De Leon vs. PLDT

Unless expressly prohibited by some other law, a public utility corporation may issue and repurchase redeemable shares upon the expiration of a fixed period, provided the terms of redemption were disclosed to shareholders and approved by the relevant regulatory authority, and provided the statutory requirements of fixed annual income and convertibility into common shares are satisfied.

In 1973, the State adopted the concept of telephone subscriber self-financing through Presidential Decree No. 217, requiring telephone subscribers to purchase shares of PLDT—the sole telephone utility at the time—to partly finance capital investments in telephone installations. Where preferred shares were issued under the plan, P.D. No. 217 required that the subscriber be assured a fixed annual income and given the option to convert preferred shares into common shares after a reasonable period and under reasonable terms. On June 28, 2011, the Court promulgated Gamboa vs. Teves, holding that "capital" in Article XII, Section 11 of the Constitution refers only to shares of stock entitled to vote in the election of directors, and directing the Securities and Exchange Commission to assess whether PLDT violated the nationality requirement. That ruling prompted PLDT's Board of Directors to amend the Seventh Article of its Articles of Incorporation and to redeem outstanding Subscriber Investment Plan preferred shares.

Edgardo C. De Leon owned 180 shares of PLDT's Subscriber Investment Plan 10% Cumulative Convertible Preferred Stock (Series T), which he acquired on August 10, 1993, as well as 10 common shares acquired on June 10, 1987. The Subscriber Investment Plan preferred shares were issued pursuant to the State's telephone subscriber self-financing policy under Presidential Decree No. 217, which required subscribers to purchase PLDT shares to partly finance the corporation's capital investments in telephone installations. The stock certificates issued to De Leon bore on their dorsal portion the terms and conditions governing the shares, including a provision that "the Corporation at the option of the Board of Directors may redeem the Series [T] 10% Cumulative Convertible Preferred Stock at the time outstanding." These terms had been approved by the then-Board of Communications.

On June 28, 2011, the Court promulgated Gamboa vs. Teves, holding that "capital" in Article XII, Section 11 of the Constitution refers only to shares of stock entitled to vote in the election of directors. Although the Court in Gamboa did not implead PLDT and refused to rule on the factual issue of whether foreigners effectively controlled PLDT, it directed the Securities and Exchange Commission's Chairperson to assess PLDT's compliance with the nationality requirement. In response, PLDT's Board of Directors, in a July 5, 2011 Resolution, amended the Seventh Article of PLDT's Articles of Incorporation, subclassifying its Authorized Preferred Capital Stock into 150,000,000 voting preferred shares and 807,500,000 non-voting serial preferred shares. A Special Stockholders Meeting scheduled for September 20, 2011 to ratify the amendment was cancelled for lack of quorum.

Thereafter, in a September 23, 2011 Resolution, the PLDT Board authorized the redemption of all outstanding Subscriber Investment Plan preferred shares effective January 19, 2012, covering Series A through FF, as well as Series GG, HH, and II as soon as they became redeemable. PLDT mailed redemption notices to affected preferred shareholders, giving them the option either to claim redemption payments or to convert their preferred shares to common shares on or before January 9, 2012. PLDT published the notices in newspapers and opened a trust account with RCBC for the Redemption Trust Fund. By January 19, 2012, PLDT had redeemed 403,193,766 Subscriber Investment Plan preferred shares and converted approximately 3,024,474 preferred shares into common shares.

Instead of surrendering or converting his preferred shares, De Leon, together with Perfecto R. Yasay, Jr.—another preferred shareholder owning 180 Subscriber Investment Plan preferred shares—wrote PLDT on January 31, 2012 objecting to the redemption and demanding that PLDT reverse its actions. PLDT refused, stating in a February 10, 2012 letter that the redemption was consistent with the terms and conditions approved by the Board of Communications, now the National Telecommunications Commission. De Leon and Yasay, Jr. insisted that the amendment of PLDT's Articles of Incorporation was "a desperate attempt to keep the foreign ownership of its shares within the limits allowed by the Constitution." The PLDT Board then scheduled a Special Stockholders Meeting for March 22, 2012 to approve the amendment.

