SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 

 

FORM 6-K

Report of Foreign Private Issuer 

 

Pursuant to Rule 13a-16 or 15d-16 of the Securities Exchange Act of 1934

 

 

**For the month of September 2006**
 

 

**Commission File Number 1-03006**

 

 

Philippine Long Distance Telephone Company
(Exact Name of Registrant asSpecified in Its Charter)

 

**Ramon****Cojuangco Building**

**Makati Avenue**

**Makati****City**

**Philippines**

(Address of principal executiveoffices)

 

 

(Indicate by check markwhether the registrant files or will file annual reports under cover Form 20-For Form 40-F.)

 

Form20-F      Ö                                  Form40-F

 

 

(Indicate by check markwhether by furnishing the information contained in this Form, the registrant isalso thereby furnishing the information to the Commission pursuant to Rule12g3-2(b) under the Securities Exchange Act of 1934.)

 

Yes                                                        No       Ö

 

 

(If "Yes" ismarked, indicate below the file number assigned to the registrant in connectionwith Rule 12g3-2(b): 82- ________ )
****
 

 

NOTE REGARDINGFORWARD-LOOKING STATEMENTS

 

Some information in this report may containforward-looking statements within the meaning of Section 27A of the U.S.Securities Act of 1933 and Section 21E of the U.S. Securities Exchange Act of1934.  We have based these forward-looking statements on our current beliefs,expectations and intentions as to facts, actions and events that will or mayoccur in the future.  Such statements generally are identified byforward-looking words such as “believe,” “plan,” “anticipate,” “continue,” “estimate,”“expect,” “may,” “will” or other similar words.

A forward-looking statement may include astatement of the assumptions or bases underlying the forward-lookingstatement.  We have chosen these assumptions or bases in good faith.  Theseforward-looking statements are subject to risks, uncertainties and assumptions,some of which are beyond our control.  In addition, these forward-lookingstatements reflect our current views with respect to future events and are nota guarantee of future performance.  Actual results may differ materially frominformation contained in the forward-looking statements as a result of a numberof factors, including, without limitation, the risk factors set forth in“Item 3. Key Information – Risk Factors” in our annual report on Form 20-Ffor the fiscal year ended December 31, 2005.  You should also keep in mind thatany forward-looking statement made by us in this report or elsewhere speaksonly as at the date on which we made it.  New risks and uncertainties come upfrom time to time, and it is impossible for us to predict these events or howthey may affect us.  We have no duty to, and do not intend to, update or revisethe statements in this report after the date hereof.  In light of these risksand uncertainties, you should keep in mind that actual results may differmaterially from any forward-looking statement made in this report or elsewhere.

 
 

 

**EXHIBITS**
 

 

 

Exhibit Number

 

Page

 

1

 

A copy of the disclosure letter we sent today to the Philippine Stock Exchange and the Securities and Exchange Commission regarding the news article entitled “Aliens control PLDT (60% foreign ownership violates Constitution)” published in the 
** **

   
 September 13, 2006 issue of Malaya.

 

 

18

 

** **

   

Exhibit 1

 

 

 

 

September 14,2006

 

 

 

SECURITIES &EXCHANGE COMMISSION

CorporationFinance Department 

SEC Building, EDSA

Mandaluyong City

 

Attention:        DirectorJustina F. Callangan

                        CorporationFinance Department

 

Gentlemen:

 

Re       :           PhilippineLong Distance Telephone Company

                        SECRegistration No. PW-55

 

In compliance withSection 17.1(b) of the Securities Regulation Code and SRC Rule 17.1, we submitherewith five (5) copies of our letter dated September 14, 2006 to thePhilippine Stock Exchange, Inc. regarding the news article entitled ”Aliens control PLDT (60% foreign ownershipviolates Constitution)” published in the
** **

  September 13, 2006 issue ofMalaya.

 

Respectfully yours,

 

/s/Ma. Lourdes C. Rausa-Chan

MA. LOURDES C. RAUSA-CHAN

Corporate Secretary

 

MLCRC:amq

Encs.

Page 1 of 18

  Exhibit 1

 

 

SECURITIES ANDEXCHANGE COMMISSION

 

 

SEC FORM 17-C

 

 

CURRENT REPORTUNDER SECTION 17

OF THE SECURITIESREGULATION CODE

AND SRC RULE 17.1

 

 

1.                 September 14, 2006 

(Date of earliest event reported)

 

2.                 SEC Identification Number  PW-55

 

3.                 BIR Tax Identification No. 000-488-793

 

4.                 PHILIPPINE LONGDISTANCE TELEPHONE COMPANY                                        

            Exactname of issuer as specified in its charter

 

5.         PHILIPPINES6. _____________ (SEC Use Only)  

            Province, country or otherjurisdiction                Industry Classification Code

of Incorporation

 

7.         Ramon Cojuangco Building, Makati Avenue, Makati City                    1200 

     Address of principal office                                                            PostalCode

 

8.         (632)816-8553; 816-8556                                 

Issuer's telephone number, includingarea code
 

9.         NotApplicable                                                               

            Formername or former address, if changed since last report

 

10.             Securities registered pursuant to Sections 8 and 12 ofthe Securities Regulation Code or Sections 4 and 8 of the Revised SecuritiesAct

 

 

            Titleof Each Class                             Number of Shares of Common Stock

          Licensed and Amount of Debt Outstanding

 

Page 2 of 18

  Exhibit 1

 

11.            Item 9 – Other Events

 

            Attachedhereto is a copy of our letter to the Philippine Stock Exchange, Inc. (“PSE”)dated September 14, 2006 in connection with the news article entitled ”Alienscontrol PLDT (60% foreign ownership violates Constitution)” published in the
** **

  September 13, 2006 issue ofMalaya, together with the letter of our external counsel which sets forthPLDT’s response to the various issues raised in the columns of Mr. AmadoMacasaet over the past few weeks.

