Private International Law: Corporations
Assignment 14: Corporations
Corporation
A corporation is an artificial being
created by operation of law,
having the right of succession
and the powers, attributes and properties expressly authorized by law or incident to its existence.
It is an artificial being;
It is created by operation of law;
It has the right of succession; and
It has the powers, attributes, and properties expressly authorized by law or incident to its existence.
Conflicts Problems on Corporations
Conflict of laws with respect to corporations generally deals with laws governing their administration, incorporation, nationality, and domicile.
With commercial transactions becoming more frequent and widespread in the modern world, determining what law applies to a corporate entity has become very relevant.
Rules on ownership have also become particularly pertinent, especially for corporations operating in several countries and subject to local laws.
Domestic and Foreign Corporations
Domestic corporations are those organized and existing under the laws of the Philippines.
Foreign corporations, on the other hand, are those "formed, organized, or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or State."
Although organized in another jurisdiction, foreign corporations may operate in the Philippines so long as they apply for a license with the Securities and Exchange Commission. The application must be accompanied by a copy of the articles of incorporation and by-laws, certified in accordance with law, and their translation into an official language of the Philippines.
In addition, the foreign corporation must designate a resident agent authorized to receive summons and notices affecting the corporation. Upon the grant of a license, the foreign corporation may then transact business in the Philippines. The absence of a license, however, does not impede the filing of a suit against the corporation on any valid cause of action recognized under Philippine laws.
Pseudo-foreign corporations are those incorporated in one state but operating in another state.
Usually, the state of incorporation has less stringent rules than the states in which they operate.
In the Philippines, pseudo-foreign corporations are treated as foreign corporations licensed to do business in the jurisdiction.
Cargills Inc. vs Intra Strata Assurance Corporation, G.R. No. 168266, March 15, 2010
Cargill, a corporation organized in the State of Delaware, executed a contract with Northern Mindanao Corporation (NMC) for the sale of molasses.
Intra Strata Assurance Corporation issued a performance bond to guarantee NMC's performance.
When NMC failed to deliver the agreed quantity of molasses, Cargill sued both NMC and Intra Strata.
The parties entered into a compromise agreement, but NMC again failed to comply with its terms.
RTC: Rendered judgment against Intra Strata.
CA: Reversed the lower court's decision, arguing that Cargill lacked the capacity to sue in the Philippines as it was a foreign corporation doing business in the country without the requisite license.
Whether Cargill have the capacity to sue in the Philippines? Yes, Cargill has the capacity to sue in the Philippines.
License Requirement for Foreign Corporations:
A foreign corporation must obtain a license and certificate from the appropriate government agency before transacting business in the Philippines.
A foreign corporation that operates without a proper license cannot maintain any action or proceeding before Philippine courts.
Definition of “Doing Business”:
The Corporation Code does not define “doing business,” but Section 1 of Republic Act No. 5455 provides a definition:
“Doing business” shall include soliciting orders, purchases, service contracts, opening offices (e.g., liaison offices or branches), appointing representatives or distributors domiciled in the Philippines, and other acts that imply continuity of commercial dealings aimed at achieving profit.
Similar provisions are found in Section 3(d) of Republic Act No. 7042 (Foreign Investments Act of 1991), which further enumerates acts that do not constitute "doing business," such as mere investment as a shareholder or appointing a distributor transacting business in its own name.
Cargill is not “doing business”:
In this case, petitioner and NMC amended their contract multiple times to allow NMC to fulfill its obligations. This does not demonstrate an intent to engage in continuous business operations in the Philippines. Instead, the transactions were isolated.
Additional factors supporting this conclusion:
Cargill does not have an office in the Philippines.
Cargill's local broker is an independent contractor, not an agent.
The contract involved only the purchase of molasses from a Philippine exporter, with no indication of profit-making activities by Cargill in the Philippines.
A foreign company merely importing goods from a Philippine exporter, without opening an office or appointing an agent in the Philippines, is not "doing business" in the Philippines. Cargill's activities were limited to an isolated transaction, allowing it to maintain the suit.
Doing Business
Section 133 of the Corporation Code of the Philippines explicitly states:
Sec. 133. Doing business without a license.
No foreign corporation transacting business in the Philippines without a license, or its successors or assigns, shall be permitted to maintain or intervene in any action, suit or proceeding in any court or administrative agency of the Philippines; but such corporation may be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws.
The phrase “doing business” is clearly defined in Section 3(d) of R.A. No. 7042 (Foreign Investments Act of 1991), to wit:
d) The phrase "doing business" shall include soliciting orders, service contracts, opening offices, whether called "liaison" offices or branches; appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totalling one hundred eighty (180) days or more; participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization:
Provided, however, That the phrase "doing business" shall not be deemed to include mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor; nor having a nominee director or officer to represent its interests in such corporation; nor appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account.
This definition is supplemented by Section 1(f), Rule I, Implementing Rules and Regulations, which elaborates on the meaning of the same phrase:
f. "Doing business" shall include soliciting orders, service contracts, opening offices, whether liaison offices or branches; appointing representatives or distributors, operating under full control of the foreign corporation, domiciled in the Philippines or who in any calendar year stay in the country for a period totalling one hundred eighty [180] days or more; participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to and in progressive prosecution of commercial gain or of the purpose and object of the business organization.
