine companies, wherein it holds directly and indirectly a 60% effective equity interest in the Olympic Properties.46 Quoting the said Annual report:

On September 9, 2004, the Company and Olympic Mines & Development Corporation ("Olympic") entered into a series of agreements including a Property Purchase and Development Agreement (the Transaction Documents) with respect to three nickel laterite properties in Palawan, Philippines (the "Olympic Properties"). The Transaction Documents effectively establish a joint venture between the Company and Olympic for purposes of developing the Olympic Properties. The Company holds directly and indirectly an initial 60% interest in the joint venture. Under certain circumstances and upon achieving certain milestones, the Company may earn up to a 100% interest, subject to a 2.5% net revenue royalty.47 (emphasis supplied)

Thus, as demonstrated in this first corporation, McArthur, when it is "grandfathered," company layering was utilized by MBMI to gain control over McArthur. It is apparent that MBMI has more than 60% or more equity interest in McArthur, making the latter a foreign corporation.

Tesoro Mining and Development, Inc.

Tesoro, which acquired its MPSA application from SMMI, has a capital stock of ten million pesos (PhP 10,000,000) divided into ten thousand (10,000) common shares at PhP 1,000 per share, as demonstrated below:

[[reference = http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pdf]]

Name Nationality

Number ofShares

AmountSubscribed

Amount Paid

Sara MarieMining, Inc.

Filipino 5,997 PhP 5,997,000.00

PhP 825,000.00

MBMIResources, Inc.

Canadian 3,998 PhP 3,998,000.00

PhP 1,878,174.60

Lauro L. Salazar

Filipino 1 PhP 1,000.00

PhP 1,000.00

Fernando B.Esguerra

Filipino 1 PhP 1,000.00

PhP 1,000.00

Manuel A.Agcaoili

Filipino 1 PhP 1,000.00

PhP 1,000.00

Michael T. Mason

American

1 PhP 1,000.00

PhP 1,000.00

Kenneth Cawkell

Canadian 1 PhP 1,000.00

PhP 1,000.00

Total 10,000 PhP 10,000,000.00

PhP 2,708,174.60

Except for the name "Sara Marie Mining, Inc.," the table above shows exactly the same figures as the corporate structure of petitioner McArthur, down to the last centavo. All the other shareholders are the same: MBMI, Salazar, Esguerra, Agcaoili, Mason and Cawkell. The figures under "Nationality," "Number of Shares," "Amount Subscribed," and "Amount Paid" are exactly the same. Delving deeper, we scrutinize SMMI’s corporate structure:

Sara Marie Mining, Inc.

Name Nationality Number ofShares

AmountSubscribed

Amount Paid

Olympic Mines &DevelopmentCorp.

Filipino 6,663 PhP 6,663,000.00

PhP 0

MBMI Resources,Inc.

Canadian 3,331 PhP 3,331,000.00

PhP 2,794,000.00

Amanti Limson Filipino 1 PhP 1,000.00

PhP 1,000.00

Fernando B.Esguerra

Filipino 1 PhP 1,000.00

PhP 1,000.00

Lauro Salazar Filipino 1 PhP 1,000.00

PhP 1,000.00

Emmanuel G.Hernando

Filipino 1 PhP 1,000.00

PhP 1,000.00

Michael T. Mason American 1 PhP 1,000.00

PhP 1,000.00

Kenneth Cawkell Canadian 1 PhP 1,000.00

PhP 1,000.00

59

Total 10,000 PhP 10,000,000.00

PhP 2,809,900.00

After subsequently studying SMMI’s corporate structure, it is not farfetched for us to spot the glaring similarity between SMMI and MMC’s corporate structure. Again, the presence of identical stockholders, namely: Olympic, MBMI, Amanti Limson (Limson), Esguerra, Salazar, Hernando, Mason and Cawkell. The figures under the headings "Nationality," "Number of Shares," "Amount Subscribed," and "Amount Paid" are exactly the same except for the amount paid by MBMI which now reflects the amount of two million seven hundred ninety four thousand pesos (PhP 2,794,000). Oddly, the total value of the amount paid is two million eight hundred nine thousand nine hundred pesos (PhP 2,809,900).

Accordingly, after "grandfathering" petitioner Tesoro and factoring in Olympic’s participation in SMMI’s corporate structure, it is clear that MBMI is in control of Tesoro and owns 60% or more equity interest in Tesoro. This makes petitioner Tesoro a non-Filipino corporation and, thus, disqualifies it to participate in the exploitation, utilization and development of our natural resources.

Narra Nickel Mining and Development Corporation

Moving on to the last petitioner, Narra, which is the transferee and assignee of PLMDC’s MPSA application, whose corporate structure’s arrangement is similar to that of the first two petitioners discussed. The capital stock of Narra is ten million pesos (PhP 10,000,000), which is divided into ten thousand common shares (10,000) at one thousand pesos (PhP 1,000) per share, shown as follows:

Name Nationality Number ofShares

AmountSubscribed

Amount Paid

Patricia LouiseMining &DevelopmentCorp.

Filipino 5,997 PhP 5,997,000.00

PhP 1,677,000.00

MBMIResources, Inc.

Canadian 3,998 PhP 3,996,000.00

PhP 1,116,000.00

Higinio C.Mendoza, Jr.

Filipino 1 PhP 1,000.00 PhP 1,000.00

Henry E.Fernandez

Filipino 1 PhP 1,000.00 PhP 1,000.00

Manuel A.Agcaoili

Filipino 1 PhP 1,000.00 PhP 1,000.00

Ma. Elena A.Bocalan

Filipino 1 PhP 1,000.00 PhP 1,000.00

Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1,000.00

Robert L.McCurdy

American 1 PhP 1,000.00 PhP 1,000.00

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP 10,000,000.00

PhP 2,800,000.00(emphasis supplied)

Again, MBMI, along with other nominal stockholders, i.e., Mason, Agcaoili and Esguerra, is present in this corporate structure.

Patricia Louise Mining & Development Corporation

Using the grandfather method, we further look and examine PLMDC’s corporate structure:

Name Nationality Number of Shares

Amount Subscribed

Amount Paid

Palawan Alpha South Resources Development Corporation

Filipino 6,596 PhP 6,596,000.00

PhP 0

MBMI Resources,

Inc.

Canadian 3,396 PhP 3,396,000.00

PhP 2,796,000.00

Higinio C. Mendoza, Jr.

Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernando B. Esguerra

Filipino 1 PhP 1,000.00 PhP 1,000.00

Henry E. Fernandez Filipino 1 PhP 1,000.00 PhP 1,000.00

Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00

Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1,000.00

Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP 10,000,000.00

PhP 2,708,174.60

Yet again, the usual players in petitioners’ corporate structures are present. Similarly, the amount of money paid by the 2nd tier majority stock holder, in this case, Palawan Alpha South Resources and Development Corp. (PASRDC), is zero.

Studying MBMI’s Summary of Significant Accounting Policies dated October 31, 2005 explains the reason behind the intricate corporate layering that MBMI immersed itself in:

JOINT VENTURES The Company’s ownership interests in various mining ventures engaged in the acquisition, exploration and development of mineral properties in the Philippines is described as follows:

(a) Olympic Group

The Philippine companies holding the Olympic Property, and the ownership and interests therein, are as follows:

Olympic- Philippines (the "Olympic Group")

Sara Marie Mining Properties Ltd. ("Sara Marie") 33.3%

Tesoro Mining & Development, Inc. (Tesoro) 60.0%

Pursuant to the Olympic joint venture agreement the Company holds directly and indirectly an effective equity interest in the Olympic Property of 60.0%. Pursuant to a shareholders’ agreement, the Company exercises joint control over the companies in the Olympic Group.

(b) Alpha Group

The Philippine companies holding the Alpha Property, and the ownership interests therein, are as follows:

Alpha- Philippines (the "Alpha Group")

Patricia Louise Mining Development Inc. ("Patricia") 34.0%

Narra Nickel Mining & Development Corporation (Narra) 60.4%

60

Under a joint venture agreement the Company holds directly and indirectly an effective equity interest in the Alpha Property of 60.4%. Pursuant to a shareholders’ agreement, the Company exercises joint control over the companies in the Alpha Group.48 (emphasis supplied)

Concluding from the above-stated facts, it is quite safe to say that petitioners McArthur, Tesoro and Narra are not Filipino since MBMI, a 100% Canadian corporation, owns 60% or more of their equity interests. Such conclusion is derived from grandfathering petitioners’ corporate owners, namely: MMI, SMMI and PLMDC. Going further and adding to the picture, MBMI’s Summary of Significant Accounting Policies statement– –regarding the "joint venture" agreements that it entered into with the "Olympic" and "Alpha" groups––involves SMMI, Tesoro, PLMDC and Narra. Noticeably, the ownership of the "layered" corporations boils down to MBMI, Olympic or corporations under the "Alpha" group wherein MBMI has joint venture agreements with, practically exercising majority control over the corporations mentioned. In effect, whether looking at the capital structure or the underlying relationships between and among the corporations, petitioners are NOT Filipino nationals and must be considered foreign since 60% or more of their capital stocks or equity interests are owned by MBMI.

Application of the res inter alios acta rule

Petitioners question the CA’s use of the exception of the res inter alios acta or the "admission by co-partner or agent" rule and "admission by privies" under the Rules of Court in the instant case, by pointing out that statements made by MBMI should not be admitted in this case since it is not a party to the case and that it is not a "partner" of petitioners.

Secs. 29 and 31, Rule 130 of the Revised Rules of Court provide:

Sec. 29. Admission by co-partner or agent.- The act or declaration of a partner or agent of the party within the scope of his authority and during the existence of the partnership or agency, may be given in evidence against such party after the partnership or agency is shown by evidence other than such act or declaration itself. The same rule applies to the act or declaration of a joint owner, joint debtor, or other person jointly interested with the party.

Sec. 31. Admission by privies.- Where one derives title to property from another, the act, declaration, or omission of the latter, while holding the title, in relation to the property, is evidence against the former.

Petitioners claim that before the above-mentioned Rule can be applied to a case, "the partnership relation must be shown, and that proof of the fact must be made by evidence other than the admission itself."49 Thus, petitioners assert that the CA erred in finding that a partnership relationship exists between them and MBMI because, in fact, no such partnership exists.

Partnerships vs. joint venture agreements

Petitioners claim that the CA erred in applying Sec. 29, Rule 130 of the Rules by stating that "by entering into a joint venture, MBMI have a joint interest" with Narra, Tesoro and McArthur. They challenged the conclusion of the CA which pertains to the close characteristics of

"partnerships" and "joint venture agreements." Further, they asserted that before this particular partnership can be formed, it should have been formally reduced into writing since the capital involved is more than three thousand pesos (PhP 3,000). Being that there is no evidence of written agreement to form a partnership between petitioners and MBMI, no partnership was created.

We disagree.

A partnership is defined as two or more persons who bind themselves to contribute money, property, or industry to a common fund with the intention of dividing the profits among themselves.50 On the other hand, joint ventures have been deemed to be "akin" to partnerships since it is difficult to distinguish between joint ventures and partnerships. Thus:

[T]he relations of the parties to a joint venture and the nature of their association are so similar and closely akin to a partnership that it is ordinarily held that their rights, duties, and liabilities are to be tested by rules which are closely analogous to and substantially the same, if not exactly the same, as those which govern partnership. In fact, it has been said that the trend in the law has been to blur the distinctions between a partnership and a joint venture, very little law being found applicable to one that does not apply to the other.51

Though some claim that partnerships and joint ventures are totally different animals, there are very few rules that differentiate one from the other; thus, joint ventures are deemed "akin" or similar to a partnership. In fact, in joint venture agreements, rules and legal incidents governing partnerships are applied.52

Accordingly, culled from the incidents and records of this case, it can be assumed that the relationships entered between and among petitioners and MBMI are no simple "joint venture agreements." As a rule, corporations are prohibited from entering into partnership agreements; consequently, corporations enter into joint venture agreements with other corporations or partnerships for certain transactions in order to form "pseudo partnerships."

Obviously, as the intricate web of "ventures" entered into by and among petitioners and MBMI was executed to circumvent the legal prohibition against corporations entering into partnerships, then the relationship created should be deemed as "partnerships," and the laws on partnership should be applied. Thus, a joint venture agreement between and among corporations may be seen as similar to partnerships since the elements of partnership are present.

Considering that the relationships found between petitioners and MBMI are considered to be partnerships, then the CA is justified in applying Sec. 29, Rule 130 of the Rules by stating that "by entering into a joint venture, MBMI have a joint interest" with Narra, Tesoro and McArthur.

Panel of Arbitrators’ jurisdiction

We affirm the ruling of the CA in declaring that the POA has jurisdiction over the instant case. The POA has jurisdiction to settle disputes over rights to mining areas which definitely involve the petitions filed by Redmont against petitioners Narra, McArthur and Tesoro. Redmont, by filing its petition against petitioners, is asserting the right of Filipinos over mining areas in the Philippines against alleged foreign-owned mining corporations. Such claim constitutes a "dispute" found in Sec. 77 of RA 7942:

Within thirty (30) days, after the submission of the case by the parties for the decision, the panel shall have exclusive and original jurisdiction to hear and decide the following:

(a) Disputes involving rights to mining areas

(b) Disputes involving mineral agreements or permits

We held in Celestial Nickel Mining Exploration Corporation v. Macroasia Corp.:53

The phrase "disputes involving rights to mining areas" refers to any adverse claim, protest, or opposition to an application for mineral agreement. The POA therefore has the jurisdiction to resolve any adverse claim, protest, or opposition to a pending application for a mineral agreement filed with the concerned Regional Office of the MGB. This is clear from Secs. 38 and 41 of the DENR AO 96-40, which provide:

61

Sec. 38.

x x x x

Within thirty (30) calendar days from the last date of publication/posting/radio announcements, the authorized officer(s) of the concerned office(s) shall issue a certification(s) that the publication/posting/radio announcement have been complied with. Any adverse claim, protest, opposition shall be filed directly, within thirty (30) calendar days from the last date of publication/posting/radio announcement, with the concerned Regional Office or through any concerned PENRO or CENRO for filing in the concerned Regional Office for purposes of its resolution by the Panel of Arbitrators pursuant to the provisions of this Act and these implementing rules and regulations. Upon final resolution of any adverse claim, protest or opposition, the Panel of Arbitrators shall likewise issue a certification to that effect within five (5) working days from the date of finality of resolution thereof. Where there is no adverse claim, protest or opposition, the Panel of Arbitrators shall likewise issue a Certification to that effect within five working days therefrom.

x x x x

No Mineral Agreement shall be approved unless the requirements under this Section are fully complied with and any adverse claim/protest/opposition is finally resolved by the Panel of Arbitrators.

Sec. 41.

x x x x

Within fifteen (15) working days form the receipt of the Certification issued by the Panel of Arbitrators as provided in Section 38 hereof, the concerned Regional Director shall initially evaluate the Mineral Agreement applications in areas outside Mineral reservations. He/She shall thereafter endorse his/her findings to the Bureau for further evaluation by the Director within fifteen (15) working days from receipt of forwarded documents. Thereafter, the Director shall endorse the same to the secretary for consideration/approval within fifteen working days from receipt of such endorsement.

In case of Mineral Agreement applications in areas with Mineral Reservations, within fifteen (15) working days from receipt of the Certification issued by the Panel of Arbitrators as provided for in Section 38 hereof, the same shall be evaluated and endorsed by the Director to the Secretary for consideration/approval within fifteen days from receipt of such endorsement. (emphasis supplied)

It has been made clear from the aforecited provisions that the "disputes involving rights to mining areas" under Sec. 77(a) specifically refer only to those disputes relative to the applications for a mineral agreement or conferment of mining rights.

The jurisdiction of the POA over adverse claims, protest, or oppositions to a mining right application is further elucidated by Secs. 219 and 43 of DENR AO 95-936, which read:

Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the provisions of Sections 28, 43 and 57 above, any adverse claim, protest or opposition specified in said sections may also be filed directly with the Panel of Arbitrators within the concerned periods for filing such claim, protest or opposition as specified in said Sections.

Sec. 43. Publication/Posting of Mineral Agreement.-

x x x x

The Regional Director or concerned Regional Director shall also cause the posting of the application on the bulletin boards of the Bureau, concerned Regional office(s) and in the concerned

province(s) and municipality(ies), copy furnished the barangays where the proposed contract area is located once a week for two (2) consecutive weeks in a language generally understood in the locality. After forty-five (45) days from the last date of publication/posting has been made and no adverse claim, protest or opposition was filed within the said forty-five (45) days, the concerned offices shall issue a certification that publication/posting has been made and that no adverse claim, protest or opposition of whatever nature has been filed. On the other hand, if there be any adverse claim, protest or opposition, the same shall be filed within forty-five (45) days from the last date of publication/posting, with the Regional Offices concerned, or through the Department’s Community Environment and Natural Resources Officers (CENRO) or Provincial Environment and Natural Resources Officers (PENRO), to be filed at the Regional Office for resolution of the Panel of Arbitrators. However previously published valid and subsisting mining claims are exempted from posted/posting required under this Section.

No mineral agreement shall be approved unless the requirements under this section are fully complied with and any opposition/adverse claim is dealt with in writing by the Director and resolved by the Panel of Arbitrators. (Emphasis supplied.)

It has been made clear from the aforecited provisions that the "disputes involving rights to mining areas" under Sec. 77(a) specifically refer only to those disputes relative to the applications for a mineral agreement or conferment of mining rights.

The jurisdiction of the POA over adverse claims, protest, or oppositions to a mining right application is further elucidated by Secs. 219 and 43 of DENRO AO 95-936, which reads:

Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the provisions of Sections 28, 43 and 57 above, any adverse claim, protest or opposition specified in said sections may also be filed directly with the Panel of Arbitrators within the concerned periods for filing such claim, protest or opposition as specified in said Sections.

Sec. 43. Publication/Posting of Mineral Agreement Application.-

x x x x

The Regional Director or concerned Regional Director shall also cause the posting of the application on the bulletin boards of the Bureau, concerned Regional office(s) and in the concerned province(s) and municipality(ies), copy furnished the barangays where the proposed contract area is located once a week for two (2) consecutive weeks in a language generally understood in the locality. After forty-five (45) days from the last date of publication/posting has been made and no adverse claim, protest or opposition was filed within the said forty-five (45) days, the concerned offices shall issue a certification that publication/posting has been made and that no adverse claim, protest or opposition of whatever nature has been filed. On the other hand, if there be any adverse claim, protest or opposition, the same shall be filed within forty-five (45) days from the last date of publication/posting, with the Regional offices concerned, or through the Department’s Community Environment and Natural Resources Officers (CENRO) or Provincial Environment and Natural Resources Officers (PENRO), to be filed at the Regional Office for resolution of the Panel of Arbitrators. However, previously published valid and subsisting mining claims are exempted from posted/posting required under this Section.

No mineral agreement shall be approved unless the requirements under this section are fully complied with and any opposition/adverse claim is dealt with in writing by the Director and resolved by the Panel of Arbitrators. (Emphasis supplied.)

These provisions lead us to conclude that the power of the POA to resolve any adverse claim, opposition, or protest relative to mining rights under Sec. 77(a) of RA 7942 is confined only to adverse claims, conflicts and oppositions relating to applications for the grant of mineral rights.

62

POA’s jurisdiction is confined only to resolutions of such adverse claims, conflicts and oppositions and it has no authority to approve or reject said applications. Such power is vested in the DENR Secretary upon recommendation of the MGB Director. Clearly, POA’s jurisdiction over "disputes involving rights to mining areas" has nothing to do with the cancellation of existing mineral agreements. (emphasis ours)

Accordingly, as we enunciated in Celestial, the POA unquestionably has jurisdiction to resolve disputes over MPSA applications subject of Redmont’s petitions. However, said jurisdiction does not include either the approval or rejection of the MPSA applications, which is vested only upon the Secretary of the DENR. Thus, the finding of the POA, with respect to the rejection of petitioners’ MPSA applications being that they are foreign corporation, is valid.

Justice Marvic Mario Victor F. Leonen, in his Dissent, asserts that it is the regular courts, not the POA, that has jurisdiction over the MPSA applications of petitioners.

This postulation is incorrect.

It is basic that the jurisdiction of the court is determined by the statute in force at the time of the commencement of the action.54

Sec. 19, Batas Pambansa Blg. 129 or "The Judiciary Reorganization

Act of 1980" reads:

Sec. 19. Jurisdiction in Civil Cases.—Regional Trial Courts shall exercise exclusive original jurisdiction:

1. In all civil actions in which the subject of the litigation is incapable of pecuniary estimation.

On the other hand, the jurisdiction of POA is unequivocal from Sec. 77 of RA 7942:

Section 77. Panel of Arbitrators.—

x x x Within thirty (30) days, after the submission of the case by the parties for the decision, the panel shall have exclusive and original jurisdiction to hear and decide the following:

(c) Disputes involving rights to mining areas

(d) Disputes involving mineral agreements or permits

It is clear that POA has exclusive and original jurisdiction over any and all disputes involving rights to mining areas. One such dispute is an MPSA application to which an adverse claim, protest or opposition is filed by another interested applicant.1âwphi1 In the case at bar, the dispute arose or originated from MPSA applications where petitioners are asserting their rights to mining areas subject of their respective MPSA applications. Since respondent filed 3 separate petitions for the denial of said applications, then a controversy has developed between the parties and it is POA’s jurisdiction to resolve said disputes.

Moreover, the jurisdiction of the RTC involves civil actions while what petitioners filed with the DENR Regional Office or any concerned DENRE or CENRO are MPSA applications. Thus POA has jurisdiction.

Furthermore, the POA has jurisdiction over the MPSA applications under the doctrine of primary jurisdiction. Euro-med Laboratories v. Province of Batangas55 elucidates:

The doctrine of primary jurisdiction holds that if a case is such that its determination requires the expertise, specialized training and knowledge of an administrative body, relief must first be

obtained in an administrative proceeding before resort to the courts is had even if the matter may well be within their proper jurisdiction.

Whatever may be the decision of the POA will eventually reach the court system via a resort to the CA and to this Court as a last recourse.

Selling of MBMI’s shares to DMCI

As stated before, petitioners’ Manifestation and Submission dated October 19, 2012 would want us to declare the instant petition moot and academic due to the transfer and conveyance of all the shareholdings and interests of MBMI to DMCI, a corporation duly organized and existing under Philippine laws and is at least 60% Philippine-owned.56 Petitioners reasoned that they now cannot be considered as foreign-owned; the transfer of their shares supposedly cured the "defect" of their previous nationality. They claimed that their current FTAA contract with the State should stand since "even wholly-owned foreign corporations can enter into an FTAA with the State."57Petitioners stress that there should no longer be any issue left as regards their qualification to enter into FTAA contracts since they are qualified to engage in mining activities in the Philippines. Thus, whether the "grandfather rule" or the "control test" is used, the nationalities of petitioners cannot be doubted since it would pass both tests.

The sale of the MBMI shareholdings to DMCI does not have any bearing in the instant case and said fact should be disregarded. The manifestation can no longer be considered by us since it is being tackled in G.R. No. 202877 pending before this Court.1âwphi1 Thus, the question of whether petitioners, allegedly a Philippine-owned corporation due to the sale of MBMI's shareholdings to DMCI, are allowed to enter into FTAAs with the State is a non-issue in this case.

In ending, the "control test" is still the prevailing mode of determining whether or not a corporation is a Filipino corporation, within the ambit of Sec. 2, Art. II of the 1987 Constitution, entitled to undertake the exploration, development and utilization of the natural resources of the Philippines. When in the mind of the Court there is doubt, based on the attendant facts and circumstances of the case, in the 60-40 Filipino-equity ownership in the corporation, then it may apply the "grandfather rule."

WHEREFORE, premises considered, the instant petition is DENIED. The assailed Court of Appeals Decision dated October 1, 2010 and Resolution dated February 15, 2011 are hereby AFFIRMED.

SO ORDERED.

63

G.R. No. 178158               December 4, 2009STRATEGIC ALLIANCE DEVELOPMENT CORPORATION, Petitioner, vs.RADSTOCK SECURITIES LIMITED and PHILIPPINE NATIONAL CONSTRUCTION CORPORATION,Respondents.ASIAVEST MERCHANT BANKERS BERHAD, Intervenor.x - - - - - - - - - - - - - - - - - - - - - - -xG.R. No. 180428LUIS SISON, Petitioner, vs.PHILIPPINE NATIONAL CONSTRUCTION CORPORATION and RADSTOCK SECURITIES LIMITED,Respondents.D E C I S I O NCARPIO, J.:

Prologue

This case is an anatomy of a P6.185 billion1 pillage of the public coffers that ranks among one of the most brazen and hideous in the history of this country. This case answers the questions why our Government perennially runs out of funds to provide basic services to our people, why the great masses of the Filipino people wallow in poverty, and why a very select few amass unimaginable wealth at the expense of the Filipino people.