 

 

 

SIGNATURE

 

 

            Pursuantto the requirements of the Securities Regulation Code, the Issuer has dulycaused this report to be signed on its behalf by the undersigned hereto dulyauthorized.

 

 

 

 

PHILIPPINE LONG DISTANCE

TELEPHONE COMPANY

 

 

/s/ Ma. Lourdes C. Rausa-Chan

MA. LOURDES C. RAUSA-CHAN

Corporate Secretary

 

 

 

Date:  September 14, 2006

 

Distribution Copies:  5copies – Securities & Exchange Commission

                        1copy    - Philippine Stock Exchange

                                    1copy    - Company Secretary

 

Page 3 of 18

  Exhibit 1

 

 

** **

  September 14, 2006

 

The Philippine Stock Exchange
Disclosure Department

4th Floor PSECentre

Exchange Road, Ortigas Center

Pasig City

 

Attention:        Ms.Jurisita M. Quintos 

SeniorVice President 

 

Ladies and Gentlemen:

 

We refer to yourletter dated September 13, 2006 requesting for confirmation of the informationcontained in the news article entitled ”Aliens control PLDT (60% foreignownership violates Constitution)” published in the
** **

  September 13, 2006issue of Malaya, as quoted below:

 

Page 4 of 18

  *“By theirown admissions, foreign investors are violating, with obvious impunity, theConstitution and the law by having more than 60 percent control of PhilippineLong Distance Telephone Co., a public utility where foreign equity is notallowed to exceed 40 percent.  In submissions to the New York Stock Exchangewhere PLDT and its major foreign investor, First Pacific, are listed, theinvestments of PCD Nominees Corp., presumed to be an arm of First Pacificregistered in Bermuda, are stated at 31.23 percent.  Together with JP MorganHong Kong Nominees Corp. (Hong Kong) with an investment of 16.37 percent, NTTCommunications Corp. (Japanese), with 6.91 percent and NTT Docomo (Japanese),with 6.91 percent, the total foreign holdings of common shares in PLDT come upto 60.4 percent.  These submissions are not identical to disclosures made tothe Philippine Stock Exchange where PLDT is also listed.  In the companyprofile submitted to the NYSE, PCD Nominees Corp. with 31.23 percent, isdescribed as foreign.  The same company with identical equity is described as‘various’ in submissions to the PSE.  The number of PLDT board seats wasrecently increased from 9 to 13.  NTT has been allowed to nominate two seats.First Pacific is entitled to six or a total of eight members nominated byforeign stockholders.  This is equivalent to 60 percent of the board seats andidentical to the extent of foreign holdings.  Based on intertwinedrelationships of First Pacific, an Indonesian company operating out of HongKong and registered in Bermuda. x x x”*

Exhibit 1

* *

 

Wecategorically deny that foreign ownership of PLDT’s capital exceeds theconstitutional limit of 40 percent and that foreigners control the Board ofPLDT.

 

Foreignownership of PLDT’s capital has always been and remains to be below 40 percentand foreign representation in the Board of PLDT is in proportion to thepercentage of foreign ownership of PLDT’s capital.  As of August 31, 2006, only122,693,774 shares or 13.7% of the 896,294,802 total subscribed shares of PLDTwere owned by foreigners, with two foreign representations in the Board ofPLDT.

 

PLDTabides with its avowed principle to comply with all laws, rules and regulationsapplicable to us, and vehemently rejects the unfounded and erroneousallegations in the abovementioned news article.

 

Attachedis the letter of our external counsel which sets forth PLDT’s response to thevarious issues raised in the columns of Mr. Amado Macasaet over the past fewweeks.

 

Respectfullyyours,

 

/s/Ma. Lourdes C. Rausa-Chan

MA. LOURDES C. RAUSA-CHAN

Corporate Secretary

 

MLCRC:amq

Enc.

Page 5 of 18

  Exhibit 1

 

 

                                                                                                September 13, 2006

 

**Mr. Amado P. Macasaet**

c/o 371 Bonifacio Drive

Port Area, Manila

 

Dear Mr. Macasaet:

 

Ourclient, the Philippine Long Distance Telephone Company (“**PLDT**”),requested us to respond to issues raised in your columns over the past fewweeks regarding the ownership of PLDT.  At the outset, we should point out thatthese issues result from a misapprehension of both the facts and of theapplicable laws and that they have been raised before.  PLDT has alreadyresponded to those issues to show that it and its shareholders are in fullcompliance with all applicable legal requirements; however, since you revisitthese issues, we shall address them yet again. 

 

Theprincipal issues you have raised pertain to: (a) PLDT’s 1999 acquisition ofSmart Communications, Inc. (“**Smart**”) as its wholly owned subsidiary fromthe latter’s erstwhile shareholders and (b) PLDT’s compliance with the 60%Filipino shareholding requirement imposed by the Constitution on publicutilities.

 

Asregards the first issue, PLDT’s Board of Directors and shareholders made theirdecision to acquire Smart, an extremely profitable company, and approved themanner of acquiring it, as a wholly-owned subsidiary, with full knowledge ofall the facts and considerations relating to, and in accordance with all of thelegal requirements for making, the acquisition. PLDT’s Board and shareholdersclearly understood and accepted that because they wanted PLDT to acquire Smartwithout paying cash for its shares, but by issuing new PLDT common shares inexchange for the shares of Smart’s erstwhile shareholders, then their (PLDT’sshareholders’) erstwhile proportionate holdings in PLDT would be diluted.  ButPLDT’s Board and shareholders still approved the acquisition on those termsbecause they understood that, in exchange, the value of their PLDTshares--whose number would not be reduced--would be greatly enhanced becauseSmart would end up being a wholly-owned PLDT asset and subsidiary.  