The Implementing Rules and Regulations of R.A. 7042 provide under Section 1(f), Rule I, that "doing business" does not include the following acts:
Mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor;
Having a nominee director or officer to represent its interests in such corporation;
Appointing a representative or distributor domiciled in the Philippines which transacts business in the representative's or distributor's own name and account;
The publication of a general advertisement through any print or broadcast media;
Maintaining a stock of goods in the Philippines solely for the purpose of having the same processed by another entity in the Philippines;
Consignment by a foreign entity of equipment with a local company to be used in the processing of products for export;
Collecting information in the Philippines; and
Performing services auxiliary to an existing isolated contract of sale which are not on a continuing basis, such as installing in the Philippines machinery it has manufactured or exported to the Philippines, servicing the same, training domestic workers to operate it, and similar incidental services.
Steelcase vs. Design International Selections, Inc, G.R. No. 1711995, April 18, 2012
Steelcase, a foreign corporation from Michigan, entered into an oral dealership agreement with Design International Selections, Inc. (DISI), a Philippine corporation.
Under the agreement, DISI was allowed to market, sell, and service Steelcase’s products in the Philippines.
The agreement was breached. Steelcase sued DISI for a sum of money.
DISI moved to dismiss, claiming Steelcase was doing business in the Philippines without a license, hence, cannot maintain a suit in our courts.
Whether Steelcase was doing business in the Philippines. No, Steelcase was not doing business in the Philippines.
Rule on Doing Business for Foreign Corporations
Under Section 133 of the Corporation Code, unlicensed foreign corporations transacting business in the Philippines cannot sue in local courts.
"Doing business" is defined under Section 3(d) of R.A. 7042 (Foreign Investments Act) and clarified by its Implementing Rules.
Simply appointing a distributor is not doing business unless the distributor operates under the full control of the foreign corporation.
If the distributor acts independently, buying and selling products for its own account, the foreign corporation cannot be deemed to be doing business.
Nature of the Dealership Agreement
The agreement between Steelcase and DISI was a buy-and-sell arrangement:
DISI placed orders, paid Steelcase, and added its own profit margin.
Steelcase shipped the goods, with DISI covering freight and taxes.
DISI acted in its own name and account, contradicting its claim that it was merely Steelcase’s conduit.
DISI as an Independent Contractor
DISI distributed products of Steelcase and other companies independently.
This clearly shows DISI was an independent contractor, which is one of the exceptions under R.A. 7042.
Steelcase’s act of appointing DISI did not constitute "doing business" in the Philippines.
Estoppel Against DISI
DISI entered into the agreement knowingly and benefited from the arrangement.
DISI only raised the issue of Steelcase’s lack of license after it was informed of a $600,000 debt.
By acknowledging Steelcase’s corporate existence and benefiting from the agreement, DISI is estopped from questioning Steelcase’s capacity to sue.
Steelcase was not doing business in the Philippines
Steelcase was not doing business in the Philippines as it merely appointed an independent distributor (DISI), which falls under the exceptions of R.A. 7042.
DISI is estopped from raising the issue of Steelcase's capacity to sue due to its actions and benefit from the agreement.
Residence of Corporations
A corporation may only have one domicile, but it can be a resident of several states.
The domicile of a juridical person is the state of its incorporation.
However, it may do business in other states and thus become a resident thereof.
This may be gleaned by looking at several laws dealing with the residence of corporations. Hence:
Section 22(H) and (I) of the National Internal Revenue Code defines a:
Resident foreign corporation as a foreign corporation engaged in trade or business within the Philippines.
Non-resident foreign corporation as a "foreign corporation not engaged in trade or business within the Philippines.
Section 1(d) of Presidential Decree No. 1034, otherwise known as the Offshore Banking Law, provides that:
Branches, subsidiaries, affiliates, extension offices or any other units of corporation or juridical person organized under the laws of any foreign country operating in the Philippines shall be considered residents of the Philippines.
The Supreme Court has also ruled that:
"Our laws and jurisprudence indicate a purpose to assimilate foreign corporations, duly licensed to do business here, to the status of domestic corporations."
Hence, if foreign corporations are considered domestic corporations, they should also be considered residents thereof.
The idea that corporations cannot have a residence separate from their domicile is therefore wrong and erroneous since domicile and residence are two completely different doctrines.
State Investment House vs. Citibank, G.R. Nos. 79926-27, October 17, 1991
Consolidated Mines Inc. (CMI) secured loans from Bank of America, Citibank, and HSBC.
When CMI failed to pay, the three banks filed a petition for voluntary insolvency.
Earlier, State Investment sued CMI for damages and collection of money, resulting in a writ of preliminary attachment over CMI's properties.
State Investment opposed the insolvency petition, arguing that the three banks were not residents of the Philippines under the Insolvency Law.
Whether Bank of America, Citibank, and HSBC residents of the Philippines? Yes, they are residents of the Philippines.
