The two percent threshold prescribed in Section 11(b) of R.A. No. 7941 is unconstitutional for the purpose of distributing additional party-list seats, as it makes it mathematically impossible to achieve the maximum number of available party-list seats and frustrates the constitutional mandate for proportional representation. A new four-step procedure for allocating party-list seats was established: (1) Rank parties from highest to lowest votes; (2) Parties receiving at least 2% of total votes get one guaranteed seat; (3) Additional seats are distributed proportionally based on total votes until all available seats are filled, disregarding fractional seats; (4) Each party is limited to a maximum of three seats.

The case arose from the May 14, 2007 national elections, specifically concerning the allocation of seats for party-list representatives in the House of Representatives. The COMELEC, acting as the National Board of Canvassers (NBC), applied the formula established in Veterans Federation Party v. COMELEC (the "Panganiban formula" or "Veterans formula") to determine the winners and allocate seats. This application led to dissatisfaction among several party-list groups who believed the formula was unconstitutional and did not allow for the full 20% allocation of seats for party-list representatives as mandated by the Constitution.

• Following the May 14, 2007 elections, the COMELEC, as the National Board of Canvassers (NBC), canvassed 15,950,900 votes cast for 93 party-list organizations.
• BANAT filed a petition before the COMELEC (NBC No. 07-041 (PL)) asking for the proclamation of the full 20% of party-list representatives mandated by the Constitution, arguing against the application of the Veterans ruling (Panganiban formula).
• On July 9, 2007, the COMELEC promulgated NBC Resolution No. 07-60, partially proclaiming 13 party-list organizations as winners, each receiving one seat for obtaining at least 2% of the total party-list votes. It stated that additional seats would be determined later using the Veterans formula.
• Subsequently, COMELEC issued NBC Resolution No. 07-72, allocating additional seats. Buhay received 2 additional seats (total 3), while Bayan Muna, CIBAC, Gabriela, and APEC each received 1 additional seat (total 2 each). Other parties that met the 2% threshold received only one seat. This resulted in only a few parties getting more than one seat.
• On August 3, 2007, the COMELEC, in NBC Resolution No. 07-88, denied BANAT's petition (NBC No. 07-041 (PL)) as moot and academic, affirming its adherence to the Veterans formula.
• Bayan Muna, Abono, and A Teacher also questioned the COMELEC's use of the Veterans formula, arguing it violated the Constitution and R.A. No. 7941. Their motion for reconsideration before the NBC was denied.
• As of May 19, 2008, COMELEC had proclaimed a total of 15 party-list organizations, with a total of 21 seats filled using the Veterans formula. (Buhay-3; Bayan Muna, CIBAC, Gabriela, APEC - 2 each; A Teacher, Akbayan, Alagad, Butil, Coop-Natcco, Anak Pawis, ARC, Abono, AGAP, AMIN - 1 each). An Waray was also proclaimed with one seat.

• BANAT argued that the 20% allocation for party-list representatives in the Constitution is mandatory, not merely a ceiling.
• BANAT questioned the constitutionality of the 3-seat limit and the 2% threshold in Section 11(b) of R.A. No. 7941.
• BANAT proposed alternative formulas for seat allocation, one harmonizing Section 11(b) with Section 12 of R.A. No. 7941, and another assuming the 2% threshold is unconstitutional.
• Bayan Muna, A Teacher, and Abono argued that the COMELEC's First-Party Rule (derived from Veterans) violates the constitutional principle of proportional representation and R.A. No. 7941.
• Bayan Muna, et al., contended that the 2-4-6 formula for the first party and a different formula for other qualifying parties under the Veterans rule violate Section 11(b) of R.A. No. 7941 and the principle of proportional representation.
• Bayan Muna, et al., argued that the Veterans formula systematically prevents the filling of all party-list seats and does not factor in the total number of seats allotted for the party-list system.

• The COMELEC, through its resolutions, maintained that it was duty-bound to implement the Veterans ruling and its formula for allocating party-list seats.
• The COMELEC, in NBC Resolution No. 07-88, denied BANAT's petition for being moot, implying that the proclamations made under the Veterans formula were already in effect.
• The COMELEC's application of the Veterans formula involved a two-step process: first, determining parties that met the 2% threshold for one guaranteed seat, and second, allocating additional seats based on specific calculations for the "first party" and then for other qualified parties.

• Is the twenty percent allocation for party-list representatives provided in Section 5(2), Article VI of the Constitution mandatory or merely a ceiling?
• Is the three-seat limit provided in Section 11(b) of R.A. No. 7941 constitutional?
• Is the two percent threshold prescribed in Section 11(b) of R.A. No. 7941 to qualify for one seat constitutional?
• How shall the party-list representative seats be allocated?
• Does the Constitution prohibit major political parties from participating in the party-list elections? If not, can major political parties be barred from participating in the party-list elections?