On 1 May 2007, the 30-year old franchise of Philippine National Construction Corporation (PNCC) under Presidential Decree No. 1113 (PD 1113), as amended by Presidential Decree No. 1894 (PD 1894), expired. During the 13th Congress, PNCC sought to extend its franchise. PNCC won approval from the House of Representatives, which passed House Bill No. 57492 renewing PNCC’s franchise for another 25 years. However, PNCC failed to secure approval from the Senate, dooming the extension of PNCC’s franchise. Led by Senator Franklin M. Drilon, the Senate opposed PNCC’s plea for extension of its franchise.3 Senator Drilon’s privilege speech4 explains why the Senate chose not to renew PNCC’s franchise:

I repeat, Mr. President. PNCC has agreed in a compromise agreement dated 17 August 2006 to transfer to Radstock Securities Limited P17,676,063,922, no small money, Mr. President, my dear colleagues, P17.6 billion.

What does it consist of? It consists of the following: 19 pieces of real estate properties with an appraised value ofP5,993,689,000. Do we know what is the bulk of this? An almost 13-hectare property right here in the Financial Center. As we leave the Senate, as we go out of this Hall, as we drive thru past the GSIS, we will see on the right a vacant lot, that is PNCC property. As we turn right on Diosdado Macapagal, we see on our right new buildings, these are all PNCC properties. That is 12.9 hectares of valuable asset right in this Financial Center that is worthP5,993,689.000.

What else, Mr. President? The 20% of the outstanding capital stock of PNCC with a par value of P2,300,000,000-- I repeat, 20% of the outstanding capital stock of PNCC worth P2,300 billion-- was assigned to Radstock.

In addition, Mr. President and my dear colleagues, please hold on to your seats because part of the agreement is 50% of PNCC’s 6% share in the gross toll revenue of the Manila North Tollways Corporation for 27 years, from 2008 to 2035, is being assigned to Radstock. How much is this worth? It is worth P9,382,374,922. I repeat,P9,382,374,922.

x x x x

Mr. President, P17,676,000,000, however, was made to appear in the agreement to be only worthP6,196,156,488. How was this achieved? How was an aggregate amount of P17,676,000,000 made to appear to be only P6,196,156,488? First, the 19 pieces of real estate worth P5,993,689,000 were only assigned a value ofP4,195,000,000 or only 70% of their appraised value.

Second, the PNCC shares of stock with a par value of P2.3 billion were marked to market and therefore were valued only at P713 million.

Third, the share of the toll revenue assigned was given a net present value of only P1,287,000,000 because of a 15% discounted rate that was applied.

In other words, Mr. President, the toll collection of P9,382,374,922 for 27 years was given a net present value of only P1,287,000,000 so that it is made to appear that the compromise agreement is only worth P6,196,000,000.

Mr. President, my dear colleagues, this agreement will substantially wipe out all the assets of PNCC. It will be left with nothing else except, probably, the collection for the next 25 years or so from the North Luzon Expressway. This agreement brought PNCC to the cleaners and literally cleaned the PNCC of all its assets. They brought PNCC to the cleaners and cleaned it to the tune of P17,676,000,000.

x x x x

Mr. President, are we not entitled, as members of the Committee, to know who is Radstock Securities Limited?

Radstock Securities Limited was allegedly incorporated under the laws of the British Virgin Islands. It has no known board of directors, except for its recently appointed attorney-in-fact, Mr. Carlos Dominguez.

Mr. President, are the members of the Committee not entitled to know why 20 years after the account to Marubeni Corporation, which gave rise to the compromise agreement 20 years after the obligation was allegedly incurred, PNCC suddenly recognized this obligation in its books when in fact this obligation was not found in its books for 20 years?

In other words, Mr. President, for 20 years, the financial statements of PNCC did not show any obligation to Marubeni, much less, to Radstock. Why suddenly on October 20, 2000, P10 billion in obligation was recognized? Why was it recognized?

During the hearing on December 18, Mr. President, we asked this question to the Asset Privatization Trust (APT) trustee, Atty. Raymundo Francisco, and he was asked: "What is the basis of your recommendation to recognize this?" He said: "I based my recommendation on a legal opinion of Feria and Feria." I asked him: "Who knew of this opinion?" He said: "Only me and the chairman of PNCC, Atty. Renato Valdecantos." I asked him: "Did you share this opinion with the members of the board who recognized the obligation of P10 billion?" He said: "No." "Can you produce this opinion now?" He said: "I have no copy."

Mysteriously, Mr. President, an obligation of P10 billion based on a legal opinion which, even Mr. Arthur Aguilar, the chairman of PNCC, is not aware of, none of the members of the PNCC board on October 20, 2000 who recognized this obligation had seen this opinion. It is mysterious.

Mr. President, are the members of our Committee not entitled to know why Radstock Securities Limited is given preference over all other creditors notwithstanding the fact that this is an unsecured obligation? There is no mortgage to secure this obligation.

More importantly, Mr. President, equally recognized is the obligation of PNCC to the Philippine government to the tune of P36 billion. PNCC owes the Philippine government P36 billion recognized in its books, apart from P3 billion in taxes. Why in the face of all of these is Radstock given preference? Why is it that Radstock is given preference to claim P17.676 billion of the assets of PNCC and give it superior status over the claim of the Philippine government, of the Filipino people to the extent of P36 billion and taxes in the amount of P3 billion? Why, Mr. President? Why is Radstock given preference not only over the Philippine government claims of P39 billion but also over other creditors

64

including a certain best merchant banker in Asia, which has already a final and executory judgment against PNCC for about P300 million? Why, Mr. President? Are we not entitled to know why the compromise agreement assigned P17.676 billion to Radstock? Why was it executed?5 (Emphasis supplied)

Aside from Senator Drilon, Senator Sergio S. Osmeña III also saw irregularities in the transactions involving the Marubeni loans, thus:

SEN. OSMEÑA. Ah okay. Good.

Now, I'd like to point out to the Committee that – it seems that this was a politically driven deal like IMPSA. Because the acceptance of the 10 billion or 13 billion debt came in October 2000 and the Radstock assignment was January 10, 2001. Now, why would Marubeni sell for $2 million three months after there was a recognition that it was owed P10 billion. Can you explain that, Mr. Dominguez?

MR. DOMINGUEZ. Your Honor, I am not aware of the decision making process of Marubeni. But my understanding was, the Japanese culture is not a litigious one and they didn't want to get into a, you know, a court situation here in the Philippines having a lot of other interest, et cetera.

SEN. OSMEÑA. Well, but that is beside the point, Mr. Dominguez. All I am asking is does it stand to reason that after you get an acceptance by a debtor that he owes you 10 billion, you sell your note for 100 million.

Now, if that had happened a year before, maybe I would have understood why he sold for such a low amount. But right after, it seems that this was part of an orchestrated deal wherein with certain powerful interest would be able to say, "Yes, we will push through. We'll fix the courts. We'll fix the board. We'll fix the APT. And we will be able to do it, just give us 55 percent of whatever is recovered," am I correct?

MR. DOMINGUEZ. As I said, Your Honor, I am not familiar with the decision making process of Marubeni. But my understanding was, as I said, they didn't want to get into a …

SEN. OSMEÑA. All right.MR. DOMINGUEZ. ...litigious situation.6

x x x xSEN. OSMEÑA. All of these financial things can be arranged. They can hire a local bank, Filipino, to be trustee for the real estate. So ...SEN. DRILON. Well, then, that’s a dummy relationship.

SEN. OSMEÑA. In any case, to me the main point here is that a third party, Radstock, whoever owns it, bought Marubeni’s right for $2 million or P100 million. Then, they are able to go through all these legal machinations and get awarded with the consent of PNCC of 6 billion. That’s a 100 million to 6 billion. Now, Mr. Aguilar, you have been in the business for such a long time. I mean, this hedge funds whether it’s Radstock or New Bridge or Texas Pacific Group or Carlyle or Avenue Capital, they look at their returns. So if Avenue Capital buys something for $2 million and you give him $4 million in one year, it’s a 100 percent return. They’ll walk away and dance to their stockholders. So here in this particular case, if you know that Radstock only bought it for $2 million, I would have gotten board approval and say, "Okay, let’s settle this for $4 million." And Radstock would have jumped up and down. So what looks to me is that this was already a scheme. Marubeni wrote it off already. Marubeni wrote everything off. They just got a $2 million and they probably have no more residual rights or maybe there’s a clause there, a secret clause, that says, "I want 20 percent of whatever you’re able to eventually collect." So $2 million. But whatever it is, Marubeni practically wrote it off. Radstock’s liability now or exposure is only $2 million plus all the lawyer fees, under-the-table, etcetera. All right. Okay. So it’s pretty obvious to me that if anybody were using his brain, I would have gone up to Radstock and say, "Here’s $4 million. Here’s P200 million. Okay." They would have walked away. But evidently, the "ninongs" of Radstock – See, I don’t care who owns Radstock. I

want to know who is the ninong here who stands to make a lot of money by being able to get to courts, the government agencies, OGCC, or whoever else has been involved in this, to agree to 6 billion or whatever it was. That’s a lot of money. And believe me, Radstock will probably get one or two billion and four billion will go into somebody else’s pocket. Or Radstock will turn around, sell that claim for P4 billion and let the new guy just collect the payments over the years.

x x x x7

SEN. OSMEÑA. x x x I just wanted to know is CDCP Mining a 100 percent subsidiary of PNCC?MR. AGUILAR. Hindi ho. Ah, no.SEN. OSMEÑA. If they’re not a 100 percent, why would they sign jointly and severally? I just want to plug the loopholes.MR. AGUILAR. I think it was – if I may just speculate. It was just common ownership at that time.SEN. OSMEÑA. Al right. Now – Also, the ...MR. AGUILAR. Ah, 13 percent daw, Your Honor.SEN. OSMEÑA. Huh?MR. AGUILAR. Thirteen percent ho.SEN. OSMEÑA. What’s 13 percent?MR. AGUILAR. We owned ...x x x xSEN. OSMEÑA. x x x CDCP Mining, how many percent of the equity of CDCP Mining was owned by PNCC, formerly CDCP?MS. PASETES. Thirteen percent.SEN. OSMEÑA. Thirteen. And as a 13 percent owner, they agreed to sign jointly and severally?MS. PASETES. Yes.SEN. OSMEÑA. One-three? So poor PNCC and CDCP got taken to the cleaners here. They sign for a 100 percent and they only own 13 percent.x x x x8 (Emphasis supplied)I.The Case

Before this Court are the consolidated petitions for review9 filed by Strategic Alliance Development Corporation (STRADEC) and Luis Sison (Sison), with a motion for intervention filed by Asiavest Merchant Bankers Berhad (Asiavest), challenging the validity of the Compromise Agreement between PNCC and Radstock. The Court of Appeals approved the Compromise Agreement in its Decision of 25 January 200710 in CA-G.R. CV No. 87971.

II.The Antecedents

PNCC was incorporated in 1966 for a term of fifty years under the Corporation Code with the name Construction Development Corporation of the Philippines (CDCP).11 PD 1113, issued on 31 March 1977, granted CDCP a 30-year franchise to construct, operate and maintain toll facilities in the North and South Luzon Tollways. PD 1894, issued on 22 December 1983, amended PD 1113 to include in CDCP’s franchise the Metro Manila Expressway, which would "serve as an additional artery in the transportation of trade and commerce in the Metro Manila area."

Sometime between 1978 and 1981, Basay Mining Corporation (Basay Mining), an affiliate of CDCP, obtained loans from Marubeni Corporation of Japan (Marubeni) amounting to 5,460,000,000 yen and US$5 million. A CDCP official issued letters of guarantee for the loans, committing CDCP to pay solidarily for the full amount of the 5,460,000,000 yen loan and to the extent of P20 million for the US$5 million loan. However, there was no CDCP Board Resolution authorizing the issuance of the letters of guarantee. Later, Basay Mining changed its name to CDCP Mining Corporation (CDCP Mining). CDCP Mining secured the Marubeni loans when CDCP and CDCP Mining were still privately owned and managed.

Subsequently in 1983, CDCP changed its corporate name to PNCC to reflect the extent of the Government's equity investment in the company, which arose when government financial institutions converted their loans to PNCC into equity following PNCC’s inability to pay the loans.12 Various government financial institutions held a total of seventy-seven point forty-eight percent (77.48%) of PNCC’s voting equity, most of which were later

65

transferred to the Asset Privatization Trust (APT) under Administrative Orders No. 14 and 64, series of 1987 and 1988, respectively.13 Also, the Presidential Commission on Good Government holds some 13.82% of PNCC’s voting equity under a writ of sequestration and through the voluntary surrender of certain PNCC shares. In fine, the Government owns 90.3% of the equity of PNCC and only 9.70% of PNCC’s voting equity is under private ownership.14

Meanwhile, the Marubeni loans to CDCP Mining remained unpaid. On 20 October 2000, during the short-lived Estrada Administration, the PNCC Board of Directors15 (PNCC Board) passed Board Resolution No. BD-092-2000 admitting PNCC’s liability to Marubeni for P10,743,103,388 as of 30 September 1999. PNCC Board Resolution No. BD-092-2000 reads as follows:

RESOLUTION NO. BD-092-2000

RESOLVED, That the Board recognizes, acknowledges and confirms PNCC’s obligations as of September 30, 1999 with the following entities, exclusive of the interests and other charges that may subsequently accrue and still become due therein, to wit:

a). the Government of the Republic of the Philippines in the amount of P36,023,784,751.00; and

b). Marubeni Corporation in the amount of P10,743,103,388.00. (Emphasis supplied)

This was the first PNCC Board Resolution admitting PNCC’s liability for the Marubeni loans. Previously, for two decades the PNCC Board consistently refused to admit any liability for the Marubeni loans.

Less than two months later, or on 22 November 2000, the PNCC Board passed Board Resolution No. BD-099-2000 amending Board Resolution No. BD-092-2000. PNCC Board Resolution No. BD-099-2000 reads as follows:

RESOLUTION NO. BD-099-2000

RESOLVED, That the Board hereby amends its Resolution No. BD-092-2000 dated October 20, 2000 so as to read as follows:

RESOLVED, That the Board recognizes, acknowledges and confirms its obligations as of September 30, 1999 with the following entities, exclusive of the interests and other charges that may subsequently accrue and still due thereon, subject to the final determination by the Commission on Audit (COA) of the amount of obligation involved, and subject further to the declaration of the legality of said obligations by the Office of the Government Corporate Counsel (OGCC), to wit:

a). the Government of the Republic of the Philippines in the amount of P36,023,784,751.00; and

b). Marubeni Corporation in the amount of P10,743,103,388.00. (Emphasis supplied)

In January 2001, barely three months after the PNCC Board first admitted liability for the Marubeni loans, Marubeni assigned its entire credit to Radstock for US$2 million or less than P100 million. In short, Radstock paid Marubeni less than 10% of the P10.743 billion admitted amount. Radstock immediately sent a notice and demand letter to PNCC.

On 15 January 2001, Radstock filed an action for collection and damages against PNCC before the Regional Trial Court of Mandaluyong City, Branch 213 (trial court). In its order of 23 January 2001, the trial court issued a writ of preliminary attachment against PNCC. The trial court ordered PNCC’s bank accounts garnished and several of its real properties attached. On 14 February 2001, PNCC moved to set aside the 23 January 2001 Order and to discharge the writ of attachment. PNCC also filed a

motion to dismiss the case. The trial court denied both motions. PNCC filed motions for reconsideration, which the trial court also denied. PNCC filed a petition for certiorari before the Court of Appeals, docketed as CA-G.R. SP No. 66654, assailing the denial of the motion to dismiss. On 30 August 2002, the Court of Appeals denied PNCC’s petition. PNCC filed a motion for reconsideration, which the Court of Appeals also denied in its 22 January 2003 Resolution. PNCC filed a petition for review before this Court, docketed as G.R. No. 156887.

Meanwhile, on 19 June 2001, at the start of the Arroyo Administration, the PNCC Board, under a new President and Chairman, revoked Board Resolution No. BD-099-2000.

The trial court continued to hear the main case. On 10 December 2002, the trial court ruled in favor of Radstock, as follows:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and the defendant is directed to pay the total amount of Thirteen Billion One Hundred Fifty One Million Nine Hundred Fifty Six thousand Five Hundred Twenty Eight Pesos (P13,151,956,528.00) with interest from October 15, 2001 plus Ten Million Pesos (P10,000,000.00) as attorney’s fees.

SO ORDERED.16

PNCC appealed the trial court’s decision to the Court of Appeals, docketed as CA-G.R. CV No. 87971.

On 19 March 2003, this Court issued a temporary restraining order in G.R. No. 156887 forbidding the trial court from implementing the writ of preliminary attachment and ordering the suspension of the proceedings before the trial court and the Court of Appeals. In its 3 October 2005 Decision, this Court ruled as follows:

WHEREFORE, the petition is partly GRANTED and insofar as the Motion to Set Aside the Order and/or Discharge the Writ of Attachment is concerned, the Decision of the Court of Appeals on August 30, 2002 and its Resolution of January 22, 2003 in CA-G.R. SP No. 66654 are REVERSED and SET ASIDE. The attachments over the properties by the writ of preliminary attachment are hereby ordered LIFTED effective upon the finality of this Decision. The Decision and Resolution of the Court of Appeals are AFFIRMED in all other respects. The Temporary Restraining Order is DISSOLVED immediately and the Court of Appeals is directed to PROCEED forthwith with the appeal filed by PNCC.

No costs.

SO ORDERED.17

On 17 August 2006, PNCC and Radstock entered into the Compromise Agreement where they agreed to reduce PNCC’s liability to Radstock, supposedly from P17,040,843,968, to P6,185,000,000. PNCC and Radstock submitted the Compromise Agreement to this Court for approval. In a Resolution dated 4 December 2006 in G.R. No. 156887, this Court referred the Compromise Agreement to the Commission on Audit (COA) for comment. The COA recommended approval of the Compromise Agreement. In a Resolution dated 22 November 2006, this Court noted the Compromise Agreement and referred it to the Court of Appeals in CA-G.R. CV No. 87971. In its 25 January 2007 Decision, the Court of Appeals approved the Compromise Agreement.

STRADEC moved for reconsideration of the 25 January 2007 Decision. STRADEC alleged that it has a claim against PNCC as a bidder of the National Government’s shares, receivables, securities and interests in PNCC. The matter is subject of a complaint filed by STRADEC against PNCC and the Privatization and Management Office (PMO) for the issuance of a Notice of Award of Sale to Dong-A Consortium of which STRADEC is a partner. The case, docketed as Civil Case No. 05-882, is pending before the Regional Trial Court of Makati, Branch 146 (RTC Branch 146).

66

The Court of Appeals treated STRADEC’s motion for reconsideration as a motion for intervention and denied it in its 31 May 2007 Resolution. STRADEC filed a petition for review before this Court, docketed as G.R. No. 178158.

Rodolfo Cuenca (Cuenca), a stockholder and former PNCC President and Board Chairman, filed an intervention before the Court of Appeals. Cuenca alleged that PNCC had no obligation to pay Radstock. The Court of Appeals also denied Cuenca’s motion for intervention in its Resolution of 31 May 2007. Cuenca did not appeal the denial of his motion.

On 2 July 2007, this Court issued an order directing PNCC and Radstock, their officers, agents, representatives, and other persons under their control, to maintain the status quo ante.

Meanwhile, on 20 February 2007, Sison, also a stockholder and former PNCC President and Board Chairman, filed a Petition for Annulment of Judgment Approving Compromise Agreement before the Court of Appeals. The case was docketed as CA-G.R. SP No. 97982.

Asiavest, a judgment creditor of PNCC, filed an Urgent Motion for Leave to Intervene and to File the Attached Opposition and Motion-in-Intervention before the Court of Appeals in CA-G.R. SP No. 97982.

In a Resolution dated 12 June 2007, the Court of Appeals dismissed Sison’s petition on the ground that it had no jurisdiction to annul a final and executory judgment also rendered by the Court of Appeals. In the same resolution, the Court of Appeals also denied Asiavest’s urgent motion.

Asiavest filed its Urgent Motion for Leave to Intervene and to File the Attached Opposition and Motion-in-Intervention in G.R. No. 178158.18

Sison filed a motion for reconsideration. In its 5 November 2007 Resolution, the Court of Appeals denied Sison’s motion.

On 26 November 2007, Sison filed a petition for review before this Court, docketed as G.R. No. 180428.

In a Resolution dated 18 February 2008, this Court consolidated G.R. Nos. 178158 and 180428.

On 13 January 2009, the Court held oral arguments on the following issues:

1. Does the Compromise Agreement violate public policy?

2. Does the subject matter involve an assumption by the government of a private entity’s obligation in violation of the law and/or the Constitution? Is the PNCC Board Resolution of 20 October 2000 defective or illegal?

3. Is the Compromise Agreement viable in the light of the non-renewal of PNCC’s franchise by Congress and its inclusion of all or substantially all of PNCC’s assets?

4. Is the Decision of the Court of Appeals annullable even if final and executory on grounds of fraud and violation of public policy and the Constitution?

III.Propriety of Actions

The Court of Appeals denied STRADEC’s motion for intervention on the ground that the motion was filed only after the Court of Appeals and the trial court had promulgated their respective decisions.

Section 2, Rule 19 of the 1997 Rules of Civil Procedure provides:

SECTION 2. Time to intervene.– The motion to intervene may be filed at any time before rendition of judgment by the trial court. A copy of the pleading-in-intervention shall be attached to the motion and served on the original parties.

The rule is not absolute. The rule on intervention, like all other rules of procedure, is intended to make the powers of the Court completely available for justice.19 It is aimed to facilitate a comprehensive adjudication of rival claims, overriding technicalities on the timeliness of the filing of the claims.20 This Court has ruled:

[A]llowance or disallowance of a motion for intervention rests on the sound discretion of the court after consideration of the appropriate circumstances. Rule 19 of the Rules of Court is a rule of procedure whose object is to make the powers of the court fully and completely available for justice. Its purpose is not to hinder or delay but to facilitate and promote the administration of justice. Thus, interventions have been allowed even beyond the prescribed period in the Rule in the higher interest of justice. Interventions have been granted to afford indispensable parties, who have not been impleaded, the right to be heard even after a decision has been rendered by the trial court, when the petition for review of the judgment was already submitted for decision before the Supreme Court, and even where the assailed order has already become final and executory. In Lim v. Pacquing (310 Phil. 722 (1995)], the motion for intervention filed by the Republic of the Philippines was allowed by this Court to avoid grave injustice and injury and to settle once and for all the substantive issues raised by the parties.21

In Collado v. Court of Appeals,22 this Court reiterated that exceptions to Section 2, Rule 12 could be made in the interest of substantial justice. Citing Mago v. Court of Appeals,23 the Court stated:

It is quite clear and patent that the motions for intervention filed by the movants at this stage of the proceedings where trial had already been concluded x x x and on appeal x x x the same affirmed by the Court of Appeals and the instant petition for certiorari to review said judgments is already submitted for decision by the Supreme Court, are obviously and, manifestly late, beyond the period prescribed under x x x Section 2, Rule 12 of the Rules of Court.

But Rule 12 of the Rules of Court, like all other Rules therein promulgated, is simply a rule of procedure, the whole purpose and object of which is to make the powers of the Court fully and completely available for justice. The purpose of procedure is not to thwart justice. Its proper aim is to facilitate the application of justice to the rival claims of contending parties. It was created not to hinder and delay but to facilitate and promote the administration of justice. It does not constitute the thing itself which courts are always striving to secure to litigants. It is designed as the means best adopted to obtain that thing. In other words, it is a means to an end.

Concededly, STRADEC has no legal interest in the subject matter of the Compromise Agreement. Section 1, Rule 19 of the 1997 Rules of Civil Procedure states:

SECTION 1. Who may intervene. - A person who has a legal interest in the matter in litigation, or in the success of either of the parties, or an interest against both, or is so situated as to be adversely affected by a distribution or other disposition of property in the custody of the court or of an officer thereof may, with leave of court, be allowed to intervene in the action. The Court shall consider whether or not the intervention will unduly delay or prejudice the adjudication of the rights of the original parties, and whether or not the intervenor’s rights may be fully protected in a separate proceeding.

STRADEC’s interest is dependent on the outcome of Civil Case No. 05-882. Unless STRADEC can show that RTC Branch 146 had

67

already decided in its favor, its legal interest is simply contingent and expectant.

However, Asiavest has a direct and material interest in the approval or disapproval of the Compromise Agreement. Asiavest is a judgment creditor of PNCC in G.R. No. 110263 and a court has already issued a writ of execution in its favor. Asiavest’s interest is actual and material, direct and immediate characterized by either gain or loss from the judgment that this Court may render.24 Considering that the Compromise Agreement involves the disposition of all or substantially all of the assets of PNCC, Asiavest, as PNCC’s judgment creditor, will be greatly prejudiced if the Compromise Agreement is eventually upheld.

Sison has legal standing to challenge the Compromise Agreement. Although there was no allegation that Sison filed the case as a derivative suit in the name of PNCC, it could be fairly deduced that Sison was assailing the Compromise Agreement as a stockholder of PNCC. In such a situation, a stockholder of PNCC can sue on behalf of PNCC to annul the Compromise Agreement.

A derivative action is a suit by a stockholder to enforce a corporate cause of action.25 Under the Corporation Code, where a corporation is an injured party, its power to sue is lodged with its board of directors or trustees.26However, an individual stockholder may file a derivative suit on behalf of the corporation to protect or vindicate corporate rights whenever the officials of the corporation refuse to sue, or are the ones to be sued, or hold control of the corporation.27 In such actions, the corporation is the real party-in-interest while the suing stockholder, on behalf of the corporation, is only a nominal party.28

In this case, the PNCC Board cannot conceivably be expected to attack the validity of the Compromise Agreement since the PNCC Board itself approved the Compromise Agreement. In fact, the PNCC Board steadfastly defends the Compromise Agreement for allegedly being advantageous to PNCC.