Relevant Laws
National Internal Revenue Code (NIRC): A resident foreign corporation is one engaged in trade or business in the Philippines, unlike a non-resident foreign corporation.
Offshore Banking Law (P.D. No. 1034): Foreign corporations operating in the Philippines (e.g., branches, subsidiaries, affiliates) are considered residents of the Philippines.
General Banking Act (R.A. No. 337): Branches of foreign banks in the Philippines are treated like domestic banking institutions for most purposes, bound by the same laws and regulations.
American Law Parallels
A corporation is deemed to have residence where it exercises its business operations and functions.
A corporation can have its domicile (state of incorporation) and residence (place of business activities) in separate states.
Residence vs. Domicile
A foreign corporation is not considered a resident merely by being licensed to operate; actual business activities in the country establish its residence.
“Locality of existence” (where the business operates) is a key factor in determining corporate residence.
Granting a foreign corporation a license to operate does not make it a resident; it legitimizes its business activities.
What determines residence is the corporation's actual presence and lawful business operations in the Philippines.
The three banks—Bank of America, Citibank, and HSBC—were residents of the Philippines as they were legitimately operating and conducting business in the country.
The "Internal Affairs" Rule
Foreign corporations and pseudo-foreign corporations present governance issues.
They can be governed either by the laws of their state of incorporation or the laws of the forum where they operate.
Most jurisdictions follow the general rule that the “internal affairs” of a corporation are governed by the laws of the state of incorporation. However, some jurisdictions allow courts to apply the law of the forum to adjudicate internal corporate matters.
The Philippines adheres to the internal affairs rule. Section 146 of the Revised Corporation Code of the Philippines states:
SEC. 146. Law Applicable. - A foreign corporation lawfully doing business in the Philippines shall be bound by all laws, rules and regulations applicable to domestic corporations of the same class, except such only as provide for the creation, formation, organization or dissolution of corporations or those which fix the relations, liabilities, responsibilities, or duties of stockholders, members, or officers of corporations to each other or to the corporation.
In a nutshell, Section 146 tells us that Philippine laws shall apply to foreign corporations except in matters relating to:
Creation, formation, organization, or dissolution of corporations; or
Relations, liabilities, responsibilities, or duties of stockholders, members, or officers to each other or to the corporation.
Rogers vs. Guaranty Trust Co, 288 U.S. 123 (1932)
Rogers owned shares in the American Tobacco Company (ATC), a corporation organized under New Jersey law.
ATC's board approved resolutions to reduce the par value of its stock, double the number of shares, and sell shares to employees under New Jersey law.
Rogers challenged these resolutions in a New York district court.
ATC moved to dismiss, arguing that the case involved the internal affairs of a foreign corporation (New Jersey) and should not be decided in New York.
Whether New Jersey law or New York law apply to the dispute. New Jersey law applies.
Shareholder Agreement with State of Incorporation
By acquiring shares, Rogers impliedly agreed that the company's internal affairs would be governed by New Jersey law, the state of incorporation.
General Rule on Jurisdiction
Courts generally decline to interfere in the management of corporations organized in another state, leaving such matters to the courts of the state of incorporation.
Judicial Discretion on Stockholder Suits
There is no absolute rule for when a court will assume jurisdiction over internal corporate disputes.
Courts will decline jurisdiction when convenience, efficiency, and justice favor the courts of the corporation's domicile.
ATC's Presence in New Jersey
ATC has substantial business operations in New Jersey, in addition to its registered office. It cannot be considered a mere local concern in New York.
Jurisdiction Over Stock Validity
Questions regarding the stock's cancellation, validity, and sale are most appropriately decided in New Jersey, where the corporation is domiciled and where its statutes are authoritatively interpreted.
Western Air Lines, Inc. vs. Sobieski, 191 Cal.App.2d 399 (1961)
Western Air Lines ("Western"), a Delaware corporation, had its principal place of business in California.
Western's board sought to amend its certificate of incorporation under Delaware law to eliminate cumulative voting for directors.
California argues that this change, which requires shareholder approval via proxy solicitation, constitutes a "sale" of securities under California law. Therefore, Western needs a permit from the California Commissioner of Corporations to proceed.
The Commissioner denied the permit, reasoning that Western's extensive operations in California made it a pseudo-foreign corporation and thus subject to California laws protecting shareholders.
Whether Delaware law or California law govern the regulation of securities for a corporation with significant California operations. California law applies.
"Pseudo-Foreign Corporations" Recognized
Western argued that the Commissioner arbitrarily created a new category of corporation (pseudo-foreign corporations).
The court held that the Commissioner did not create a new class but merely named corporations domiciled in another state but operating primarily in California.
Administrative Rules Are Justified
The Commissioner's creation of rules for pseudo-foreign corporations is fair and necessary.
Naming these corporations did not change their nature but clarified standards for permitting corporate activities in California.
Legislative Intent and Shareholder Rights
The California Legislature’s policy on cumulative voting reflects its intent to protect shareholder rights.
The Commissioner has the discretion to scrutinize corporate schemes, especially those reducing shareholder protections.
