How the Judiciary Can Help the Economy

* Address delivered by retired Chief Justice ARTEMIO V. PANGANIBAN during the “2012 ACCRA LAW-MAP BUSINESS LAW FORUM” held on November 29, 2012 at the Manila Golf Club, Makati City.


I thank my esteemed compañero, Atty. Avelino V. Cruz, Chairman of the ACCRA Law Office, for inviting me to speak during this wholeday forum commemorating the 40th Anniversary of his venerable law firm. I have known Ave and his wife Helen for many decades.

After the EDSA people power revolution in 1986, President Corazon Aquino offered him a seat in the Supreme Court. However, he respectfully declined, preferring to remain in his job as then Deputy Prime Minister, second in command to then Vice-President Salvador Laurel, who was named concurrent Prime Minister.

If you will remember, the government at that time was organized according to the 1973 Constitution, which instituted a semi-parliamentary government. This was the form of government inherited by Mrs. Aquino, to which she conformed her government when it began in February 1986. However, a year later, the 1987 Constitution was crafted. It restored the presidential system and abolished the Offices of the Prime Minister and the Deputy Prime Minister.

That’s the saga of how Ave lost his stratospheric government job. Had he accepted the offer for him to be an associate justice, he could have been Chief Justice a decade later. And there would have been no Chief Justice Hilario G. Davide Jr and Chief Justice Artemio V. Panganiban because, though younger in years than both Chief Justice Davide and me, he would have been more senior to us in the totem pole of the Supreme Court. And I would not have been invited here as a retired Chief Justice!

I am glad to meet the members of the Management Association of the Philippines, especially BPI President and CEO Aurelio R. Montinola, whom I congratulate for having been just named MAP Management Man of the Year 2012. Prior to my Supreme Court stint, I was active in the MAP and, in fact, was at one time the Chairman of the Management Man of the Year Committee. I therefore know how stringent the standards are for this award. And having known Gigi for many years now, and being an independent director of BPI, I also know that the award is well deserved and, in fact, long overdue. Palakpakan po natin si Gigi.


Liberty and Prosperity Under the Rule of Law

In inviting me here, Ave Cruz asked me to speak on the interdependence between law and the economy, and specifically to discuss landmark Supreme Court decisions affecting the economy and business. I am glad to do so because my own legal and judicial philosophy, “liberty and prosperity under the rule of law,” calls for a symbiotic calibration of the relationship of law and business, and of good governance and good economics.

I recall that to close my term as Chief Justice, I convened a Global Forum on Liberty and Prosperity on October 18-20, 2006. More than 300 jurists and lawyers from all over the world, including several chief justices, came. The Chief Justice of Canada, the Honorable Beverley McLachlin so enjoyed her visit here that she and her husband stayed for three more days after the Forum. In fact, she said that my legal philosophy works best “under the rule of law” which she spouses as her own philosophy. Hence, I agreed to label my legal philosophy in its complete form as “liberty and prosperity under the rule of law.”

Global Forum on Liberty and Prosperity

The academe added flavor to the Forum by awarding honorary doctoral degrees in law to three notables, Chief Justice McLachlin by the Ateneo de Manila, Russian Chief Justice Vyacheslav Levedev by the University of Santo Tomas and French Chief Justice Guy Canivet by the Far Eastern University. McLachlin and Levedev are still sitting but Canivet, like me, has retired.

Ladies and gentlemen, amid the serious economic crisis engulfing the developed world, the Philippines has shown remarkable resilience. This year, our economy grew 6.3 percent in the first quarter, 5.9 percent in the second, and a fantastic 7.1 percent in the third, for an over-all 6.5 percent growth for the first nine months of the year, making the Philippines the best performer in the ASEAN Region and the second best in Asia – second only to China. Small wonder, Christine Legarde, the first woman Managing Director of the International Monetary Fund, hailed the Philippines for being “probably the only country in which (the IMF) increased the growth forecast as opposed to other places in the world where (the IMF) actually decreased (its) forecast.”

Concededly, the responsibility for propelling our economy and alleviating poverty rests primarily with our President and Congress, together with the private business sector, which is the recognized engine of economic growth in our democratic free enterprise system.