 

Atthe same time, PLDT’s Board and shareholders approved the issuance and sale ofnew shares to NTT Communications Corporation (“**NTT**”), a major Japanesetelecommunications company.  PLDT’s shareholders approved NTT’s entry as asignificant PLDT shareholder through a cash equity infusion because they sawthe value of PLDT’s forming an alliance with NTT by NTT’s becoming a strategicinvestor in PLDT.  PLDT’s shareholders waived their pre-emptive rights so thatthey could implement these transactions.

 

Page 6 of 18

  Smart’s andPLDT’s performance and profitability since these transactions have proven thewisdom of these decisions.  In any event, since you have repeatedly raisedquestions regarding the process followed and disclosures made in connectionwith the transactions, we now provide you with data to show not only that allthe parties to the transaction, but also that relevant government agencies, andthe public through them, had all the material facts, and that all applicablelaws and regulations were followed, when implementing the transactions.Incidentally, most, if not all of these data are publicly available and wouldhave been readily accessible to you had you chosen to do basic research foryour articles before writing them.

 

Thereafter,we shall address your second issue and demonstrate that the foreignshareholding in PLDT is far lower than the 40% maximum limit imposed by theConstitution on public utilities.  

 

 

**A.         The issuance of PLDT common shares tostockholders of Smart and to NTT.**

** **

1.         PLDT’sstockholders approved the share issuances.  On December 10, 1999,stockholders holding more than 70% of PLDT’s common and preferred sharesapproved, during a special stockholders’ meeting, the issuance of 47,297,436PLDT common shares as follows:

 

(a)        35,098,474PLDT common shares were issued to the erstwhile stockholders of Smart asconsideration and in exchange for Smart’s entire issued capital stock.  Thisresulted in Smart’s becoming a wholly owned subsidiary of PLDT.  Contrary tostatements made in your columns, the shares were not issued to Smart itself butto its shareholders and the proposed transactions also did not involve PLDT’sacquisition of any shares in Metro Pacific Asset Holdings, Inc. (“**MPAH**”);and

 

(b)        12,198,462 PLDT common shares were issued to NTTfor cash (P14.7 billion).  

 

Tobe able to issue the foregoing common shares to Smart’s erstwhile stockholdersand to NTT, it was necessary for PLDT to increase its authorized capital stock(from P8.5 billion to P9.395 billion) by amending the SeventhArticle of its Articles of Incorporation.  Stockholders representing more than71% of PLDT’s common and preferred shares approved the increase incapitalization and its concomitant amendment to the Articles, also at theDecember 10, 1999 meeting. 

 

Theseapprovals were promptly disclosed to the Securities and Exchange Commission (“**SEC**”)and the Philippine Stock Exchange (“**PSE**”) and are a matter of publicrecord.

 

2.         Dilutionof PLDT shareholders; First Pacific interests in PLDT disclosed.Principally through the notice of meeting and proxy statement (dated October22, 1999) that PLDT distributed to all of its stockholders for purposes of andprior to the December 10, 1999 meeting, PLDT categorically advised itsstockholders (and the SEC) that the voting interest of the holders of PLDTcommon stock would be diluted as a result of the issuance of PLDT common sharesto Smart’s erstwhile stockholders and to NTT.  (As you know, PLDT was alsorequired under SEC regulations to submit the notice of meeting and proxystatement to the SEC, which approved the document prior to its dissemination toPLDT’s stockholders.)  

 

Page 7 of 18

  PhilippineTelecommunications Investments Corporation (“**PTIC**”) was among the PLDTshareholders whose holdings were diluted, like the rest of the holders of PLDTcommon stock, pursuant to the stockholder approvals given at the December 10,1999 meeting. As of that date PTIC held 21.41% of PLDT’s common stock and 3.24%of PLDT’s total outstanding capital stock (that is, common and preferredshares).  After the December 10, 1999 resolutions were implemented, PTIC heldapproximately 15.4% of PLDT’s common stock and 3.06% of PLDT’s totaloutstanding capital stock.  (As of August 31, 2006, these figures were 13.87%and 2.91%, respectively.)  

 

Reduction of government’s indirect proportionate interests in PLDT.  As you must know,Prime Holdings, Inc. (“**PHI**”) owns 46% of PTIC, and PHI’s PTICshareholdings were the principal subjects of G.R. No. 149802 and related cases,which the Supreme Court recently resolved in favor of the government.  Pursuantto the Supreme Court’s Decision in G.R. No. 149802, it is in this corporation,PHI, that the government owns shares; the government does not own shares inPLDT itself (or in PTIC). At any rate, the reduction in the government’sindirect proportionate interests in PLDT (held through PHI and PTIC) resultingfrom the approvals given by PLDT stockholders during their December 10, 1999special meeting was the necessary effect of PLDT’s shareholders, includingPTIC, deciding to enhance PLDT’s value by acquiring Smart from its formershareholders in exchange for new shares in PLDT, thereby making Smart awholly-owned PLDT subsidiary.[1]  Thatdecision made by PLDT’s shareholders is binding on PLDT’s entire stockholdingbody.[2]Moreover, the additional value brought to PLDT shares by PLDT’s acquisition ofSmart and the entry of NTT benefits the government as an indirect holder ofinterests in PLDT through PHI and PTIC.   

 

PLDTfurther disclosed to its stockholders that upon completion of the proposedtransactions, the First Pacific Group’s direct and indirect economic interestin the company’s increased issued common capital stock would go up toapproximately 22.8% (from 17.5%), while NTT’s would be approximately 15%.  

