J.A.B. Bulao & Associates

CASE 2012-0073: ARCHBISHOP FERNANDO R. CAPALLA ET AL. VS. THE HON. COMMISSION OF ELECTIONS; SOLIDARITY FOR SOVEREIGNTY ET AL VS. COMMISSION ON ELECTIONS (G.R. . No. 201112, G.R. No. 201121, 23 OCTOBER 2012, PERALTA, J.) SUBJECT/S: WHEN MODIFICATIONS OR AMENDMENTS OF CONTRACTS BIDDED OUT ARE ALLOWED; PURPOSE OF PUBLIC BIDDING; VALIDITY OF THE OPTION TO PURCHASE IN THE CONTRACT WITH SMARTMATIC ALLOWED. (BRIEF TITLE: ARCH. CAPALLA VS. COMELEC)

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DISPOSITIVE:

WHEREFORE, premises considered, the motions for reconsideration are DENIED for lack of merit.

SO ORDERED.

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SUBJECTS/DOCTRINES/DIGESTS

COMELEC EXERCISED THE OPTION TO PURCHASE IN THE CONTRACT WITH SMARTMATIC.  PROPER?

YES BECAUSE THE CONTRACT WAS STILL EFFECTIVE. THE TERM OF THE CONTRACT WAS FROM DATE OF EFFECTIVITY UNTIL RELEASE OF PERFORMANCE SECURITY. THE PERFORMANCE SECURITY WAS NOT YET RELEASED.

We cannot subscribe to said postulation.

Article 2.2 of the AES Contract reads:

Article 2

EFFECTIVITY

x x x x

2.2. The Term of this Contract begins from the date of effectivity until the release of the Performance Security, without prejudice to the surviving provisions of this Contract including the warranty provision as prescribed in Article 8.3 and the period of the option to purchase (Emphasis supplied).

The provision means that the contract takes effect from the date ofeffectivity until the release of the performance security. Article 8 thereof, on the other hand, states when the performance security is released, to wit:

Article 8

Performance Security and Warranty

x x x x

Within seven (7) days from delivery by the PROVIDER to COMELEC of the Over-all Project Management Report after successful conduct of the May 10, 2010 elections, COMELEC shall release to the PROVIDER the above-mentioned Performance Security without need of demand.

The performance security may, therefore, be released before December 31, 2010, the deadline set in the AES Contract within which the Comelec could exercise the option. The moment the performance security is released, the contract would have ceased to exist. However, since it is without prejudice to the surviving provisions of the contract, the warranty provision and the period of the option to purchase survive even after the release of the performance security. While these surviving provisions may have different terms, in no way can we then consider the provision on the OTP separate from the main contract of lease such that it cannot be amended under Article 19.

In this case, the contract is still effective because the performance security has not been released. Thus, not only the option and warranty provisions survive but the entire contract as well. In light of the contractual provisions, we, therefore, sustain the amendment of the option period.

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IS AN AMENDMENT OF A PREVIOUSLY BIDDED CONTRACT INVALID PER SE?

NO. THE AMENDMENT MUST BE SUBSTANTIAL SUCH THAT THE OTHER BIDDERS WERE DEPRIVED OF THE TERMS AND OPPORTUNITIES GRANTED TO THE WINNING BIDDER AFTER IT WON THE SAME AND THAT IT IS PREJUDICIAL TO PUBLIC INTEREST.

The amendment of a previously bidded contract is not per se invalid. For it to be nullified, the amendment must be substantial such that the other bidders were deprived of the terms and opportunities granted to the winning bidder after it won the same and that it is prejudicial to public interest.

In our assailed decision, we found the amendment not substantial because no additional right was made available to Smartmatic-TIM that was not previously available to the other bidders; except for the extension of the option period, the exercise of the option was still subject to same terms and conditions such as the purchase price and the warranty provisions; and the amendment is more advantageous to the Comelec and the public.

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MOVANTS SEEK THE APPLICATION OF THE SAN DIEGO CASE. DOES SAID CASE APPLY?

NO. UNDER THE SAN DIEGO CASE WHAT WAS AMENDED WAS THE EXTENTION OF  A LEASE  WHICH IF EXTENDED WOULD RESULT TO PREJUDICE AGAINST THE MUNICIPALITY OF NAUJAN. HERE THE EXTENSION REFERS TO THE PERIOD WITHIN WHICH TO EXERCISE THE OPTION TO PURCHASE WHICH IS ADVANTAGEOUS TO THE COMELEC.