Nonetheless, the question frequently asked is how the judiciary can help the economy. My stock answer is that, in judging controversies involving the economy, the judiciary must defer as much as possible to the political branches of government, the President and Congress in collaboration with the private sector.

In my humble view, jurists and lawyers should not only safeguard the liberty of our people but must also nurture their prosperity under the rule of law. Thus, their objective should be two-fold: justice and jobs; freedom and food; ethics and economics; democracy and development. Liberty and prosperity must always go together; one is useless without the other.

During my term as a jurist, I tried to implement this legal philosophy by interpreting the Constitution and the laws in this manner: In litigations involving political and civil liberties, the scales of justice should weigh heavily against the government and in favor of the people, pursuant to the doctrine of strict scrutiny. However, in matters affecting the economy of the country and the prosperity of our people, courts – in the absence of grave abuse of discretion and a blatant violation of our Constitution – must defer to the Executive and Legislative branches of government, in accordance with the principle of deferential interpretation of laws and executive issuances.

The first part of the philosophy – the safeguarding of liberty – is a long-held tradition of the legal profession and the judiciary, both here and abroad. The primacy of liberty is universal. It is enshrined in the Magna Charta of the British; the Bill of Rights of the Americans and in the struggle for freedom of our own people, from Lapu-Lapu to Andres Bonifacio to Jose Rizal and to Ninoy Aquino. It is reflected in many Supreme Court decisions that uphold the rights to free speech, to peaceful assembly, to liberty of abode, to due process, and to travel freely.

The second part of the philosophy– the nurturing of prosperity under the rule of law – is fairly new. Not given enough emphasis in the past are the economic freedoms of our people, like the right to own and enjoy property, to the pursuit of happiness, to adequate social services, to a rising standard of living, to an improved quality of life, to economic well-being and to be free from poverty, disease, disability and destitution. In this morning’s session, I will concentrate on this part of my legal philosophy by discussing three landmark decisions of our Supreme Court, (1) Tañada vs Angara, (2) La Bugal B’laan vs Ramos and (3) Gamboa vs Teves.

Let me preface my discussion by saying that the judiciary is a passive branch of government and is not required or expected to initiate or espouse actions or programs to improve the economy or to upgrade the living conditions of our people. On the other hand, the political branches of government, namely, the President and Congress, are actively mandated to develop the economy and to promote the well being of our nation. In the fulfilment of this duty, our people shall judge them. And if they fail in fulfilling such duty, our people can replace them during periodic elections. Consequently, on matters involving the economy and prosperity, judges should defer to our political leaders.

To promote this legal philosophy, I formed last year, with the help of several friends like retired Chief Justice Hilario G. Davide Jr., business icon Washington Sycip and former Education Secretary Edilberto C. de Jesus, the Foundation for Liberty and Prosperity. Last September 18, 2012, the FLP with the co-sponsorship of the Metrobank Foundation and the Metro Pacific Investments Corporation launched, as its initial project, 10 professorial chairs on liberty and prosperity in nine leading law schools and one in the Philippine Judicial Academy.

Parenthetically, let me add that it is not easy to convince the judiciary to embrace the economy and business. In its March 16, 2008 issue, the New York Times Magazine reported that it took the US Chamber of Commerce more than 30 years to make the US Supreme Court understand and “be receptive to business.” We have yet to do that in our country.

Globalization, Deregulation, Privatization, Liberalization

Let me now discuss the three decisions I earlier mentioned. For many decades since World War II till the early 1990’s, the protection of native goods and local services was the popular policy here and in many other countries. Pursuant thereto, Congress barred the importations of foreign goods and services, and set up high tariff walls and taxes to bar them. In this way, local manufactures and service products were protected, promoted and patronized.

Later, however, nations became more interdependent, and protectionism became obsolete. The World Trade Organization (WTO) was organized to tear down tariffs, duties, import quotas and other trade barriers. Economic paradigms shifted from government control to deregulation, from government ownership to privatization, from national sovereignty to globalization and liberalization of trade. Joining this worldwide trend, our Senate ratified the Philippine adherence to WTO.