Besides, the circumstances in this case are peculiar. Sison, as former PNCC President and Chairman of the PNCC Board, was responsible for the approval of the Board Resolution issued on 19 June 2001 revoking the previous Board Resolution admitting PNCC’s liability for the Marubeni loans.29 Such revocation, however, came after Radstock had filed an action for collection and damages against PNCC on 15 January 2001. Then, when the trial court rendered its decision on 10 December 2002 in favor of Radstock, Sison was no longer the PNCC President and Chairman, although he remains a stockholder of PNCC.

When the case was on appeal before the Court of Appeals, there was no need for Sison to avail of any remedy, until PNCC and Radstock entered into the Compromise Agreement, which disposed of all or substantially all of PNCC’s assets. Sison came to know of the Compromise Agreement only in December 2006. PNCC and Radstock submitted the Compromise Agreement to the Court of Appeals for approval on 10 January 2007. The Court of Appeals approved the Compromise Agreement on 25 January 2007. To require Sison at this stage to exhaust all the remedies within the corporation will render such remedies useless as the Compromise Agreement had already been approved by the Court of Appeals. PNCC’s assets are in danger of being dissipated in favor of a private foreign corporation. Thus, Sison had no recourse but to avail of an extraordinary remedy to protect PNCC’s assets.

Besides, in the interest of substantial justice and for compelling reasons, such as the nature and importance of the issues raised in this case,30 this Court must take cognizance of Sison’s action. This Court should exercise its prerogative to set aside technicalities in the Rules, because after all, the power of this Court to suspend its own rules whenever the interest of justice requires is well recognized.31 In Solicitor General v. The Metropolitan Manila Authority,32 this Court held:

Unquestionably, the Court has the power to suspend procedural rules in the exercise of its inherent power, as expressly recognized in the Constitution, to promulgate rules concerning ‘pleading, practice and procedure in all courts.’ In proper cases,

procedural rules may be relaxed or suspended in the interest of substantial justice, which otherwise may be miscarried because of a rigid and formalistic adherence to such rules. x x x

We have made similar rulings in other cases, thus:

Be it remembered that rules of procedure are but mere tools designed to facilitate the attainment of justice. Their strict and rigid application, which would result in technicalities that tend to frustrate rather than promote substantial justice, must always be avoided. x x x Time and again, this Court has suspended its own rules and excepted a particular case from their operation whenever the higher interests of justice so require.

IV.The PNCC Board Acted in Bad Faith and with Gross Negligence

in Directing the Affairs of PNCC

In this jurisdiction, the members of the board of directors have a three-fold duty: duty of obedience, duty of diligence, and duty of loyalty.33 Accordingly, the members of the board of directors (1) shall direct the affairs of the corporation only in accordance with the purposes for which it was organized;34 (2) shall not willfully and knowingly vote for or assent to patently unlawful acts of the corporation or act in bad faith or with gross negligence in directing the affairs of the corporation;35 and (3) shall not acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees.36

In the present case, the PNCC Board blatantly violated its duty of diligence as it miserably failed to act in good faith in handling the affairs of PNCC.

First. For almost two decades, the PNCC Board had consistently refused to admit liability for the Marubeni loans because of the absence of a PNCC Board resolution authorizing the issuance of the letters of guarantee.

There is no dispute that between 1978 and 1980, Marubeni Corporation extended two loans to Basay Mining (later renamed CDCP Mining): (1) US$5 million to finance the purchase of copper concentrates by Basay Mining; and (2)Y5.46 billion to finance the completion of the expansion project of Basay Mining including working capital.

There is also no dispute that it was only on 20 October 2000 when the PNCC Board approved a resolution expressly admitting PNCC’s liability for the Marubeni loans. This was the first Board Resolution admitting liability for the Marubeni loans, for PNCC never admitted liability for these debts in the past. Even Radstock admitted that PNCC’s 1994 Financial Statements did not reflect the Marubeni loans.37 Also, former PNCC Chairman Arthur Aguilar stated during the Senate hearings that "the Marubeni claim was never in the balance sheet x x x nor was it in a contingent account."38 Miriam M. Pasetes, SVP Finance of PNCC, and Atty. Herman R. Cimafranca of the Office of the Government Corporate Counsel, confirmed this fact, thus:

SEN. DRILON. x x x And so, PNCC itself did not recognize this as an obligation but the board suddenly recognized it as an obligation. It was on that basis that the case was filed, is that correct? In fact, the case hinges on – they knew that this claim has prescribed but because of that board resolution which recognized the obligation they filed their complaint, is that correct?

MR. CIMAFRANCA. Apparently, it's like that, Senator, because the filing of the case came after the acknowledgement.

SEN. DRILON. Yes. In fact, the filing of the case came three months after the acknowledgement.

MR. CIMAFRANCA. Yes. And that made it difficult to handle on our part.

68

SEN. DRILON. That is correct. So, that it was an obligation which was not recognized in the financial statements of PNCC but revived – in the financial statements because it has prescribed but revived by the board effectively. That's the theory, at least, of the plaintiff. Is that correct? Who can answer that?

Ms. Pasetes, yes.

MS. PASETES. It is not an obligation of PNCC that is why it is not reflected in the financial statements.39 (Emphasis supplied)

In short, after two decades of consistently refuting its liability for the Marubeni loans, the PNCC Board suddenly and inexplicably reversed itself by admitting in October 2000 liability for the Marubeni loans. Just three months after the PNCC Board recognized the Marubeni loans, Radstock acquired Marubeni's receivable and filed the present collection case.

Second. The PNCC Board admitted liability for the Marubeni loans despite PNCC’s total liabilities far exceeding its assets. There is no dispute that the Marubeni loans, once recognized, would wipe out the assets of PNCC, "virtually emptying the coffers of the PNCC."40 While PNCC insists that it remains financially viable, the figures in the COA Audit Reports tell otherwise.41 For 2006 and 2005, "the Corporation has incurred negative gross margin of P84.531 Million and P80.180 Million, respectively, and net losses that had accumulated in a deficit of   P 14.823 Billion as of 31 December 2006 . "42 The COA even opined that "unless [PNCC] Management addresses the issue on net losses in its financial rehabilitation plan, x x x the Corporation may not be able to continue its operations as a going concern."

Notably, during the oral arguments before this Court, the Government Corporate Counsel admitted the PNCC’s huge negative net worth, thus:

JUSTICE CARPIO

x x x what is the net worth now of PNCC? Negative what? Negative 6 Billion at least[?]

ATTY. AGRA

Yes, your Honor.43 (Emphasis supplied)

Clearly, the PNCC Board’s admission of liability for the Marubeni loans, given PNCC’s huge negative net worth of at least P6 billion as admitted by PNCC’s counsel, or P14.823 billion based on the 2006 COA Audit Report, would leave PNCC an empty shell, without any assets to pay its biggest creditor, the National Government with an admitted receivable of P36 billion from PNCC.

Third. In a debilitating self-inflicted injury, the PNCC Board revived what appeared to have been a dead claim by abandoning one of PNCC’s strong defenses, which is the prescription of the action to collect the Marubeni loans.

Settled is the rule that actions prescribe by the mere lapse of time fixed by law.44 Under Article 1144 of the Civil Code, an action upon a written contract, such as a loan contract, must be brought within ten years from the time the right of action accrues. The prescription of such an action is interrupted when the action is filed before the court, when there is a written extrajudicial demand by the creditor, or when there is any written acknowledgment of the debt by the debtor.45

In this case, Basay Mining obtained the Marubeni loans sometime between 1978 and 1981. While Radstock claims that numerous demand letters were sent to PNCC, based on the records, the extrajudicial demands to pay the loans appear to have been made only in 1984 and 1986. Meanwhile, the written acknowledgment of the debt, in the form of Board Resolution No. BD-092-2000, was issued only on 20 October 2000.

Thus, more than ten years would have already lapsed between Marubeni’s extrajudicial demands in 1984 and 1986 and the acknowledgment by the PNCC Board of the Marubeni loans in 2000. However, the PNCC Board suddenly passed Board Resolution No. BD-092-2000 expressly admitting liability for the Marubeni loans. In short, the PNCC Board admitted liability for the Marubeni loans despite the fact that the same might no longer be judicially collectible. Although the legal advantage was obviously on its side, the PNCC Board threw in the towel even before the fight could begin. During the Senate hearings, the matter of prescription was discussed, thus:

SEN. DRILON. ... the prescription period is 10 years and there were no payments – the last demands were made, when? The last demands for payment?

MS. OGAN. It was made January 2001 prior to the filing of the case.

SEN. DRILON. Yes, all right. Before that, when was the last demand made? By the time they filed the complaint more than 10 years already lapsed.

MS. OGAN. On record, Mr. Chairman, we have demands starting from - - a series of demands which started from May 23, 1984, letter from Marubeni to PNCC, demand payment. And we also have the letter of September 3, 1986, letter of Marubeni to then PNCC Chair Mr. Jaime. We have the June 24, 1986 letter from Marubeni to the PNCC Chairman. Also the March 4, 1988 letter...SEN. DRILON. The March 4, 1988 letter is not a demand letter.MS. OGAN. It is exactly addressed to the Asset Privatization Trust.SEN. DRILON. It is not a demand letter? Okay.MS. OGAN. And we have also...SEN. DRILON. Anyway...

THE CHAIRMAN. Please answer when you are asked, Ms. Ogan. We want to put it on the record whether it is "yes" or "no".

MS. OGAN. Yes, sir.

SEN. DRILON. So, even assuming that all of those were demand letters, the 10 years prescription set in and it should have prescribed in 1998, whatever is the date, or before the case was filed in 2001.

MR. CIMAFRANCA. The 10-year period for – if the contract is written, it's 10 years and it should have prescribed in 10 years and we did raise that in our answer, in our motion to dismiss.

SEN. DRILON. I know. You raised this in your motion to dismiss and you raised this in your answer. Now, we are not saying that you were negligent in not raising that. What we are just putting on the record that indeed there is basis to argue that these claims have prescribed.

Now, the reason why there was a colorable basis on the complaint filed in 2001 was that somehow the board of PNCC recognized the obligation in a special board meeting on October 20, 2000. Hindi ba ganoon 'yon?

MS. OGAN. Yes, that is correct.

SEN. DRILON. Why did the PNCC recognize this obligation in 2000 when it was very clear that at that point more than 10 years have lapsed since the last demand letter?

MR. AGUILAR. May I volunteer an answer?

SEN. DRILON. Please.

MR. AGUILAR. I looked into that, Mr. Chairman, Your Honor. It was as a result of and I go to the folder letter "N." In our own demand research it was not period, Your Honor, that Punongbayan in the big folder, sir, letter "N" it was the period where PMO was selling PNCC and Punongbayan and Araullo Law Office came out with an

69

investment brochure that indicated liabilities both to national government and to Marubeni/Radstock. So, PMO said, "For good order, can you PNCC board confirm that by board resolution?" That's the tone of the letter.

SEN. DRILON. Confirm what? Confirm the liabilities that are contained in the Punongbayan investment prospectus both to the national government and to PNCC. That is the reason at least from the record, Your Honor, how the PNCC board got to deliberate on the Marubeni.

THE CHAIRMAN. What paragraph? Second to the last paragraph?MR. AGUILAR. Yes. Yes, Mr. Chairman. Ito po 'yong – that"s to our recollection, in the records, that was the reason.SEN. DRILON. Is that the only reason why ...MR. AGUILAR. From just the records, Mr. Chairman, and then interviews with people who are still around.SEN. DRILON. You mean, you acknowledged a prescribed obligation because of this paragraph?MR. AGUILAR. I don’t know what legal advice we were following at that time, Mr. Chairman.46 (Emphasis supplied)Besides prescription, the Office of the Government Corporate Counsel (OGCC) originally believed that PNCC had another formidable legal weapon against Radstock, that is, the lack of authority of Alfredo Asuncion, then Executive Vice-President of PNCC, to sign the letter of guarantee on behalf of CDCP. During the Senate hearings, the following exchange reveals the OGCC’s original opinion:

THE CHAIRMAN. What was the opinion of the Office of the Government Corporate Counsel?

MS. OGAN. The opinion of the Office of the Government Corporate Counsel is that PNCC should exhaust all means to resist the case using all defenses available to a guarantee and a surety that there is a valid ground for PNCC's refusal to honor or make good the alleged guarantee obligation. It appearing that from the documents submitted to the OGCC that there is no board authority in favor or authorizing Mr. Asuncion, then EVP, to sign or execute the letter of guarantee in behalf of CDCP and that said letter of guarantee is not legally binding upon or enforceable against CDCP as principals, your Honors.47

x x x x

SEN. DRILON. Now that we have read this, what was the opinion of the Government Corporate Counsel, Mr. Cimafranca?

MR. CIMAFRANCA. Yes, Senator, we did issue an opinion upon the request of PNCC and our opinion was that there was no valid obligation, no valid guarantee. And we incorporated that in our pleadings in court.48 (Emphasis supplied)

Clearly, PNCC had strong defenses against the collection suit filed by Radstock, as originally opined by the OGCC. It is quite puzzling, therefore, that the PNCC Board, which had solid grounds to refute the legitimacy of the Marubeni loans, admitted its liability and entered into a Compromise Agreement that is manifestly and grossly prejudicial to PNCC.

Fourth. The basis for the admission of liability for the Marubeni loans, which was an opinion of the Feria Law Office, was not even shown to the PNCC Board.

Atty. Raymundo Francisco, the APT trustee overseeing the proposed privatization of PNCC at the time, was responsible for recommending to the PNCC Board the admission of PNCC’s liability for the Marubeni loans. Atty. Francisco based his recommendation solely on a mere alleged opinion of the Feria Law Office. Atty. Francisco did not bother to show this "Feria opinion" to the members of the PNCC Board, except to Atty. Renato Valdecantos, who as the then PNCC Chairman did not also show the "Feria opinion" to the other PNCC Board members. During the Senate hearings, Atty. Francisco could not produce a copy of the "Feria opinion." The Senators grilled Atty. Francisco on his recommendation to recognize PNCC’s liability for the Marubeni loans, thus:

THE CHAIRMAN. x x x You were the one who wrote this letter or rather this memorandum dated 17 October 2000 to Atty. Valdecantos. Can you tell us the background why you wrote the letter acknowledging a debt which is non-existent?

MR. FRANCISCO. I was appointed as the trustee in charge of the privatization of the PNCC at that time, sir. And I was tasked to do a study and engage the services of financial advisors as well as legal advisors to do a legal audit and financial study on the position of PNCC. I bidded out these engagements, the financial advisership went to Punongbayan and Araullo. The legal audit went to the Feria Law Offices.

THE CHAIRMAN. Spell it. Boy Feria?

MR. FRANCISCO. Feria-- Feria.

THE CHAIRMAN. Lugto?

MR. FRANCISCO. Yes. Yes, Your Honor. And this was the findings of the Feria Law Office – that the Marubeni account was a legal obligation.

So, I presented this to our board. Based on the findings of the legal audit conducted by the Ferial Law Offices, sir.

THE CHAIRMAN. Why did you not ask the government corporate counsel? Why did you have to ask for the opinion of an outside counsel?

MR. FRANCISCO. That was the – that was the mandate given to us, sir, that we have to engage the ...THE CHAIRMAN. Mandate given by whom?MR. FRANCISCO. That is what we usually do, sir, in the APT.THE CHAIRMAN. Ah, you get outside counsel?MR. FRANCISCO. Yes, we...THE CHAIRMAN. Not necessarily the government corporate counsel?MR. FRANCISCO. No, sir.

THE CHAIRMAN. So, on the basis of the opinion of outside counsel, private, you proceeded to, in effect, recognize an obligation which is not even entered in the books of the PNCC? You probably resuscitated a non-existing obligation anymore?

MR. FRANCISCO. Sir, I just based my recommendation on the professional findings of the law office that we engaged, sir.THE CHAIRMAN. Did you not ask for the opinion of the government corporate counsel?MR. FRANCISCO. No, sir.THE CHAIRMAN. Why?MR. FRANCISCO. I felt that the engagements of the law office was sufficient, anyway we were going to raise it to the Committee on Privatization for their approval or disapproval, sir.THE CHAIRMAN. The COP?MR. FRANCISCO. Yes, sir.THE CHAIRMAN. That’s a cabinet level?MR. FRANCISCO. Yes, sir. And we did that, sir.

THE CHAIRMAN. Now... So you sent your memo to Atty. Renato B. Valdecantos, who unfortunately is not here but I think we have to get his response to this. And as part of the minutes of special meeting with the board of directors on October 20, 2000, the board resolved in its Board Resolution No. 092-2000, the board resolved to recognize, acknowledge and confirm PNCC’s obligations as of September 30, 1999, etcetera, etcetera. (A), or rather (B), Marubeni Corporation in the amount of P10,740,000.

Now, we asked to be here because the franchise of PNCC is hanging in a balance because of the – on the questions on this acknowledgement. So we want to be educated.

Now, the paper trail starts with your letter. So, that’s it – that’s my kuwan, Frank.Yes, Senator Drilon.SEN. DRILON. Thank you, Mr. Chairman.

70

Yes, Atty. Francisco, you have a copy of the minutes of October 20, 2000?MR. FRANCISCO. I’m sorry, sir, we don’t have a copy.SEN. DRILON. May we ask the corporate secretary of PNCC to provide us with a copy?Okay naman andiyan siya.(Ms. Ogan handing the document to Mr. Francisco.)You have familiarized yourselves with the minutes, Atty. Francisco?MR. FRANCISCO. Yes, sir.

SEN. DRILON. Now, mention is made of a memorandum here on line 8, page 3 of this board’s minutes. It says, "Director Francisco has prepared a memorandum requesting confirmation, acknowledgement, and ratification of this indebtedness of PNCC to the national government which was determined by Bureau of Treasury as of September 30, 1999 is 36,023,784,751. And with respect to PNCC’s obligation to Marubeni, this has been determined to be in the total amount of 10,743,103,388, also as of September 30, 1999; that there is need to ratify this because there has already been a representation made with respect to the review of the financial records of PNCC by Punongbayan and Araullo, which have been included as part of the package of APT’s disposition to the national government’s interest in PNCC."

You recall having made this representation as found in the minutes, I assume, Atty. Francisco?

MR. FRANCISCO. Yes, sir. But I’d like to be refreshed on the memorandum, sir, because I don’t have a copy.

SEN. DRILON. Yes, this memorandum was cited earlier by Senator Arroyo, and maybe the secretary can give him a copy? Give him a copy?

MS. OGAN. (Handing the document to Mr. Francisco.)

MR. FRANCISCO. Your Honor, I have here a memorandum to the PNCC board through Atty. Valdecantos, which says that – in the last paragraph, if I may read? "May we request therefore, that a board resolution be adopted, acknowledging and confirming the aforementioned PNCC obligations with the national government and Marubeni as borne out by the due diligence audit."

SEN. DRILON. This is the memorandum referred to in these minutes. This memorandum dated 17 October 2000 is the memorandum referred to in the minutes.

MR. FRANCISCO. I would assume, Mr. Chairman.

SEN. DRILON. Right.

Now, the Punongbayan representative who was here yesterday, Mr...

THE CHAIRMAN. Navarro.

SEN. DRILON. ... Navarro denied that he made this recommendation.

THE CHAIRMAN. He asked for opinion, legal opinion.

SEN. DRILON. He said that they never made this representation and the transcript will bear us out. They said that they never made this representation that the account of Marubeni should be recognized.

MR. FRANCISCO. Mr. Chairman, in the memorandum, I only mentioned here the acknowledgement and confirmation of the PNCC obligations. I was not asking for a ratification. I never mentioned ratification in the memorandum. I just based my memo based on the due diligence audit of the Feria Law Offices.

SEN. DRILON. Can you say that again? You never asked for a ratification...

MR. FRANCISCO. No. I never mentioned in my memorandum that I was asking for a ratification. I was just – in my memo it says, "acknowledging and confirming the PNCC obligation." This was what ...

SEN. DRILON. Isn’t it the same as ratification? I mean, what’s the difference?

MR. FRANCISCO. I – well, my memorandum was meant really just to confirm the findings of the legal audit as ...

SEN. DRILON. In your mind as a lawyer, Atty. Francisco, there’s a difference between ratification and – what’s your term? -- acknowledgment and confirmation?

MR. FRANCISCO. Well, I guess there’s no difference, Mr. Chairman.

SEN. DRILON. Right.

Anyway, just of record, the Punongbayan representatives here yesterday said that they never made such representation.

In any case, now you’re saying it’s the Feria Law Office who rendered that opinion? Can we – you know, yesterday we were asking for a copy of this opinion but we were never furnished one. The ... no less than the Chairman of this Committee was asking for a copy.

THE CHAIRMAN. Well, copy of the opinion...

MS. OGAN. Yes, Mr. Chairman, we were never furnished a copy of this opinion because it’s opinion rendered for the Asset Privatization Trust which is its client, not the PNCC, Mr. Chairman.

THE CHAIRMAN. All right. The question is whether – but you see, this is a memorandum of Atty. Francisco to the Chairman of the Asset Privatization Trust. You say now that you were never furnished a copy because that’s supposed to be with the Asset ...

MS. OGAN. Yes, Mr. Chairman.

THE CHAIRMAN. ... but yet the action of – or rather the opinion of the Feria Law Offices was in effect adopted by the board of directors of PNCC in its minutes of October 20, 2000 where you are the corporate secretary, Ms. Ogan.

MS. OGAN. Yes, Mr. Chairman.

THE CHAIRMAN. So, what I am saying is that this opinion or rather the opinion of the Feria Law Offices of which you don’t have a copy?

MS. OGAN. Yes, sir.

THE CHAIRMAN. And the reason being that, it does not concern the PNCC because that’s an opinion rendered for APT and not for the PNCC.

MS. OGAN. Yes, Mr. Chairman, that was what we were told although we made several requests to the APT, sir.

THE CHAIRMAN. All right. Now, since it was for the APT and not for the PNCC, I ask the question why did PNCC adopt it? That was not for the consumption of PNCC. It was for the consumption of the Asset Privatization Trust. And that is what Atty. Francisco says and it’s confirmed by you saying that this was a memo – you don’t have a copy because this was sought for by APT and the Feria Law Offices just provided an opinion – provided the APT with an opinion. So, as corporate secretary, the board of directors of PNCC adopted it, recognized the Marubeni Corporation.

You read the minutes of the October 20, 2000 meeting of the board of directors on Item V. The resolution speaks of .. so, go ahead.

71

MS. OGAN. I gave my copies. Yes, sir.THE CHAIRMAN. In effect the Feria Law Offices’ opinion was for the consumption of the APT.MS. OGAN. That was what we were told, Mr. Chairman.THE CHAIRMAN. And you were not even provided with a copy.THE CHAIRMAN. Yet you adopted it.MS. OGAN. Yes, sir.SEN DRILON. Considering you were the corporate secretary.THE CHAIRMAN. She was the corporate secretary.SEN. DRILON. She was just recording the minutes.THE CHAIRMAN. Yes, she was recording.Now, we are asking you now why it was taken up?MS. OGAN. Yes, sir, Mr. Chairman, this was mentioned in the memorandum of Atty. Francisco, memorandum to the board.SEN. DRILON. Mr. Chairman, Mr. Francisco represented APT in the board of PNCC. And is that correct, Mr. Francisco?THE CHAIRMAN. You’re an ex-officio member.SEN. DRILON. Yes.MR. FRANCISCO. Ex-officio member only, sir, as trustee in charge of the privatization of PNCC.SEN. DRILON. With the permission of Mr. Chair, may I ask a question...THE CHAIRMAN. Oh, yes, Senator Drilon.SEN. DRILON. Atty. Francisco, you sat in the PNCC board as APT representative, you are a lawyer, there was a legal opinion of Feria, Feria, Lugto, Lao Law Offices which you cited in your memorandum. Did you discuss – first, did you give a copy of this opinion to PNCC?MR. FRANCISCO. I gave a copy of this opinion, sir, to our chairman who was also a member of the board of PNCC, Mr. Valdecantos, sir.SEN. DRILON. And because he was...MR. FRANCISCO. Because he was my immediate boss in the APT.

SEN. DRILON. Apparently, [it] just ended up in the personal possession of Mr. Valdecantos because the corporate secretary, Glenda Ogan, who is supposed to be the custodian of the records of the board never saw a copy of this.

MR. FRANCISCO. Well, sir, my – the copy that I gave was to Mr. Valdecantos because he was the one sitting in the PNCC board, sir.