Movants seek the application of San Diego57 where we nullified the extension of the lease agreement and considered said amendment substantial. We, however, find the case inapplicable. The extension made in San Diego pertained to the period of the main contract of lease while in this case, the extension referred not to the main contract of lease of goods and services but to the period within which to exercise the OTP. In extending the original period of lease of five years to another five years without public bidding, the Municipality of Naujan, Province of Mindoro acted in violation of existing law. The period of lease undoubtedly was a vital and essential particular to the contract of lease. In San Diego, the Municipality of Naujan was the lessor of its municipal waters and the petitioner, the lessee. An extension of the lease contract would mean that the lessee would be given undue advantage because it would enjoy the lease of the property under the same terms and conditions for a longer period. Moreover, prior to the extension of the lease period, the rentals were reduced upon the request of the lessee. The end result was that the municipality was deprived of income by way of rentals because of the reduced rates and longer period of lease. In this case, the extension of the option period means that the Comelec had more time to determine the propriety of exercising the option.

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IS A BIDDER PRECLUDED FROM MODIFYING OR AMENDING CERTAIN PROVISIONS OF THE CONTRACT BIDDED UPON.

NO. BUT SUCH CHANGES MUST NOT CONSTITUTE SUBSTANTIAL OR MATERIAL AMENDMENTS THAT WOULD ALTER THE BASIC PARAMETERS OF THE CONTRACT AND WOULD CONSTITUTE A DENIAL TO THE OTHER BIDDERS OF THE OPPORTUNITY TO BID ON THE SAME TERMS.

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HOW DOES ONE DETERMINE WHETHER SUCH AMENDMENT IS SUBSTANTIAL?

WHETHER THE CONTRACT, WHEN TAKEN AS A WHOLE, WOULD CONTAIN SUBSTANTIALLY DIFFERENT TERMS AND CONDITIONS THAT WOULD HAVE THE EFFECT OF ALTERING THE TECHNICAL AND/OR FINANCIAL PROPOSALS PREVIOUSLY SUBMITTED BY OTHER BIDDERS. AND WHETHER  THE ALTERATIONS AND MODIFICATIONS IN THE CONTRACT EXECUTED BETWEEN THE GOVERNMENT AND THE WINNING BIDDER MUST BE SUCH AS TO RENDER SUCH EXECUTED CONTRACT TO BE AN ENTIRELY DIFFERENT CONTRACT FROM THE ONE THAT WAS BIDDED UPON.

As held in Agan, Jr. v. Philippine International Air Terminals Co., Inc.:

While we concede that a winning bidder is not precluded from modifying or amending certain provisions of the contract bidded upon,

such changes must not constitute substantial or material amendments that would alter the basic parameters of the ontract and would constitute a denial to the other bidders of the opportunity to bid on the same terms. Hence, the determination of whether or not a modification or amendment of a contract bidded out constitutes a substantial amendment rests on whether the contract,  when taken as a whole, would contain substantially different terms and conditions that would have the effect of altering the technical and/or financial proposals previously submitted by other bidders. The alterations and modifications in the contract executed between the government and the winning bidder must be such as to render such  executed contract to be an entirely different contract from the one that was bidded upon.

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WHAT IS THE PURPOSE OF BUBLIC BIDDINGS?

FOR THE BEST PROTECTION OF THE PUBLIC AND TO GIVE THE PUBLIC THE BEST POSSIBLE ADVANTAGES BY MEANS OF OPEN COMPETITION BETWEEN THE BIDDERS.

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WHAT MODIFICATIONS AND AMENDMENTS ARE PROHIBITED?

MODIFICATIONS OR AMENDMENTS WHICH GIVE THE WINNING BIDDER AN EDGE OR ADVANTAGE OVER THE OTHER BIDDERS WHO TOOK PART IN THE BIDDING, OR WHICH MAKE THE SIGNED CONTRACT UNFAVORABLE TO THE GOVERNMENT.

IN THIS CASE, THE EXTENSION OF THE OPTION PERIOD AND THE EVENTUAL PURCHASE OF THE SUBJECT GOODS RESULTED IN MORE BENEFITS AND ADVANTAGES TO THE GOVERNMENT AND TO THE PUBLIC IN GENERAL.

