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Point of Law

Pledging shares of stock

/ 12:10 AM March 16, 2017

In Gamboa v. Teves (GR No. 176579), the Supreme Court declared that “[t]he term capital in Section 11, Article XII of the Philippine 1987 Constitution refers only to shares of stock entitled to vote in the election of directors… and not to the total outstanding capital stock comprising both common and nonvoting preferred shares.”

In its decision, the high court cited “the intent of the framers of the Constitution to place in the hands of Filipino citizens the control and management of public utilities.” This, in turn, is carried out through the right to “vote in the election of directors because it is the board of directors that controls or manages the corporation.”

In simple terms, in determining whether a public utility is 60 percent owned by Filipinos as required by the Constitution, at least 60 percent of the voting shares (shares entitled to vote in the election of directors) must be owned by Filipinos. Hence, even if Filipinos own more than 60 percent of the capital stock of the company or 100 percent of nonvoting preferred shares, the company is in violation of the 60-40 rule if foreigners own more than 40 percent of the voting stock.


To illustrate, Public Utility Company has 100 shares consisting of 30 common shares, 10 voting preferred shares and 60 nonvoting preferred shares. To comply with the Gamboa ruling, Filipinos must own at least 60 percent of the 40 voting shares (24 of the common shares or 24 of the common and voting preferred shares combined).

If Filipinos do not own this number of voting shares, Public Utility Company does not comply with the minimum Filipino ownership required by the Constitution. This is even if Filipinos own all of the 60 nonvoting preferred shares (representing 60 percent of the outstanding capital stock) of the company. In this case, the Congressional franchise giving the company the license to operate as a public utility may be revoked.

The above illustration is a simple mathematical illustration of the implications of the Gamboa ruling. There are certainly more complex situations where compliance with the Gamboa ruling is not as straightforward.

At the very least, the Gamboa ruling raises questions on its effect on some lending requirements of foreign creditors. For example, stockholders of a public utility company may borrow money from a foreign creditor (e.g., foreign bank or foreign partners) to fund their requirements. The creditor may require that the debtor’s shares of stock in the public utility company should be pledged to it as security for the loan.

In some cases, the foreign creditor may require that the right to vote (e.g., by proxy or voting trust agreement) is exercised by it pending full payment of the loan. (Section 55, Corporation Code). Will the pledge be considered a violation of the Constitution as to make it invalid? If the pledge is valid, will giving the right to vote to the foreign creditor have an impact on the computation of the nationality requirement? If so, how will the public utility company monitor things to ensure it will not put its franchise at risk?

There is another issue. The Civil Code provides that “[u]nless there is a stipulation to the contrary, the pledge shall extend to the interest and earnings of the right pledged.” (Article 2102).

This issue is also worth commenting on but my better judgment tells me that I should reserve my comments until the high court decides with finality the case of Roy vs. SEC (GR No. 207246), which is a sequel to the Gamboa case.

The author can be contacted at


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TAGS: election of directors, shares of stock, total outstanding capital stock
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