• The twenty percent allocation for party-list representatives is a ceiling; party-list representatives cannot be more than 20% of the members of the House of Representatives. However, the Court cannot allow a provision in law (the 2% threshold for additional seats) that systematically prevents this ceiling from being filled. The number of party-list seats is determined by the formula: (Number of district representatives / .80) x .20 = Number of party-list seats. For the 14th Congress with 220 district representatives, this means 55 party-list seats.
• The three-seat limit in Section 11(b) of R.A. No. 7941 is constitutional. It is a valid statutory device to prevent any single party from dominating party-list elections.
• The two percent threshold in Section 11(b) of R.A. No. 7941 is constitutional for qualifying for one guaranteed seat. However, the continued operation of the two percent threshold for the distribution of additional seats is unconstitutional because it makes it mathematically impossible to achieve the maximum number of available party-list seats (e.g., 55 seats cannot be filled if a 2% threshold is required for each seat, as 50 x 2% = 100%).
• Party-list seats shall be allocated using the following four-step procedure:
  1. Parties, organizations, and coalitions shall be ranked from highest to lowest based on votes garnered.
  2. Parties receiving at least two percent (2%) of the total votes cast for the party-list system shall be entitled to one guaranteed seat each.
  3. Parties garnering a sufficient number of votes, according to the ranking in paragraph 1, shall be entitled to additional seats in proportion to their total number of votes until all additional seats are allocated. The guaranteed seats are deducted from the maximum seats reserved. The remaining available seats are distributed by first, multiplying the percentage of votes of each party by the remaining available seats (whole integer is the share). Second, assign one seat to parties next in rank until all seats are distributed. Fractional seats are disregarded.
  4. Each party, organization, or coalition shall be entitled to not more than three (3) seats.
• By a vote of 8-7, the Court decided to continue the ruling in Veterans disallowing major political parties from participating in the party-list elections, directly or indirectly. (The ponencia, however, argued that neither the Constitution nor R.A. No. 7941 prohibits major political parties from participating through sectoral wings, but this view did not prevail in the final voting on this specific issue).

• Proportional Representation — A principle in electoral systems where seats are allocated to political parties in proportion to the votes they receive. The Court held that the Veterans formula had flaws in its mathematical interpretation of "proportional representation" for additional seats, leading to the new formula. The new formula aims to better achieve proportional representation by allowing more parties to gain additional seats based on their vote share after the initial 2% threshold for a guaranteed seat, and by striking down the 2% threshold for additional seats.
• Two Percent Threshold (for guaranteed seat) — As per Section 11(b) of R.A. No. 7941, parties, organizations, and coalitions receiving at least two percent (2%) of the total votes cast for the party-list system shall be entitled to one seat each. The Court upheld this for the first or guaranteed seat.
• Unconstitutionality of Two Percent Threshold (for additional seats) — The Court declared the continued application of the two percent threshold for the distribution of additional seats as unconstitutional. It reasoned that this makes it mathematically impossible to fill the maximum number of available party-list seats (e.g., if 55 seats are available, 50 parties getting 2% each would only fill 50 seats, as 50 x 2% = 100% of votes). This frustrates the constitutional aim of broader representation up to the 20% ceiling.
• Three-Seat Limit — As per Section 11(b) of R.A. No. 7941, each party, organization, or coalition shall be entitled to not more than three (3) seats. The Court affirmed this as a valid statutory device to prevent any single party from dominating the party-list elections.
• 20% Allocation for Party-List Representatives (Constitutional Ceiling) — Section 5(2), Article VI of the Constitution states that party-list representatives shall constitute twenty per centum of the total number of representatives. The Court reiterated that this is a ceiling, not a mandatory number to be filled, but struck down statutory interpretations (like the 2% threshold for additional seats) that systematically prevent its attainment.
• Judicial Review — The power of the courts to determine the constitutionality of legislative and executive acts. The Court exercised this power by declaring a portion of Section 11(b) of R.A. No. 7941 unconstitutional as applied to additional seats.
• Statutory Construction — The process of interpreting and applying legislation. The Court re-interpreted R.A. No. 7941, particularly Section 11, to align it with the constitutional mandate of proportional representation and the 20% ceiling for party-list seats, departing from the interpretation in Veterans.