On March 16, 2012, De Leon and Yasay, Jr. filed a complaint before the Regional Trial Court of Makati seeking to enjoin the March 22, 2012 Special Stockholders Meeting and to nullify PLDT's redemption of shares, arguing that PLDT violated the preferred shareholders' right to remain equity holders and that the redemption was intended to facilitate the creation of 150,000,000 additional preferred shares under foreign control, in violation of Article XII, Section 11 of the Constitution and P.D. No. 217. The March 22, 2012 meeting proceeded without a temporary restraining order, and the amendment creating the additional 150,000,000 voting preferred shares was approved. PLDT filed its Answer with Compulsory Counterclaims and a Motion to Declare the Complaint a Nuisance or Harassment Suit, arguing that De Leon and Yasay, Jr. were no longer shareholders when they filed the complaint, that nothing in P.D. No. 217 prohibited redemption, and that they were barred from objecting to terms indicated on the dorsal portion of their stock certificates. The RTC granted the motion and dismissed the complaint, finding that petitioners had known since 1993 and 1998 respectively that their shares were redeemable, that their combined 360 shares were insignificant compared to the 402,000,000 shares already redeemed, and that P.D. No. 217 contained no prohibition on redemption. The Court of Appeals affirmed, finding that P.D. No. 217 did not prohibit redemption, that petitioners were no longer shareholders at the time of filing, and that their claim of constitutional circumvention was unsubstantiated.

• Validity of Redemption: The Heirs of De Leon contended that P.D. No. 217 explicitly provides that the option to convert preferred shares belongs to the preferred stockholder, and that PLDT exercised an option not belonging to it when it redeemed the Subscriber Investment Plan preferred shares. They argued that the terms and conditions on the dorsal portion of the stock certificates allowing PLDT to redeem the shares were void for being contrary to law.
• Policy of Widespread Ownership: Petitioner maintained that P.D. No. 217 was issued to ensure widespread ownership of public utilities funded by as many individual investors as possible, and that PLDT's redemption of the Subscriber Investment Plan preferred shares violated this policy, rendering the redemption void.
• Constitutional Circumvention: Petitioner argued that the redemption was done to avoid the required quorum and votes for the amendment of PLDT's Articles of Incorporation and for the creation of 150,000,000 additional preferred shares, which were created to circumvent the nationality requirements under Article XII, Section 11 of the Constitution and the ruling in Gamboa vs. Teves, such that PLDT's outstanding capital stock became dominated by aliens.
• Nuisance Suit Declaration: Petitioner asserted that the complaint was neither a nuisance nor a harassment suit, arguing that the policy behind P.D. No. 217 gave significance to each individual stockholder regardless of the size of shareholdings, and that De Leon still held 1,027 common shares in PLDT even after redemption of his preferred shares, giving him sufficient interest as a stockholder to question PLDT's corporate acts.
• Validity of Additional Preferred Shares: Petitioner argued that the Court of Appeals erred in refusing to rule on the validity of the creation of the 150,000,000 additional preferred shares, contending that the creation was a natural consequence of the Special Stockholders Meeting that the complaint sought to enjoin, and was therefore neither irrelevant nor immaterial.