Complex Corporate Structures and Regulatory Oversight
The court recognized the complexity of modern corporations with nationwide activities.
Without such oversight, a foreign corporation could evade California laws protecting shareholders by amending its charter in another state.
This would undermine California’s Corporate Securities Act and the state's ability to safeguard shareholder interests.
Commissioner’s Discretion
The Commissioner has the authority to assess and regulate corporate actions that impact shareholders in California.
Allowing foreign corporations to bypass this oversight through out-of-state amendments would render California’s protective laws ineffective.
Mansfield Hardwood Lumber co. vs. Johnson, 268 F.2d 317 (5th Cir. 1959)
The court recognized that a growing minority of jurisdictions acknowledge a fiduciary relationship between officers, directors, majority stockholders, and minority stockholders, particularly in relation to stock purchases.
Whether the fiduciary relationship should be governed by the law of Delaware (state of incorporation) or Louisiana (state of domicile). Louisiana law governs the fiduciary relationship.
Federal Court Conflict-of-Laws Rule
A federal court in a diversity case must apply the conflict-of-laws rule of the state in which it sits.
Louisiana's conflict-of-laws rules align with those of other states, requiring reference to general law.
Role of State of Incorporation vs. Forum State
Generally, the state of incorporation governs the relationship between the corporation and stockholders, while the place of the wrong determines the breach of duty.
Delaware does not impose fiduciary duties on officers or majority stockholders when buying stock from minority stockholders.
Inapplicability of State of Incorporation’s Law
When the only connection to the state of incorporation is the fact of incorporation, and all other relevant factors (e.g., residence, place of business) are in another jurisdiction, the laws of the forum state (Louisiana) should apply.
If the charter or statutory laws of the state of incorporation are not applicable, Louisiana law governs.
State of Incorporation
By incorporating in a particular state, a corporation thereby agrees that the laws of that state shall be the governing law with respect to the internal affairs of the corporation.
The internal affairs generally refer to matters relating to the governance of the corporation as well as the rights and responsibilities of officers and stockholders.
Thus, if a corporation organizes in the State of Delaware, the laws of Delaware shall apply in case there is an intra-corporate dispute among stockholders. This is the case even if the corporation were to operate in another state or even foreign countries.
There are benefits to incorporating in a particular jurisdiction over another. Some of these benefits relate to lower cost of incorporation, a simpler incorporation procedure, more modern corporate laws and governance, and a favorable tax rate ranging from zero to minimal taxation. For example, many incorporate in the State of Delaware because of the belief that Delaware has flexible corporate regulations and lower corporate taxes.
Domicile of Corporations
Corporations have the domicile of juridical persons.
Article 51 of the Civil Code specifically provides that "[w]hen the law creating or recognizing them, or any other provision does not fix the domicile of juridical persons, the same shall be understood to be the place where their legal representation is established or where they exercise their principal functions."
The domicile of corporations is the place where they have their principal place of business as stated in the articles of incorporation. The domicile of a corporation has important uses, foremost of which is fixing the venue for personal actions.
Once fixed in the articles of incorporation, the principal place of business becomes the determining factor where suits will be filed for or against the corporation. If the corporation maintains several places of business, venue will still be the principal place, which is that indicated in the articles of incorporation.
While corporations may have several places of business, it can only have one principal place of business. A corporation will not be allowed to allege other places of business aside from that stated in the articles of incorporation, for to do so would create confusion in determining the venue of personal actions. At the same time, it will be a violation of the Rules of Court.
Hyatt Elevators vs. Goldstar Elevators, G.R. No. 161026, October 24, 2005
Hyatt Elevators ("Hyatt") and Goldstar Elevators ("Goldstar") are domestic corporations engaged in installing, selling, and distributing elevators and escalators.
Hyatt filed a complaint for unfair trade practices and damages against LG Industrial Systems and LG International Corporation, and later impleaded Goldstar.
Goldstar filed a motion to dismiss based on improper venue, as neither Hyatt nor the defendants resided in Mandaluyong City.
Whether venue was properly laid in Mandaluyong City. No, venue is improper in Mandaluyong City.
"Residence" and "Domicile" Defined
The case depends on the proper interpretation of Section 2 of Rule 4 of the 1997 Revised Rules of Court, which governs venue for personal actions.
The term "residence" for venue purposes is synonymous with "domicile," which refers to the location where the corporation's legal representation is established or where its principal functions are exercised.
The domicile of a corporation is determined by the place specified in its Articles of Incorporation, as required by the Corporation Code.
Hyatt's principal place of business was Makati
In this case, Hyatt's principal place of business was Makati, as stated in its Articles of Incorporation. Thus, Makati, not Mandaluyong, was the correct venue.
The argument that the Rules of Court do not specify that a corporation's complaint must be filed in the location of its principal office is without merit; jurisprudence confirms that the place of the principal office determines the residence for venue purposes.
Hyatt's argument that its Makati office was closed and relocated to Mandaluyong is irrelevant because its residence is still tied to the location in the Articles of Incorporation.
The venue rules are designed for the convenience of the parties and to prevent confusion. Allowing a party to change the venue by simply moving its office would create unnecessary confusion and inconvenience.