THE “ADVANTAGE TO THE GOVERNMENT,” TIME AND BUDGET CONSTRAINTS, THE APPLICATION OF THE RULES ON VALID AMENDMENT OF GOVERNMENT CONTRACTS, AND THE SUCCESSFUL CONDUCT OF THE MAY 2010 ELECTIONS ARE AMONG THE FACTORS LOOKED INTO IN ARRIVING AT THE CONCLUSION THAT THE ASSAILED RESOLUTIONS ISSUED BY THE COMELEC AND THE AGREEMENT AND DEED ENTERED INTO BETWEEN THE COMELEC AND SMARTMATIC-TIM, ARE VALID.

It must be pointed out that public biddings are held for the best protection of the public and to give the public the best possible advantages by means of open competition between the bidders, and to change them without complying with the bidding requirement would be against public policy.60 What are prohibited are modifications or amendments which give the winning bidder an edge or advantage over the other bidders who took part in the bidding, or which make the signed contract unfavorable to the government.61 In this case, as thoroughly discussed in our June 13, 2012 Decision, the extension of the option period and the eventual purchase of the subject goods resulted in more benefits and advantages to the government and to the public in general.

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The “advantage to the government,” time and budget constraints, the application of the rules on valid amendment of government contracts, and the successful conduct of the May 2010 elections are among the factors looked into in arriving at the conclusion that the assailed Resolutions issued by the Comelec and the agreement and deed entered into between the Comelec and Smartmatic-TIM, are valid.

Lastly, we need not further discuss the issues raised by movants on the alleged glitches of the subject PCOS machines, their compliance with the minimum system capabilities required by law, and the supposed abdication of the Comelec’s exclusive power in the conduct of elections as these issues have been either thoroughly discussed in the assailed decision or in the earlier case of Roque, Jr. v. Commission on Elections.

TO READ THE DECISION, JUST DOWNLOAD THE FILE BELOW:

SCD-2012-0073-CAPALLA-OCT 2012

LEGAL NOTE 0133: THE GODFATHER RULE IN CORPORATION LAW.

SOURCE: HEIRS OF WILSON P. GAMBOA, PETITIONERS, VS. FINANCE SECRETARY MARGARITO B. TEVES, FINANCE UNDERSECRETARY JOHN P. SEVILLA, AND COMMISSIONER RICARDO ABCEDE OF THE PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT (PCGG) IN THEIR CAPACITIES AS CHAIR AND MEMBERS, RESPECTIVELY, OF THE PRIVATIZATION COUNCIL, CHAIRMAN ANTHONI SALIM OF FIRST PACIFIC CO., LTD. IN HIS CAPACITY AS DIRECTOR OF METRO PACIFIC ASSET HOLDINGS INC., CHAIRMAN MANUEL V. PANGILINAN OF PHILIPPINE LONG DISTANCE TELEPHONE COMPANY (PLDT) IN HIS CAPACITY AS MANAGING DIRECTOR OF FIRST PACIFIC CO., LTD., PRESIDENT NAPOLEON L. NAZARENO OF PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, CHAIR FE BARIN OF THE SECURITIES AND EXCHANGE COMMISSION, AND PRESIDENT FRANCIS LIM OF THE PHILIPPINE STOCK EXCHANGE, RESPONDENTS. (G.R. NO. 176579, 09 OCTOBER 2012, CARPIO, J.) SUBJECT/S: DEFINITION OF CAPITAL IN CORPORATION LAW; THE GODFATHER RULE (BRIEF TITLE: HEIRS OF GAMBOA VS. TEVES)

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SUBJECTS/DOCTRINES/DIGEST:

WHAT IS THE GRANDFATHER RULE?

COMPLIANCE WITH THE CONSTITUTIONAL LIMITATION(S) ON ENGAGING IN NATIONALIZED ACTIVITIES MUST BE DETERMINED BY ASCERTAINING IF 60% OF THE INVESTING CORPORATION’S OUTSTANDING CAPITAL STOCK IS OWNED BY “FILIPINO CITIZENS”, OR AS INTERPRETED, BY NATURAL OR INDIVIDUAL FILIPINO CITIZENS. IF SUCH INVESTING CORPORATION IS IN TURN OWNED TO SOME EXTENT BY ANOTHER INVESTING CORPORATION, THE SAME PROCESS MUST BE OBSERVED. ONE MUST NOT STOP UNTIL THE CITIZENSHIPS OF THE INDIVIDUAL OR NATURAL STOCKHOLDERS OF LAYER AFTER LAYER OF INVESTING CORPORATIONS HAVE BEEN ESTABLISHED.