 

Inthis connection, the company’s notice of meeting and proxy statement for theDecember 10, 1999 meeting also informed PLDT stockholders--and the SEC--that(a) Larouge B.V. (“**Larouge**”) and MPAH collectively acquired a 52.7%interest in PTIC in November 1998, which had increased to 53.9%; (b) PTIC ownedapproximately 21.5% of PLDT’s common stock; (c) Larouge was an indirectwholly-owned subsidiary of First Pacific Company Limited (“**First Pacific**”);and (d) First Pacific also held an indirect economic interest in MPAH.

 

PLDT’sstockholders had the full benefit of these disclosures before they approved theincrease in capital stock and the share issuances to allow for the acquisitionof Smart and the entry of NTT. 

 

Page 8 of 18

  3.         Shareissuance to NTT; PLDT stockholders agreed to waiver of pre-emptive rights.Contrary to your misrepresentation, NTT was not accorded any “specialtreatment” in relation to the issuance to it of PLDT common shares.  It iscompletely untrue that PLDT stockholders were not asked to waive theirpre-emptive rights to those shares.  On the contrary, the agenda of theDecember 10, 1999 special PLDT stockholders’ meeting specifically includedconsideration by PLDT’s stockholders of a further amendment to the SeventhArticle of PLDT’s Articles of Incorporation, Subdivision B(4) for them to waivethe pre-emptive rights of holders of PLDT common shares to subscribe for anyissue of 12,198,462 common shares to NTT (or an NTT subsidiary) for cash.

 

Stockholdersrepresenting more than 70% of PLDT’s common and preferred shares approved theforegoing amendment and the waiver of their pre-emptive rights, also at theDecember 10, 1999 meeting.  Accordingly, the Seventh Article of the Articleshas since provided as follows:

 

***

B.         CommonCapital Stock

 

***

4.         The ownership of shares of Common CapitalStock shall not entitle the owner thereof to any right (other than such right,if any, as the Board of Directors in its discretion may from time to timegrant) to subscribe for or to purchase or to have offered to him forsubscription or purchase (a) any issue of shares of any class of preferredstock of the corporation, (b) any issue of up to 12,198,462 shares of commoncapital stock, for cash, to NTT Communications Corporation (or a subsidiarythereof) as a strategic investor in the Corporation, and (c) any issue ofup to 1,289,745 shares of common capital stock pursuant to the Executive StockOption Plan which was approved by the Board of Directors on April 27, 1999 ***

 

(Underscoring supplied)  

 

            Theseapprovals are also a matter of public record, because they were promptlydisclosed to the SEC and the PSE.  In fact, PLDT’s Articles are a publicdocument you could--and, in fact, should--have inspected at or obtained fromthe SEC before making your allegations.

 

4.         PLDT’sacquisition of Smart and issuance of common shares to NTT disclosed to andapproved by its stockholders and the relevant regulators.  It is also nottrue, contrary to your misrepresentations, that the issuance of PLDT commonshares to Smart’s then-stockholders and to NTT “[was] not *** disclosed to thePSE.”  As we have said, these transactions (and their incidents andconsequences) were fully disclosed to and approved by not only PLDT’sstockholders, but also the relevant regulators, more specifically:

 

(a)        The SEC, which on March 17, 2000 approvedthe amendments to PLDT’s Articles (including the increase in the company’scapital stock, which enabled the share issuances to Smart’s shareholders and toNTT and the denial of pre-emptive rights).  In addition, PLDT timely submittedto SEC, and the latter approved, the notice and proxy statement and the informationstatements for the December 10, 1999 special stockholders’ meeting;

Page 9 of 18

   

(b)        The PSE, which approved PLDT’s application tolist the common shares issued to Smart’s erstwhile stockholders and to NTT; thenewly-issued common shares were approved for listing by the PSE Board ofGovernors on April 12, 2000 and actually listed on the exchange on April 28,2000; and

 

(c)        The National Telecommunications Commission (“**NTC**”),which on December 17, 1999 approved PLDT’s acquisition of Smart’s entire issuedcapital stock in the proceeding docketed as BMC Case No. 99-283.

 

Inother words, the transactions approved by PLDT’s stockholders on December 10,1999 likewise received the unqualified imprimatur of no less than threegovernment agencies.  All of these approvals are also a matter of publicrecord, which you could have easily verified had you the slightest interest inascertaining the facts before making your allegations.

 

(PLDTlikewise fully disclosed the transactions to the United States Securities &Exchange Commission and the New York Stock Exchange (“**NYSE**”) where, asyou know, PLDT’s common shares and American Depositary Shares are also listed.)

 

5.         Valuationof the Smart capital stock acquired by PLDT disclosed to PLDT’s stockholdersand determined to be fair to PLDT; PLDT’s investment in Smart validated.The notice of meeting and proxy statement disseminated by PLDT for the December10, 1999 special stockholders’ meeting discussed PLDT’s valuation for the Smartcapital stock it proposed to acquire.  In particular, the company disclosedthat each outstanding share of Smart common stock would be exchanged for0.01285 PLDT common shares.  Consequently, you are wrong to assert that Smartshares were valued higher than PLDT shares in this transaction.  Moreover, theinvestment bank Morgan Stanley Dean Witter, which acted as financial advisor tothe Special Committee created by the PLDT Board to evaluate the transaction,issued a September 28, 1999 opinion declaring that ‘the consideration to bepaid by PLDT [for Smart’s outstanding capital stock] was fair from a financialpoint of view to PLDT.”[3]

 

Aswe have said, Smart’s consistently excellent financial performance over theyears validates PLDT’s investment.  Smart is the leading mobile phone companyin the Philippines today, and in 2005 contributed, as a wholly ownedsubsidiary, no less than 60% of PLDT’s revenues.  This helped enable PLDT togenerate net profits of P34.5 billion in 2005, which in turn enabled itto declare a total of P12.3 billion in dividends to holders of itscommon stock for that year, representing 40% of PLDT’s core earnings pershare.  