Clavecilla Radio System vs. Antillon, G.R. No. L-22238, February 18, 1967
New Cagayan Grocery (Necagro) sent a telegram through Clavecilla Radio System, but the word "NOT" was omitted from the message, changing its meaning entirely.
REURTEL WASHED NOT AVAILABLE
REFINED TWENTY FIFTY IF AGREEABLE
SHALL SHIP LATER REPLY POHANG
Necagro filed a complaint against Clavecilla in the Municipal Trial Court of Cagayan de Oro City.
Clavecilla filed a motion to dismiss, citing improper venue, but the City Judge denied it.
Clavecilla filed a petition for prohibition with preliminary injunction, but the Court of First Instance dismissed the petition, allowing the case to proceed in Cagayan de Oro.
Whether the venue was properly laid in Cagayan de Oro City. Venue is improper in Cagayan de Oro City. The proper venue is Manila, where Clavecilla's principal office is located.
Principle of Corporate Residence
A corporation's residence is the location of its principal office.
Clavecilla’s principal office is in Manila, thus, the case should have been filed there.
Branch Office Argument Rejected:
The appellee argued that since Clavecilla had a branch office in Cagayan de Oro, it could be sued there.
However, the court clarified that when the defendant resides in the Philippines, the corporation can only have one residence and must be sued in the municipality of that residence, regardless of the place where he may be found and served with summons.
Precedents
Cohen v. Benguet Commercial Co., Ltd.: The court held that a corporation may only be sued in the municipality of its residence, not where it can be served with summons.
Inconvenience of Multiple Venues
Allowing a lawsuit to be filed in any place where a corporation has a branch office would create confusion and inconvenience for the corporation.
Regulation of Venue:
The laying of venue is governed by the Rules of Court, and it is not up to the plaintiff’s discretion.
In this case, the venue was improperly laid in Cagayan de Oro City.
Tayag vs. Benguet Consolidated, G.R. No. L-23145, November 29, 1968
Idonah Slade Perkins died on March 27, 1960, in New York City.
County Trust Company of New York was appointed domiciliary administrator in New York, and Tayag was appointed ancillary administrator in the Philippines.
Perkins left 33,002 shares of Benguet Consolidated, but the domiciliary administrator failed to produce the stock certificates when ordered by the Court of First Instance (CFI) in Manila.
The CFI ordered the stock certificates to be considered lost, canceled, and new ones issued to Tayag, the ancillary administrator.
Whether Philippine courts have the power and authority over shares of stock held by a domiciliary administrator. Yes, Philippine Courts Have Authority.
Power of Ancillary Administrator
The ancillary administrator in the Philippines has the power to control and possess the assets of the decedent within the Philippines, especially when they are part of the estate to settle local claims.
This power extends to assets like stock certificates held by a Philippine corporation (Benguet Consolidated).
Jurisdiction Over Local Assets:
The Philippines, being the situs of the corporation, allows its courts to have jurisdiction over assets (such as stock certificates) of a foreign decedent, regardless of the decedent’s domicile.
Corporate Authority and Jurisdiction
A corporation, as an artificial being created by law, is subject to the jurisdiction of the state and its courts.
It cannot refuse to obey lawful court orders issued by the state, including orders to transfer or issue stock certificates.
The court’s authority over a corporation is unquestionable, as the corporation operates within the jurisdiction of the Philippine government. It is inconceivable for a corporation to resist legal orders from Philippine courts.
Corporation’s Legal Existence and Duty to Obey
A corporation owes its existence to the state and must comply with lawful orders from the state’s judiciary, including those regarding asset management, such as issuing new stock certificates when the original ones are lost or inaccessible.
Corporations cannot choose which court orders to follow. The claim that a corporation may ignore judicial orders would undermine the authority of the state that created it.
Nationality of Corporations
A corporation, like an individual, has a nationality of its own.
A corporation's nationality becomes relevant in determining compliance with laws prescribing minimum ownership requirements by Filipinos for certain industries or activities under the Constitution.
The Constitution limits ownership of certain businesses and industries to Philippine citizens and corporations to protect the national economy and patrimony.
This is pursuant to the state policy of "protect[ing] Filipino enterprises against unfair foreign competition and trade practices." These industries or businesses are usually referred to as "nationalized industries."
The following are provisions of the Constitution limiting certain businesses or industries to Filipino citizens or corporations:
SEC. 2. All lands of the public domain, waters, minerals, coal, petroleum, and other mineral oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural resources are owned by the State. With the exception of agricultural lands, all other natural resources shall not be alienated. The exploration, development, and utilization of natural resources shall be under the full control and supervision of the State. The State may directly undertake such activities, or it may enter into co-production, joint venture, or production-sharing agreements with Filipino citizens, or corporations or associations at least sixty per centum of whose capital is owned by such citizens. Such agreements may be for a period not exceeding twenty-five years, renewable for not more than twenty-five years, and under such terms and conditions as may be provided by law.
In cases of water rights for irrigation, water supply, fisheries, or industrial uses other than the development of water power, beneficial use may be the measure and limit of the grant.