Citing the provisions of our Constitution mandating “economic nationalism,” some minority senators challenged the constitutionality of the Senate ratification of the WTO Treaty. Using deferential interpretation in Tañada vs. Angara (May 2, 1997), the Supreme Court, in a decision I had the honor of authoring, unanimously upheld the ratification, ruling in this wise:

“While the Constitution has a bias in favor of Filipino goods, services, labor and enterprises, at the same time, it recognizes the need for business exchange with the rest of the world on the bases of equality and reciprocity, and limits the protection of Philippine enterprises only against foreign competition and trade practices that are unfair.”

Exercising judicial restraint, the Court refused to pass upon the wisdom or viability of deregulation and globalization. It said, “Ineludibly, what the Senate did (in ratifying the WTO Treaty) was a valid exercise of its authority. As to whether such exercise was wise, beneficial or viable is outside the realm of judicial inquiry and review. That is a matter between the elected policymakers and the people.”

Looking back, let me reminisce that initially, I had some difficulty explaining to my Supreme Court colleagues the meaning of the new buzzwords of globalization, deregulation, privatization and liberalization detailed in the WTO Treaty, which was contained in 36 book-size volumes. The justices were schooled and believed in protectionism as the road to economic prosperity. Further, the petitioners indeed had struck a familiar argument that the Constitution, which was crafted in 1987, was protective of homegrown products and services. However, I had to point out that the Charter also recognized and adopted the generally accepted principles of international law as part of the law of the land.

At the start, there were dissenting and doubting voices; later however they all concurred. But when I circulated the decision I crafted for their signatures, only four fully concurred while 10 concurred only “in the result,” meaning they agreed to dismiss the petition but not necessarily with my reasons. I felt it was a disservice to the nation to do that, because our people will not know the collective reasons for our judgment.

So, I asked for a re-deliberation and challenged the unbelievers to write their own positions. But in the end, 13 of the 15 justices (including me) concurred in full, with only two retaining their “in the result” agreement, thereby unanimously enshrining in our jurisprudence the doctrine of deferential interpretation on issues involving the economy and prosperity.

At bottom, the case could have been decided either way by the citation of the proper parts of the Constitution that supported one’s legal philosophy. What carried the day was my call for deference to the political branches, to Congress and to the President whom our people mandated to save them from destitution, disease and disability.

Constitutionality of the Mining Law

Let me now move to another major decision affecting business, La Bugal-B’laan Tribal Association vs Ramos, involving the constitutionality of the Mining Law of 1995 (RA 7942), the Implementing Rules and Regulations or IRR of that law (namely, DENR Administrative Order or DAO 96-40 issued December 20, 1996), and the Financial and Technical Assistance Agreement (FTAA) entered into by President Fidel V. Ramos with the Western Mining Corporation, a foreign company. The original decision of the Supreme Court issued on January 27, 2004, by vote of 8-5 (with one justice taking no part and one seat vacant) struck down as unconstitutional the major provisions of the Mining Law, the IRR and the FTAA.

However, on reconsideration, the Court on December 1, 2004 reversed itself by a more definitive vote of 10-4 (with one justice still abstaining). It vigorously and fully upheld the constitutionality of the Mining Law, the IRR and the FTAA. The issues revolved around the proper interpretation of the word “control” in the exploration, development and utilization of natural resources, particularly as they related to FTAAs. As the ponente or writer of that decision, I relied once more on my legal philosophy of deferring the political branches of government in resolving controversies affecting the economy, Thus, I roped the Decision on this anchor:

“The Constitution should be read in broad, life-giving strokes. It should not be used to strangulate economic growth or to serve narrow, parochial interests. Rather, it should be construed to grant Congress and the President sufficient discretion and reasonable leeway to enable them to attract foreign investments and expertise, as well as to secure for our people and our posterity the blessings of prosperity and peace.”

However, the four dissenters led by Justice Antonio T. Carpio, wanted the Court to restrict the President’s discretion in defining the specific terms and condition of FTAAs, especially the grant of management prerogatives and financial benefits to foreign entities entering into FTAAs with the government.

Given however the nature and complexity of FTAAs, the humongous capital required, the complicated technology needed, and the intricacies of international trade, the Court gave a wide degree of discretion to the President who had the advantage of getting the needed technical expertise to enable him to discharge his mandate to eradicate “the grinding poverty of our people.”