 

** **

**B.        PLDT’s foreignequity levels comply with the law.**

 

Page 10 of 18

  It isapparently your “conclusion” that “First Pacific by its direct or indirectRelationship *[sic]* with NTT, Docomo, Larouge B.V. has Violated *[sic]*the Constitution and the laws when its or their Investments *[sic]*exceeded the 40 percent limit on public utilities.” Indeed, you have also seenfit to make the completely false and irresponsible misrepresentation that a“60% foreign ownership [of PLDT] violates [the] Constitution.”

 

Theseallegations are completely baseless and erroneous.

 

1.         Regulatorsare aware of PLDT’s shareholding structure.  To begin with, PLDT stressesthat its shareholding structure is regularly reported to and is known toregulators such as the SEC, PSE, and the NYSE principally through the variousdisclosures and reports that PLDT, as a publicly listed telecom-municationscompany, regularly submits to them.[4]

 

PLDT’sAnnual Report for 2005 (SEC Form 17-A)--which was filed with the SEC, submittedto the PSE, and widely disseminated to the company’s stockholders--sets forthinformation (as of April 17, 2006) on holders of at least 5% of the company’scommon stock.  These holders include:

 

** **

** **

**Name of Holder of**

**PLDT Common Stock**

** **

** **

**Nationality**

**Number of PLDT Common Shares Held**

**as of April 17, 2006**

**% to Total Outstanding Common Stock**

**as of April 17, 2006**

PCD Nominee Corporation

Filipino[5]

71,741,717[6]

39.54%

J.P. Morgan Hong Kong Nominees Limited

Hong Kong

29,918,502

16.49%

PTIC

Filipino

26,034,263

14.35%

Metro Pacific Resources, Inc. (“**MPRI**”)

Filipino

17,112,534

  9.43%

NTT[7]

Japanese

12,633,487

6.96%

NTT DoCoMo, Inc (“**DoCoMo**”)

Japanese

12,633,486

6.96%

 

TheAnnual Report indicates that there were 181,432,721 PLDT common sharesoutstanding as of April 17, 2006.

 

Onthe other hand, the stockholding figures in PLDT’s latest filing with the NYSE(Form 20-F, for 2005) were as of May 31, 2006.[8]

Page 11 of 18

   

** **

** **

**Name of Holder of**

**PLDT Common Stock**

** **

** **

**Citizenship**

**Number of PLDT Common Shares Held**

**as of May 31, 2006**

% to Total Outstanding Common Stock

**as of May 31, 2006**

PCD Nominee Corporation

Philippine Corporation

72,125,189

39.66%

J.P. Morgan Hong Kong Nominees Limited

Hong Kong

Corporation

29,921,268

16.45%

PTIC

Philippine Corporation

26,034,263

14.32%

MPRI

Philippine Corporation

17,112,534

9.41%

NTT

Japanese

Corporation

12,633,487

6.95%

DoCoMo

Japanese

Corporation

12,633,486

6.95%

 

TheForm 20-F indicates that 180,789,003 PLDT common shares were outstanding as ofDecember 31, 2005.

 

Wewish to emphasize the following:

 

(a)        There is no inconsistency between PLDT’s AnnualReport (filed with the SEC and PSE) and its Form 20-F (filed with the NYSE).Specifically, both filings indicate that the “[c]itizenship” of the PCD NomineeCorporation is a “Philippine Corporation” because it is a juridical entityorganized and existing under Philippine law.  Moreover, based on the SECfilings of the PCD Nominee Corporation and the Philippine Depository Trust Corporation(“**PDTC**”), practically 100% of the PCD Nominee Corporation is owned bythe PDTC, which in turn is at least 60% Filipino-owned.  Consequently, PCDNominee Corporation is plainly a Filipino corporation. (Contrary to thestatement in your September 5 fax to Mr. Manuel V. Pangilinan, PLDT’s Form 20-Fdoes not indicate that the PCD Nominee Corporation is “foreign” or has a31.23% shareholding in PLDT.)  

 

(b)        PLDT does not inquire into the beneficial ownersor customers of the broker-participants of the PDTC who have lodged shares withthem.  In fact, even the PCD’s reports to PLDT do not go beyond the list ofbroker-participants and their PLDT common shareholdings.

 

Page 12 of 18

  As far asPLDT is aware, First Pacific is not the beneficial owner of all of the PLDTcommon shares of the “various” (foreign) persons included in the PCD NomineeCorporation.  For example, although PLDT’s Annual Report and Form 20-F indicatethat Larouge holds more than 8 million PLDT common shares lodged with the PCDNominee Corporation, both of the reports also disclose that the PCD accountlikewise includes PLDT common shares held by an FMR Corporation, which isapparently a U.S. corporation incorporated in Bermuda.  PLDT is not aware, andhas no reason to believe, that FMR Corporation is a First Pacific affiliate.  

 

In this connection, NTT and DoCoMo are also not FirstPacific affiliates.

 

(c)        It is correct that theaggregate holdings of PLDT common stock of the “various” (foreign) personsincluded in the PCD Nominee Corporation, J.P. Morgan Hong Kong NomineesLimited, NTT, and DoCoMo (at least as of April 17, 2006) amounted to about61.8% of the PLDT common stock outstanding as of that date.  

 

However, contrary to your “conclusion,” this equity leveldoes not breach the 40% foreign ownership restriction for publicutilities.

 

2.         Acorporation’s total outstanding capital stock, consisting of its common andpreferred shares, is considered in determining compliance with applicablenationality restrictions.  Your “conclusion” appears to be based on themisimpression that only a corporation’s *common* stock should be countedin computing the levels of its foreign ownership and, necessarily, indetermining compliance with nationality restrictions for public utilities.  