The State shall protect the nation's marine wealth in its archipelagic waters, territorial sea, and exclusive economic zone, and reserve its use and enjoyment exclusively to Filipino citizens.
The Congress may, by law, allow small-scale utilization of natural resources by Filipino citizens, as well as cooperative fish farming, with priority to subsistence fishermen and fishworkers in rivers, lakes, bays, and lagoons.
The President may enter into agreements with foreign-owned corporations involving either technical or financial assistance for large-scale exploration, development, and utilization of minerals, petroleum, and other mineral oils according to the general terms and conditions provided by law; based on real contributions to the economic growth and general welfare of the country. In such agreements, the State shall promote the development and use of local scientific and technical resources.
The President shall notify the Congress of every contract entered into in accordance with this provision, within thirty days from its execution.
SEC. 7. Save in cases of hereditary succession, no private lands shall be transferred or conveyed except to individuals, corporations, or associations qualified to acquire or hold lands of the public domain.
SEC. 10. The Congress shall, upon recommendation of the economic and planning agency, when the national interest dictates, reserve to citizens of the Philippines or to corporations or associations at least sixty per centum of whose capital is owned by such citizens, or such higher percentage as Congress may prescribe, certain areas of investments.
The Congress shall enact measures that will encourage the formation and operation of enterprises whose capital is wholly owned by Filipinos.
In the grant of rights, privileges, and concessions covering the national economy and patrimony, the State shall give preference to qualified Filipinos.
The State shall regulate and exercise authority over foreign investments within its national jurisdiction and in accordance with its national goals and priorities.
SEC. 11. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines at least sixty per centum of whose capital is owned by such citizens, nor shall such franchise, certificate, or authorization be exclusive in character or for a longer period than fifty years. Neither shall any such franchise or right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress when the common good so requires.
The State shall encourage equity participation in public utilities by the general public. The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its capital, and all the executive and managing officers of such corporation or association must be citizens of the Philippines.
In the area of mining, there is a variation of ownership requirements based on the extent of mining activities to be undertaken.
For large-scale mining in the form of technical or financial assistance agreements, foreign-owned corporations, owned by foreigners to the extent of 100% of the capital thereof, may participate in mining activities.
For mineral production agreements, the same is limited to Filipino citizens, or corporations or associations at least sixty per centum of whose capital is owned by such citizens.
The reason for this difference is that large-scale mining is a capital-intensive industry needing the infusion of foreign capital.
Narra Nickel Mining and Devt Corpo vs. Redmont Consolidated Mines Corporation, G.R. No. 195580, April 21, 2014
Redmont Consolidated Mines Corporation sought to engage in mining activities in Palawan.
Areas identified by Redmont were already subject to Mineral Production Sharing Agreement (MPSA) applications by Narra Nickel Mining and Development Corporation (Narra), Tesoro Mining and Development, Inc. (Tesoro), and McArthur Mining, Inc. (McArthur).
Redmont filed petitions before the DENR Panel of Arbitrators (POA) to deny these applications, alleging the corporations were foreign-owned, as their stocks were primarily owned by MBMI, a 100% foreign (Canadian) corporation.
POA: Narra, Tesoro, and McArthur were foreign corporations.
Mines Adjudication Board (MAB): Reversed the POA decision.
CA: Reinstated the POA decision.
Whether Narra, Tesoro, and McArthur foreign corporations. YES
Whether the "grandfather rule" the proper approach to determine the corporations' nationality. YES
Under the grandfather rule, Narra, Tesoro, and McArthur are foreign corporations.
Corporate Layering and the Grandfather Rule
While corporate layering is allowed under the Foreign Investments Act (FIA), it becomes illegal if used to circumvent the Constitution and relevant laws.
The grandfather rule must apply when doubt exists as to compliance with the 60-40 Filipino-foreign ownership requirement under the Constitution.
Intention of the Constitution
The framers of the Constitution intended the use of the grandfather rule when corporate layering raises doubt.
When the Constitution conflicts with a statute, the Constitution prevails.
DOJ Opinion No. 020 (2005)
The SEC Rules and DOJ Opinion define two approaches:
Control Test (Liberal Rule): If a corporation is at least 60% Filipino-owned, no further tracing of ownership is needed.
Grandfather Rule (Strict Rule): Applies when Filipino ownership is in doubt—ownership must be traced to determine actual Filipino participation.
In this case, doubt existed, necessitating the application of the grandfather rule.
Presence of Doubt in Filipino Ownership
The Court found "doubt" due to the funding and control exercised by MBMI, a 100% Canadian corporation.
MBMI's involvement in Narra, Tesoro, and McArthur demonstrated that the corporations were effectively foreign-controlled, despite claims of Filipino ownership.
Circumventing the Law
Petitioners' assertion that "doubt" exists only when Filipino ownership is less than 60% is rejected.
Corporate schemes and layering can create an illusion of compliance (60% Filipino ownership "on paper") while maintaining foreign control in reality.
Final Assessment of Ownership
Using the grandfather rule, the Court found that MBMI effectively owned 60% or more of Narra, Tesoro, and McArthur's capital stocks.