Interpreting the 60-40 Rule in Public Utilities

Finally, let me discuss a very recent decision, Gamboa vs Teves, promulgated by the Supreme Court on June 28, 2011, that involved also the interpretation of the word “control,” this time as it applies to public utilities in general and to the Philippine Long Distance Telephone Company in particular.

Inasmuch as this case involves PLDT, let me formally disclose what is already contained in my personal website that I have been sitting as an independent member of the board of advisers (not board of directors) of PLDT since mid-2009. That was well after I had retired from the Supreme Court in 2006. In that independent capacity, I do not represent PLDT’s management or any stockholder. So the views I express are mine, and not necessarily those of PLDT.  Having clarified that, let me now go back to the main subject of my discourse.

Section 11 of Article XII of the Constitution states that (1) only Filipino citizens or “corporations… at least 60 per centum of whose capital is owned by such citizens” may operate a public utility such as a telephone company; (2) “the participation of foreign investors in the (board of directors) of any public utility enterprise shall be limited to their proportionate share in its capital,” and (3) “all the executive and managing officers of such corporations must be citizens of the Philippines.”

As we all know, the capital stock of a corporation may be divided into (a) “voting” or “common” and (b) “non-voting” or “preferred” shares. Only voting or common shares can be used to elect members of the board of directors. Non-voting or preferred shares cannot; but they may legally be used in voting on eight very important issues, like in disposing of all or substantially all of the corporate assets; in incurring or increasing bonded indebtedness; or in merging the corporation with another; or in dissolving the corporation; etc.

The Supreme Court disposed, by vote of 10-3 with two seats vacant and with Justice Carpio as ponente, that the word “capital” in the cited Charter provision “refers only to shares of stock entitled to vote in the election of directors and thus in the present case only to the common shares, and not to the total outstanding capital stock (common and non-voting preferred shares).”  Hence, according to this Decision, foreign investments in public utilities, like PLDT, should be limited to only 40 per cent of the voting shares. The Decision said that this interpretation will ensure that Filipinos will “effectively control” public utilities because “it is the board of directors that controls or manages a corporation.”

To assure such control, the dispositive portion of the Decision directed the chairperson of the Securities and Exchange Commission (SEC) “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… the Constitution, to impose the appropriate sanctions under the law.” Parenthetically, while the dispositive portion of the Decision alluded to “respondent” PLDT, the petitioner did not implead the telephone company in his petition.

The dissenters, led by Justice Presbitero J. Velasco Jr., argued that the word “capital” should include not only the voting but also the preferred and all other shares because this was the interpretation given by the framers of the current and previous Constitutions since 1935.

The Velasco dissent further said that the Constitution already assures Filipino control of public utilities because, in electing directors, foreigners can use only 40 percent of the common shares they hold, even if they owned more than that percentage. Hence, “they will never be in a position to elect majority of the members of the Board of Directors… although they (may) actually own more than 50 % of the common shares.” Consequently, Filipinos will always control the board. Also, only Filipinos may be “executive and managing officers” of public utilities, thus doubly ensuring Filipino control. In point of fact, of the 13 directors of PLDT, only two are foreigners (Japanese) while the rest, or to be exact, 11 are Filipinos.

I will discuss later in this speech the main ruling of the Court that only the voting shares should be considered in computing the 40 percent maximum equity that foreigners may own in partly nationalized corporations like public utilities.

In the meantime, let me take up, with due respect, some egregious errors of facts in the Court’s Decision and its misconception of business principles. The Decision observed that the par value of PLDT’s voting or common shares is only P5.00, yet they each earned P70 in cash dividends in 2009. (Parenthetically, this is erroneous because cash dividends declared in 2009 were double that amount. But for purposes of our discussion, let us assume the Court’s findings of fact are correct.) In contrast, the non-voting or preferred shares have a par value of P10.00, but their cash dividends was “a measly P1.00 per share… In other words, preferred shares have twice the par value of common shares but they cannot elect directors and have only 1/70 of the dividends of common shares.”