 

Thatview is incorrect.  The *entirety* of a corporation’s outstanding capitalstock--consisting of *all* of its common and preferred shares--mustbe considered, and is the correct basis, for ascertaining such ownership levelsand compliance.  This is clear from the following:

 

(a)        Article XII, Section 11 of the Constitution[9](which contains the nationality restrictions for public utilities) does notdistinguish among classes of stock.  The Constitution applies its foreign owner­ship limitationon the corporation's “capital,” without distinc­tion as to classes of shares.  

 

(b)        Similarly, in defining “outstanding capitalstock,” Section 137 of the Corporation Code[10]also does not distinguish between common and preferred shares, nor doesit exclude either class of shares, in determining the outstanding capital stock(the “capital”) of a corporation.  

 

Page 13 of 18

  (c)        Thedeliberations of the Constitutional Commission[11](which drafted the present Constitution) confirm the foregoing view.  When theCommission was deciding on the basis for computing the foreign equity limits fornationalized activities under the Constitution (including the operation ofpublic utilities), among the concepts (and potential bases for the computation)proposed and discussed were “voting stock” and “controlling interest.”  However,the deliberations show that the Constitutional Commission ultimately rejectedthose proposals and, instead, purposely chose to use the term “capital.”Therefore, there is no doubt that the Constitutional Commission intended forboth common and preferred shares to be considered and counted in determiningcompliance with nationality restrictions for the ownership of the capital stockof public utilities.

 

(d)        The SEC--the government agency primarilyresponsible for implementing the Corporation Code, and which is alsoresponsible for ensuring compliance with the Constitution’s foreign equityrestrictions as regards nationalized activities[12]--has categorically ruled that both commonand non-voting preferred shares should be counted for purposes of computing the60-40% Filipino-alien equity requirement for certain economic activities underthe Constitution (see SEC Opinions dated April 14, 1987[13] and December 27, 1995[14]).  Thus, the SEC has likewise held thatforeigners can validly own more than 40% of the common shares but not more than40% of the total outstanding capital stock which would include both common andnon-voting preferred shares for purposes of Article XII, Section 11 of theConstitution (SEC Opinion dated February 15, 1988[15]).  In these rulings, the SEC categoricallysaid that the term “capital” as used in the Constitution means the sum total ofthe shares subscribed and paid by the shareholders, irrespective of theirnomenclature or the shares’ classification as common or preferred. 

 

3.         Thelevels of PLDT’s foreign equity did not, and still do not, exceed theConstitution’s 40% foreign ownership limits for public utilities.    

 

(a)        Upon the implementation of the resolutionsapproved at the December 10, 1999 special meeting of PLDT’s stockholders, PLDT’sforeign equity comprised only approximately 12.52% of PLDT’s total outstandingcapital stock (*i.e.*, common and preferred shares).

 

In this connection, Smart’s filings with the SECindicate that, when PLDT acquired Smart’s entire capital stock, Smart itselfwas at least 60% Filipino-owned.  Therefore, PLDT’s acquisition of Smart didnot breach the 40% foreign ownership restriction for public utilities.

 

(b)        PLDT’s latest Form 20-F indicates that, as of May31, 2006, approximately 86.31% of PLDT’s outstanding capital stock wasregistered in the names of Philippine persons.  

Page 14 of 18

   

(c)        The shareholding levels of certain holders ofPLDT common stock as of April 17, 2006, in relation to PLDT’s total outstandingcapital stock, were as follows:

 

** **

** **

**Name of Holder of**

**PLDT Common Stock**

** **

** **

**Nationality**

**Number of PLDT Common Shares Held**

**as of April 17, 2006**

**% to Total Outstanding Common Stock**

**as of April 17, 2006**

**% to Total Outstanding PLDT Shares**

**as of April 17, 2006**

PCDNominee Corporation[16]

Various

Filipino

57,032,281

14,709,436

39.54%

8.0%  

 [The % held by the “various” holders is 6.36%.]

J.P. Morgan Hong Kong Nominees Limited

Hong Kong

29,918,502

16.49%

3.34%

PTIC

Filipino

26,034,263

14.35%

2.9%

MPRI

Filipino

17,112,534

9.43%

1.91%

NTT

Japanese

12,633,487

6.96%

1.41%

NTT DoCoMo, Inc.

Japanese

12,633,486

6.96%

1.41%

 

Therefore, even if the Filipino nationality of PCD NomineeCorporation were to be ignored, and the PLDT common stock that PCD NomineeCorporation considers that it holds beneficially for its “various” (foreign)clients were to be deemed held by a foreign shareholder[17] still, when this is added to the holdingsof J.P. Morgan Hong Kong Nominees Limited, NTT, and DoCoMo as of April 17,2006, only 12.52% of PLDT’s total outstanding capital stock as of April 17,2006 may be considered held by non-Filipinos.[18]

 

(d)        In PLDT’s September 6, 2006 Foreign OwnershipMonitoring Report to the PSE, PLDT advised that as of August 31, 2006, thetotal outstanding PLDT shares (common and preferred) amounted to 896,171,539shares.  Thus, the total number of PLDT shares that are allowed to foreignersis 358,468,615 shares (40% of 896,171,539 shares).  However, the total numberof PLDT shares owned by foreigners as of August 31, 2006 was only 123,349,287shares.  This is comprises only approximately 13.76% of PLDT’s totaloutstanding capital stock and is less than half the 40% allowed to foreigners.

 

Therefore, PLDT’s shareholding structure complies with theConstitution’s nationality restrictions for public utilities.

 

Page 15 of 18

  4.         Evenshares denominated as non-voting have voting rights.  There appears to be amisconception that only holders of common shares have voting rights and so onlythose holders can exercise control over a corporation; consequently, under thisview, only common shares should be considered in determining compliance withnationality restrictions under the Constitution.   