SEN. DRILON. No, you sit in the board.MR. FRANCISCO. I was just an ex-officio member. And all my reports were coursed through our Chairman, Mr. Valdecantos, sir.SEN. DRILON. Now, did you ever tell the board that there is a legal position taken or at least from the documents it is possible that the claim has prescribed?MR. FRANCISCO. I took this up in the board meeting of the PNCC at that time and I told them about this matter, sir.SEN. DRILON. No, you told them that the claim could have, under the law, could have prescribed?MR. FRANCISCO. No, sir.SEN. DRILON. Why? You mean, you didn’t tell the board that it is possible that this liability is no longer a valid liability because it has prescribed?MR. FRANCISCO. I did not dwell into the findings anymore, sir, because I found the professional opinion of the Feria Law Office to be sufficient.49 (Emphasis supplied)Atty. Francisco’s act of recommending to the PNCC Board the acknowledgment of the Marubeni loans based only on an opinion of a private law firm, without consulting the OGCC and without showing this opinion to the members of the PNCC Board except to Atty. Valdecantos, reflects how shockingly little his concern was for PNCC, contrary to his claim that "he only had the interest of PNCC at heart." In fact, if what was involved was his own money, Atty. Francisco would have preferred not just two, but at least three different opinions on how to deal with the matter, and he would have maintained his non-liability.

SEN. OSMEÑA. x x x

All right. And lastly, just to clear our minds, there has always been this finger-pointing, of course, whenever – this is typical Filipino. When they're caught in a bind, they always point a finger, they pretend they don't know. And it just amazes me that you have been appointed trustees, meaning, representatives of the Filipino

people, that's what you were at APT, right? You were not Erap's representatives, you were representative of the Filipino people and you were tasked to conserve the assets that that had been confiscated from various cronies of the previous administration. And here, you are asked to recognize the P10 billion debt and you point only to one law firm. If you have cancer, don't you to a second opinion, a second doctor or a third doctor? This is just a question. I am just asking you for your opinion if you would take the advice of the first doctor who tells you that he's got to open you up.

MR. FRANCISCO. I would go to three or more doctors, sir.

SEN. OSMEÑA. Three or more. Yeah, that's right. And in this case the APT did not do so.

MR. FRANCISCO. We relied on the findings of the …

SEN. OSMEÑA. If these were your money, would you have gone also to obtain a second, third opinion from other law firms. Kung pera mo itong 10 billion na ito. Siguro you're not gonna give it up that easily ano, 'di ba?

MR. FRANCISCO. Yes, sir.

SEN. OSMEÑA. You'll probably keep it in court for the next 20 years.

x x x x50 (Emphasis supplied)

This is a clear admission by Atty. Francisco of bad faith in directing the affairs of PNCC - that he would not have recognized the Marubeni loans if his own funds were involved or if he were the owner of PNCC.

The PNCC Board admitted liability for the P10.743 billion Marubeni loans without seeing, reading or discussing the "Feria opinion" which was the sole basis for its admission of liability. Such act surely goes against ordinary human nature, and amounts to gross negligence and utter bad faith, even bordering on fraud, on the part of the PNCC Board in directing the affairs of the corporation. Owing loyalty to PNCC and its stockholders, the PNCC Board should have exercised utmost care and diligence in admitting a gargantuan debt of P10.743 billion that would certainly force PNCC into insolvency, a debt that previous PNCC Boards in the last two decades consistently refused to admit.

Instead, the PNCC Board admitted PNCC’s liability for the Marubeni loans relying solely on a mere opinion of a private law office, which opinion the PNCC Board members never saw, except for Atty. Valdecantos and Atty. Francisco. The PNCC Board knew that PNCC, as a government owned and controlled corporation (GOCC), must rely "exclusively" on the opinion of the OGCC. Section 1 of Memorandum Circular No. 9 dated 27 August 1998 issued by the President states:

SECTION 1. All legal matters pertaining to government-owned or controlled corporations, their subsidiaries, other corporate off-springs and government acquired asset corporations (GOCCs) shall be exclusively referred to and handled by the Office of the Government Corporate Counsel (OGCC). (Emphasis supplied)

The PNCC Board acted in bad faith in relying on the opinion of a private lawyer knowing that PNCC is required to rely "exclusively" on the OGCC’s opinion. Worse, the PNCC Board, in admitting liability for P10.743 billion, relied on the recommendation of a private lawyer whose opinion the PNCC Board members have not even seen.

During the oral arguments, Atty. Sison explained to the Court that the intention of APT was for the PNCC Board merely to disclose the claim of Marubeni as part of APT's full disclosure policy to prospective buyers of PNCC. Atty. Sison stated that it was not the intention of APT for the PNCC Board to admit liability for the Marubeni loans, thus:

72

x x x It was the Asset Privatization Trust A-P-T that was tasked to sell the company. The A-P-T, for purposes of disclosure statements, tasked the Feria Law Office to handle the documentation and the study of all legal issues that had to be resolved or clarified for the information of prospective bidders and or buyers. In the performance of its assigned task the Feria Law Office came upon the Marubeni claim and mentioned that the APTC and/or PNCC must disclose that there is a claim by Marubeni against PNCC for purposes of satisfying the requirements of full disclosure. This seemingly innocent statement or requirement made by the Feria Law Office was then taken by two officials of the Asset Privatization Trust and with malice aforethought turned it into the basis for a multi-billion peso debt by the now government owned and/or controlled PNCC. x x x.51 (Emphasis supplied)

While the PNCC Board passed Board Resolution No. BD-099-2000 amending Board Resolution No. BD-092-2000, such amendment merely added conditions for the recognition of the Marubeni loans, namely, subjecting the recognition to a final determination by COA of the amount involved and to the declaration by OGCC of the legality of PNCC’s liability. However, the PNCC Board reiterated and stood firm that it "recognizes, acknowledges and confirms its obligations" for the Marubeni loans. Apparently, Board Resolution No. BD-099-2000 was a futile attempt to "revoke" Board Resolution No. BD-092-2000. Atty. Alfredo Laya, Jr., a former PNCC Director, spoke on his protests against Board Resolution No. BD-092-2000 at the Senate hearings, thus:

MR. LAYA. Mr. Chairman, if I can …

THE CHAIRMAN. Were you also at the board?

MR. LAYA. At that time, yes, sir.

THE CHAIRMAN. Okay, go ahead.

MR. LAYA. That's why if – maybe this can help clarify the sequence. There was this meeting on October 20. This matter of the Marubeni liability or account was also discussed. Mr. Macasaet, if I may try to refresh. And there was some discussion, sir, and in fact, they were saying even at that stage that there should be a COA or an OGCC audit. Now, that was during the discussion of October 20. Later on, the minutes came out. The practice, then, sir, was for the minutes to come out at the start of the meeting of the subsequent. So the minutes of October 20 came out on November 22 and then we were going over it. And that is in the subsequent minutes of the meeting …

THE CHAIRMAN. May I interrupt. You were taking up in your November 22 meeting the October 20 minutes?

MR. LAYA. Yes, sir.

THE CHAIRMAN. This minutes that we have?

MR. LAYA. Yes, sir.

THE CHAIRMAN. All right, go ahead.

MR. LAYA. Now, in the November 22 meeting, we noticed this resolution already for confirmation of the board – proceedings of October 20. So immediately we made – actually, protest would be a better term for that – we protested the wording of the resolution and that's why we came up with this resolution amending the October 20 resolution.

SEN. DRILON. So you are saying, Mr. Laya, that the minutes of October 20 did not accurately reflect the decisions that you made on October 20 because you were saying that this recognition should be subject to OGCC and COA? You seem to imply and we want to make it – and I want to get that for the record. You seem to imply that there was no decision to recognize the obligation during that meeting because you wanted it to subject it to COA and OGCC, is that correct?

MR. LAYA. Yes, your Honor.SEN. DRILON. So how did...MR. LAYA. That's my understanding of the proceedings at that time, that's why in the subsequent November 22 meeting, we raised this point about obtaining a COA and OGCC opinion.SEN. DRILON. Yes. But you know, the November 22 meeting repeated the wording of the resolution previously adopted only now you are saying subject to final determination which is completely of different import from what you are saying was your understanding of the decision arrived at on October 20.MR. LAYA. Yes, sir. Because our thinking then...SEN. DRILON. What do you mean, yes, sir?MR. LAYA. It's just a claim under discussion but then the way it is translated, as the minutes of October 20 were not really verbatim.SEN. DRILON. So, you never intended to recognize the obligation.MR. LAYA. I think so, sir. That was our – personally, that was my position.SEN. DRILON. How did it happen, Corporate Secretary Ogan, that the minutes did not reflect what the board …THE CHAIRMAN. Ms. Pasetes …MS. PASETES. Yes, Mr. Chairman.

THE CHAIRMAN. … you are the chief financial officer of PNCC.

MS. PASETES. Your Honor, before that November 22 board meeting, management headed by Mr. Rolando Macasaet, myself and Atty. Ogan had a discussion about the recognition of the obligations of 10 billion of Marubeni and 36 billion of the national government on whether to recognize this as an obligation in our books or recognize it as an obligation in the pro forma financial statement to be used for the privatization of PNCC because recognizing both obligations in the books of PNCC would defeat our going concern status and that is where the position of the president then, Mr. Macasaet, stemmed from and he went back to the board and moved to reconsider the position of October 20, 2000, Mr. Chair.52 (Emphasis supplied)

In other words, despite Atty. Laya’s objections to PNCC’s admitting liability for the Marubeni loans, the PNCC Board still admitted the same and merely imposed additional conditions to temper somehow the devastating effects of Board Resolution No. BD-092-2000.

The act of the PNCC Board in issuing Board Resolution No. BD-092-2000 expressly admitting liability for the Marubeni loans demonstrates the PNCC Board’s gross and willful disregard of the requisite care and diligence in managing the affairs of PNCC, amounting to bad faith and resulting in grave and irreparable injury to PNCC and its stockholders. This reckless and treacherous move on the part of the PNCC Board clearly constitutes a serious breach of its fiduciary duty to PNCC and its stockholders, rendering the members of the PNCC Board liable under Section 31 of the Corporation Code, which provides:

SEC. 31. Liability of directors, trustees or officers. -- Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons.

When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation.

Soon after the short-lived Estrada Administration, the PNCC Board revoked its previous admission of liability for the Marubeni loans. During the oral arguments, Atty. Sison narrated to the Court:

x x x After President Estrada was ousted, I was appointed as President and Chairman of PNCC in April of 2001, this particular

73

board resolution was brought to my attention and I immediately put the matter before the board. I had no problem in convincing them to reverse the recognition as it was illegal and had no basis in fact. The vote to overturn that resolution was unanimous. Strange to say that some who voted to overturn the recognition were part of the old board that approved it. Stranger still, Renato Valdecantos who was still a member of the Board voted in favor of reversing the resolution he himself instigated and pushed. Some of the board members who voted to recognize the obligation of Marubeni even came to me privately and said "pinilit lang kami." x x x.53 (Emphasis supplied)

In approving PNCC Board Resolution Nos. BD-092-2000 and BD-099-2000, the PNCC Board caused undue injury to the Government and gave unwarranted benefits to Radstock, through manifest partiality, evident bad faith or gross inexcusable negligence of the PNCC Board. Such acts are declared under Section 3(e) of RA 3019 or the Anti-Graft and Corrupt Practices Act, as "corrupt practices xxx and xxx unlawful." Being unlawful and criminal acts, these PNCC Board Resolutions are void ab initio and cannot be implemented or in any way given effect by the Executive or Judicial branch of the Government.

Not content with forcing PNCC to commit corporate suicide with the admission of liability for the Marubeni loans under Board Resolution Nos. BD-092-2000 and BD-099-2000, the PNCC Board drove the last nail on PNCC’s coffin when the PNCC Board entered into the manifestly and grossly disadvantageous Compromise Agreement with Radstock. This time, the OGCC, headed by Agnes DST Devanadera, reversed itself and recommended approval of the Compromise Agreement to the PNCC Board. As Atty. Sison explained to the Court during the oral arguments:

x x x While the case was pending in the Court of Appeals, Radstock in a rare display of extreme generosity, conveniently convinced the Board of PNCC to enter into a compromise agreement for ½ the amount of the judgment rendered by the RTC or P6.5 Billion Pesos. This time the OGCC, under the leadership of now Solicitor General Agnes Devanadera, approved the compromise agreement abandoning the previous OGCC position that PNCC had a meritorious case and would be hard press to lose the case. What is strange is that although the compromise agreement we seek to stop ostensibly is for P6.5 Billion only, truth and in fact, the agreement agrees to convey to Radstock all or substantially all of the assets of PNCC worth P18 Billion Pesos. There are three items that are undervalued here, the real estate that was turned over as a result of the controversial agreement, the toll revenues that were being assigned and the value of the new shares of PNCC the difference is about P12 Billion Pesos. x x x (Emphasis supplied)

V.The Compromise Agreement is Void for Being Contrary to the Constitution,Existing Laws, and Public Policy

For a better understanding of the present case, the pertinent terms and conditions of the Compromise Agreement between PNCC and Radstock are quoted below:

COMPROMISE AGREEMENT

KNOW ALL MEN BY THESE PRESENTS:

This Agreement made and entered into this 17th day of August 2006, in Mandaluyong City, Metro Manila, Philippines, by and between:

PHILIPPINE NATIONAL CONSTRUCTION CORPORATION, a government acquired asset corporation, created and existing under the laws of the Republic of the Philippines, with principal office address at EDSA corner Reliance Street, Mandaluyong City, Philippines, duly represented herein by its Chairman ARTHUR N. AGUILAR, pursuant to a Board Resolution attached herewith as Annex "A" and made an integral part hereof, hereinafter referred to as PNCC;

- and -

RADSTOCK SECURITIES LIMITED, a private corporation incorporated in the British Virgin Islands, with office address at Suite 1402 1 Duddell Street, Central Hongkong duly-represented herein by its Director, CARLOS G. DOMINGUEZ, pursuant to a Board Resolution attached herewith as Annex "B" and made an integral part hereof, hereinafter referred to as RADSTOCK.

WITNESSETH:

WHEREAS, on January 15, 2001, RADSTOCK, as assignee of Marubeni Corporation, filed a complaint for sum of money and damages with application for a writ of preliminary attachment with the Regional Trial Court (RTC), Mandaluyong City, docketed as Civil Case No. MC-01-1398, to collect on PNCC’s guarantees on the unpaid loan obligations of CDCP Mining Corporation as provided under an Advance Payment Agreement and Loan Agreement;

WHEREAS, on December 10, 2002, the RTC of Mandaluyong rendered a decision in favor of plaintiff RADSTOCK directing PNCC to pay the total amount of Thirteen Billion One Hundred Fifty One Million Nine Hundred Fifty-Six Thousand Five Hundred Twenty-Eight Pesos (P13,151,956,528.00) with interest from October 15, 2001 plus Ten Million Pesos (P10,000,000.00) as attorney's fees.

WHEREAS, PNCC had elevated the case to the Court of Appeals (CA-G.R. SP No. 66654) on Certiorari and thereafter, to the Supreme Court (G.R. No. 156887) which Courts have consistently ruled that the RTC did not commit grave abuse of discretion when it denied PNCC’s Motion to Dismiss which sets forth similar or substantially the same grounds or defenses as those raised in PNCC's Answer;

WHEREAS, the case has remained pending for almost six (6) years even after the main action was appealed to the Court of Appeals;

WHEREAS, on the basis of the RTC Decision dated December 10, 2002, the current value of the judgment debt against PNCC stands at P17,040,843,968.00 as of July 31, 2006 (the "Judgment Debt");

WHEREAS, RADSTOCK is willing to settle the case at the reduced Compromise Amount of Six Billion One Hundred Ninety-Six Million Pesos (P6,196,000,000.00) which may be paid by PNCC, either in cash or in kind to avoid the trouble and inconvenience of further litigation as a gesture of goodwill and cooperation;

WHEREAS, it is an established legal policy or principle that litigants in civil cases should be encouraged to compromise or amicably settle their claims not only to avoid litigation but also to put an end to one already commenced (Articles 2028 and 2029, Civil Code);

WHEREAS, this Compromise Agreement has been approved by the respective Board of Directors of both PNCC and RADSTOCK, subject to the approval of the Honorable Court;

NOW, THEREFORE, for and in consideration of the foregoing premises, and the mutual covenants, stipulations and agreements herein contained, PNCC and RADSTOCK have agreed to amicably settle the above captioned Radstock case under the following terms and conditions:

1. RADSTOCK agrees to receive and accept from PNCC in full and complete settlement of the Judgment Debt, the reduced amount of Six Billion, One Hundred Ninety-Six Million Pesos (P6,196,000,000.00) (the "Compromise Amount").

2. This Compromise Amount shall be paid by PNCC to RADSTOCK in the following manner:

a. PNCC shall assign to a third party assignee to be designated by RADSTOCK all its rights and interests to the following real

74

properties provided the assignee shall be duly qualified to own real properties in the Philippines;

(1) PNCC’s rights over that parcel of land located in Pasay City with a total area of One Hundred Twenty-Nine Thousand Five Hundred Forty-Eight (129,548) square meters, more or less, and which is covered by and more particularly described in Transfer Certificate of Title No. T-34997 of the Registry of Deeds for Pasay City. The transfer value is P3,817,779,000.00.

PNCC’s rights and interests in Transfer Certificate of Title No. T-34997 of the Registry of Deeds for Pasay City is defined and delineated by Administrative Order No. 397, Series of 1998, and RADSTOCK is fully aware and recognizes that PNCC has an undertaking to cede at least 2 hectares of this property to its creditor, the Philippine National Bank; and that furthermore, the Government Service Insurance System has also a current and existing claim in the nature of boundary conflicts, which undertaking and claim will not result in the diminution of area or value of the property. Radstock recognizes and acknowledges the rights and interests of GSIS over the said property.

(2) T-452587 (T-23646) - Parañaque (5,123 sq. m.) subject to the clarification of the Privatization and Management Office (PMO) claims thereon. The transfer value isP45,000,900.00.

(3) T-49499 (529715 including T-68146-G (S-29716) (1,9747-A)-Parañaque (107 sq. m.) (54 sq. m.) subject to the clarification of the Privatization and Management Office (PMO) claims thereon. The transfer value is P1,409,100.00.(4) 5-29716-Parañaque (27,762 sq. m.) subject to the clarification of the Privatization and Management Office (PMO) claims thereon. The transfer value is P242,917,500.00.(5) P-169 - Tagaytay (49,107 sq. m.). The transfer value is P13,749,400.00.(6) P-170 - Tagaytay (49,100 sq. m.). The transfer value is P13,749,400.00.(7) N-3320 - Town and Country Estate, Antipolo (10,000 sq. m.). The transfer value isP16,800,000.00.(8) N-7424 - Antipolo (840 sq. m.). The transfer value is P940,800.00.(9) N-7425 - Antipolo (850 sq. m.). The transfer value is P952,000.00.(10) N-7426 - Antipolo (958 sq. m.). The transfer value is P1,073,100.00.(11) T-485276 - Antipolo (741 sq. m.). The transfer value is P830,200.00.(12) T-485277 - Antipolo (680 sq. m.). The transfer value is P761,600.00.(13) T-485278 - Antipolo (701 sq. m.). The transfer value is P785,400.00.(14) T-131500 - Bulacan (CDCP Farms Corp.) (4,945 sq, m.). The transfer value isP6,475,000.00.(15) T-131501 - Bulacan (678 sq. m.). The transfer value is P887,600.00.(16) T-26,154 (M) - Bocaue, Bulacan (2,841 sq. m.). The transfer value is P3,779,300.00.(17) T-29,308 (M) - Bocaue, Bulacan (733 sq. m.). The transfer value is P974,400.00.(18) T-29,309 (M) Bocaue, Bulacan (1,141 sq. m.). The transfer value is P1,517,600.00.(19) T-260578 (R. Bengzon) Sta. Rita, Guiguinto, Bulacan (20,000 sq. m.). The transfer value isP25,200,000.00.

The transfer values of the foregoing properties are based on 70% of the appraised value of the respective properties.

b. PNCC shall issue to RADSTOCK or its assignee common shares of the capital stock of PNCC issued at par value which shall comprise 20% of the outstanding capital stock of PNCC after the conversion to equity of the debt exposure of the Privatization Management Office (PMO) and the National Development

Company (NDC) and other government agencies and creditors such that the total government holdings shall not fall below 70% voting equity subject to the approval of the Securities and Exchange Commission (SEC) and ratification of PNCC’s stockholders, if necessary. The assigned value of the shares issued to RADSTOCK is P713 Million based on the approximate last trading price of PNCC shares in the Philippine Stock Exchange as the date of this agreement, based further on current generally accepted accounting standards which stipulates the valuation of shares to be based on the lower of cost or market value.

Subject to the procurement of any and all necessary approvals from the relevant governmental authorities, PNCC shall deliver to RADSTOCK an instrument evidencing an undertaking of the Privatization and Management Office (PMO) to give RADSTOCK or its assignee the right to match any offer to buy the shares of the capital stock and debts of PNCC held by PMO, in the event the same shares and debt are offered for privatization.

c. PNCC shall assign to RADSTOCK or its assignee 50% of the PNCC's 6% share in the gross toll revenue of the Manila North Tollways Corporation (MNTC), with a Net Present Value of P1.287 Billion computed in the manner outlined in Annex "C" herein attached as an integral part hereof, that shall be due and owing to PNCC pursuant to the Joint Venture Agreement between PNCC and First Philippine Infrastructure Development Corp. dated August 29, 1995 and other related existing agreements, commencing in 2008. It shall be understood that as a result of this assignment, PNCC shall charge and withhold the amounts, if any, pertaining to taxes due on the amounts assigned.

Under the Compromise Agreement, PNCC shall pay Radstock the reduced amount ofP6,185,000,000.00 in full settlement of PNCC’s guarantee of CDCP Mining’s debt allegedly totalingP17,040,843,968.00 as of 31 July 2006. To satisfy its reduced obligation, PNCC undertakes to (1) "assign to a third party assignee to be designated by Radstock all its rights and interests" to the listed real properties therein; (2) issue to Radstock or its assignee common shares of the capital stock of PNCC issued at par value which shall comprise 20% of the outstanding capital stock of PNCC; and (3) assign to Radstock or its assignee 50% of PNCC’s 6% share, for the next 27 years (2008-2035), in the gross toll revenues of the Manila North Tollways Corporation.

A. The PNCC Board has no power to compromise the P6.185 billion amount.

Does the PNCC Board have the power to compromise the P6.185 billion "reduced" amount? The answer is in the negative.1avvphi1

The Dissenting Opinion asserts that PNCC has the power, citing Section 36(2) of Presidential Decree No. 1445 (PD 1445), otherwise known as the Government Auditing Code of the Philippines, enacted in 1978. Section 36 states:

SECTION 36. Power to Compromise Claims. — (1) When the interest of the government so requires, the Commission may compromise or release in whole or in part, any claim or settled liability to any government agency not exceeding ten thousand pesos and with the written approval of the Prime Minister, it may likewise compromise or release any similar claim or liability not exceeding one hundred thousand pesos, the application for relief therefrom shall be submitted, through the Commission and the Prime Minister, with their recommendations, to the National Assembly.

(2) The respective governing bodies of government-owned or controlled corporations, and self-governing boards, commissions or agencies of the government shall have the exclusive power to compromise or release any similar claim or liability when expressly authorized by their charters and if in their judgment, the interest of their respective corporations or agencies so requires.

75

When the charters do not so provide, the power to compromise shall be exercised by the Commission in accordance with the preceding paragraph. (Emphasis supplied)

The Dissenting Opinion asserts that since PNCC is incorporated under the Corporation Code, the PNCC Board has all the powers granted to the governing boards of corporations incorporated under the Corporation Code, which includes the power to compromise claims or liabilities.

Section 36 of PD 1445, enacted on 11 June 1978, has been superseded by a later law -- Section 20(1), Chapter IV, Subtitle B, Title I, Book V of Executive Order No. 292 or the Administrative Code of 1987, which provides:

Section 20. Power to Compromise Claims. - (1) When the interest of the Government so requires, the Commission may compromise or release in whole or in part, any settled claim or liability to any government agency not exceeding ten thousand pesos arising out of any matter or case before it or within its jurisdiction, and with the written approval of the President, it may likewise compromise or release any similar claim or liability not exceeding one hundred thousand pesos. In case the claim or liability exceeds one hundred thousand pesos, the application for relief therefrom shall be submitted, through the Commission and the President, with their recommendations, to the Congress[.] x x x (Emphasis supplied)

Under this provision,54 the authority to compromise a settled claim or liability exceeding P100,000.00 involving a government agency, as in this case where the liability amounts to P6.185 billion, is vested not in COA but exclusively in Congress. Congress alone has the power to compromise the P6.185 billion purported liability of PNCC. Without congressional approval, the Compromise Agreement between PNCC and Radstock involvingP6.185 billion is void for being contrary to Section 20(1), Chapter IV, Subtitle B, Title I, Book V of the Administrative Code of 1987.

PNCC is a "government agency" because Section 2 on Introductory Provisions of the Revised Administrative Code of 1987 provides that –

Agency of the Government refers to any of the various units of the Government, including a department, bureau, office, instrumentality, or government-owned or controlled corporation, or a local government or a distinct unit therein. (Boldfacing supplied)

Thus, Section 20(1), Chapter IV, Subtitle B, Title I, Book V of the Administrative Code of 1987 applies to PNCC, which indisputably is a government owned or controlled corporation.

In the same vein, the COA’s stamp of approval on the Compromise Agreement is void for violating Section 20(1), Chapter IV, Subtitle B, Title I, Book V of the Administrative Code of 1987. Clearly, the Dissenting Opinion’s reliance on the COA’s finding that the terms and conditions of the Compromise Agreement are "fair and above board" is patently erroneous.