Evidence showed MBMI’s joint ventures and relationships with underlying corporations further solidified its majority control.
Control Test vs. Grandfather Rule
The control test remains the general rule for determining corporate nationality.
However, when doubt arises (as in this case), the grandfather rule must be applied.
Grandfather Rule (Investment Test)
The SEC en banc voted and decided to do away with the strict computation of the so-called Investment Test otherwise known as the "Grandfather Rule" in determining the nationality of corporations with foreign equity in accordance with the Opinion of the Department of Justice (DOJ) No. 18, Series of 1989 dated January 19, 1989.
It should be noted in this connection that the Grandfather Rule is a method of determining the nationality of a corporation, which in turn is owned by another corporation by breaking down the equity structure of the shareholders of the corporation that owns the other.
The percentage of Filipino equity in the corporation is computed by attributing the nationality of the second or even subsequent tier of ownership to determine the nationality of the corporate shareholder.
The percentage of shares held by the second corporation in the first is multiplied by the latter's own Filipino equity, and the product of these percentages is determined to be the ultimate Filipino ownership of the subsidiary corporation.
The Grandfather Rule "hews with the rule that 'beneficial ownership' of corporations engaged in nationalized activities must reside in the hands of Filipino citizens."
However, the Grandfather Rule is a corollary rule — even if the 60-40 Filipino to foreign equity ratio is apparently met by the subject or investee corporation, a resort to the Grandfather Rule is necessary if doubt exists as to the locus of the beneficial ownership and control.
These include "layering" cases contemplated in this case.
Doubt exists, for instance, if the following indicators are present:
that the foreign investors provide practically all the funds for the investment jointly undertaken with Filipinos;
that the foreign investors undertake to provide practically all the technological support for the venture; and
that the foreign investors, while being minority stockholders, manage the company and prepare all economic viability studies.
In addition, previous issuances of the DOJ and the SEC likewise apply the "Grandfather Rule" in some cases because of the qualification in the opinion to the effect that if the percentage of Filipino ownership in the corporation or partnership (that is a stockholder of another corporation that is partly nationalized) is less than 60%, only the number of shares corresponding to such percentage shall be counted as of Philippine Nationality.
By way of exception, the Grandfather Rule applies if the share of Filipinos in a shareholder corporation is less than 60%. As noted earlier, the qualification in the DOJ and SEC opinion is to the effect that if the percentage of Filipino ownership in the shareholder-corporation or partnership is less than 60%, only the number of shares corresponding to such.
Example:
Corporation X has the following shareholders:
Corporation Y: 70% ownership
Filipino Individuals: 30% ownership
Corporation Y has the following shareholders:
Filipino Individuals: 40% ownership
Foreign Corporation Z: 60% ownership
Compute the Filipino ownership in Corporation Y
Foreign Corporation Z owns 60% of Corporation Y.
Filipino Individuals own 40% of Corporation Y.
Filipino ownership in Corporation Y = 40%.
Compute the Filipino ownership in Corporation X through Corporation Y
Corporation Y owns 70% of Corporation X.
Filipino ownership in Corporation Y = 40%.
Filipino ownership attributed to Corporation X through Corporation Y:
70% × 40% = 28%.
Add the direct Filipino ownership in Corporation X
Direct Filipino ownership in Corporation X = 30%.
Combine the percentages to get the total Filipino ownership
Total Filipino ownership = 28% (through Corporation Y) + 30% (direct).
Total Filipino ownership = 58%.
Controlling Doctrine: Control Test
To settle the confusion, the Supreme Court has declared in unequivocal terms that the controlling approach is still the control test.
Narra Nickel declared that the "control test" is "still the prevailing mode of determining whether or not a corporation is a Filipino corporation." Hence, the approach now is to apply the control test in determining the nationality of a corporation, especially those engaging in nationalized industries. This is the general rule.
What happens now to the grandfather rule? The grandfather rule has not been totally abandoned, though. It still finds application as an exception to the general rule.
It applies only when there is doubt in the 60-40 Filipino equity ownership in the corporation.
One instance of doubt was already provided by the Court in Narra Nickel: when a foreign corporation uses Philippine corporations as dummies, with these dummies suspiciously asking for the conversion of their MPSAs to FTAAs once their dummy status has been exposed.
The gambit of the petitioners in Narra Nickel is easy to see: once their controlling ownership was challenged, they moved to change their mining agreement with the government to allow them to continue doing business in the Philippines. Unfortunately, the courts saw through their ruse and applied the stricter test of the grandfather rule to them.
Capital Refers to Common Shares
In computing the controlling interest in a corporation, the common notion before was that control should be determined based on the outstanding capital stock of the corporation. Therefore, both the common and preferred shares were considered in arriving at the capitalization requirements of the Constitution.
All that was changed when the Supreme Court finally ruled that "capital" actually referred only to common shares since only these shares had voting power with respect to most corporate decisions.
Hence, since common shares dictated and controlled the direction of the corporation, only they should be counted in arriving at the controlling interest of Filipinos and foreigners for purposes of complying with the nationality requirements of the Constitution.