Then, it concluded, “This undeniably shows that beneficial interest in PLDT is not with the non-voting preferred shares (mostly owned by Filipinos) but with the common shares (mostly owned by aliens), blatantly violating the constitutional requirement of 60 percent…  Filipino beneficial ownership in a public utility… In short, Filipinos hold less than 60 percent of the voting stock, and earn less than 60 percent of the dividends of PLDT.” (bold types in original)

The pure legalists and the uninitiated in business may find logical the foregoing disquisition in the Decision. But I respectfully submit that it is neither legal nor logical. It is not legal because the Constitution does not speak of dividends. Nowhere does it talk of how much each kind of shares should earn. The Charter speaks only of the ownership or “effective control” of the “capital” of a corporation engaged in public utilities, not of “benefits.”

It is not logical because it ignored the market value of the shares and their rates of returns. The decision itself noted that “the PLDT common shares with a par value of P5.00 have a current stock market value of P2,328 per share, while PLDT preferred shares with a par value of P10.00 per share have a current stock market value ranging from… P10.92 to P11.06 per share.”

However, the Decision failed to use this critical information in computing the actual and real financial benefits. Clearly, on the basis of the facts given by the majority, an investor needs about P11.00 to buy a PLDT preferred share, which would earn P1.00. Here, the rate of return on the investment is nine percent. On the other hand, to acquire a common share, an investor must pay P2,328 yet earn only P70 or only about three percent (the correct figure is P140 which yields a rate of return on investment of six percent).

On this basis, preferred shares, which are mostly held by Filipinos, earn three times more than the common shares. So, it is neither logical nor correct to say that “beneficial ownership” in PLDT rests with foreigners just because they hold more common shares than Filipinos.

Clearly, the par values of shares are not determinative of their real worth or earning potential. Investors buy shares from the company or from the stock market, depending on their appetite for risks, not on the shares’ par values. Conservatives invest in preferred shares because they are less risky and their earnings, like bank deposits, are fixed. The adventurous choose common shares because they could potentially be worth much more. Or much less, if the company flops.

While common shares may yield smaller dividends, they can – in time – increase their market value. Sometimes, a company strikes oil, or perfects its high tech products. When this happens, the market value of common shares exponentially grows while the yields of preferred shares remain fixed.

A classic example of exponential growth is Microsoft, which made Bill Gates the richest American almost overnight. Another example. In 2001, PLDT’s net income was about P3.4 billion; its common shares had a market price of P417. Then, it expanded into the high-risk but high-reward wireless digital cell phone technology. In just four years, in 2005, its net income exponentially soared ten times to P34 billion. And kept on growing since then. In 2010, its net income was P40 billion and its common shares’ market price rose to P2,554.

Of course, in bad times, common shares could collapse and reduce billionaires to paupers, as has happened in the Philippines in 1997, and in the US in 2008. To recall, in 1997, the Asian financial crisis hit Thailand first and then spread everywhere. Because of this, the real estate business in the Philippines collapsed. The foray of Metro Pacific Holdings into Fort Bonifacio failed and almost bankrupted the company. We are also familiar with the financial crisis in 2008 that started in the United States and resulted in the collapse of several heretofore financial untouchables like Lehman Brothers, Merrill Lynch, American International Group (AIG) and Washington Mutual, the largest savings and loan association in the United States.

But then, that’s what business is all about. It is about taking and managing risks, not about legislating profits or promulgating decisions awarding economic benefits. It is not for the faint-hearted or for jurists to intrude into unnecessarily and imprudently.

In sum, the Decision’s theoretical requirement that 60 percent of all financial benefits in a public utility must go to Filipinos regardless of how much they invested is totally unfair and blatantly ignores the most fundamental tenets of investments. Under this absurd thesis, no foreigner will invest in our country. For the most basic rule in a free market economy is that investors share in the profits and other benefits of an enterprise based on the amount they invested and the risks they assumed.


Applicable to All Kinds of Shares?

The Court’s ruling on the 60-40 capital stock sharing did not end with the Decision. On October 9, 2012, it issued a Resolution – again by vote of 10-3, with one justice taking no part, with one seat vacant – that not only denied the motions for reconsideration with finality but also expanded the coverage of the original Decision dated June 28, 2011.

This original Decision held that “Mere legal title is insufficient to meet the 60 percent Filipino-owned “capital” required in the Constitution. Full beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60 percent of the voting rights, is required. The legal and beneficial ownership of the 60 percent of the outstanding capital stock must rest in the hands of Filipino nationals.”