Citing Benedicto v. Board of Administrators of Television Stations RPN, BBC and IBC,55 the Dissenting Opinion views that congressional approval is not required for the validity of the Compromise Agreement because the liability of PNCC is not yet "settled."

In Benedicto, the PCGG filed in the Sandiganbayan a civil case to recover from the defendants (including Roberto S. Benedicto) their ill-gotten wealth consisting of funds and other properties. The PCGG executed a compromise agreement with Roberto S. Benedicto ceding to the latter a substantial part of his ill-gotten assets and the State granting him immunity from further prosecution. The Court held that prior congressional approval is not required for the PCGG to enter into a compromise agreement with persons against whom it has filed actions for recovery of ill-gotten wealth.

In Benedicto, the Court found that the government’s claim against Benedicto was not yet settled unlike here where the PNCC Board expressly admitted the liability of PNCC for the Marubeni loans. In Benedicto, the ownership of the alleged ill-gotten assets was still being litigated in the Sandiganbayan and no party ever admitted any liability, unlike here where the PNCC Board had already admitted through a formal Board Resolution PNCC’s liability for the Marubeni loans. PNCC’s express admission of liability for the Marubeni loans is essentially the premise of the execution of the Compromise Agreement. In short, Radstock’s claim against PNCC is settled by virtue of PNCC’s express admission of liability for the Marubeni loans. The Compromise Agreement merely reduced this settled liability from P17 billion to P6.185 billion.

The provision of the Revised Administrative Code on the power to settle claims or liabilities was precisely enacted to prevent government agencies from admitting liabilities against the government, then compromising such "settled" liabilities. The present case is exactly what the law seeks to prevent, a compromise agreement on a creditor’s claim settled through admission by a government agency without the approval of Congress for amounts exceeding P100,000.00. What makes the application of the law even more necessary is that the PNCC Board’s twin moves are manifestly and grossly disadvantageous to the Government. First, the PNCC admitted solidary liability for a staggering P10.743 billion private debt incurred by a private corporation which PNCC does not even control. Second, the PNCC Board agreed to pay Radstock P6.185 billion as a compromise settlement ahead of all other creditors, including the Government which is the biggest creditor.

The Dissenting Opinion further argues that since the PNCC is incorporated under the Corporation Code, it has the power, through its Board of Directors, to compromise just like any other private corporation organized under the Corporation Code. Thus, the Dissenting Opinion states:

Not being a government corporation created by special law, PNCC does not owe its creation to some charter or special law, but to the Corporation Code. Its powers are enumerated in the Corporation Code and its articles of incorporation. As an autonomous entity, it undoubtedly has the power to compromise, and to enter into a settlement through its Board of Directors, just like any other private corporation organized under the Corporation Code. To maintain otherwise is to ignore the character of PNCC as a corporate entity organized under the Corporation Code, by which it was vested with a personality and identity distinct and separate from those of its stockholders or members. (Boldfacing and underlining supplied)

The Dissenting Opinion is woefully wide off the mark. The PNCC is not "just like any other private corporation" precisely because it is not a private corporation but indisputably a government owned corporation. Neither is PNCC "an autonomous entity" considering that PNCC is under the Department of Trade and Industry, over which the President exercises control. To claim that PNCC is an "autonomous entity" is to say that it is a lost command in the Executive branch, a concept that violates the President's constitutional power of control over the entire Executive branch of government.56

The government nominees in the PNCC Board, who practically compose the entire PNCC Board, are public officers subject to the Anti-Graft and Corrupt Practices Act, accountable to the Government and the Filipino people. To hold that a corporation incorporated under the Corporation Code, despite its being 90.3% owned by the Government, is "an autonomous entity" that could solely through its Board of Directors compromise, and transfer ownership of, substantially all its assets to a private third party without the approval required under the Administrative Code of 1987,57 is to invite the plunder of all such government owned corporations.

The Dissenting Opinion’s claim that PNCC is an autonomous entity just like any other private corporation is inconsistent with its assertion that Section 36(2) of the Government Auditing Code is the governing law in determining PNCC's power to compromise. Section 36(2) of the Government Auditing Code expressly states

76

that it applies to the governing bodies of "government-owned or controlled corporations." The phrase "government-owned or controlled corporations" refers to both those created by special charter as well as those incorporated under the Corporation Code. Section 2, Article IX-D of the Constitution provides:

SECTION 2. (1) The Commission on Audit shall have the power, authority, and duty to examine, audit, and settle all accounts pertaining to the revenue and receipts of, and expenditures or uses of funds and property, owned or held in trust by, or pertaining to, the Government, or any of its subdivisions, agencies, or instrumentalities, including government-owned or controlled corporations with original charters, and on a post-audit basis: (a) constitutional bodies, commissions and offices that have been granted fiscal autonomy under this Constitution; (b) autonomous state colleges and universities; (c) other government-owned or controlled corporations and their subsidiaries; and (d) such non-governmental entities receiving subsidy or equity, directly or indirectly, from or through the Government, which are required by law or the granting institution to submit to such audit as a condition of subsidy or equity. However, where the internal control system of the audited agencies is inadequate, the Commission may adopt such measures, including temporary or special pre-audit, as are necessary and appropriate to correct the deficiencies. It shall keep the general accounts of the Government and, for such period as may be provided by law, preserve the vouchers and other supporting papers pertaining thereto.

(2) The Commission shall have exclusive authority, subject to the limitations in this Article, to define the scope of its audit and examination, establish the techniques and methods required therefor, and promulgate accounting and auditing rules and regulations, including those for the prevention and disallowance of irregular, unnecessary, excessive, extravagant, or unconscionable expenditures, or uses of government funds and properties. (Emphasis supplied)

In explaining the extent of the jurisdiction of COA over government owned or controlled corporations, this Court declared in Feliciano v. Commission on Audit:58

The COA's audit jurisdiction extends not only to government "agencies or instrumentalities," but also to "government-owned and controlled corporations with original charters" as well as "other government-owned or controlled corporations" without original charters.

x x x x

Petitioner forgets that the constitutional criterion on the exercise of COA's audit jurisdiction depends on the government's ownership or control of a corporation. The nature of the corporation, whether it is private, quasi-public, or public is immaterial.

The Constitution vests in the COA audit jurisdiction over "government-owned and controlled corporations with original charters," as well as "government-owned or controlled corporations" without original charters. GOCCs with original charters are subject to COA pre-audit, while GOCCs without original charters are subject to COA post-audit. GOCCs without original charters refer to corporations created under the Corporation Code but are owned or controlled by the government. The nature or purpose of the corporation is not material in determining COA's audit jurisdiction. Neither is the manner of creation of a corporation, whether under a general or special law.

Clearly, the COA’s audit jurisdiction extends to government owned or controlled corporations incorporated under the Corporation Code. Thus, the COA must apply the Government Auditing Code in the audit and examination of the accounts of such government owned or controlled corporations even though incorporated under the Corporation Code. This means that Section 20(1), Chapter IV, Subtitle B, Title I, Book V of the Administrative Code of 1987 on the power to compromise, which superseded Section 36 of the Government Auditing Code, applies to the present case in

determining PNCC’s power to compromise. In fact, the COA has been regularly auditing PNCC on a post-audit basis in accordance with Section 2, Article IX-D of the Constitution, the Government Auditing Code, and COA rules and regulations.

B. PNCC’s toll fees are public funds.

PD 1113 granted PNCC a 30-year franchise to construct, operate and maintain toll facilities in the North and South Luzon Expressways. Section 1 of PD 111359 provides:

Section 1. Any provision of law to the contrary notwithstanding, there is hereby granted to the Construction and Development Corporation of the Philippines (CDCP), a corporation duly organized and registered under the laws of the Philippines, hereinafter called the GRANTEE, for a period of thirty (30) years from May 1, 1977 the right, privilege and authority to construct, operate and maintain toll facilities covering the expressways from Balintawak (Station 9 + 563) to Carmen, Rosales, Pangasinan and from Nichols, Pasay City (Station 10 + 540) to Lucena, Quezon, hereinafter referred to collectively as North Luzon Expressway, respectively.

The franchise herein granted shall include the right to collect toll fees at such rates as may be fixed and/or authorized by the Toll Regulatory Board hereinafter referred to as the Board created under Presidential Decree No. 1112 for the use of the expressways above-mentioned. (Emphasis supplied)

Section 2 of PD 1894,60 which amended PD 1113 to include in PNCC’s franchise the Metro Manila expressway, also provides:

Section 2. The term of the franchise provided under Presidential Decree No. 1113 for the North Luzon Expressway and the South Luzon Expressway which is thirty (30) years from 1 May 1977 shall remain the same; provided that, the franchise granted for the Metro Manila Expressway and all extensions linkages, stretches and diversions that may be constructed after the date of approval of this decree shall likewise have a term of thirty (30) years commencing from the date of completion of the project. (Emphasis supplied)

Based on these provisions, the franchise of the PNCC expired on 1 May 2007 or thirty years from 1 May 1977.

PNCC, however, claims that under PD 1894, the North Luzon Expressway (NLEX) shall have a term of 30 years from the date of its completion in 2005. PNCC argues that the proviso in Section 2 of PD 1894 gave "toll road projects completed within the franchise period and after the approval of PD No. 1894 on 12 December 1983 their own thirty-year term commencing from the date of the completion of the said project, notwithstanding the expiry of the said franchise."

This contention is untenable.

The proviso in Section 2 of PD 1894 refers to the franchise granted for the Metro Manila Expressway and all extensions linkages, stretches and diversions constructed after the approval of PD 1894. It does not pertain to the NLEX because the term of the NLEX franchise, "which is 30 years from 1 May 1977, shall remain the same," as expressly provided in the first sentence of the same Section 2 of PD 1894. To construe that the NLEX franchise had a new term of 30 years starting from 2005 glaringly conflicts with the plain, clear and unequivocal language of the first sentence of Section 2 of PD 1894. That would be clearly absurd.

There is no dispute that Congress did not renew PNCC’s franchise after its expiry on 1 May 2007. However, PNCC asserts that it "remains a viable corporate entity even after the expiration of its franchise under Presidential Decree No. 1113." PNCC points out that the Toll Regulatory Board (TRB) granted PNCC a "Tollway Operation Certificate" (TOC) which conferred on PNCC the authority to operate and maintain toll facilities, which includes the power to collect toll fees. PNCC further posits that the toll fees are private funds because they represent "the consideration given to

77

tollway operators in exchange for costs they incurred or will incur in constructing, operating and maintaining the tollways."

This contention is devoid of merit.

With the expiration of PNCC’s franchise, the assets and facilities of PNCC were automatically turned over, by operation of law, to the government at no cost. Sections 2(e) and 9 of PD 1113 and Section 5 of PD 1894 provide:

Section 2 [of PD 1113]. In consideration of this franchise, the GRANTEE shall:

(e) Turn over the toll facilities and all equipment directly related thereto to the government upon expiration of the franchise period without cost.

Section 9 [of PD 1113]. For the purposes of this franchise, the Government, shall turn over to the GRANTEE (PNCC) not later than April 30, 1977 all physical assets and facilities including all equipment and appurtenances directly related to the operations of the North and South Toll Expressways: Provided, That, the extensions of such Expressways shall also be turned over to GRANTEE upon completion of their construction or of functional sections thereof: Provided, However, That upon termination of the franchise period, said physical assets and facilities including improvements thereon, together with equipment and appurtenances directly related to their operations, shall be turned over to the Government without any cost or obligation on the part of the latter. (Emphasis supplied)

Section 5 [of PD No. 1894]. In consideration of this franchise, the GRANTEE shall:

(a) Construct, operate and maintain at its own expense the Expressways; and

(b) Turn over, without cost, the toll facilities and all equipment, directly related thereto to the Government upon expiration of the franchise period. (Emphasis supplied)

The TRB does not have the power to give back to PNCC the toll assets and facilities which were automatically turned over to the Government, by operation of law, upon the expiration of the franchise of the PNCC on 1 May 2007. Whatever power the TRB may have to grant authority to operate a toll facility or to issue a "Tollway Operation Certificate," such power does not obviously include the authority to transfer back to PNCC ownership of National Government assets, like the toll assets and facilities, which have become National Government property upon the expiry of PNCC’s franchise. Such act by the TRB would repeal Section 5 of PD 1894 which automatically vested in the National Government ownership of PNCC’s toll assets and facilities upon the expiry of PNCC’s franchise. The TRB obviously has no power to repeal a law. Further, PD 1113, as amended by PD 1894, granting the franchise to PNCC, is a later law that must necessarily prevail over PD 1112 creating the TRB. Hence, the provisions of PD 1113, as amended by PD 1894, are controlling.

The government’s ownership of PNCC's toll assets and facilities inevitably results in the government’s ownership of the toll fees and the net income derived from these toll assets and facilities. Thus, the toll fees form part of the National Government’s General Fund, which includes public moneys of every sort and other resources pertaining to any agency of the government.61 Even Radstock’s counsel admits that the toll fees are public funds, to wit:

ASSOCIATE JUSTICE CARPIO:

Okay. Now, when the franchise of PNCC expired on May 7, 2007, under the terms of the franchise under PD 1896, all the assets, toll way assets, equipment, etcetera of PNCC became owned by government at no cost, correct, under the franchise?

DEAN AGABIN:Yes, Your Honor.ASSOCIATE JUSTICE CARPIO:Okay. So this is now owned by the national government. [A]ny income from these assets of the national government is national government income, correct?DEAN AGABIN:Yes, Your Honor.62

x x x xASSOCIATE JUSTICE CARPIO:x x x My question is very simple x x x Is the income from these assets of the national government (interrupted)DEAN AGABIN:Yes, Your Honor.63

x x x xASSOCIATE JUSTICE CARPIO:So, it’s the government [that] decides whether it goes to the general fund or another fund. [W]hat is that other fund? Is there another fund where revenues of the government go?DEAN AGABIN:It’s the same fund, Your Honor, except that (interrupted)ASSOCIATE JUSTICE CARPIO:So it goes to the general fund?DEAN AGABIN:Except that it can be categorized as a private fund in a commercial sense, and it can be categorized as a public fund in a Public Law sense.ASSOCIATE JUSTICE CARPIO:Okay. So we agree that, okay, it goes to the general fund. I agree with you, but you are saying it is categorized still as a private funds?DEAN AGABIN:Yes, Your Honor.ASSOCIATE JUSTICE CARPIO:But it’s part of the general fund. Now, if it is part of the general fund, who has the authority to spend that money?DEAN AGABIN:Well, the National Government itself.ASSOCIATE JUSTICE CARPIO:Who in the National Government, the Executive, Judiciary or Legislative?DEAN AGABIN:Well, the funds are usually appropriated by the Congress.ASSOCIATE JUSTICE CARPIO:x x x you mean to say there are exceptions that money from the general fund can be spent by the Executive without going t[hrough] Congress, or xxx is [that] the absolute rule?DEAN AGABIN:Well, in so far as the general fund is concerned, that is the absolute rule set aside by the National Government.ASSOCIATE JUSTICE CARPIO:x x x you are saying this is general fund money - the collection from the assets[?]DEAN AGABIN:Yes.64 (Emphasis supplied)

Forming part of the General Fund, the toll fees can only be disposed of in accordance with the fundamental principles governing financial transactions and operations of any government agency, to wit: (1) no money shall be paid out of the Treasury except in pursuance of an appropriation made by law, as expressly mandated by Section 29(1), Article VI of the Constitution; and (2) government funds or property shall be spent or used solely for public purposes, as expressly mandated by Section 4(2) of PD 1445 or the Government Auditing Code.65

Section 29(1), Article VI of the Constitution provides:

Section 29(1). No money shall be paid out of the Treasury except in pursuance of an appropriation made by law.

The power to appropriate money from the General Funds of the Government belongs exclusively to the Legislature. Any act in violation of this iron-clad rule is unconstitutional.

Reinforcing this Constitutional mandate, Sections 84 and 85 of PD 1445 require that before a government agency can enter into a

78

contract involving the expenditure of government funds, there must be an appropriation law for such expenditure, thus:

Section 84. Disbursement of government funds.

1. Revenue funds shall not be paid out of any public treasury or depository except in pursuance of an appropriation law or other specific statutory authority.

x x x x

Section 85. Appropriation before entering into contract.

1. No contract involving the expenditure of public funds shall be entered into unless there is an appropriation therefor, the unexpended balance of which, free of other obligations, is sufficient to cover the proposed expenditure.

x x x x

Section 86 of PD 1445, on the other hand, requires that the proper accounting official must certify that funds have been appropriated for the purpose.66 Section 87 of PD 1445 provides that any contract entered into contrary to the requirements of Sections 85 and 86 shall be void, thus:

Section 87. Void contract and liability of officer. Any contract entered into contrary to the requirements of the two immediately preceding sections shall be void, and the officer or officers entering into the contract shall be liable to the government or other contracting party for any consequent damage to the same extent as if the transaction had been wholly between private parties. (Emphasis supplied)

Applying Section 29(1), Article VI of the Constitution, as implanted in Sections 84 and 85 of the Government Auditing Code, a law must first be enacted by Congress appropriating P6.185 billion as compromise money before payment to Radstock can be made.67 Otherwise, such payment violates a prohibitory law and thus void under Article 5 of the Civil Code which states that "[a]cts executed against the provisions of mandatory or prohibitory laws shall be void, except when the law itself authorizes their validity."

Indisputably, without an appropriation law, PNCC cannot lawfully pay P6.185 billion to Radstock. Any contract allowing such payment, like the Compromise Agreement, "shall be void" as provided in Section 87 of the Government Auditing Code. In Comelec v. Quijano-Padilla,68 this Court ruled:

Petitioners are justified in refusing to formalize the contract with PHOTOKINA. Prudence dictated them not to enter into a contract not backed up by sufficient appropriation and available funds. Definitely, to act otherwise would be a futile exercise for the contract would inevitably suffer the vice of nullity. In Osmeña vs. Commission on Audit, this Court held:

The Auditing Code of the Philippines (P.D. 1445) further provides that no contract involving the expenditure of public funds shall be entered into unless there is an appropriation therefor and the proper accounting official of the agency concerned shall have certified to the officer entering into the obligation that funds have been duly appropriated for the purpose and the amount necessary to cover the proposed contract for the current fiscal year is available for expenditure on account thereof. Any contract entered into contrary to the foregoing requirements shall be VOID.

Clearly then, the contract entered into by the former Mayor Duterte was void from the very beginning since the agreed cost for the project (P,368,920.00) was way beyond the appropriated amount (P,419,180.00) as certified by the City Treasurer. Hence, the contract was properly declared void and unenforceable in COA's 2nd Indorsement, dated September 4, 1986. The COA declared and we agree, that:

The prohibition contained in Sec. 85 of PD 1445 (Government Auditing Code) is explicit and mandatory. Fund availability is, as it has always been, an indispensable prerequisite to the execution of any government contract involving the expenditure of public funds by all government agencies at all levels. Such contracts are not to be considered as final or binding unless such a certification as to funds availability is issued (Letter of Instruction No. 767, s. 1978). Antecedent of advance appropriation is thus essential to government liability on contracts (Zobel vs. City of Manila, 47 Phil. 169). This contract being violative of the legal requirements aforequoted, the same contravenes Sec. 85 of PD 1445 and is null and void by virtue of Sec. 87.

Verily, the contract, as expressly declared by law, is inexistent and void ab initio. This is to say that the proposed contract is without force and effect from the very beginning or from its incipiency, as if it had never been entered into, and hence, cannot be validated either by lapse of time or ratification. (Emphasis supplied)

Significantly, Radstock’s counsel admits that an appropriation law is needed before PNCC can use toll fees to pay Radstock, thus:

ASSOCIATE JUSTICE CARPIO:

Okay, I agree with you. Now, you are saying that money can be paid out of the general fund only through an appropriation by Congress, correct? That’s what you are saying.

DEAN AGABIN:Yes, Your Honor.ASSOCIATE JUSTICE CARPIO:I agree with you also. Okay, now, can PNCC xxx use this money to pay Radstock without Congressional approval?DEAN AGABIN:Well, I believe that that may not be necessary. Your Honor, because earlier, the government had already decreed that PNCC should be properly paid for the reclamation works which it had done. And so (interrupted)ASSOCIATE JUSTICE CARPIO:No. I am talking of the funds.DEAN AGABIN:And so it is like a foreign obligation.ASSOCIATE JUSTICE CARPIO:Counsel, I'm talking of the general funds, collection from the toll fees. Okay. You said, they go to the general fund. You also said, money from the general fund can be spent only if there is an appropriation law by Congress.DEAN AGABIN:Yes, Your Honor.There is no law.DEAN AGABIN:Yes, except that, Your Honor, this fund has not yet gone to the general fund.ASSOCIATE JUSTICE CARPIO:No. It’s being collected everyday. As of May 7, 2007, national government owned those assets already. All those x x x collections that would have gone to PNCC are now national government owned. It goes to the general fund. And any body who uses that without appropriation from Congress commits malversation, I tell you.DEAN AGABIN:That is correct, Your Honor, as long as it has already gone into the general fund.ASSOCIATE JUSTICE CARPIO:Oh, you mean to say that it’s still being held now by the agent, PNCC. It has not been remitted to the National Government?DEAN AGABIN:Well, if PNCC (interrupted)ASSOCIATE JUSTICE CARPIO:But if (interrupted)DEAN AGABIN:If this is the share that properly belongs to PNCC as a private entity (interrupted)ASSOCIATE JUSTICE CARPIO:No, no. I am saying that – You just agreed that all those collections now will go to the National Government forming part of the general fund. If, somehow, PNCC is holding this money in the

79

meantime, it holds xxx it in trust, correct? Because you said, it goes to the general fund, National Government. So it must be holding this in trust for the National Government.DEAN AGABIN:Yes, Your Honor.ASSOCIATE JUSTICE CARPIO:Okay. Can the person holding in trust use it to pay his private debt?DEAN AGABIN:No, Your Honor.ASSOCIATE JUSTICE CARPIO:Cannot be.DEAN AGABIN:But I assume that there must be some portion of the collections which properly pertain to PNCC.ASSOCIATE JUSTICE CARPIO:If there is some portion that xxx may be [for] operating expenses of PNCC. But that is notDEAN AGABIN:Even profit, Your Honor.ASSOCIATE JUSTICE CARPIO:Yeah, but that is not the six percent. Out of the six percent, that goes now to PNCC, that’s entirely national government. But the National Government and the PNCC can agree on service fees for collecting, to pay toll collectors.DEAN AGABIN:Yes, Your Honor.ASSOCIATE JUSTICE CARPIO:But those are expenses. We are talking of the net income. It goes to the general fund. And it’s only Congress that can authorize that expenditure. Not even the Court of Appeals can give its stamp of approval that it goes to Radstock, correct?DEAN AGABIN:Yes, Your Honor.69 (Emphasis supplied)Without an appropriation law, the use of the toll fees to pay Radstock would constitute malversation of public funds. Even counsel for Radstock expressly admits that the use of the toll fees to pay Radstock constitutes malversation of public funds, thus:ASSOCIATE JUSTICE CARPIO:x x x As of May 7, 2007, [the] national government owned those assets already. All those x x x collections that would have gone to PNCC are now national government owned. It goes to the general fund. And any body who uses that without appropriation from Congress commits malversation, I tell you.DEAN AGABIN:That is correct, Your Honor, as long as it has already gone into the general fund.ASSOCIATE JUSTICE CARPIO:Oh, you mean to say that it’s still being held now by the agent, PNCC. It has not been remitted to the National Government?DEAN AGABIN:Well, if PNCC (interrupted)ASSOCIATE JUSTICE CARPIO:But if (interrupted)DEAN AGABIN:If this is the share that properly belongs to PNCC as a private entity (interrupted)ASSOCIATE JUSTICE CARPIO:No, no. I am saying that – You just agreed that all those collections now will go to the National Government forming part of the general fund. If, somehow, PNCC is holding this money in the meantime, it holds x x x it in trust, correct? Because you said, it goes to the general fund, National Government. So it must be holding this in trust for the National Government.DEAN AGABIN:Yes, Your Honor.70 (Emphasis supplied)Indisputably, funds held in trust by PNCC for the National Government cannot be used by PNCC to pay a private debt of CDCP Mining to Radstock, otherwise the PNCC Board will be liable for malversation of public funds.In addition, to pay Radstock P6.185 billion violates the fundamental public policy, expressly articulated in Section 4(2) of the Government Auditing Code,71 that government funds or property shall be spent or used solely for pubic purposes, thus:Section 4. Fundamental Principles. x x x (2) Government funds or property shall be spent or used solely for public purposes. (Emphasis supplied)There is no question that the subject of the Compromise Agreement is CDCP Mining’s private debt to Marubeni, which Marubeni subsequently assigned to Radstock. Counsel for

Radstock admits that Radstock holds a private debt of CDCP Mining, thus:ASSOCIATE JUSTICE CARPIO:So your client is holding a private debt of CDCP Mining, correct?DEAN AGABIN:Correct, Your Honor.72 (Emphasis supplied)CDCP Mining obtained the Marubeni loans when CDCP Mining and PNCC (then CDCP) were still privately owned and managed corporations. The Government became the majority stockholder of PNCC only because government financial institutions converted their loans to PNCC into equity when PNCC failed to pay the loans. However, CDCP Mining have always remained a majority privately owned corporation with PNCC owning only 13% of its equity as admitted by former PNCC Chairman Arthur N. Aguilar and PNCC SVP Finance Miriam M. Pasetes during the Senate hearings, thus:SEN. OSMEÑA. x x x – I just wanted to know is CDCP Mining a 100 percent subsidiary of PNCC?MR. AGUILAR. Hindi ho. Ah, no.SEN. OSMEÑA. If they’re not a 100 percent, why would they sign jointly and severally? I just want to plug the loopholes.MR. AGUILAR. I think it was – if I may just speculate. It was just common ownership at that time.SEN. OSMEÑA. Al right. Now – Also, the ...MR. AGUILAR. Ah, 13 percent daw, your Honor.SEN. OSMEÑA. Huh?MR. AGUILAR. Thirteen percent ho.SEN. OSMEÑA. What’s 13 percent?MR. AGUILAR. We owned ...MS. PASETES. Thirteen percent of ...SEN. OSMEÑA. PNCC owned ...MS. PASETES. (Mike off) CDCP ...SEN. DRILON. Use the microphone, please.MS. PASETES. Sorry. Your Honor, the ownership of CDCP of CDCP Basay Mining ...SEN. OSMEÑA. No, no, the ownership of CDCP. CDCP Mining, how many percent of the equity of CDCP Mining was owned by PNCC, formerly CDCP?MS. PASETES. Thirteen percent.SEN. OSMEÑA. Thirteen. And as a 13 percent owner, they agreed to sign jointly and severally?MS. PASETES. Yes.SEN. OSMEÑA. One-three?