 

Butthis is wrong because Section 6 of the Corporation Code grants voting rights toholders of shares of a corporation on certain fundamental corporate matters[19]--*notwithstanding* theirclassification in the corporation’s articles of incorporation as non-voting.Thus, although only holders of PLDT common shares can elect the company’sdirectors, they clearly do not have a monopoly over the exercise of “control”over a corporation/public utility.  It is therefore not surprising that theSEC in its Opinion dated April 14, 1987[20]said that even preferred non-voting shares should be included in thecomputation of the 60%-40% Filipino-foreign equity requirement, preciselybecause they are entitled to vote on the most important and fundamentalcorporate matters.

 

5.         Foreignequity is determined by direct/record ownership of shares.

 

PLDT’s Annual Report and Form 20-F both disclose thefollowing:

 

•                    FirstPacific is the beneficial owner of the PLDT common shares held by PTIC[21] and MPRI.

 

•                    FirstPacific has an economic interest of at least 24%[22] and a voting interest of at least 30%[23] in PLDT based on the PLDT commonshareholdings of PTIC, MPRI, Larouge, and Semilion Enterprises, Inc.

 

Thisdisclosure notwithstanding, the PLDT common shares held by PTIC and MPRI may notbe considered foreign-owned.  

 

(a)      PTIC and MPRI were both incorporated under theCorporation Code and exist under Philippine law, and so are domesticcorporations.

 

(b)      More importantly, 60% of the shares in both PTICand MPRI are held and owned of record by Philippine nationals[24], and both the Constitution and the lawexpress the limitation on foreign ownership of nationalized businesses in termsof ownership**of shares*,*and not**of“beneficial ownership” or of *“*indirect” or “economic interest.”  The SECmade that same declaration in its March 23, 1993 opinion.[25]

Page 16 of 18

   

In determining the nationality of corporations with foreignequity, the Commission En Banc, on the basis of the opinion of theDepartment of Justice No. 18, s. 1989, dated January 19, 1989, voted anddecided to do away with the strict application/ computation of the so called“grandfather rule” (Re: Far Southeast Gold Resources, Inc. FSEGRI), andinstead applied the so called “control test” method of determining corporatenationality.  The method as applied in the said case states as follows:

 

“Shares belonging to corporations or partnerships at least 60% of thecapital of which is owned by Filipino citizens shall be considered as ofPhilippine nationality...”  (Underscoring supplied, Justice Opinion datedJanuary 19, 1989)

 

Applying the above-ruling to the instant case, MEI, which is60% Filipino owned is considered a Filipino company.  Consequently, itsinvestment in MMDC is considered that of a Filipino.  Therefore, the 60% Filipinoequity requirement for mining companies would still be met by MMDC ***. 

* *

Accordingly, corporations such as PTIC and MPRI[26] need only to be at least 60%Filipino-owned in order for all shares of stock belonging to them to beconsidered of Philippine nationality.  Consequently, by the foregoing standard(*i.e.*, the “control test” rather than the discarded grandfather rule),PTIC and MPRI are clearly Philippine nationals.  Thus, their equity in PLDTshould and is properly considered as belonging to Philippine nationals.[27]

 

 

**C.        The courts haveupheld PLDT’s position and shareholding structure.**

 

            In closing,we note that the issue you have raised regarding the correct basis fordetermining foreign equity levels in PLDT (*i.e*., whether or not onlycommon shares or the company’s entire outstanding capital stock should beconsidered) and, by extension, the company’s compliance with the Constitutionalnationality restrictions, has already been raised before Philippine courts andthis issue has already been resolved in the manner we have explained above.  

Page 17 of 18

  Atty. VictorC. Fernandez filed SEC Case No. 01863[28] inDecember 1999 against the then-PLDT Board to annul the aforementioned PLDTstockholder resolutions passed on December 10, 1999 and approving the issuanceof PLDT common shares to (a) Smart’s erstwhilestockholders as consideration and in exchange for PLDT’s acquisition of Smart’sentire issued capital stock and (b) NTT, for cash.  Among the petition’sgrounds was that these issuances would supposedly result in PLDT’s exceedingthe 40% foreign ownership restriction for public utilities because foreignerswould own more than 40% of PLDT’s *common* stock.

 

            The respondents-PLDTdirectors, citing substantially the authorities cited in this letter, pointedout that PLDT’s common and preferred shares (that is, its entire shareholdingbase, or “capital” to use the Constitution’s term) should both be considered inascertaining compliance with the relevant nationality restrictions.  

 

Ina February 21, 2003 decision, the Regional TrialCourt of Makati, Branch 142, upheld the PLDT Board and dismissed the petition.The court also ruled, among others, that MPRI and PTIC were Philippinenationals, and so their equity in PLDT should be considered Filipinoshareholdings. 

 

Theserulings were affirmed by the Supreme Court when it dismissed Atty. Fernandez’sappeal.[29]  Thisdismissal and, consequently, the Decision upholding PLDT’s shareholdingstructure as being in full compliance with the 40% foreign ownership limitationhave since become final and executory.

             We believewe have addressed the issues you have raised. We therefore ask that you publishboth a retraction as well as the complete text of this letter with the sameprominence and regularity that you gave to your baseless assertions.

 

Sincerely,

 

/s/E. M. Lombos

                                                                        E.M.Lombos

 

 

 

Cc: Corporate Secretary,PLDT

 

 

 

Page 18 of 18

  Signatures

 

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 

 

 

PHILIPPINE LONG DISTANCE

TELEPHONE COMPANY

 

 

 

By        :     /s/ Ma. Lourdes C. Rausa-Chan

Name  :     Ma. Lourdes C. Rausa-Chan

Title     :     Senior Vice President, Corporate

                  Affairs and Legal Services Head 

                  and Corporate Secretary

 

 

 

 

 

 

 

Date:September 14, 2006

 

[1]               A dissenting PLDTstockholder could have exercised his appraisal rights in light of the amendmentto PLDT’s Articles denying pre-emptive rights in respect of the share issuanceto NTT.

