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SEC has already amended the Constitution!

Through a mere memorandum, the Securities and Exchange Commission has, in effect, lifted in 2013 the constitutional provision that foreign equity cannot exceed 40 percent in utility firms.

Philippine Long Distance Telephone Co. (PLDT), and therefore, its cell phone subsidiary Smart, is 54 percent foreign-owned, mainly by the Indonesian Salim conglomerate’s First Pacific and the Japanese Nippon Telephone and Telegraph’s firms. Its competitor Globe Telecoms is 47 percent owned by Singapore Telecoms, with the Ayalas, the firm’s face, owning only 30 percent.

Which one is correct? Or who has the authority to define?

But based on the SEC’s memorandum, a bureaucratic sleight-of-hand, the two firms are considered majority controlled by Filipinos and are complying with the constitutional requirements.

How did the SEC manage to trash our Constitution? Quite ironically, or maybe even in a defiant pose, it was through its response to the Supreme Court’s earth-shaking decision in June 28, 2011 (reaffirmed June 2012) on a petition made by the late Wilson Gamboa in 2007.

The SEC changed the definition of “capital” in order to dilute foreigners’ shares.

The petition had claimed that that the purchase of the firm’s controlling shares by Salim and Japanese companies starting in 1999, and foreign firms’ holdings of its shares in the stock market, had resulted in an ownership structure that violated the constitutional limits on foreign equity in utility firms.

The Court itself pointed out that based on PLDT’s data itself (for 2010), 64 percent of the firms’ common shares were held by foreigners while Filipinos owned only 36 percent, thus breaching the Constitution’s 40 percent limit.

PLDT, however, argued that foreign ownership must be computed as a percentage of all kinds of shares, both common and preferred shares.

PLDT claimed that including preferred shares, Filipinos had 86 percent of total shares, while foreigners had only 14 percent.

PLDT’s arguments were hogwash, and everyone in the corporate and legal world knew it.

Nowhere in the world are preferred shares included in computing an entity’s control of a firm. From its invention in the US at the turn of the late 19th century, a preferred share is a bit of a misnomer, and is essentially a type of debt, reflected in the fact that it is assured of a fixed dividend, unlike dividends of common shares, which are based on the firm’s profitability. Preferred shares are almost by definition non-voting, that is, its owners have absolutely no say in running the corporation.

“Capital” means common shares

The Court threw out PLDT’s arguments and affirmed what everyone in the country and the world believe how corporate control is determined.

The court declared: “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 non­voting preferred shares).”

The Court ordered: “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.” (All caps font in original decision.).”

But what does the SEC do?

It issued Memorandum Circular No. 8 May 22, 2013, signed solely by its chair Tersita Herbosa — who was formerly a partner at ACCRA law, which has been PLDT’s law firm for decades. The most important part of the memorandum reads:

“For purposes of determining compliance (with the constitutional ownership requirement), the required percentage of Filipino ownership shall be applied to BOTH (a) the total number of outstanding shares of stock entitled to vote in the election of directors; AND (b) the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors.”

The highest court of the land very clearly pointed out, and elucidated in most of its decision, that “capital,” when used in computing corporate control, should mean only common shares.

Yet, the SEC ignores that decision, and says that the percentage ownership by foreigners is to be computed using the “total number of outstanding shares of stock, whether or not entitled to vote,” which includes preferred stocks.

A mere SEC circular, in effect, lifted the 40 percent constitutional ban and has allowed PLDT and Globe, both utility companies, to get away with being foreign controlled.

According to Globe’s own data in its November 2014 report to the Philippines Exchange, foreigners own 85.5 million common shares, or 64.4 percent of the total, which is clearly over the 40 percent limit provided in the Constitution and affirmed by the Supreme Court.

(According to Globe’s own list of “Top 100 stockholders,” Singapore Telecom International PTE, Ltd. is its biggest owner with 47.2 percent of the total. Second is Ayala Corp., with 30.23 percent. A further 17.4 percent is held by foreigners, registered with the PCD Nominee Corp.)
However, these 85.5 million common shares make up just 27.2 percent of the total 311 million common and preferred shares, according to the SEC ruling that Globe follows.

PLDT: 54 percent foreign-owned

In the case of PLDT, based on its latest report (April 2014) to the SEC, 54 percent of its common shares are owned by foreigners, clearly in violation of the Constitutional 40 percent limit.

However, PLDT claims foreigners own only 17.4 percent, using the SEC’s memorandum that the percentage is on the basis of total common and preferred shares, which total 660 million.

According to PLDT’s list of its largest stockholders, the Salim-controlled firms Philippine Telecommunications Investment and Metro Pacific Resources have 12 percent and 10 percent, respectively, while the Japanese companies NTT DoCoMo and NTT Communications Corp. together own 16.4 percent. Foreigners, through JP Morgan Asset Holdings in Hong Hong Kong, and the PCD Nominee Corp., hold 20 percent.

PLDT even made an important move in October 2012, which it thought was a clever one that would convince the Supreme Court that it was complying with the 40 percent constitutional limit. It issued 150 million new preferred shares to a strange entity, BTF Holdings – funded entirely by the firms’ pension fund, the Beneficial Trust Fund.

What a sham. It calculates that the shares given to BTF Holdings, which would dilute total outstanding shares, made it compliant with the Supreme Court’s definition of control, as those new shares were given voting rights. But management controls BTF itself, with three out of its five-man board of trustees designated by the PLDT board.

The basic law of the land, the Constitution and the only entity authorized to interpret it, the Supreme Court, say one thing how that foreigners’ extent of control of a firm is defined. The regulatory body, the SEC, tells the firms it regulates to compute it differently, in this case favoring PLDT and Globe’s current ownership structure, which is tightly controlled by foreigners.

What kind of rule of law do we have?

Economists have actually invented a new term for a similar phenomenon in developing countries: Regulatory Capture — elites managing to capture a regulatory body to make it serve its interests, not the nation’s.

I realize many think that foreigners’ control of utility firms does not matter, just as long as they provide efficient services and pay the right taxes.

Two things, though. First, don’t we care anymore about our Constitution and the rule of law, when foreigners trash them?

And an important second point: These foreign firms aren’t really bringing capital in. They are actually bringing capital out. That, on Monday.

PLDT and Globe, however, haven’t really gotten away with it totally. The lawyer who took up Gamboa’s cause, Jose Roy, filed a petition with the Supreme Court right after the SEC issued its memorandum in 2013, claiming that it violated the High Court’s rulings.

The response filed by PLDT has been mainly to claim that if a Court ruling against it could result in an economic chaos, given the firm’s size and the foreign funds that would be spooked. “Too big to be ruled constitutional,” PLDT is basically saying.

And I believe that the Supreme Court, unlike the SEC, hasn’t been, and won’t be, captured.