So poor PNCC and CDCP got taken to the cleaners here. They sign for a 100 percent and they only own 13 percent.

x x x x73 (Emphasis supplied)

PNCC cannot use public funds, like toll fees that indisputably form part of the General Fund, to pay a private debt of CDCP Mining to Radstock. Such payment cannot qualify as expenditure for a public purpose. The toll fees are merely held in trust by PNCC for the National Government, which is the owner of the toll fees.

Considering that there is no appropriation law passed by Congress for the P6.185 billion compromise amount, the Compromise Agreement is void for being contrary to law, specifically Section 29(1), Article VI of the Constitution and Section 87 of PD 1445. And since the payment of the P6.185 billion pertains to CDCP Mining’s private debt to Radstock, the Compromise Agreement is also void for being contrary to the fundamental public policy that government funds or property shall be spent or used solely for public purposes, as provided in Section 4(2) of the Government Auditing Code.

C. Radstock is not qualified to own land in the Philippines.

Radstock is a private corporation incorporated in the British Virgin Islands. Its office address is at Suite 14021 Duddell Street, Central Hongkong. As a foreign corporation, with unknown owners whose nationalities are also unknown, Radstock is not qualified to own land in the Philippines pursuant to Section 7, in relation to Section 3, Article XII of the Constitution. These provisions state:

Section. 3. Lands of the public domain are classified into agricultural, forest or timber, mineral lands, and national parks. Agricultural lands of the public domain may be further classified

80

by law according to the uses to which they may be devoted. Alienable lands of the public domain shall be limited to agricultural lands. Private corporations or associations may not hold such lands of the public domain except by lease, for a period not exceeding twenty-five years, renewable for not more than twenty-five years, and not to exceed one hundred thousand hectares in area. Citizens of the Philippines may lease not more than five hundred hectares, or acquire not more than twelve hectares thereof by purchase, homestead, or grant.

Taking into account the requirements of conservation, ecology, and development, and subject to the requirements of agrarian reform, the Congress shall determine, by law, the size of lands of the public domain which may be acquired, developed, held, or leased and the conditions therefor.

x x x x

Section 7. Save in cases of hereditary succession, no private lands shall be transferred or conveyed except to individuals, corporations, or associations qualified to acquire or hold lands of the public domain.

The OGCC admits that Radstock cannot own lands in the Philippines. However, the OGCC claims that Radstock can own the rights to ownership of lands in the Philippines, thus:

ASSOCIATE JUSTICE CARPIO:Under the law, a foreigner cannot own land, correct?ATTY. AGRA:Yes, Your Honor.ASSOCIATE JUSTICE CARPIO:Can a foreigner who xxx cannot own land assign the right of ownership to the land?ATTY. AGRA:Again, Your Honor, at that particular time, it will be PNCC, not through Radstock, that chain of events should be, there’s a qualified nominee (interrupted)ASSOCIATE JUSTICE CARPIO:Yes, xxx you said, Radstock will assign the right of ownership to the qualified assignee[.] So my question is, can a foreigner own the right to ownership of a land when it cannot own the land itself?ATTY. AGRA:The foreigner cannot own the land, Your Honor.ASSOCIATE JUSTICE CARPIO:But you are saying it can own the right of ownership to the land, because you are saying, the right of ownership will be assigned by Radstock.ATTY. AGRA:The rights over the properties, Your Honors, if there’s a valid assignment made to a qualified party, then the assignment will be made.ASSOCIATE JUSTICE CARPIO:Who makes the assignment?ATTY. AGRA:It will be Radstock, Your Honor.ASSOCIATE JUSTICE CARPIO:So, if Radstock makes the assignment, it must own its rights, otherwise, it cannot assign it, correct?ATTY. AGRA:Pursuant to the compromise agreement, once approved, yes, Your Honors.ASSOCIATE JUSTICE CARPIO:So, you are saying that Radstock can own the rights to ownership of the land?ATTY. AGRA:Yes, Your Honors.ASSOCIATE JUSTICE CARPIO:Yes?ATTY. AGRA:The premise, Your Honor, you mentioned a while ago was, if this Court approves said compromise (interrupted)ASSOCIATE JUSTICE CARPIO:No, no. Whether there is such a compromise agreement - - It’s an academic question I am asking you, can a foreigner assign rights to ownership of a land in the Philippines?ATTY. AGRA:

Under the Compromise Agreement, Your Honors, these rights should be respected.ASSOCIATE JUSTICE CARPIO:So, it can?ATTY. AGRA:It can. Your Honor. But again, this right must, cannot be perfected or cannot be, could not take effect.ASSOCIATE JUSTICE CARPIO:But if it cannot - - It’s not perfected, how can it assign?ATTY. AGRA:Not directly, Your Honors. Again, there must be a qualified nominee assigned by Radstock.ASSOCIATE JUSTICE CARPIO:It’s very clear, it’s an indirect way of selling property that is prohibited by law, is it not?ATTY. AGRA:Again, Your Honor, know, believe this is a Compromise Agreement. This is a dacion en pago.ASSOCIATE JUSTICE CARPIO:So, dacion en pago is an exception to the constitutional prohibition.ATTY. AGRA:No, Your Honor. PNCC, will still hold on to the property, absent a valid assignment of properties.ASSOCIATE JUSTICE CARPIO:But what rights will PNCC have over that land when it has already signed the compromise? It is just waiting for instruction xxx from Radstock what to do with it? So, it’s a trustee of somebody, because it does not, it cannot, [it] has no dominion over it anymore? It’s just holding it for Radstock. So, PNCC becomes a dummy, at that point, of Radstock, correct?ATTY. AGRA:No, Your Honor, I believe it (interrupted)ASSOCIATE JUSTICE CARPIO:Yeah, but it does not own the land, but it still holding the land in favor of the other party to the Compromise AgreementATTY. AGRA:Pursuant to the compromise agreement, that will happen.ASSOCIATE JUSTICE CARPIO:Okay. May I (interrupted)ATTY. AGRA:Again, Your Honor, if the compromise agreement ended with a statement that Radstock will be the owner of the property (interrupted)ASSOCIATE JUSTICE CARPIO:Yeah. Unfortunately, it says, to a qualified assignee.ATTY. AGRA:Yes, Your Honor.ASSOCIATE JUSTICE CARPIO:And at this point, when it is signed and execut[ed] and approved, PNCC has no dominion over that land anymore. Who has dominion over it?ATTY. AGRA:Pending the assignment to a qualified party, Your Honor, PNCC will hold on to the property.ASSOCIATE JUSTICE CARPIO:Hold on, but who x x x can exercise acts of dominion, to sell it, to lease it?ATTY. AGRA:

Again, Your Honor, without the valid assignment to a qualified nominee, the compromise agreement in so far as the transfer of these properties will not become effective. It is subject to such condition. Your Honor.74 (Emphasis supplied)

There is no dispute that Radstock is disqualified to own lands in the Philippines. Consequently, Radstock is also disqualified to own the rights to ownership of lands in the Philippines. Contrary to the OGCC’s claim, Radstock cannot own the rights to ownership of any land in the Philippines because Radstock cannot lawfully own the land itself. Otherwise, there will be a blatant circumvention of the Constitution, which prohibits a foreign private corporation from owning land in the Philippines. In addition, Radstock cannot transfer the rights to ownership of land in the Philippines if it cannot own the land itself. It is basic that an assignor or seller cannot assign or sell something he does not own at the time the ownership, or the rights to the ownership, are to be transferred to the assignee or buyer.75

81

The third party assignee under the Compromise Agreement who will be designated by Radstock can only acquire rights duplicating those which its assignor (Radstock) is entitled by law to exercise.76 Thus, the assignee can acquire ownership of the land only if its assignor, Radstock, owns the land. Clearly, the assignment by PNCC of the real properties to a nominee to be designated by Radstock is a circumvention of the Constitutional prohibition against a private foreign corporation owning lands in the Philippines. Such circumvention renders the Compromise Agreement void.

D. Public bidding is required forthe disposal of government properties.

Under Section 79 of the Government Auditing Code,77 the disposition

of government lands to private parties requires public bidding.78 COA Circular No. 89-926, issued on 27 January 1989, sets forth the guidelines on the disposal of property and other assets of the government. Part V of the COA Circular provides:

V. MODE OF DISPOSAL/DIVESTMENT: -

This Commission recognizes the following modes of disposal/divestment of assets and property of national government agencies, local government units and government-owned or controlled corporations and their subsidiaries, aside from other such modes as may be provided for by law.

1. Public Auction

Conformably to existing state policy, the divestment or disposal of government property as contemplated herein shall be undertaken primarily thru public auction. Such mode of divestment or disposal shall observe and adhere to established mechanics and procedures in public bidding, viz:

a. adequate publicity and notification so as to attract the greatest number of interested parties; (vide, Sec. 79, P.D. 1445)b. sufficient time frame between publication and date of auction;c. opportunity afforded to interested parties to inspect the property or assets to be disposed of;d. confidentiality of sealed proposals;e. bond and other prequalification requirements to guarantee performance; andf. fair evaluation of tenders and proper notification of award.

It is understood that the Government reserves the right to reject any or all of the tenders. (Emphasis supplied)

Under the Compromise Agreement, PNCC shall dispose of substantial parcels of land, by way of dacion en pago, in favor of Radstock. Citing Uy v. Sandiganbayan,79 PNCC argues that a dacion en pago is an exception to the requirement of a public bidding.

PNCC’s reliance on Uy is misplaced. There is nothing in Uy declaring that public bidding is dispensed with in a dacion en pago transaction. The Court explained the transaction in Uy as follows:

We do not see any infirmity in either the MOA or the SSA executed between PIEDRAS and respondent banks. By virtue of its shareholdings in OPMC, PIEDRAS was entitled to subscribe to 3,749,906,250 class "A" and 2,499,937,500 class "B" OPMC shares. Admittedly, it was financially sound for PIEDRAS to exercise its pre-emptive rights as an existing shareholder of OPMC lest its proportionate shareholdings be diluted to its detriment. However, PIEDRAS lacked the necessary funds to pay for the additional subscription. Thus, it resorted to contract loans from respondent banks to finance the payment of its additional subscription. The mode of payment agreed upon by the parties was that the payment would be made in the form of part of the

shares subscribed to by PIEDRAS. The OPMC shares therefore were agreed upon by the parties to be equivalent payment for the amount advanced by respondent banks. We see the wisdom in the conditions of the loan transaction. In order to save PIEDRAS and/or the government from the trouble of selling the shares in order to raise funds to pay off the loans, an easier and more direct way was devised in the form of the dacion en pago agreements.

Moreover, we agree with the Sandiganbayan that neither PIEDRAS nor the government sustained any loss in these transactions. In fact, after deducting the shares to be given to respondent banks as payment for the shares, PIEDRAS stood to gain about 1,540,781,554 class "A" and 710,550,000 class "B" OPMC shares virtually for free. Indeed, the question that must be asked is whether or not PIEDRAS, in the exercise of its pre-emptive rights, would have been able to acquire any of these shares at all if it did not enter into the financing agreements with the respondent banks.80

Suffice it to state that in Uy, neither PIEDRAS81 nor the government suffered any loss in the dacion en pagotransactions, unlike here where the government stands to lose at least P6.185 billion worth of assets.

Besides, a dacion en pago is in essence a form of sale, which basically involves a disposition of a property. In Filinvest Credit Corp. v. Philippine Acetylene, Co., Inc.,82 the Court defined dacion en pago in this wise:

Dacion en pago, according to Manresa, is the transmission of the ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of obligation. In dacion en pago, as a special mode of payment, the debtor offers another thing to the creditor who accepts it as equivalent of payment of an outstanding debt. The undertaking really partakes in one sense of the nature of sale, that is, the creditor is really buying the thing or property of the debtor, payment for which is to be charged against the debtor's debt.As such, the essential elements of a contract of sale, namely, consent, object certain, and cause or consideration must be present. In its modern concept, what actually takes place in dacion en pago is an objective novation of the obligation where the thing offered as an accepted equivalent of the performance of an obligation is considered as the object of the contract of sale, while the debt is considered as the purchase price. In any case, common consent is an essential prerequisite, be it sale or innovation to have the effect of totally extinguishing the debt or obligation.83 (Emphasis supplied)

E. PNCC must follow rules on preference of credit.

Radstock is only one of the creditors of PNCC. Asiavest is PNCC’s judgment creditor. In its Board Resolution No. BD-092-2000, PNCC admitted not only its debt to Marubeni but also its debt to the National Government84 in the amount of P36 billion.85 During the Senate hearings, PNCC admitted that it owed the Government P36 billion, thus:

SEN. OSMEÑA. All right. Now, second question is, the management of PNCC also recognize the obligation to the national government of 36 billion. It is part of the board resolution.

MS. OGAN. Yes, sir, it is part of the October 20 board resolution.

SEN. OSMEÑA. All right. So if you owe the national government 36 billion and you owe Marubeni 10 billion, you know, I would just declare bankruptcy and let an orderly disposition of assets be done. What happened in this case to the claim, the 36 billion claim of the national government? How was that disposed of by the PNCC? Mas malaki ang utang ninyo sa national government, 36 billion. Ang gagawin ninyo, babayaran lahat ang utang ninyo sa Marubeni without any assets left to satisfy your obligations to the national government. There should have been, at least, a pari passu payment of all your obligations, 'di ba?

MS. PASETES. Mr. Chairman...

82

SEN. OSMEÑA. Yes.

MS. PASETES. PNCC still carries in its books an equity account called equity adjustments arising from transfer of obligations to national government - - 5.4 billion - - in addition to shares held by government amounting to 1.2 billion.

SEN. OSMEÑA. What is the 36 billion?

THE CHAIRMAN. Ms. Pasetes...

SEN. OSMEÑA. Wait, wait, wait.

THE CHAIRMAN. Baka ampaw yun eh.

SEN. OSMEÑA. Teka muna. What is the 36 billion that appear in the resolution of the board in September 2000 (sic)? This is the same resolution that recognizes, acknowledges and confirms PNCC's obligations to Marubeni. And subparagraph (a) says "Government of the Philippines, in the amount of 36,023,784,000 and change. And then (b) Marubeni Corporation in the amount of 10,743,000,000. So, therefore, in the same resolution, you acknowledged that had something like P46.7 billion in obligations. Why did PNCC settle the 10 billion and did not protect the national government's 36 billion? And then, number two, why is it now in your books, the 36 billion is now down to five? If you use that ratio, then Marubeni should be down to one.

MS. PASETES. Sir, the amount of 36 billion is principal plus interest and penalties.

SEN. OSMEÑA. And what about Marubeni? Is that just principal only?

MS. PASETES. Principal and interest.

SEN. OSMEÑA. So, I mean, you know, it's equal treatment. Ten point seven billion is principal plus penalties plus interest, hindi ba?

MS. PASETES. Yes, sir. Yes, Your Honor.

SEN. OSMEÑA. All right. So now, what you are saying is that you gonna pay Marubeni 6 billion and change and the national government is only recognizing 5 billion. I don't think that's protecting the interest of the national government at all.86

In giving priority and preference to Radstock, the Compromise Agreement is certainly in fraud of PNCC’s other creditors, including the National Government, and violates the provisions of the Civil Code on concurrence and preference of credits.

This Court has held that while the Corporation Code allows the transfer of all or substantially all of the assets of a corporation, the transfer should not prejudice the creditors of the assignor corporation.87 Assuming that PNCC may transfer all or substantially all its assets, to allow PNCC to do so without the consent of its creditors or without requiring Radstock to assume PNCC’s debts will defraud the other PNCC creditors88 since the assignment will place PNCC’s assets beyond the reach of its other creditors.89 As this Court held in Caltex (Phil.), Inc. v. PNOC Shipping and Transport Corporation:90

While the Corporation Code allows the transfer of all or substantially all the properties and assets of a corporation, the transfer should not prejudice the creditors of the assignor. The only way the transfer can proceed without prejudice to the creditors is to hold the assignee liable for the obligations of the assignor. The acquisition by the assignee of all or substantially all of the assets of the assignor necessarily includes the assumption of the assignor's liabilities, unless the creditors who did not consent to the transfer choose to rescind the transfer on the ground of fraud. To allow an assignor to transfer all its business, properties and assets without the consent of its creditors and without requiring the assignee to assume the assignor's

obligations will defraud the creditors. The assignment will place the assignor's assets beyond the reach of its creditors. (Emphasis supplied)

Also, the law, specifically Article 138791 of the Civil Code, presumes that there is fraud of creditors when property is alienated by the debtor after judgment has been rendered against him, thus:

Alienations by onerous title are also presumed fraudulent when made by persons against whom some judgment has been rendered in any instance or some writ of attachment has been issued. The decision or attachment need not refer to the property alienated, and need not have been obtained by the party seeking rescission. (Emphasis supplied)

As stated earlier, Asiavest is a judgment creditor of PNCC in G.R. No. 110263 and a court has already issued a writ of execution in its favor. Thus, when PNCC entered into the Compromise Agreement conveying several prime lots in favor of Radstock, by way of dacion en pago, there is a legal presumption that such conveyance is fraudulent under Article 1387 of the Civil Code.92 This presumption is strengthened by the fact that the conveyance has virtually left PNCC’s other creditors, including the biggest creditor – the National Government - with no other asset to garnish or levy.

Notably, the presumption of fraud or intention to defraud creditors is not just limited to the two instances set forth in the first and second paragraphs of Article 1387 of the Civil Code. Under the third paragraph of the same article, "the design to defraud creditors may be proved in any other manner recognized by the law of evidence." In Oria v. Mcmicking,93 this Court considered the following instances as badges of fraud:

1. The fact that the consideration of the conveyance is fictitious or is inadequate.2. A transfer made by a debtor after suit has begun and while it is pending against him.3. A sale upon credit by an insolvent debtor.4. Evidence of large indebtedness or complete insolvency.5. The transfer of all or nearly all of his property by a debtor, especially when he is insolvent or greatly embarrassed financially.6. The fact that the transfer is made between father and son, when there are present other of the above circumstances.

7. The failure of the vendee to take exclusive possession of all the property. (Emphasis supplied)

Among the circumstances indicating fraud is a transfer of all or nearly all of the debtor’s assets, especially when the debtor is greatly embarrassed financially. Accordingly, neither a declaration of insolvency nor the institution of insolvency proceedings is a condition sine qua non for a transfer of all or nearly all of a debtor’s assets to be regarded in fraud of creditors. It is sufficient that a debtor is greatly embarrassed financially.

In this case, PNCC’s huge negative net worth - at least P6 billion as expressly admitted by PNCC’s counsel during the oral arguments, or P14 billion based on the 2006 COA Audit Report - necessarily translates to an extremely embarrassing financial situation. With its huge negative net worth arising from unpaid billions of pesos in debt, PNCC cannot claim that it is financially stable. As a consequence, the Compromise Agreement stipulating a transfer in favor of Radstock of substantially all of PNCC’s assets constitutes fraud. To legitimize the Compromise Agreement just because there is still no judicial declaration of PNCC’s insolvency will work fraud on PNCC’s other creditors, the biggest creditor of which is the National Government. To insist that PNCC is very much liquid, given its admitted huge negative net worth, is nothing but denial of the truth. The toll fees that PNCC collects belong to the National Government. Obviously, PNCC cannot claim it is liquid based on its collection of such toll fees, because PNCC merely holds such toll fees in trust for the National Government.

83

PNCC does not own the toll fees, and such toll fees do not form part of PNCC’s assets.

PNCC owes the National Government P36 billion, a substantial part of which constitutes taxes and fees, thus:

SEN. ROXAS. Thank you, Mr. Chairman.

Mr. PNCC Chairman, could you describe for us the composition of your debt of about five billion – there are in thousands, so this looks like five and half billion. Current portion of long-term debt, about five billion. What is this made of?

MS. PASETES. The five billion is composed of what is owed the Bureau of Treasury and the Toll Regulatory Board for concession fees that’s almost three billion and another 2.4 billion owed Philippine National Bank.

SEN. ROXAS. So, how much is the Bureau of Treasury?

MS. PASETES. Three billion.

SEN. ROXAS. Three – Why do you owe the Bureau of Treasury three billion?

MS. PASETES. That represents the concession fees due Toll Regulatory Board principal plus interest, Your Honor.

x x x x94 (Emphasis supplied)

In addition, PNCC’s 2006 Audit Report by COA states as follows:

TAX MATTERS

The Company was assessed by the Bureau of Internal Revenue (BIR) of its deficiencies in various taxes. However, no provision for any liability has been made yet in the Company’s financial statements.

• 1980 deficiency income tax, deficiency contractor’s tax and deficiency documentary stamp tax assessments by the BIR totaling P212.523 Million.

x x x x

• Deficiency business tax of P64 Million due the Belgian Consortium, PNCC’s partner in its LRT Project.

• 1992 deficiency income tax, deficiency value-added tax and deficiency expanded withholding tax of P1.04 Billion which was reduced to P709 Million after the Company’s written protest.

x x x x

• 2002 deficiency internal revenue taxes totaling P72.916 Million.

x x x x.95 (Emphasis supplied)

Clearly, PNCC owes the National Government substantial taxes and fees amounting to billions of pesos.

The P36 billion debt to the National Government was acknowledged by the PNCC Board in the same board resolution that recognized the Marubeni loans. Since PNCC is clearly insolvent with a huge negative net worth, the government enjoys preference over Radstock in the satisfaction of PNCC’s liability arising from taxes and duties, pursuant to the provisions of the Civil Code on concurrence and preference of credits. Articles 2241,96 224297 and 224398 of the Civil Code expressly mandate that taxes and fees due the National Government "shall be preferred" and "shall first be satisfied" over claims like those arising from the Marubeni loans which "shall enjoy no preference" under Article 2244.99

However, in flagrant violation of the Civil Code, the PNCC Board favored Radstock over the National Government in the order of credits. This would strip PNCC of its assets leaving virtually nothing for the National Government. This action of the PNCC Board is manifestly and grossly disadvantageous to the National Government and amounts to fraud.

During the Senate hearings, Senator Osmeña pointed out that in the Board Resolution of 20 October 2000, PNCC acknowledged its obligations to the National Government amounting to P36,023,784,000 and to Marubeni amounting to P10,743,000,000. Yet, Senator Osmeña noted that in the PNCC books at the time of the hearing, theP36 billion obligation to the National Government was reduced to P5 billion. PNCC’s Miriam M. Pasetes could not properly explain this discrepancy, except by stating that the P36 billion includes the principal plus interest and penalties, thus:

SEN. OSMEÑA. Teka muna. What is the 36 billion that appear in the resolution of the board in September 2000 (sic)? This is the same resolution that recognizes, acknowledges and confirms PNCC's obligations to Marubeni. And subparagraph (a) says "Government of the Philippines, in the amount of 36,023,784,000 and change. And then (b) Marubeni Corporation in the amount of 10,743,000,000. So, therefore, in the same resolution, you acknowledged that had something like P46.7 billion in obligations. Why did PNCC settle the 10 billion and did not protect the national government's 36 billion? And then, number two, why is it now in your books, the 36 billion is now down to five? If you use that ratio, then Marubeni should be down to one.

MS. PASETES. Sir, the amount of 36 billion is principal plus interest and penalties.

SEN. OSMEÑA. And what about Marubeni? Is that just principal only?

MS. PASETES. Principal and interest.

SEN. OSMEÑA. So, I mean, you know, it's equal treatment. Ten point seven billion is principal plus penalties plus interest, hindi ba?

MS. PASETES. Yes, sir. Yes, Your Honor.