[2]               In this connection, it hasbeen suggested that PTIC and PHI should be dissolved to enable the governmentto directly own PLDT shares.  This, in our view, is erroneous.  PTIC and PHIpresumably have creditors in addition to other shareholders.  Accordingly, evenif the corporations were already being liquidated, there is no basis at thistime for a PHI or PTIC shareholder (even if it is the government) to claim, orto posit entitlement to, specific corporate assets such as PLDT shares.

[3]               A copy of this opinion wasannexed to the notice of meeting and proxy statement disseminated by PLDT forthe December 10, 1999 special stockholders’ meeting.

[4]               The source of the alleged stockholding figures citedin your fax is not clear to PLDT or to us.  

[5]               On page 6 of the AnnualReport, the “[c]itizenship” of the PCD Nominee Corporation was, as in PLDT’sForm 20-F, given as “Philippine Corporation.”  

[6]               This number is furtherdivided into 57,032,281 and 14,709,436 for “various” (foreign) and “Filipino”clients, respectively, of PCD Nominee Corporation for whom it claims to holdthe shares beneficially. 

[7]               The PLDT common sharesheld by NTT totaled 25,266,973 (of which 12,633,486 NTT recently sold toDoCoMo) from the 12,198,462 PLDT common shares issued to NTT pursuant to itssubscription for cash and 13,068,509 were issued in exchange for NTT’s Smartshares (NTT was among Smart’s erstwhile shareholders from whom PLDT acquiredSmart).

[8]               The Form 20-F has slightdiscrepancies from the Annual Report because the SEC Form 17-A figures were asof April 17, 2006, while the NYSE Form 20-F was as of May 31, 2006.  PLDT’sJ.P. Morgan Hong Kong Nominees Limited accounts move depending on deposits/withdrawalsor lodgments/upliftments of common shares.

[9]               Article XII, Section 11 provides: “No franchise, certificate, or any other form of authorization forthe operation of a public utility shall be granted except to citizens of thePhilippines or to corporations or associations organized under the laws of thePhilippines at least sixty *percentum* of whose capital is owned bysuch citizens, nor shall such franchise, certificate or authorization beexclusive in character or for a longer period than fifty years ***”(underscoring supplied).

[10]            Section 137 of the Corporation Code provides: “Outstanding capitalstock defined. -- The term “outstanding capital stock”, as used in this Code,means the total shares of stock issued under binding subscriptionagreements to subscribers or stockholders, whether or not fully or partiallypaid, except treasury shares” (underscoring supplied).

[11]             See III Record of the Constitutional Commission, at269, 326-327, 357, and 582.

[12]             See Corporation Code, secs.143 and 17.  Section 17, in particular, authorizes the SEC to disapproveamendments to a corporation’s articles of incorporation (such as the amendmentsto PLDT’s Articles related to the resolutions passed during the December 10,1999 special stockholders’ meeting) if it (the SEC) determines that “thepercentage of ownership of the capital stock to be owned by citizens of thePhilippines has not been complied with as required by existing laws or theConstitution.”  Obviously, the SEC did not determine that those resolutions resultedin a breach of the foreign equity restrictions for public utilities, because itapproved the amendments to PLDT’s Articles on, among others, the increase ofits capital stock to P9.395 billion and the denial of pre-emptive rightsas regards the issuance of PLDT common shares to NTT.  

[13]             Addressed to SupremeTechnetronic Corporation.

[14]             Addressed to Joaquin Cunanan& Co.

[15]             Addressed to Atty. FelipeGozon.

[16]             On page 6 of the AnnualReport, the “[c]itizenship” of the PCD Nominee Corporation was, as in PLDT’sForm 20-F, given as “Philippine Corporation.”

[17]             But see the discussion initem 5 below.

[18]             I.e., 6.36% plus 3.34% plus1.41% plus 1.41%, respectively, or a total of 12.52%.

[19]             These matters are: (a) amendment of the articles ofincorporation; (b) adoption and amendment of by-laws; (c) sale, lease,exchange, mortgage, pledge or other disposition of all or substantially all ofthe corporate property; (d) incurring, creating or increasing bondedindebtedness; (e) increase or decrease of capital stock; (f) merger orconsolidation of the corporation with another corporation or othercorporations; (g) investment of corporate funds in another corporation orbusiness; and (h) dissolution of the corporation.  

[20]             Addressed to SupremeTechnetronic Corporation.

[21]             With respect to PLDT sharesheld by PTIC, only to the proportionate extent of Larouge’s and MPAH’sownership of PTIC.

[22]             24.22% as of April 17, 2006and 24.76% as of May 31, 2006.

[23]             30.84% as of April 17, 2006and 31.36% as of May 31, 2006.

[24]             See PTIC’S and MPRI’s latestGeneral Information Sheets submitted to the SEC.  

[25]             Addressed to Mr. Francis F. How of theNatural Resources Development Corporation.

[26]             And PCD Nominee Corporation,which as we have said is almost 100% owned by PDTC which is itself at least 60%Filipino-owned.

[27]    But even if the PLDT commonshares held by PTIC (26,034,263 shares) and MPRI (17,112,534 shares) are to beconsidered foreign owned, they held only 2.90% and 1.91%, respectively, ofPLDT’s total outstanding capital stock as of April 17, 2006.  This would meanthat the foreign equity in PLDT based on its total outstanding capital stock asof that day would be 18%, which would still be less than half of the maximum40% allowed by the Constitution.]

[28]             Entitled “Victor C. Fernandezv. Antonio O. Cojuangco, et al.”

[29]             In SC G.R. No. 157360.