This statement was expanded in the subsequent Resolution of October 9, 2012 to mean that “such requirement appl(ies) uniformly and across the board to all classes of shares, regardless of nomenclature and category, comprising the capital of a corporation.” Hence, even preferred shares, which have no voting rights for directors, should be owned at least 60 percent by Filipinos because such preferred shares may still vote in eight instances, like in the amendment of the articles of incorporation and in the increase or decrease of the capital stock.

“Thus,” the Court said, “if a corporation, engaged in a partially nationalized industry, issues a mixture of common and preferred non-voting shares, at least 60 percent of the common shares and at least 60 percent of the preferred non-voting shares must be owned by Filipinos… In short, the 60-40 ownership requirement in favor of Filipino citizens must apply separately to each class of shares, whether common, preferred non-voting, preferred voting or any other class of shares.”

This expansion means that the present practice of issuing preferred voting shares to cover the shortfall in common shares might no longer be deemed compliant with the 60-40 constitutional requirement. For example, let us say that a public utility corporation has 1,000 common shares, 1,000 voting preferred shares and 1,000 non-voting preferred shares.

Let us further assume that foreigners owned 600 of the common shares, but none of the voting preferred and none of the non-voting preferred. Under the expanded ruling, the corporation would still be in violation of the Constitution because, even if all the voting preferred and non-voting preferred are Filipino owned, still 60 per cent of the common are owned by foreigners.

Note that of the 2,000 voting shares composed of 1,000 common and 1,000 voting preferred, foreigners own only 600 or only 30 percent of all voting shares, yet the Decision would still consider the corporation to be in violation of the Constitution despite the plain fact that, under this example, foreigners cannot, repeat cannot, be in control of the corporation.

One more point, corporations in the Philippines, in the United States and elsewhere issue what are called Deposit Receipts, which are bought and sold in the stock markets. Under this program, Filipino corporations purchase shares of stock and then sells Philippine Deposit Receipts or PDRs corresponding to each of the shares, with the buyers of the PDR receiving the dividends and other benefits due the underlying shares but the Filipino sellers remain the owners and exercise the voting rights of the underlying shares. Subject to nationality requirements, PDRs could even be exchanged with the underlying shares.

PDRs were not tackled by the Supreme Court, neither in the original Decision or in the subsequent Resolution, giving rise to the conclusion that the PDR program remains constitutional and legal even under the strict interpretation given in the Gamboa case, and may be a way by which foreigners who are interested only in reaping the economic benefits may participate when the 40 percent foreign equity limit in partly nationalized corporations is reached.

Recently, the Securities and Exchange Commission has issued draft “Guidelines, Rules and Regulations” to comply with the order of the Supreme Court to apply the newly minted definition of the term “capital.”

Prudently, the SEC has called for a public hearing and for position papers by various stakeholders before finalizing these guidelines. I believe, it is not just the SEC that should be at work here but also the entire Executive Branch because ultimately, the Rules will reflect the entire Philippine government’s economic policy, especially vis-à-vis foreign investments.

The Supreme Court, it seems to me, has revived the old debate on the whether the Constitution of the Philippines should be interpreted to focus on economic protectionism, or whether economic protectionism should be balanced with the world reality that no nation can isolate itself in these times of liberalization and globalization, as was done in Tanada vs Angara.

Otherwise stated, should the Court impose upon itself the responsibility of propelling the economy, of creating jobs, of alleviating poverty, of creating wealth and enhancing prosperity? In short, should the Supreme Court clothe itself with the prerogative to choose which economic paradigm is more beneficial or wise for our people: protectionism or globalization and liberalization. Or, should it continue to use self-restraint and deference to the political branches of government on matters involving the economy?

As I said at the beginning, our economy has shown resilience amid the gloom shrouding the traditional bulwarks of prosperity, the Eurozone and the United States. How our government handles this most recent Supreme Court Decision involving the interpretation of the 60-40 ownership structure in the key businesses and industries, especially those engaged in public utilities, transportation, and natural resources, will certainly affect our momentum of growth that is the envy of many countries and economists. My own position should be clear to everyone by this time: In matters affecting the prosperity of our people, the judiciary can help the economy by deferring to the political branches of the government and to the private business sector which, to stress, is the recognized engine of growth in a regime of free enterprise.


Maraming salamat po.