• No Statutory Prohibition on Redemption: Respondent countered that nothing in P.D. No. 217 prohibited the imposition of other terms and conditions, including redemption, of preferred shares issued under its subscriber self-financing plan, noting that P.D. No. 217 itself provides that the shareholder's option to convert is subject to "reasonable terms." Respondent emphasized that the then-Board of Communications had approved the redeemable character of the preferred shares, and that P.D. No. 1874 declared all NTC decisions approving subscriber investment plans "valid and legal in all respects."
• Unsubstantiated Circumvention Claim: Respondent argued that petitioner did not attempt to substantiate his claim that the additional 150,000,000 preferred shares would be owned and controlled by foreign nationals, rendering the claim speculative and correctly rejected by the Court of Appeals. Respondent stressed that the amendment was made precisely to preempt business disruption arising from the Gamboa ruling.
• Nuisance Suit: Respondent maintained that petitioner was no longer a PLDT stockholder when he filed the complaint, divesting him of personality to bring an intra-corporate dispute, and that even considering his 180 preferred shares, his shareholding was insignificant and de minimis compared to the rest of the preferred shareholders whose shares had been redeemed. Respondent also pointed out that the allegation regarding 1,027 common shares was raised for the first time before the Supreme Court and should not be considered, and that even if true, the extent was still de minimis at 0.00047% of PLDT's total common shares.
• Due Process Inapplicable: Respondent argued that because the transaction assailed was private in nature, petitioner could not invoke the right to due process of law, which is invocable only against the government and not against private entities such as PLDT.
• Jurisdiction over Amendment Validity: Respondent contended that the Court of Appeals correctly held that the validity of the additional 150,000,000 preferred shares was immaterial because it was not raised in the complaint, and that the Securities and Exchange Commission, not the courts, has jurisdiction to determine the extent of allowable foreign ownership of a corporation, as expressly held in Gamboa.

• Statutory Prohibition on Redemption: Whether Presidential Decree No. 217 barred respondent PLDT from redeeming its Subscriber Investment Plan preferred shares.
• Constitutional Circumvention: Whether respondent PLDT's redemption of its Subscriber Investment Plan preferred shares circumvented the nationality requirement of Article XII, Section 11 of the Constitution for public utilities and the Court's ruling in Gamboa.
• Nuisance or Harassment Suit: Whether petitioner Edgardo C. De Leon's complaint was a nuisance or harassment suit.
• Validity of Additional Preferred Shares: Whether the validity of the issuance of the additional preferred shares during the March 22, 2012 Special Stockholders Meeting could be raised as an issue before the Court of Appeals.

• Statutory Prohibition on Redemption: No. Nothing in P.D. No. 217 prohibited PLDT from redeeming preferred shares issued under its subscriber self-financing plan; the decree merely prescribed conditions for preferred share issuance, not a prohibition on redemption.
• Constitutional Circumvention: No. Petitioner adduced no evidence that the redemption or the creation of additional voting preferred shares would result in foreign control of PLDT's voting stock; the allegations were speculative and constituted a non sequitur.
• Nuisance or Harassment Suit: Yes. The complaint was correctly declared a nuisance and harassment suit, petitioner's shareholding having been redeemed before the complaint was filed and his interest being de minimis under the factors enumerated in the Interim Rules of Procedure for Intra-Corporate Controversies.
• Validity of Additional Preferred Shares: No. The issue was not raised in the complaint and was correctly disregarded by the Court of Appeals; in any case, the Securities and Exchange Commission, not the courts, has jurisdiction to disapprove amendments to articles of incorporation on grounds of non-compliance with foreign ownership requirements.

• Statutory Prohibition on Redemption: The text of P.D. No. 217, particularly Section 1(5), merely required that where preferred capital stock is issued under a subscriber self-financing plan, the subscriber be assured a fixed annual income and that the preferred shares be convertible into common shares after a reasonable period and under reasonable terms at the option of the preferred stockholder. Nothing in the decree prohibited the corporation from redeeming those shares. PLDT's 1973 Amended Articles of Incorporation expressly provided that after December 31, 1998, the corporation, at the option of the Board of Directors, could redeem the Series T preferred shares, and the dorsal portion of the stock certificates reiterated this redeemability. These terms were approved by the then-Board of Communications and deemed "valid and legal in all respects" by P.D. No. 1874, which amended P.D. No. 217, with no proof that the approval had been revoked. Since petitioner and Yasay, Jr. were informed of these terms when they acquired their shares, they could not belatedly object to them. Moreover, PLDT complied with P.D. No. 217's convertibility requirement by giving preferred shareholders until January 9, 2012 to convert their shares to common shares, a period the Court found to be a "reasonable term." The objective of widespread ownership was not defeated, as PLDT had approximately 12,000 stockholders of record with the public owning 54% of common shares, exceeding the 30% minimum public offering prescribed by Republic Act No. 7925.