SEN. OSMEÑA. All right. So now, what you are saying is that you gonna pay Marubeni 6 billion and change and the national government is only recognizing 5 billion. I don't think that's protecting the interest of the national government at all.100

PNCC failed to explain satisfactorily why in its books the obligation to the National Government was reduced when no payment to the National Government appeared to have been made. PNCC failed to justify why it made it appear that the obligation to the National Government was less than the obligation to Marubeni. It is another obvious ploy to justify the preferential treatment given to Radstock to the great prejudice of the National Government.

VI.Supreme Court is Not Legitimizer of Violations of Laws

During the oral arguments, counsels for Radstock and PNCC admitted that the Compromise Agreement violates the Constitution and existing laws. However, they rely on this Court to approve the Compromise Agreement to shield their clients from possible criminal acts arising from violation of the Constitution and existing laws. In their view, once this Court approves the Compromise Agreement, their clients are home free from prosecution, and can enjoy the P6.185 billion loot. The following exchanges during the oral arguments reveal this view:

ASSOCIATE JUSTICE CARPIO:

If there is no agreement, they better remit all of that to the National Government. They cannot just hold that. They are

84

holding that [in] trust, as you said, x x x you agree, for the National Government.

DEAN AGABIN:

Yes, that’s why, they are asking the Honorable Court to approve the compromise agreement.

ASSOCIATE JUSTICE CARPIO:

We cannot approve that if the power to authorize the expenditure [belongs] to Congress. How can we usurp x x x the power of Congress to authorize that expenditure[?] It’s only Congress that can authorize the expenditure of funds from the general funds.

DEAN AGABIN:

But, Your Honor, if the Honorable Court would approve of this compromise agreement, I believe that this would be binding on Congress.

ASSOCIATE JUSTICE CARPIO:Ignore the Constitutional provision that money shall be paid out of the National Treasury only pursuant to an appropriation by law. You want us to ignore that[?]DEAN AGABIN:Not really, Your Honor, but I suppose that Congress would have no choice, because this is a final judgment of the Honorable Court. 101

x x x xASSOCIATE JUSTICE CARPIO:So, if Radstock makes the assignment, it must own its rights, otherwise, it cannot assign it, correct?ATTY. AGRA:Pursuant to the compromise agreement, once approved, yes, Your Honors.ASSOCIATE JUSTICE CARPIO:So, you are saying that Radstock can own the rights to ownership of the land?ATTY. AGRA:Yes, Your Honors.ASSOCIATE JUSTICE CARPIO:Yes?ATTY. AGRA:

The premise, Your Honor, you mentioned a while ago was, if this Court approves said compromise (interrupted).102 (Emphasis supplied)

This Court is not, and should never be, a rubber stamp for litigants hankering to pocket public funds for their selfish private gain. This Court is the ultimate guardian of the public interest, the last bulwark against those who seek to plunder the public coffers. This Court cannot, and must never, bring itself down to the level of legitimizer of violations of the Constitution, existing laws or public policy.

Conclusion

In sum, the acts of the PNCC Board in (1) issuing Board Resolution Nos. BD-092-2000 and BD-099-2000 expressly admitting liability for the Marubeni loans, and (2) entering into the Compromise Agreement, constitute evident bad faith and gross inexcusable negligence, amounting to fraud, in the management of PNCC’s affairs. Being public officers, the government nominees in the PNCC Board must answer not only to PNCC and its stockholders, but also to the Filipino people for grossly mishandling PNCC’s finances.

Under Article 1409 of the Civil Code, the Compromise Agreement is "inexistent and void from the beginning," and "cannot be ratified," thus:

Art. 1409. The following contracts are inexistent and void from the beginning:

(1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy;

x x x

(7) Those expressly prohibited or declared void by law.

These contracts cannot be ratified. x x x. (Emphasis supplied)

The Compromise Agreement is indisputably contrary to the Constitution, existing laws and public policy. Under Article 1409, the Compromise Agreement is expressly declared void and "cannot be ratified." No court, not even this Court, can ratify or approve the Compromise Agreement. This Court must perform its duty to defend and uphold the Constitution, existing laws, and fundamental public policy. This Court must not shirk in declaring the Compromise Agreement inexistent and void ab initio.

WHEREFORE, we GRANT the petition in G.R. No. 180428. We SET ASIDE the Decision dated 25 January 2007 and the Resolutions dated 12 June 2007 and 5 November 2007 of the Court of Appeals. We DECLARE (1) PNCC Board Resolution Nos. BD-092-2000 and BD-099-2000 admitting liability for the Marubeni loans VOID AB INITIO for causing undue injury to the Government and giving unwarranted benefits to a private party, constituting a corrupt practice and unlawful act under Section 3(e) of the Anti-Graft and Corrupt Practices Act, and (2) the Compromise Agreement between the Philippine National Construction Corporation and Radstock Securities Limited INEXISTENT AND VOID AB INITIO for being contrary to Section 29(1), Article VI and Sections 3 and 7, Article XII of the Constitution; Section 20(1), Chapter IV, Subtitle B, Title I, Book V of the Administrative Code of 1987; Sections 4(2), 79, 84(1), and 85 of the Government Auditing Code; and Articles 2241, 2242, 2243 and 2244 of the Civil Code.

We GRANT the intervention of Asiavest Merchant Bankers Berhad in G.R. No. 178158 but DECLARE that Strategic Alliance Development Corporation has no legal standing to sue.

SO ORDERED.

85

ANTONIO T. CARPIOAssociate Justice

G.R. No. L-14441      December 17, 1966

PEDRO R. PALTING, petitioner, vs.SAN JOSE PETROLEUM INCORPORATED, respondent.

BARRERA, J.:

This is a petition for review of the order of August 29, 1958, later supplemented and amplified by another dated September 9, 1958, of the Securities and Exchange Commission denying the opposition to, and instead, granting the registration, and licensing the sale in the Philippines, of 5,000,000 shares of the capital stock of the respondent-appellee San Jose Petroleum, Inc. (hereafter referred to as SAN JOSE PETROLEUM), a corporation organized and existing in the Republic of Panama.

On September 7, 1956, SAN JOSE PETROLEUM filed with the Philippine Securities and Exchange Commission a sworn registration statement, for the registration and licensing for sale in the Philippines Voting Trust Certificates representing 2,000,000 shares of its capital stock of a par value of $0.35 a share, at P1.00 per share. It was alleged that the entire proceeds of the sale of said securities will be devoted or used exclusively to finance the operations of San Jose Oil Company, Inc. (a domestic mining corporation hereafter to be referred to as SAN JOSE OIL) which has 14 petroleum exploration concessions covering an area of a little less than 1,000,000 hectares, located in the provinces of Pangasinan, Tarlac, Nueva Ecija, La Union, Iloilo, Cotabato, Davao and Agusan. It was the express condition of the sale that every purchaser of the securities shall not receive a stock certificate, but a registered or bearer-voting-trust certificate from the voting trustees named therein James L. Buckley and Austin G.E. Taylor, the first residing in Connecticut, U.S.A., and the second in New York City. While this application for registration was pending consideration by the Securities and Exchange Commission, SAN JOSE PETROLEUM filed an amended Statement on June 20, 1958, for registration of the sale in the Philippines of its shares of capital stock, which was increased from 2,000,000 to 5,000,000, at a reduced offering price of from P1.00 to P0.70 per share. At this time the par value of the shares has also been reduced from $.35 to $.01 per share.1

Pedro R. Palting and others, allegedly prospective investors in the shares of SAN JOSE PETROLEUM, filed with the Securities and Exchange Commission an opposition to registration and licensing of the securities on the grounds that (1) the tie-up between the issuer, SAN JOSE PETROLEUM, a Panamanian corporation and SAN JOSE OIL, a domestic corporation, violates the Constitution of the Philippines, the Corporation Law and the Petroleum Act of 1949; (2) the issuer has not been licensed to transact business in the Philippines; (3) the sale of the shares of the issuer is fraudulent, and works or tends to work a fraud upon Philippine purchasers; and (4) the issuer as an enterprise, as well as its business, is based upon unsound business principles. Answering the foregoing opposition of Palting, et al., the registrant SAN JOSE PETROLEUM claimed that it was a "business enterprise" enjoying parity rights under the Ordinance appended to the Constitution, which parity right, with respect to mineral resources in the Philippines, may be exercised, pursuant to the Laurel-Langley Agreement, only through the medium of a corporation organized under the laws of the Philippines. Thus, registrant which is allegedly qualified to exercise rights under the Parity Amendment, had to do so through the medium of a domestic corporation, which is the SAN JOSE OIL. It refused the contention that the Corporation Law was being violated, by alleging that Section 13 thereof applies only to foreign corporations doing business in the Philippines, and registrant was not doing business here. The mere fact that it was a holding company of SAN JOSE OIL and that registrant undertook the financing of and giving technical assistance to said corporation did not constitute transaction of business in the Philippines. Registrant also denied that the offering for sale in the Philippines of its shares of capital stock was fraudulent or would work or tend to work fraud on the investors. On August 29, 1958,

and on September 9, 1958 the Securities and Exchange Commissioner issued the orders object of the present appeal.

The issues raised by the parties in this appeal are as follows:

1. Whether or not petitioner Pedro R. Palting, as a "prospective investor" in respondent's securities, has personality to file the present petition for review of the order of the Securities and Exchange Commission;

2. Whether or not the issue raised herein is already moot and academic;

3. Whether or not the "tie-up" between the respondent SAN JOSE PETROLEUM, a foreign corporation, and SAN JOSE OIL COMPANY, INC., a domestic mining corporation, is violative of the Constitution, the Laurel-Langley Agreement, the Petroleum Act of 1949, and the Corporation Law; and

4. Whether or not the sale of respondent's securities is fraudulent, or would work or tend to work fraud to purchasers of such securities in the Philippines.

1. In answer to the notice and order of the Securities and Exchange Commissioner, published in 2 newspapers of general circulation in the Philippines, for "any person who is opposed" to the petition for registration and licensing of respondent's securities, to file his opposition in 7 days, herein petitioner so filed an opposition. And, the Commissioner, having denied his opposition and instead, directed the registration of the securities to be offered for sale, oppositor Palting instituted the present proceeding for review of said order.

Respondent raises the question of the personality of petitioner to bring this appeal, contending that as a mere "prospective investor", he is not an "Aggrieved" or "interested" person who may properly maintain the suit. Citing a 1931 ruling of Utah State Supreme Court2 it is claimed that the phrase "party aggrieved" used in the Securities Act3and the Rules of Court4 as having the right to appeal should refer only to issuers, dealers and salesmen of securities.

It is true that in the cited case, it was ruled that the phrase "person aggrieved" is that party "aggrieved by the judgment or decree where it operates on his rights of property or bears directly upon his interest", that the word "aggrieved" refers to "a substantial grievance, a denial of some personal property right or the imposition upon a party of a burden or obligation." But a careful reading of the case would show that the appeal therein was dismissed because the court held that an order of registration was not final and therefore not appealable. The foregoing pronouncement relied upon by herein respondent was made in construing the provision regarding an order of revocation which the court held was the one appealable. And since the law provides that in revoking the registration of any security, only the issuer and every registered dealer of the security are notified, excluding any person or group of persons having no such interest in the securities, said court concluded that the phrase "interested person" refers only to issuers, dealers or salesmen of securities.

We cannot consider the foregoing ruling by the Utah State Court as controlling on the issue in this case. Our Securities Act in Section 7(c) thereof, requires the publication and notice of the registration statement. Pursuant thereto, the Securities and Exchange Commissioner caused the publication of an order in part reading as follows:

. . . Any person who is opposed with this petition must file his written opposition with this Commission within said period (2 weeks). . . .

In other words, as construed by the administrative office entrusted with the enforcement of the Securities Act, any person (who may not be "aggrieved" or "interested" within the legal

86

acceptation of the word) is allowed or permitted to file an opposition to the registration of securities for sale in the Philippines. And this is in consonance with the generally accepted principle that Blue Sky Laws are enacted to protect investors and prospective purchasers and to prevent fraud and preclude the sale of securities which are in fact worthless or worth substantially less than the asking price. It is for this purpose that herein petitioner duly filed his opposition giving grounds therefor. Respondent SAN JOSE PETROLEUM was required to reply to the opposition. Subsequently both the petition and the opposition were set for hearing during which the petitioner was allowed to actively participate and did so by cross-examining the respondent's witnesses and filing his memorandum in support of his opposition. He therefore to all intents and purposes became a party to the proceedings. And under the New Rules of Court,5 such a party can appeal from a final order, ruling or decision of the Securities and Exchange Commission. This new Rule eliminating the word "aggrieved" appearing in the old Rule, being procedural in nature,6 and in view of the express provision of Rule 144 that the new rules made effective on January 1, 1964 shall govern not only cases brought after they took effect but all further proceedings in cases then pending, except to the extent that in the opinion of the Court their application would not be feasible or would work injustice, in which event the former procedure shall apply, we hold that the present appeal is properly within the appellate jurisdiction of this Court.

The order allowing the registration and sale of respondent's securities is clearly a final order that is appealable. The mere fact that such authority may be later suspended or revoked, depending on future developments, does not give it the character of an interlocutory or provisional ruling. And the fact that seven days after the publication of the order, the securities are deemed registered (Sec. 7, Com. Act 83, as amended), points to the finality of the order. Rights and obligations necessarily arise therefrom if not reviewed on appeal.

Our position on this procedural matter — that the order is appealable and the appeal taken here is proper — is strengthened by the intervention of the Solicitor General, under Section 23 of Rule 3 of the Rules of Court, as the constitutional issues herein presented affect the validity of Section 13 of the Corporation Law, which, according to the respondent, conflicts with the Parity Ordinance and the Laurel-Langley Agreement recognizing, it is claimed, its right to exploit our petroleum resources notwithstanding said provisions of the Corporation Law.

2. Respondent likewise contends that since the order of Registration/Licensing dated September 9, 1958 took effect 30 days from September 3, 1958, and since no stay order has been issued by the Supreme Court, respondent's shares became registered and licensed under the law as of October 3, 1958. Consequently, it is asserted, the present appeal has become academic. Frankly we are unable to follow respondent's argumentation. First it claims that the order of August 29 and that of September 9, 1958 are not final orders and therefor are not appealable. Then when these orders, according to its theory became final and were implemented, it argues that the orders can no longer be appealed as the question of registration and licensing became moot and academic.

But the fact is that because of the authority to sell, the securities are, in all probabilities, still being traded in the open market. Consequently the issue is much alive as to whether respondent's securities should continue to be the subject of sale. The purpose of the inquiry on this matter is not fully served just because the securities had passed out of the hands of the issuer and its dealers. Obviously, so long as the securities are outstanding and are placed in the channels of trade and commerce, members of the investing public are entitled to have the question of the worth or legality of the securities resolved one way or another.

But more fundamental than this consideration, we agree with the late Senator Claro M. Recto, who appeared asamicus curiae in this case, that while apparently the immediate issue in this appeal is the right of respondent SAN JOSE PETROLEUM to dispose of and sell its securities to the Filipino public, the real and ultimate controversy here would actually call for the construction of the

constitutional provisions governing the disposition, utilization, exploitation and development of our natural resources. And certainly this is neither moot nor academic.

3. We now come to the meat of the controversy — the "tie-up" between SAN JOSE OIL on the one hand, and the respondent SAN JOSE PETROLEUM and its associates, on the other. The relationship of these corporations involved or affected in this case is admitted and established through the papers and documents which are parts of the records: SAN JOSE OIL, is a domestic mining corporation, 90% of the outstanding capital stock of which is owned by respondent SAN JOSE PETROLEUM, a foreign (Panamanian) corporation, the majority interest of which is owned by OIL INVESTMENTS, Inc., another foreign (Panamanian) company. This latter corporation in turn is wholly (100%) owned by PANTEPEC OIL COMPANY, C.A., and PANCOASTAL PETROLEUM COMPANY, C.A., both organized and existing under the laws of Venezuela. As of September 30, 1956, there were 9,976 stockholders of PANCOASTAL PETROLEUM found in 49 American states and U.S. territories, holding 3,476,988 shares of stock; whereas, as of November 30, 1956, PANTEPEC OIL COMPANY was said to have 3,077,916 shares held by 12,373 stockholders scattered in 49 American state. In the two lists of stockholders, there is no indication of the citizenship of these stockholders,7 or of the total number of authorized stocks of each corporation, for the purpose of determining the corresponding percentage of these listed stockholders in relation to the respective capital stock of said corporation.

Petitioner, as well as the amicus curiae and the Solicitor General8 contend that the relationship between herein respondent SAN JOSE PETROLEUM and its subsidiary, SAN JOSE OIL, violates the Petroleum Law of 1949, the Philippine Constitution, and Section 13 of the Corporation Law, which inhibits a mining corporation from acquiring an interest in another mining corporation. It is respondent's theory, on the other hand, that far from violating the Constitution; such relationship between the two corporations is in accordance with the Laurel-Langley Agreement which implemented the Ordinance Appended to the Constitution, and that Section 13 of the Corporation Law is not applicable because respondent is not licensed to do business, as it is not doing business, in the Philippines.

Article XIII, Section 1 of the Philippine Constitution provides:

SEC. 1. All agricultural, timber, and mineral lands of the public domain, waters, minerals, coal, petroleum, and other mineral oils, all forces of potential energy, and other natural resources of the Philippines belong to the State, and their disposition, exploitation, development, or utilization shall be limited to citizens of the Philippines, or to corporations or associations at least sixty per centum of the capital of which is owned by such citizens, subject to any existing right, grant, lease or concession at the time of the inauguration of this Government established under this Constitution. . . . (Emphasis supplied)

In the 1946 Ordinance Appended to the Constitution, this right (to utilize and exploit our natural resources) was extended to citizens of the United States, thus:

Notwithstanding the provisions of section one, Article Thirteen, and section eight, Article Fourteen, of the foregoing Constitution, during the effectivity of the Executive Agreement entered into by the President of the Philippines with the President of the United States on the fourth of July, nineteen hundred and forty-six, pursuant to the provisions of Commonwealth Act Numbered Seven hundred and thirty-three, but in no case to extend beyond the third of July, nineteen hundred and seventy-four, the disposition, exploitation, development, and utilization of all agricultural, timber, and mineral lands of the public domain, waters, minerals, coal, petroleum, and other mineral oils, all forces of potential energy, and other natural resources of the Philippines, and the operation of public utilities shall, if open to any person, be open to citizens of the United States, and to all forms of business enterprises owned or controlled, directly or

87

indirectly, by citizens of the United States in the same manner as to, and under the same conditions imposed upon, citizens of the Philippines or corporations or associations owned or controlled by citizens of the Philippines (Emphasis supplied.)

In the 1954 Revised Trade Agreement concluded between the United States and the Philippines, also known as the Laurel-Langley Agreement, embodied in Republic Act 1355, the following provisions appear:

ARTICLE VI

1. The disposition, exploitation, development and utilization of all agricultural, timber, and mineral lands of the public domain, waters, minerals, coal, petroleum and other mineral oils, all forces and sources of potential energy, and other natural resources of either Party, and the operation of public utilities, shall, if open to any person, be open to citizens of the other Party and to all forms of business enterprise owned or controlled, directly or indirectly, by citizens of such other Party in the same manner as to and under the same conditions imposed upon citizens or corporations or associations owned or controlled by citizens of the Party granting the right.

2. The rights provided for in Paragraph 1 may be exercised, . . . in the case of citizens of the United States, with respect to natural resources in the public domain in the Philippines, only through the medium of a corporation organized under the laws of the Philippines and at least 60% of the capital stock of which is owned or controlled by citizens of the United States. . . .

3. The United States of America reserves the rights of the several States of the United States to limit the extent to which citizens or corporations or associations owned or controlled by citizens of the Philippines may engage in the activities specified in this Article. The Republic of the Philippines reserves the power to deny any of the rights specified in this Article to citizens of the United States who are citizens of States, or to corporations or associations at least 60% of whose capital stock or capital is owned or controlled by citizens of States, which deny like rights to citizens of the Philippines, or to corporations or associations which are owned or controlled by citizens of the Philippines. . . . (Emphasis supplied.)

Re-stated, the privilege to utilize, exploit, and develop the natural resources of this country was granted, by Article XIII of the Constitution, to Filipino citizens or to corporations or associations 60% of the capital of which is owned by such citizens. With the Parity Amendment to the Constitution, the same right was extended to citizens of the United States and business enterprises owned or controlled directly or indirectly, by citizens of the United States.

There could be no serious doubt as to the meaning of the word "citizens" used in the aforementioned provisions of the Constitution. The right was granted to 2 types of persons: natural persons (Filipino or American citizens) and juridical persons (corporations 60% of which capital is owned by Filipinos and business enterprises owned or controlled directly or indirectly, by citizens of the United States). In American law, "citizen" has been defined as "one who, under the constitution and laws of the United States, has a right to vote for representatives in congress and other public officers, and who is qualified to fill offices in the gift of the people. (1 Bouvier's Law Dictionary, p. 490.) A citizen is —

One of the sovereign people. A constituent member of the sovereignty, synonymous with the people." (Scott v. Sandford, 19 Ho. [U.S.] 404, 15 L. Ed. 691.)

A member of the civil state entitled to all its privileges. (Cooley, Const. Lim. 77. See U.S. v. Cruikshank 92 U.S.

542, 23 L. Ed. 588; Minor v. Happersett 21 Wall. [U.S.] 162, 22 L. Ed. 627.)

These concepts clarified, is herein respondent SAN JOSE PETROLEUM an American business enterprise entitled to parity rights in the Philippines? The answer must be in the negative, for the following reasons:

Firstly — It is not owned or controlled directly by citizens of the United States, because it is owned and controlled by a corporation, the OIL INVESTMENTS, another foreign (Panamanian) corporation.

Secondly — Neither can it be said that it is indirectly owned and controlled by American citizens through the OIL INVESTMENTS, for this latter corporation is in turn owned and controlled, not by citizens of the United States, but still by two foreign (Venezuelan) corporations, the PANTEPEC OIL COMPANY and PANCOASTAL PETROLEUM.

Thirdly — Although it is claimed that these two last corporations are owned and controlled respectively by 12,373 and 9,979 stockholders residing in the different American states, there is no showing in the certification furnished by respondent that the stockholders of PANCOASTAL or those of them holding the controlling stock, are citizens of the United States.

Fourthly — Granting that these individual stockholders are American citizens, it is yet necessary to establish that the different states of which they are citizens, allow Filipino citizens or corporations or associations owned or controlled by Filipino citizens, to engage in the exploitation, etc. of the natural resources of these states (see paragraph 3, Article VI of the Laurel-Langley Agreement, supra). Respondent has presented no proof to this effect.

Fifthly — But even if the requirements mentioned in the two immediately preceding paragraphs are satisfied, nevertheless to hold that the set-up disclosed in this case, with a long chain of intervening foreign corporations, comes within the purview of the Parity Amendment regarding business enterprises indirectly owned or controlled by citizens of the United States, is to unduly stretch and strain the language and intent of the law. For, to what extent must the word "indirectly" be carried? Must we trace the ownership or control of these various corporationsad infinitum for the purpose of determining whether the American ownership-control-requirement is satisfied? Add to this the admitted fact that the shares of stock of the PANTEPEC and PANCOASTAL which are allegedly owned or controlled directly by citizens of the United States, are traded in the stock exchange in New York, and you have a situation where it becomes a practical impossibility to determine at any given time, the citizenship of the controlling stock required by the law. In the circumstances, we have to hold that the respondent SAN JOSE PETROLEUM, as presently constituted, is not a business enterprise that is authorized to exercise the parity privileges under the Parity Ordinance, the Laurel-Langley Agreement and the Petroleum Law. Its tie-up with SAN JOSE OIL is, consequently, illegal.

What, then, would be the Status of SAN JOSE OIL, about 90% of whose stock is owned by SAN JOSE PETROLEUM? This is a query which we need not resolve in this case as SAN JOSE OIL is not a party and it is not necessary to do so to dispose of the present controversy. But it is a matter that probably the Solicitor General would want to look into.

There is another issue which has been discussed extensively by the parties. This is whether or not an American mining corporation may lawfully "be in anywise interested in any other corporation (domestic or foreign) organized for the purpose of engaging in agriculture or in mining," in the Philippines or whether an American citizen owning stock in more than one corporation organized for the purpose of engaging in agriculture or in mining, may own more than 15% of the capital stock then outstanding and entitled to vote, of each of such corporations, in view of the express prohibition contained in Section 13 of the Philippine Corporation Law. The petitioner in this case contends that the

88

provisions of the Corporation Law must be applied to American citizens and business enterprise otherwise entitled to exercise the parity privileges, because both the Laurel-Langley Agreement (Art. VI, par. 1) and the Petroleum Act of 1948 (Art. 31), specifically provide that the enjoyment by them of the same rights and obligations granted under the provisions of both laws shall be "in the same manner as to, and under the same conditions imposed upon, citizens of the Philippines or corporations or associations owned or controlled by citizens of the Philippines." The petitioner further contends that, as the enjoyment of the privilege of exploiting mineral resources in the Philippines by Filipino citizens or corporations owned or controlled by citizens of the Philippines (which corporation must necessarily be organized under the Corporation Law), is made subject to the limitations provided in Section 13 of the Corporation Law, so necessarily the exercise of the parity rights by citizens of the United States or business enterprise owned or controlled, directly or indirectly, by citizens of the United States, must equally be subject to the same limitations contained in the aforesaid Section 13 of the Corporation Law.

