Foreign Ownership in Public Utilities: The High Court Defines "Capital"

The central question was whether the SEC committed grave abuse of discretion in issuing the circular. The petitioners argued that the SEC's interpretation would allow circumvention of the 60-40 rule by enabling corporations to issue different classes of shares with varying rights, potentially giving foreigners greater economic benefits while technically complying with the voting share requirement.

The Ruling: Voting Shares Define Control

The Court dismissed the petitions, affirming the SEC's circular as consistent with the Gamboa ruling. The Court held that "capital" in Section 11, Article XII of the Constitution refers only to shares of stock entitled to vote in the election of directors. This includes common shares and any preferred shares that carry voting rights, but excludes non-voting preferred shares.

The Court emphasized that the constitutional requirement is rooted in the principle that Filipinos should control public utilities. Since voting shares equate to control, the 60-40 requirement ensures Filipino citizens hold at least 60% of the voting stock, thereby maintaining effective control over corporate decisions.

The Court also rejected the petitioners' hypothetical scenarios as speculative, noting that the case lacked an actual controversy ripe for adjudication. The petitioners failed to demonstrate direct injury from the SEC circular, and their claims of standing as citizens, taxpayers, or subscribers were insufficient.

The Procedural Dismissal

Beyond the substantive issue, the Court dismissed the petitions on procedural grounds. The petitioners lacked locus standi because they could not show personal and substantial injury. The case also violated the doctrine of hierarchy of courts, as it should have been filed first with lower courts. Additionally, the petitioners failed to implead indispensable parties—other public utility corporations that would be directly affected by the ruling.

Practical Takeaways

• "Capital" means voting shares. For public utilities, the 60-40 Filipino ownership requirement applies to shares entitled to vote in electing directors, not all outstanding shares.
• Control is the key principle. The constitutional rule aims to keep control of public utilities in Filipino hands, which is exercised through voting rights.
• Non-voting preferred shares are excluded. These shares do not count toward the ownership requirement unless they carry voting rights.
• Compliance requires both legal and beneficial ownership. Mere legal title is insufficient; Filipinos must have full beneficial ownership of the required percentage.
• Procedural rules matter. Challenges to SEC issuances must follow proper procedure, including standing, ripeness, and the hierarchy of courts.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.