Roy v. Herbosa

G.R. No. 207246November 22, 2016Caguioa, J.En Banc

The Court, with finality, upheld SEC-MC No. 8: the 60% Filipino capital requirement for public utilities applies to the total voting shares AND the total outstanding capital stock, not separately to each class of shares.

Doctrine

For compliance with the 60% Filipino capital requirement for public utilities, the required percentage must be applied to both (a) the total number of outstanding shares entitled to vote in the election of directors and (b) the total number of outstanding shares of stock, whether or not entitled to vote — not separately to each class of shares. Filipino ownership must consist of full beneficial ownership (voting power and/or investment power over the specific stock) coupled with voting rights; dividends accruing to a stock are not determinative of its beneficial ownership.

Facts

After Gamboa v. Teves defined "capital" in Section 11, Article XII of the Constitution, the SEC issued Memorandum Circular No. 8, Series of 2013, requiring that the 60% Filipino ownership be applied to both (a) the total outstanding shares entitled to vote for directors and (b) the total outstanding capital stock, whether voting or not. Jose M. Roy III filed a Rule 65 petition assailing SEC-MC No. 8 for failing to implement Gamboa, arguing that the 60-40 rule must apply separately to each class of shares. The Court's November 22, 2016 Decision dismissed the petition on both procedural and substantive grounds, and Roy moved for reconsideration.

Issues and how the Court ruled

Whether the SEC committed grave abuse of discretion in issuing SEC-MC No. 8, which applies the 60% Filipino ownership requirement to the total voting shares and to the total outstanding capital stock, rather than to each class of shares.

No. SEC-MC No. 8 was issued in fealty to the Gamboa Decision, whose fallo requires that full and legal beneficial ownership of 60% of the outstanding capital stock, coupled with 60% of the voting rights, rest in Filipino hands — precisely what the Circular's two-tiered test provides. The pronouncement in the Gamboa Resolution that the 60-40 rule must apply uniformly and across the board to each class of shares is obiter dictum; the definite and unequivocal fallo of the Gamboa Decision controls over it, and the dispositive portion was in no way modified by the Resolution.

What constitutes 'full beneficial ownership' of stock for purposes of the Filipino equity requirement, and whether dividends determine it.

Beneficial ownership, as defined in the SRC-IRR and consonant with the FIA-IRR's 'full beneficial ownership,' turns on whether a person has voting power (power to vote or direct the voting) and/or investment power (power to dispose or direct disposition) over a specific stock. If a Filipino holds either or both over a specific stock, that stock counts toward the 60% requirement, and jus fruendi necessarily follows. Dividends accruing to a particular stock are not determinative of beneficial ownership, since dividend declaration depends on unrestricted retained earnings and corporate needs.

Whether petitioner established locus standi, observed the hierarchy of courts, and impleaded all indispensable parties.

No. The petition being a new one and not a continuation of the already final Gamboa case, movant bore the burden of justifying his own standing; invoking transcendental importance does not ipso facto confer locus standi. The petition also violated the hierarchy of courts and failed to implead indispensable parties — the PSE, SHAREPHIL, and all other public utility corporations and their shareholders whose franchises and property would be affected — who would otherwise be deprived of property without due process.

Ratio

What the Constitution requires under Section 11, Article XII is full and legal beneficial ownership of 60% of the outstanding capital stock coupled with 60% of the voting rights in Filipino hands; since SEC-MC No. 8 applies the Filipino percentage to both the voting shares and the total outstanding capital stock, it conforms to the controlling fallo of Gamboa, and the contrary 'each class of shares' passage in the Gamboa Resolution, not being carried into the dispositive portion, is obiter dictum.

Remember it as

💡 Roy's two buckets, not every basket: 60% of the voting shares AND 60% of all shares — the Gamboa 'each class' line was just obiter.

From the Supreme Court's own index

Public utility entitiesBeneficial owner or beneficial ownership of stock, explained.
Public utility entitiesCitizenship requirement; the full and legal beneficial ownership of sixty percent of the outstanding capital stock, coupled with sixty percent of the voting rights must rest in the hands of Filipino nationals.
Public utility entitiesCitizenship requirement; the purpose thereof is to prevent aliens from assuming control of public utilities, which may be inimical to the national interest.
National Internal Revenue Code(NIRC) OF 1997, AS AMENDED BY R.A. NO. 10351
Beneficial ownershipBeneficial ownership defined in the Implementing Rules and Regulations of the Securities Regulation Code (SRC-IRR) consistent in FIA-IRR, not mere legal title but full beneficial ownership of the share; definition understood only in determining the respective nationalities of the “outstanding capital stock of a public utility corporation.”
CapitalThe clear and unequivocal definition of “capital” in Gamboa has attained finality.
V oting control testIntention to apply voting control test and beneficial ownership test not mentioned in reference to “each class of shares”; Gamboa decision held that preferred shares are to be factored in only if they are entitled to vote in the election of directors.
V oting control testV oting control test or controlling interest requirement incorporated in Sec. 2 of SEC-MC No. 8; beneficial ownership test or full beneficial ownership of stocks requirement in the Foreign Investments Act of 1991 (FIA) not expressly mentioned therein will not render it invalid. FORUM SHOPPING
Judicial reviewA question is ripe for adjudication when the act being challenged has a direct adverse effect on the individual challenging it.
Judicial reviewThe Court may exercise its power of judicial review and take cognizance of a case when the following specific requisites are met: (1) there is an actual case or controversy calling for the exercise of judicial power; (2) the petitioner has standing to question the validity of the subject act or issuance, i.e., he has a personal and substantial interest in the case that he has sustained, or will sustain, direct injury as a result of the enforcement of the act or issuance; (3) the question of constitutionality is raised at the earliest opportunity; and (4) the constitutional question is the very lis mota of the case.
Indispensable partiesDefinition of capital declared in the Gamboa Decision was not modified in the Gamboa Resolution. — Operation of public utility 60% of the capital owned by Filipinos; word “capital” defined in the case of Gamboa vs. Teves .
Indispensable partiesUnder Sec. 3, Rule 7 of the Rules of Court, an indispensable party is a party-in-interest without whom there can be no final determination of an action; discussed.

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