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IS THE GRANDFATHER RULE APPLICABLE TO THIS CASE?

YES. EVEN SEC APPLIED IT.

Significantly, the SEC en banc, which is the collegial body statutorily empowered to issue rules and opinions on behalf of the SEC, has adopted the 60-40 ownership requirement in favor of Filipino citizens mandated by the Constitution for certain economic activities. This prevailing SEC ruling, which the SEC correctly adopted to thwart any circumvention of the required Filipino “ownership and control,” is laid down in the 25 March 2010 SEC en banc ruling in Redmont Consolidated Mines, Corp. v. McArthur Mining, Inc., et al.,15 to wit:

The avowed purpose of the Constitution is to place in the hands of Filipinos the exploitation of our natural resources. Necessarily, therefore, the Rule interpreting the constitutional provision should not diminish that right through the legal fiction of corporate ownership and control. But the constitutional provision, as interpreted and practiced via the 1967 SEC Rules, has favored foreigners contrary to the command of the Constitution. Hence, the Grandfather Rule must be applied to accurately determine the actual participation, both direct and indirect, of foreigners in a corporation engaged in a nationalized activity or business.

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WHAT IS TRANSCENDENTAL IN THE CASE AT HAND AND WHY?

THE INTERPRETATION OF THE TERM “CAPITAL” IN SECTION 11, ARTICLE XII OF THE CONSTITUTION HAS FAR-REACHING IMPLICATIONS TO THE NATIONAL ECONOMY. IN FACT, A RESOLUTION OF THIS ISSUE WILL DETERMINE WHETHER FILIPINOS ARE MASTERS, OR SECOND-CLASS CITIZENS, IN THEIR OWN COUNTRY. WHAT IS AT STAKE HERE IS WHETHER FILIPINOS OR FOREIGNERS WILL HAVE EFFECTIVE CONTROL OF THE PHILIPPINE NATIONAL ECONOMY.

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PANGILINAN ET AL CONTEND THAT THE TERM  “CAPITAL” IN SECTION 11, ARTICLE XII OF THE CONSTITUTION HAS LONG BEEN SETTLED AND DEFINED TO REFER TO THE TOTAL OUTSTANDING SHARES OF STOCK, WHETHER VOTING OR NON-VOTING. IS THEIR CONTENTION CORRECT?

NO. THE SUPREME COURT HAS NEVER YET INTERPRETED THE MEANING OF “CAPITAL” IN THE CONTEXT OF SECTION 11, ARTICLE XII OF THE CONSTITUTION.

For more than 75 years since the 1935 Constitution, the Court has not interpreted or defined the term “capital” found in various economic provisions of the 1935, 1973 and 1987 Constitutions. There has never been a judicial precedent interpreting the term “capital” in the 1935, 1973 and 1987 Constitutions, until now. Hence, it is patently wrong and utterly baseless to claim that the Court in defining the term “capital” in its 28 June 2011 Decision modified, reversed, or set aside the purported long-standing

definition of the term “capital,” which supposedly refers to the total outstanding shares of stock, whether voting or non-voting.

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To repeat, until the present case there has never been a Court ruling categorically defining the term “capital” found in the various economic provisions of the 1935, 1973 and 1987 Philippine Constitutions.

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PANGILINAN ET AL CONTENDS THAT SEC AND DOJ HAVE ALWAYS INTERPRETED CAPITAL TO REFER TO THE TOTAL OUTSTANDING SHARES OF STOCK WHETHER VOTING OR NOT. IS THEIR CONTENTION CORRECT?

NO. DOJ AND SEC HAVE ISSUED CONFLICTING INTERPRETATIONS.

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The opinions of the SEC, as well as of the Department of Justice (DOJ), on the definition of the term “capital” as referring to both voting and non-voting shares (combined total of common and preferred shares) are, in the first place, conflicting and inconsistent.

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IS THERE ANY DOJ  OPINION WHICH IS CONSISTENT WITH THE SC RULING, BEING NOW CONTESTED,  ON THE MATTER?