• "However, because the formula in Veterans has flaws in its mathematical interpretation of the term 'proportional representation,' this Court is compelled to revisit the formula for the allocation of additional seats to party-list organizations."
• "We rule that, in computing the allocation of additional seats, the continued operation of the two percent threshold for the distribution of the additional seats as found in the second clause of Section 11(b) of R.A. No. 7941 is unconstitutional."
• "The two percent threshold presents an unwarranted obstacle to the full implementation of Section 5(2), Article VI of the Constitution and prevents the attainment of 'the broadest possible representation of party, sectoral or group interests in the House of Representatives.'"
• "The 20% allocation of party-list representatives is merely a ceiling; party-list representatives cannot be more than 20% of the members of the House of Representatives. However, we cannot allow the continued existence of a provision in the law which will systematically prevent the constitutionally allocated 20% party-list representatives from being filled."
• "However, by a vote of 8-7, the Court decided to continue the ruling in Veterans disallowing major political parties from participating in the party-list elections, directly or indirectly."

• Veterans Federation Party v. COMELEC (396 Phil. 419 (2000)) — This was the controlling precedent for party-list seat allocation prior to BANAT. The BANAT decision revisited and modified the formula established in Veterans, particularly finding flaws in its interpretation of proportional representation and striking down the 2% threshold for additional seats which was implicitly upheld in Veterans. The BANAT court explicitly stated that the Veterans formula had flaws.
• Citizen's Battle Against Corruption (CIBAC) versus COMELEC — Cited as reiterating the Veterans ruling on the formula for additional seats, which the BANAT court found necessary to revisit.
• Ang Bagong Bayani-OFW Labor Party v. COMELEC (412 Phil. 308 (2001)) — Referenced in the dissenting opinion of Chief Justice Puno regarding the disqualification of major political parties and the interpretation of the party-list system as a social justice vehicle for the marginalized. The main opinion also cited it regarding the qualifications of nominees. The ruling on major political parties from Ang Bagong Bayani (and Veterans) was effectively continued by the 8-7 vote.

• Constitution, Article VI, Section 5(1) and (2) — This provision establishes the composition of the House of Representatives, including the 20% allocation for party-list representatives. It was central to the Court's discussion on whether the 20% is a mandatory figure or a ceiling, and how the allocation mechanism should operate to potentially fill this ceiling.
• Republic Act No. 7941 (Party-List System Act), Section 3 — Defines terms like "party-list system," "political party," and "sectoral party." The ponencia used these definitions to argue that major political parties could participate through sectoral wings, though this specific point was not upheld by the majority vote.
• Republic Act No. 7941 (Party-List System Act), Section 9 — Prescribes the qualifications of party-list nominees. The Court noted that it does not require a specific financial status, only that the nominee belongs to the marginalized and underrepresented sector they seek to represent.
• Republic Act No. 7941 (Party-List System Act), Section 11 (Number of Party-List Representatives) — This section, particularly paragraph (b) on the 2% threshold, additional seats, and the 3-seat limit, was the core statutory provision under scrutiny. The Court declared the 2% threshold unconstitutional for additional seats but upheld it for the guaranteed first seat and affirmed the 3-seat limit.
• Republic Act No. 7941 (Party-List System Act), Section 12 (Procedure in Allocating Seats for Party-List Representatives) — This section mandates the COMELEC to tally votes, rank parties, and allocate seats proportionately. BANAT argued for its application in conjunction with or as an alternative to Section 11(b). The Court's new four-step procedure effectively harmonizes these sections.

• Justice Antonio Eduardo B. Nachura — Justice Nachura concurred with the ponencia, specifically elaborating on the unconstitutionality of the inflexible 2% threshold vote required by R.A. No. 7941 for entitlement to a party-list seat. He argued that this fixed threshold prevents the full implementation of the constitutional provision for 20% party-list representation, especially as the number of district representatives (and thus available party-list seats) increases. He proposed that, until Congress amends the law, a regressive threshold (100% divided by the number of available party-list seats) should be adopted to ensure the constitutional provision remains operative.

• Chief Justice Reynato S. Puno — Chief Justice Puno dissented from the majority's ruling (in the ponencia, not the Court's 8-7 vote) that would allow major political parties to participate in the party-list system. He argued that the party-list system is a social justice vehicle intended for the marginalized and underrepresented, and allowing major political parties would suffocate the voice of these sectors and betray the democratic spirit of the Constitution. He emphasized interpreting the Constitution to give utmost deference to the aspirations of the people for genuine functional representation, which historically has been undermined by traditional political forces. He concurred with the new formula for seat allocation. (It's important to note the final 8-7 vote of the Court upheld the disallowance of major political parties, aligning with Puno's dissent on this specific point, although the ponencia by Carpio argued otherwise).