• Constitutional Circumvention: As a public utility corporation, at least 60% of PLDT's capital must be Filipino-owned under Article XII, Section 11 of the Constitution. In Gamboa, the Court held that "capital" refers only to shares of stock entitled to vote in the election of directors. However, petitioner did not explain how redeeming the Subscriber Investment Plan preferred shares would result in a violation of the constitutional nationality requirement. First, the redemption was done in accordance with P.D. No. 217. Second, there was no evidence that the creation of the additional 150,000,000 voting preferred shares would result in foreign control of respondent's voting stock. Petitioner's conclusion was a non sequitur. Gamboa itself did not contain a factual finding that PLDT actually violated Article XII, Section 11; the Court in Gamboa refused to rule on the factual issue of foreign control and focused solely on the legal question of the definition of "capital." Without evidence that the redemption was intended to circumvent the Constitution, petitioner's allegations were mere speculations.

• Nuisance or Harassment Suit: Rule 1, Section 1(b) of the Interim Rules of Procedure for Intra-Corporate Controversies enumerates factors for determining whether a suit is a nuisance or harassment suit, including the extent of the shareholding or interest of the initiating stockholder. When petitioner filed the complaint on March 16, 2012, his Subscriber Investment Plan preferred shares had already been redeemed on January 9, 2012, meaning he was no longer a PLDT preferred stockholder with substantial interest. Even considering his prior ownership of 180 preferred shares, his interest was approximately 0.00004% of the 403,193,766 Subscriber Investment Plan preferred shares redeemed, and no other shareholder joined the complaint. The allegation of 1,027 common shares was raised for the first time before the Supreme Court, remained unsubstantiated, and even if true, constituted only 0.00047% of PLDT's 216,000,000 common shares—still insufficient. While Gamboa recognized a PLDT shareholder's standing to question a government share sale on a matter of transcendental importance, that case involved an undisputed shareholder at the time of filing and a constitutional issue of public interest. Here, petitioner was no longer a preferred stockholder, and the complaint involved purely private interests rather than issues of transcendental importance.

• Validity of Additional Preferred Shares: Petitioner's complaint did not raise the validity of the additional 150,000,000 preferred shares as an issue; the prayer sought only an injunction to prohibit PLDT from excluding the shares of Subscriber Investment Plan preferred shareholders in determining quorum during the March 22, 2012 Special Stockholders Meeting and subsequent meetings. The issue was therefore correctly disregarded by the Court of Appeals. In any event, the Securities and Exchange Commission has jurisdiction to disapprove amendments to articles of incorporation on the ground that the percentage of capital stock ownership by Filipino citizens has not been complied with, as required by the Constitution or existing laws. Petitioner should have filed an action before the SEC rather than the trial court.

• Redeemability of Preferred Shares in Public Utilities — Unless expressly prohibited by law, a public utility corporation may issue and repurchase redeemable shares upon the expiration of a fixed period. The Court applied this principle by examining P.D. No. 217 and finding no prohibition on redemption, only requirements for fixed annual income and convertibility. The terms of redemption, having been disclosed on the stock certificates and approved by the regulatory authority, were binding on shareholders who could not belatedly object to them.

• Definition of "Capital" under Article XII, Section 11 of the Constitution — As established in Gamboa vs. Teves and reaffirmed here, 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. Common shares, which carry voting rights translating to control, fall within this definition; preferred shares, which usually lack voting rights, do not, unless they also carry the right to vote in the election of directors. The Court applied this definition to reject petitioner's claim that redeeming non-voting preferred shares would alter the nationality composition of PLDT's "capital."

• Nuisance or Harassment Suits in Intra-Corporate Controversies — Under Rule 1, Section 1(b) of the Interim Rules of Procedure for Intra-Corporate Controversies, courts consider five factors in determining whether a suit is a nuisance or harassment suit: (1) the extent of the shareholding or interest of the initiating stockholder or member; (2) the subject matter of the suit; (3) the legal and factual basis of the complaint; (4) the availability of appraisal rights for the act or acts complained of; and (5) prejudice or damage to the corporation in relation to the relief sought. The Court applied these factors, focusing on the de minimis extent of petitioner's shareholding and his lack of shareholder status at the time of filing.