YES IN DOJ OPINION NO. 130 DATED 07 OCTOBER 1985, DOJ RULED THAT THE RESULTING OWNERSHIP STRUCTURE OF THE SUBJECT CORPORATION WOULD BE UNCONSTITUTIONAL BECAUSE 60% OF THE VOTING STOCK WOULD BE OWNED BY JAPANESE WHILE FILIPINOS WOULD OWN ONLY 40% OF THE VOTING STOCK, ALTHOUGH WHEN THE NON-VOTING STOCK IS ADDED, FILIPINOS WOULD OWN 60% OF THE COMBINED VOTING AND NON-VOTING STOCK.

In DOJ Opinion No. 130, s. 1985,10 dated 7 October 1985, the scope of the term “capital” in Section 9, Article XIV of the 1973 Constitution was raised, that is, whether the term “capital” includes “both preferred and common stocks.” The issue was raised in relation to a stock-swap transaction between a Filipino and a Japanese corporation, both stockholders of a domestic corporation that owned lands in the Philippines. Then Minister of Justice Estelito P. Mendoza ruled that the resulting ownership structure of the corporation would be unconstitutional because 60% of the voting stock would be owned by Japanese while Filipinos would own only 40% of the voting stock, although when the non-voting stock is added, Filipinos would own 60% of the combined voting and non-voting stock.

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In short, Minister Mendoza categorically rejected the theory that the term “capital” in Section 9, Article XIV of the 1973 Constitution includes “both preferred and common stocks” treated as the same class of shares regardless of differences in voting rights and privileges. Minister Mendoza stressed that the 60-40 ownership requirement in favor of Filipino citizens in the Constitution is not complied with unless the corporation “satisfies the criterion of beneficial ownership” and that in applying the same “the primordial consideration is situs of control.”

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IS THERE ANY SEC  OPINION WHICH IS CONSISTENT WITH THE SC RULING, BEING NOW CONTESTED,  ON THE MATTER?

YES. IN OPINION NO. 23-10 DATED18 AUGUST 2012, SEC  APPLIED THE VOTING CONTROL TEST, THAT IS USING ONLY THE VOTING STOCK TO DETERMINE WHETHER A CORPORATION IS A PHILIPPINE NATIONAL.

On the other hand, in Opinion No. 23-10 dated 18 August 2010, addressed to Castillo Laman Tan Pantaleon & San Jose, then SEC General Counsel Vernette G. Umali-Paco applied the Voting Control Test, that is, using only the voting stock to determine whether a corporation is a Philippine national.

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WILL THE OPINION ISSUED BY A SEC LEGAL OFFICER OR A SEC COMMISSIONER ESTABLISH PRECEDENCE?

NO. THEIR OPINION APPLIES ONLY TO A PARTICULAR CASE. IT IS THE OPINION OF THE WHOLE COMMISSION THAT ESTABLISHES A PRECEDENCE.

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The opinions issued by SEC legal officers do not have the force and  effect of SEC rules and regulations because only the SEC en banc can adopt rules and regulations. As expressly provided in Section 4.6 of the Securities Regulation Code,12 the SEC cannot delegate to any of its individual Commissioner or staff the power to adopt any rule or regulation. Further, under Section 5.1 of the same Code, it is the SEC as a collegial body, and not any of its legal officers, that is empowered to issue opinions and approve rules and regulations.

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WHAT WAS THE MAIN RULING IN THE 28 JUNE 2011 DECISION OF THE SC REGARDING THIS CASE?

THAT THAT THE 60-40 OWNERSHIP REQUIREMENT IN FAVOR OF FILIPINO CITIZENS IN THE CONSTITUTION TO ENGAGE IN CERTAIN ECONOMIC ACTIVITIES APPLIES NOT ONLY TO VOTING CONTROL OF THE CORPORATION, BUT ALSO TO THE BENEFICIAL OWNERSHIP OF THE CORPORATION. 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 60 PERCENT OF THE OUTSTANDING CAPITAL STOCK MUST REST IN THE HANDS OF FILIPINO NATIONALS IN ACCORDANCE WITH THE CONSTITUTIONAL MANDATE. OTHERWISE, THE CORPORATION IS “CONSIDERED AS NON-PHILIPPINE NATIONAL[S]. BOTH THE VOTING CONTROL TEST AND THE BENEFICIAL OWNERSHIP TEST MUST BE APPLIED TO DETERMINE WHETHER A CORPORATION IS A “PHILIPPINE NATIONAL.”