In view of the conclusions we have already arrived at, we deem it not indispensable for us to pass upon this legal question, especially taking into account the statement of the respondent (SAN JOSE PETROLEUM) that it is essentially a holding company, and as found by the Securities and Exchange Commissioner, its principal activity is limited to the financing and giving technical assistance to SAN JOSE OIL.

4. Respondent SAN JOSE PETROLEUM, whose shares of stock were allowed registration for sale in the Philippines, was incorporated under the laws of Panama in April, 1956 with an authorized capital stock of $500,000.00, American currency, divided into 50,000,000 shares at par value of $0.01 per share. By virtue of a 3-party Agreement of June 14, 1956, respondent was supposed to have received from OIL INVESTMENTS 8,000,000 shares of the capital stock of SAN JOSE OIL (at par value of $0.01 per share), plus a note for $250,000.00 due in 6 months, for which respondent issued in favor of OIL INVESTMENTS 16,000,000 shares of its capital stock, at $0.01 per share or with a value of $160,000.00, plus a note for $230,297.97 maturing in 2 years at 6% per annum interest,9 and the assumption of payment of the unpaid price of 7,500,000 (of the 8,000,000 shares of SAN JOSE OIL).

On June 27, 1956, the capitalization of SAN JOSE PETROLEUM was increased from $500,000.00 to $17,500,000.00 by increasing the par value of the same 50,000,000 shares, from $0.01 to $0.35. Without any additional consideration, the 16,000,000 shares of $0.01 previously issued to OIL INVESTMENTS with a total value of $160,000.00 were changed with 16,000,000 shares of the recapitalized stock at $0.35 per share, or valued at $5,600,000.00. And, to make it appear that cash was received for these re-issued 16,000,000 shares, the board of directors of respondent corporation placed a valuation of $5,900,000.00 on the 8,000,000 shares of SAN JOSE OIL (still having par value of $0.10 per share) which were received from OIL INVESTMENTS as part-consideration for the 16,000,000 shares at $0.01 per share.

In the Balance Sheet of respondent, dated July 12, 1956, from the $5,900,000.00, supposedly the value of the 8,000,000 shares of SAN JOSE OIL, the sum of $5,100,000.00 was deducted, corresponding to the alleged difference between the "value" of the said shares and the subscription price thereof which is $800,000.00 (at $0.10 per share). From this $800,000.00, the subscription price of the SAN JOSE OIL shares, the amount of $319,702.03 was deducted, as allegedly unpaid subscription price, thereby giving a difference of $480,297.97, which was placed as the amount allegedly paid in on the subscription price of the 8,000,000 SAN JOSE OIL shares. Then, by adding thereto the note receivable from OIL INVESTMENTS, for $250,000.00 (part-consideration for the 16,000,000 SAN JOSE PETROLEUM shares), and the sum of $6,516.21, as deferred expenses, SAN JOSE PETROLEUM appeared to have assets in the sum of $736,814.18.

These figures are highly questionable. Take the item $5,900,000.00 the valuation placed on the 8,000,000 shares of SAN JOSE OIL. There appears no basis for such valuation other than belief by the board of directors of respondent that "should

San Jose Oil Company be granted the bulk of the concessions applied for upon reasonable terms, that it would have a reasonable value of approximately $10,000,000." 10 Then, of this amount, the subscription price of $800,000.00 was deducted and called it "difference between the (above) valuation and the subscription price for the 8,000,000 shares." Of this $800,000.00 subscription price, they deducted the sum of $480,297.97 and the difference was placed as the unpaid portion of the subscription price. In other words, it was made to appear that they paid in $480,297.97 for the 8,000,000 shares of SAN JOSE OIL. This amount ($480,297.97) was supposedly that $250,000.00 paid by OIL INVESMENTS for 7,500,000 shares of SAN JOSE OIL, embodied in the June 14 Agreement, and a sum of $230,297.97 the amount expended or advanced by OIL INVESTMENTS to SAN JOSE OIL. And yet, there is still an item among respondent's liabilities, for $230,297.97 appearing as note payable to Oil Investments, maturing in two (2) years at six percent (6%) per annum. 11 As far as it appears from the records, for the 16,000,000 shares at $0.35 per share issued to OIL INVESTMENTS, respondent SAN JOSE PETROLEUM received from OIL INVESTMENTS only the note for $250,000.00 plus the 8,000,000 shares of SAN JOSE OIL, with par value of $0.10 per share or a total of $1,050,000.00 — the only assets of the corporation. In other words, respondent actually lost $4,550,000.00, which was received by OIL INVESTMENTS.

But this is not all. Some of the provisions of the Articles of Incorporation of respondent SAN JOSE PETROLEUM are noteworthy; viz:

(1) the directors of the Company need not be shareholders;

(2) that in the meetings of the board of directors, any director may be represented and may vote through a proxy who also need not be a director or stockholder; and

(3) that no contract or transaction between the corporation and any other association or partnership will be affected, except in case of fraud, by the fact that any of the directors or officers of the corporation is interested in, or is a director or officer of, such other association or partnership, and that no such contract or transaction of the corporation with any other person or persons, firm, association or partnership shall be affected by the fact that any director or officer of the corporation is a party to or has an interest in, such contract or transaction, or has in anyway connected with such other person or persons, firm, association or partnership; and finally, that all and any of the persons who may become director or officer of the corporation shall be relieved from all responsibility for which they may otherwise be liable by reason of any contract entered into with the corporation, whether it be for his benefit or for the benefit of any other person, firm, association or partnership in which he may be interested.

These provisions are in direct opposition to our corporation law and corporate practices in this country. These provisions alone would outlaw any corporation locally organized or doing business in this jurisdiction. Consider the unique and unusual provision that no contract or transaction between the company and any other association or corporation shall be affected except in case of fraud, by the fact that any of the directors or officers of the company may be interested in or are directors or officers of such other association or corporation; and that none of such contracts or transactions of this company with any person or persons, firms, associations or corporations shall be affected by the fact that any director or officer of this company is a party to or has an interest in such contract or transaction or has any connection with such person or persons, firms associations or corporations; and that any and all persons who may become directors or officers of this company are hereby relieved of all responsibility which they would otherwise incur by reason of any contract entered into which this company either for their own benefit, or for the benefit of any person, firm, association or corporation in which they may be interested.

89

The impact of these provisions upon the traditional judiciary relationship between the directors and the stockholders of a corporation is too obvious to escape notice by those who are called upon to protect the interest of investors. The directors and officers of the company can do anything, short of actual fraud, with the affairs of the corporation even to benefit themselves directly or other persons or entities in which they are interested, and with immunity because of the advance condonation or relief from responsibility by reason of such acts. This and the other provision which authorizes the election of non-stockholders as directors, completely disassociate the stockholders from the government and management of the business in which they have invested.

To cap it all on April 17, 1957, admittedly to assure continuity of the management and stability of SAN JOSE PETROLEUM, OIL INVESTMENTS, as holder of the only subscribed stock of the former corporation and acting "on behalf of all future holders of voting trust certificates," entered into a voting trust agreement12 with James L. Buckley and Austin E. Taylor, whereby said Trustees were given authority to vote the shares represented by the outstanding trust certificates (including those that may henceforth be issued) in the following manner:

(a) At all elections of directors, the Trustees will designate a suitable proxy or proxies to vote for the election of directors designated by the Trustees in their own discretion, having in mind the best interests of the holders of the voting trust certificates, it being understood that any and all of the Trustees shall be eligible for election as directors;

(b) On any proposition for removal of a director, the Trustees shall designate a suitable proxy or proxies to vote for or against such proposition as the Trustees in their own discretion may determine, having in mind the best interest of the holders of the voting trust certificates;

(c) With respect to all other matters arising at any meeting of stockholders, the Trustees will instruct such proxy or proxies attending such meetings to vote the shares of stock held by the Trustees in accordance with the written instructions of each holder of voting trust certificates. (Emphasis supplied.)

It was also therein provided that the said Agreement shall be binding upon the parties thereto, their successors, and upon all holders of voting trust certificates.

And these are the voting trust certificates that are offered to investors as authorized by Security and Exchange Commissioner. It can not be doubted that the sale of respondent's securities would, to say the least, work or tend to work fraud to Philippine investors.

FOR ALL THE FOREGOING CONSIDERATIONS, the motion of respondent to dismiss this appeal, is denied and the orders of the Securities and Exchange Commissioner, allowing the registration of Respondent's securities and licensing their sale in the Philippines are hereby set aside. The case is remanded to the Securities and Exchange Commission for appropriate action in consonance with this decision. With costs. Let a copy of this decision be furnished the Solicitor General for whatever action he may deem advisable to take in the premises. So ordered.

90

G.R. No. 172671               April 16, 2009

MARISSA R. UNCHUAN, Petitioner, vs.ANTONIO J.P. LOZADA, ANITA LOZADA and THE REGISTER OF DEEDS OF CEBU CITY, Respondents.

D E C I S I O N

QUISUMBING, J.:

For review are the Decision1 dated February 23, 2006 and Resolution2 dated April 12, 2006 of the Court of Appeals in CA-G.R. CV. No. 73829. The appellate court had affirmed with modification the Order3 of the Regional Trial Court (RTC) of Cebu City, Branch 10 reinstating its Decision4 dated June 9, 1997.

The facts of the case are as follows:

Sisters Anita Lozada Slaughter and Peregrina Lozada Saribay were the registered co-owners of Lot Nos. 898-A-3 and 898-A-4 covered by Transfer Certificates of Title (TCT) Nos. 532585 and 532576 in Cebu City.

The sisters, who were based in the United States, sold the lots to their nephew Antonio J.P. Lozada (Antonio) under a Deed of Sale7 dated March 11, 1994. Armed with a Special Power of Attorney8 from Anita, Peregrina went to the house of their brother, Dr. Antonio Lozada (Dr. Lozada), located at 4356 Faculty Avenue, Long Beach California.9 Dr. Lozada agreed to advance the purchase price of US$367,000 or P10,000,000 for Antonio, his nephew. The Deed of Sale was later notarized and authenticated at the Philippine Consul’s Office. Dr. Lozada then forwarded the deed, special power of attorney, and owners’ copies of the titles to Antonio in the Philippines. Upon receipt of said documents, the latter recorded the sale with the Register of Deeds of Cebu. Accordingly, TCT Nos. 12832210 and 12832311 were issued in the name of Antonio Lozada.

Pending registration of the deed, petitioner Marissa R. Unchuan caused the annotation of an adverse claim on the lots. Marissa claimed that Anita donated an undivided share in the lots to her under an unregistered Deed of Donation12 dated February 4, 1987.

Antonio and Anita brought a case against Marissa for quieting of title with application for preliminary injunction and restraining order. Marissa for her part, filed an action to declare the Deed of Sale void and to cancel TCT Nos. 128322 and 128323. On motion, the cases were consolidated and tried jointly.

At the trial, respondents presented a notarized and duly authenticated sworn statement, and a videotape where Anita denied having donated land in favor of Marissa. Dr. Lozada testified that he agreed to advance payment for Antonio in preparation for their plan to form a corporation. The lots are to be eventually infused in the capitalization of Damasa Corporation, where he and Antonio are to have 40% and 60% stake, respectively. Meanwhile, Lourdes G. Vicencio, a witness for respondents confirmed that she had been renting the ground floor of Anita’s house since 1983, and tendering rentals to Antonio.

For her part, Marissa testified that she accompanied Anita to the office of Atty. Cresencio Tomakin for the signing of the Deed of Donation. She allegedly kept it in a safety deposit box but continued to funnel monthly rentals to Peregrina’s account.

A witness for petitioner, one Dr. Cecilia Fuentes, testified on Peregrina’s medical records. According to her interpretation of said records, it was physically impossible for Peregrina to have signed the Deed of Sale on March 11, 1994, when she was reported to be suffering from edema. Peregrina died on April 4, 1994.

In a Decision dated June 9, 1997, RTC Judge Leonardo B. Cañares disposed of the consolidated cases as follows:

WHEREFORE, judgment is hereby rendered in Civil Case No. CEB-16145, to wit:

1. Plaintiff Antonio J.P. Lozada is declared the absolute owner of the properties in question;

2. The Deed of Donation (Exh. "9") is declared null and void, and Defendant Marissa R. Unchuan is directed to surrender the original thereof to the Court for cancellation;

3. The Register of Deeds of Cebu City is ordered to cancel the annotations of the Affidavit of Adverse Claim of defendant Marissa R. Unchuan on TCT Nos. 53257 and 53258 and on such all other certificates of title issued in lieu of the aforementioned certificates of title;

4. Defendant Marissa R. Unchuan is ordered to pay Antonio J.P. Lozada and Anita Lozada Slaughter the sum of P100,000.00 as moral damages; exemplary damages of P50,000.00; P50,000.00 for litigation expenses and attorney’s fees of P50,000.00; and

5. The counterclaims of defendant Marissa R. Unchuan [are] DISMISSED.

In Civil Case No. CEB-16159, the complaint is hereby DISMISSED.

In both cases, Marissa R. Unchuan is ordered to pay the costs of suit.

SO ORDERED.13

On motion for reconsideration by petitioner, the RTC of Cebu City, Branch 10, with Hon. Jesus S. dela Peña as Acting Judge, issued an Order14 dated April 5, 1999. Said order declared the Deed of Sale void, ordered the cancellation of the new TCTs in Antonio’s name, and directed Antonio to pay Marissa P200,000 as moral damages, P100,000 as exemplary damages, P100,000 attorney’s fees and P50,000 for expenses of litigation. The trial court also declared the Deed of Donation in favor of Marissa valid. The RTC gave credence to the medical records of Peregrina.

Respondents moved for reconsideration. On July 6, 2000, now with Hon. Soliver C. Peras, as Presiding Judge, the RTC of Cebu City, Branch 10, reinstated the Decision dated June 9, 1997, but with the modification that the award of damages, litigation expenses and attorney’s fees were disallowed.

Petitioner appealed to the Court of Appeals. On February 23, 2006 the appellate court affirmed with modification the July 6, 2000 Order of the RTC. It, however, restored the award of P50,000 attorney’s fees and P50,000 litigation expenses to respondents.

Thus, the instant petition which raises the following issues:

I.

WHETHER THE COURT OF APPEALS ERRED AND VIOLATED PETITIONER’S RIGHT TO DUE PROCESS WHEN IT FAILED TO RESOLVE PETITIONER’S THIRD ASSIGNED ERROR.

II.

WHETHER THE HONORABLE SUPREME COURT MAY AND SHOULD REVIEW THE CONFLICTING FACTUAL FINDINGS OF THE HONORABLE REGIONAL TRIAL COURT IN ITS OWN DECISION AND RESOLUTIONS ON THE MOTIONS FOR RECONSIDERATION, AND THAT OF THE HONORABLE COURT OF APPEALS.

91

III.

WHETHER THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER’S CASE IS BARRED BY LACHES.

IV.

WHETHER THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE DEED OF DONATION EXECUTED IN FAVOR OF PETITIONER IS VOID.

V.

WHETHER THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT ANITA LOZADA’S VIDEOTAPED STATEMENT IS HEARSAY.15

Simply stated, the issues in this appeal are: (1) Whether the Court of Appeals erred in upholding the Decision of the RTC which declared Antonio J.P. Lozada the absolute owner of the questioned properties; (2) Whether the Court of Appeals violated petitioner’s right to due process; and (3) Whether petitioner’s case is barred by laches.

Petitioner contends that the appellate court violated her right to due process when it did not rule on the validity of the sale between the sisters Lozada and their nephew, Antonio. Marissa finds it anomalous that Dr. Lozada, an American citizen, had paid the lots for Antonio. Thus, she accuses the latter of being a mere dummy of the former. Petitioner begs the Court to review the conflicting factual findings of the trial and appellate courts on Peregrina’s medical condition on March 11, 1994 and Dr. Lozada’s financial capacity to advance payment for Antonio. Likewise, petitioner assails the ruling of the Court of Appeals which nullified the donation in her favor and declared her case barred by laches. Petitioner finally challenges the admissibility of the videotaped statement of Anita who was not presented as a witness.

On their part, respondents pray for the dismissal of the petition for petitioner’s failure to furnish the Register of Deeds of Cebu City with a copy thereof in violation of Sections 316 and 4,17 Rule 45 of the Rules. In addition, they aver that Peregrina’s unauthenticated medical records were merely falsified to make it appear that she was confined in the hospital on the day of the sale. Further, respondents question the credibility of Dr. Fuentes who was neither presented in court as an expert witness18 nor professionally involved in Peregrina’s medical care.

Further, respondents impugn the validity of the Deed of Donation in favor of Marissa. They assert that the Court of Appeals did not violate petitioner’s right to due process inasmuch as it resolved collectively all the factual and legal issues on the validity of the sale.

Faithful adherence to Section 14,19 Article VIII of the 1987 Constitution is indisputably a paramount component of due process and fair play. The parties to a litigation should be informed of how it was decided, with an explanation of the factual and legal reasons that led to the conclusions of the court.20

In the assailed Decision, the Court of Appeals reiterates the rule that a notarized and authenticated deed of sale enjoys the presumption of regularity, and is admissible without further proof of due execution. On the basis thereof, it declared Antonio a buyer in good faith and for value, despite petitioner’s contention that the sale violates public policy. While it is a part of the right of appellant to urge that the decision should directly meet the issues presented for resolution,21 mere failure by the appellate court to specify in its decision all contentious issues raised by the appellant and the reasons for refusing to believe appellant’s contentions is not sufficient to hold the appellate court’s decision contrary to the requirements of the law22 and the Constitution.23 So long as the decision of the Court of Appeals contains the necessary findings of facts to warrant its conclusions, we cannot declare said court in error if it withheld "any specific findings of fact with respect to the evidence for the defense."24 We

will abide by the legal presumption that official duty has been regularly performed,25 and all matters within an issue in a case were laid down before the court and were passed upon by it.26

In this case, we find nothing to show that the sale between the sisters Lozada and their nephew Antonio violated the public policy prohibiting aliens from owning lands in the Philippines. Even as Dr. Lozada advanced the money for the payment of Antonio’s share, at no point were the lots registered in Dr. Lozada’s name. Nor was it contemplated that the lots be under his control for they are actually to be included as capital of Damasa Corporation. According to their agreement, Antonio and Dr. Lozada are to hold 60% and 40% of the shares in said corporation, respectively. Under Republic Act No. 7042,27 particularly Section 3,28 a corporation organized under the laws of the Philippines of which at least 60% of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines, is considered a Philippine National. As such, the corporation may acquire disposable lands in the Philippines. Neither did petitioner present proof to belie Antonio’s capacity to pay for the lots subjects of this case.

Petitioner, likewise, calls on the Court to ascertain Peregrina’s physical ability to execute the Deed of Sale on March 11, 1994. This essentially necessitates a calibration of facts, which is not the function of this Court.29Nevertheless, we have sifted through the Decisions of the RTC and the Court of Appeals but found no reason to overturn their factual findings. Both the trial court and appellate court noted the lack of substantial evidence to establish total impossibility for Peregrina to execute the Deed of Sale.

In support of its contentions, petitioner submits a copy of Peregrina’s medical records to show that she was confined at the Martin Luther Hospital from February 27, 1994 until she died on April 4, 1994. However, a Certification30 from Randy E. Rice, Manager for the Health Information Management of the hospital undermines the authenticity of said medical records. In the certification, Rice denied having certified or having mailed copies of Peregrina’s medical records to the Philippines. As a rule, a document to be admissible in evidence, should be previously authenticated, that is, its due execution or genuineness should be first shown.31 Accordingly, the unauthenticated medical records were excluded from the evidence. Even assuming that Peregrina was confined in the cited hospital, the Deed of Sale was executed on March 11, 1994, a month before Peregrina reportedly succumbed to Hepato Renal Failure caused by Septicemia due to Myflodysplastic Syndrome.32 Nothing in the records appears to show that Peregrina was so incapacitated as to prevent her from executing the Deed of Sale. Quite the contrary, the records reveal that close to the date of the sale, specifically on March 9, 1994, Peregrina was even able to issue checks33 to pay for her attorney’s professional fees and her own hospital bills. At no point in the course of the trial did petitioner dispute this revelation.

Now, as to the validity of the donation, the provision of Article 749 of the Civil Code is in point:

art. 749. In order that the donation of an immovable may be valid, it must be made in a public document, specifying therein the property donated and the value of the charges which the donee must satisfy.

The acceptance may be made in the same deed of donation or in a separate public document, but it shall not take effect unless it is done during the lifetime of the donor.

If the acceptance is made in a separate instrument, the donor shall be notified thereof in an authentic form, and this step shall be noted in both instruments.

When the law requires that a contract be in some form in order that it may be valid or enforceable, or that a contract be proved in a certain way, that requirement is absolute and indispensable.34 Here, the Deed of Donation does not appear to be duly notarized. In page three of the deed, the stamped name of Cresencio Tomakin appears above the words Notary Public until December 31, 1983 but below it were the typewritten words

92

Notary Public until December 31, 1987. A closer examination of the document further reveals that the number 7 in 1987and Series of 1987 were merely superimposed.35 This was confirmed by petitioner’s nephew Richard Unchuan who testified that he saw petitioner’s husband write 7 over 1983 to make it appear that the deed was notarized in 1987. Moreover, a Certification36 from Clerk of Court Jeoffrey S. Joaquino of the Notarial Records Division disclosed that the Deed of Donation purportedly identified in Book No. 4, Document No. 48, and Page No. 35 Series of 1987 was not reported and filed with said office. Pertinent to this, the Rules require a party producing a document as genuine which has been altered and appears to have been altered after its execution, in a part material to the question in dispute, to account for the alteration. He may show that the alteration was made by another, without his concurrence, or was made with the consent of the parties affected by it, or was otherwise properly or innocently made, or that the alteration did not change the meaning or language of the instrument. If he fails to do that, the document shall, as in this case, not be admissible in evidence.371avvphi1

Remarkably, the lands described in the Deed of Donation are covered by TCT Nos. 7364538 and 73646,39 both of which had been previously cancelled by an Order40 dated April 8, 1981 in LRC Record No. 5988. We find it equally puzzling that on August 10, 1987, or six months after Anita supposedly donated her undivided share in the lots to petitioner, the Unchuan Development Corporation, which was represented by petitioner’s husband, filed suit to compel the Lozada sisters to surrender their titles by virtue of a sale. The sum of all the circumstances in this case calls for no other conclusion than that the Deed of Donation allegedly in favor of petitioner is void. Having said that, we deem it unnecessary to rule on the issue of laches as the execution of the deed created no right from which to reckon delay in making any claim of rights under the instrument.

Finally, we note that petitioner faults the appellate court for not excluding the videotaped statement of Anita as hearsay evidence. Evidence is hearsay when its probative force depends, in whole or in part, on the competency and credibility of some persons other than the witness by whom it is sought to be produced. There are three reasons for excluding hearsay evidence: (1) absence of cross-examination; (2) absence of demeanor evidence; and (3) absence of oath.41 It is a hornbook doctrine that an affidavit is merely hearsay evidence where its maker did not take the witness stand.42 Verily, the sworn statement of Anita was of this kind because she did not appear in court to affirm her averments therein. Yet, a more circumspect examination of our rules of exclusion will show that they do not cover admissions of a party;43 the videotaped statement of Anita appears to belong to this class. Section 26 of Rule 130 provides that "the act, declaration or omission of a party as to a relevant fact may be given in evidence against him. It has long been settled that these admissions are admissible even if they are hearsay.44Indeed, there is a vital distinction between admissions against interest and declaration against interest. Admissions against interest are those made by a party to a litigation or by one in privity with or identified in legal interest with such party, and are admissible whether or not the declarant is available as a witness. Declaration against interest are those made by a person who is neither a party nor in privity with a party to the suit, are secondary evidence and constitute an exception to the hearsay rule. They are admissible only when the declarant is unavailable as a witness.45 Thus, a man’s acts, conduct, and declaration, wherever made, if voluntary, are admissible against him, for the reason that it is fair to presume that they correspond with the truth, and it is his fault if they do not.46However, as a further qualification, object evidence, such as the videotape in this case, must be authenticated by a special testimony showing that it was a faithful reproduction.47 Lacking this, we are constrained to exclude as evidence the videotaped statement of Anita. Even so, this does not detract from our conclusion concerning petitioner’s failure to prove, by preponderant evidence, any right to the lands subject of this case.

Anent the award of moral damages in favor of respondents, we find no factual and legal basis therefor. Moral damages cannot be awarded in the absence of a wrongful act or omission or fraud or bad faith. When the action is filed in good faith there should be no

penalty on the right to litigate. One may have erred, but error alone is not a ground for moral damages.48 The award of moral damages must be solidly anchored on a definite showing that respondents actually experienced emotional and mental sufferings. Mere allegations do not suffice; they must be substantiated by clear and convincing proof.49 As exemplary damages can be awarded only after the claimant has shown entitlement to moral damages,50 neither can it be granted in this case.

WHEREFORE, the instant petition is DENIED. The Decision dated February 23, 2006, and Resolution dated April 12, 2006 of the Court of Appeals in CA-G.R. CV. No. 73829 are AFFIRMED with MODIFICATION. The awards of moral damages and exemplary damages in favor of respondents are deleted. No pronouncement as to costs.

SO ORDERED.