• Standing in Intra-Corporate Disputes — A plaintiff's status as a stockholder at the time of filing is essential to maintain an intra-corporate dispute. Where shares have already been redeemed before the complaint is filed, the plaintiff lacks personality to sue. The Gamboa exception—where a shareholder may question acts of transcendental public importance—does not extend to complaints involving purely private interests, even where constitutional provisions are invoked, absent evidence supporting the alleged violation.

• "Unless expressly prohibited by some other law, a public utility corporation may issue and repurchase redeemable shares upon the expiration of a fixed period." — This is the opening statement of the decision and encapsulates the core legal principle: the default rule permits redemption of redeemable shares by public utilities absent an express statutory prohibition.

• "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, and not to the total outstanding capital stock comprising both common and non-voting preferred shares." — This passage, quoted from Gamboa vs. Teves, defines the constitutional concept of "capital" for public utility nationality requirements and is the canonical formulation relied upon in the Court's analysis of the circumvention claim.

• "With no evidence that respondent redeemed the Subscriber Investment Plan to circumvent the Constitution, petitioner's allegations are mere speculations, which the Court of Appeals correctly rejected and dismissed." — This sentence states the ratio decidendi for the constitutional circumvention issue: bare allegations without evidentiary support cannot sustain a claim of constitutional violation.

• Gamboa vs. Teves, 668 Phil. 1 (2011) — Controlling precedent. The Court relied on Gamboa for the definition of "capital" under Article XII, Section 11 of the Constitution as referring only to shares entitled to vote in the election of directors. The Court distinguished Gamboa on standing, noting that the petitioner there was an undisputed shareholder at the time of filing and the issue was of transcendental public importance, unlike the present case where petitioner was no longer a shareholder and the complaint involved purely private interests. Gamboa was also cited for the proposition that the SEC, not the courts, has jurisdiction to determine compliance with foreign ownership requirements.

• Section 1, Presidential Decree No. 217 — Established basic policies for the telephone industry, including the concept of telephone subscriber self-financing. Section 1(5) required that preferred capital stock issued under a subscriber self-financing plan assure the subscriber a fixed annual income and be convertible into common shares after a reasonable period and under reasonable terms at the option of the preferred stockholder. The Court found that this provision prescribed conditions for preferred share issuance but did not prohibit redemption.
• Section 4, Presidential Decree No. 1874 — Amended P.D. No. 217 and declared all decisions or orders of the National Telecommunications Commission approving subscriber investment plans "valid and legal in all respects." The Court relied on this provision to uphold the validity of the redeemable character of the Subscriber Investment Plan preferred shares, absent proof that the NTC approval had been revoked.
• Article XII, Section 11, 1987 Constitution — Requires that at least sixty per centum of the capital of corporations or associations operating public utilities be owned by Filipino citizens. The Court applied the Gamboa interpretation of "capital" as shares entitled to vote and found no evidence that PLDT's redemption or creation of additional preferred shares violated this provision.
• Rule 1, Section 1(b), Interim Rules of Procedure for Intra-Corporate Controversies (A.M. No. 01-2-04-SC) — Prohibits nuisance and harassment suits and enumerates five factors for courts to consider in determining whether a suit qualifies as such. The Court applied these factors, particularly the extent of shareholding, to sustain the declaration of petitioner's complaint as a nuisance suit.
• Section 17(4), Batas Pambansa Blg. 68 (Corporation Code) — Cited through Gamboa for the proposition that the Securities and Exchange Commission has jurisdiction to disapprove amendments to articles of incorporation on the ground of non-compliance with foreign ownership requirements.

Carandang, Zalameda, Rosario, and Dimaampao, JJ., concurred. Justice Dimaampao was designated additional Member per Special Order No. 2839.