Gamboa vs. Teves, 652 SCRA 690 (2011)
Petitioner Wilson Gamboa challenged the Philippine Government's sale of 46.125% PTIC shares to First Pacific.
The sale allegedly increased foreign ownership of PLDT’s common shares to 81.47%, violating Section 11, Article XII of the 1987 Constitution, which limits foreign ownership in public utilities to 40%.
Whether the sale violated the foreign ownership limit for public utilities under the Constitution. YES
Whether the term "capital" in Section 11, Article XII refers to total common shares only or total outstanding capital stock. YES
The sale violated the foreign ownership limit, and the term "capital" refers only to common shares entitled to vote.
"Capital" Refers to Common Shares
Common shares have voting rights that determine control over a corporation.
Preferred shares, which typically lack voting rights, are excluded unless they can vote in the election of directors.
The framers intended to reserve control of public utilities to Filipinos. Control is exercised through the right to vote, hence the emphasis on voting shares.
Definition of "Philippine National":
Under the Foreign Investments Act of 1991, a corporation is Filipino if at least 60% of its capital stock entitled to vote is owned by Filipinos.
Mere legal title is insufficient; beneficial ownership and voting rights must rest with Filipinos.
For compliance with the 60% rule, Filipinos must have both:
Legal and beneficial ownership of shares, and
60% of the voting rights.
Mockery of Constitution
Laws reserve certain investments for Filipinos, such as: government contracts, mining, domestic shipping, and technology transfer.
The term "capital" is used consistently across these laws to mean voting shares.
In PLDT’s case:
Foreigners owned 64.27% of common shares (voting stock), while Filipinos held only 35.73%.
Filipinos owned 99.44% of preferred shares, which had no voting rights and earned minimal dividends.
Such ownership contradicts the intent and letter of the Constitution.
Voting stock determines control, not the total capital stock, ensuring Filipinos retain effective control over public utilities.
Allowing foreign control through broad definitions of "capital" would undermine the constitutional goal of a self-reliant and independent national economy controlled by Filipinos.
Self-Executing Provision:
Section 11, Article XII is self-executing. No additional legislation is needed to enforce the 60% ownership requirement for Filipinos.
Resolution (C.R. No. 176579, October 9, 2012)
No change of any long-standing rule; thus, no redefinition of the term "capital."
The movants claim that the term "capital" in Section 11, Article XII of the Constitution has historically referred to total outstanding shares of stock (both voting and non-voting). The Securities and Exchange Commission (SEC) allegedly adopted this definition consistently in its opinions.
For over 75 years (since the 1935 Constitution), there was no judicial precedent interpreting "capital" in the 1935, 1973, and 1987 Constitutions.
The claim of a long-standing definition is baseless and unsupported.
DOJ Opinion No. 130 (1985):
"Capital" cannot refer to the combined total of common (voting) and preferred (non-voting) shares. A stock-swap transaction where Filipinos owned 60% of total shares but only 40% of voting shares was ruled unconstitutional. Control over voting shares is the critical factor in satisfying the 60-40 ownership requirement.
SEC Opinion No. 23-10 (2010):
The Voting Control Test was applied, focusing on the ownership of voting stock to determine compliance with the 60-40 rule.
Control over voting shares and board composition determines Philippine nationality for corporate ownership.
The DOJ and SEC have taken contradictory and inconsistent positions on the definition of "capital."
Opinions of SEC legal officers lack the force of SEC rules and regulations, as only the SEC En Banc can issue binding rules under the Securities Regulation Code.
Administrative agency interpretations (e.g., SEC and DOJ) are preliminary and not binding on the Court.
The final interpretation of "capital" rests solely with the Supreme Court.
Definition of "Philippine National"
Section 11, Article XII of the 1987 Constitution mandates that only Filipino citizens or corporations at least 60% Filipino-owned can own and operate public utilities.
Republic Act No. 7042 (FIA) defines "Philippine national" as:
A Filipino citizen; or
A domestic partnership/association wholly owned by Filipinos; or
A corporation organized in the Philippines with at least 60% of voting capital stock owned by Filipino citizens; or
A corporation organized abroad but 100% Filipino-owned and registered in the Philippines.
Trustee funds for retirement or separation benefits must accrue at least 60% to Filipino nationals.
The definition of a "Philippine national" has remained consistent since:
Investment Incentives Act of 1967
Omnibus Investments Code of 1981
Omnibus Investments Code of 1987
Ownership of Public Utilities:
Reserved to "Philippine nationals" only.
A "non-Philippine national" cannot operate a reserved economic activity like public utilities.
Foreign Investments Negative List:
List A: Reserved to Philippine nationals by the Constitution and specific laws.
List B: Covers regulated activities such as defense-related industries or those affecting public health/morals.
The FIA regulates all foreign investments, not limited to those seeking tax/fiscal incentives.
Mere non-availment of incentives does not exempt foreign enterprises from compliance with ownership restrictions under the Constitution.
SEC Opinions:
Some SEC legal opinions disregard the FIA definition of "Philippine national," which raises concerns about competence and consistency.
Opinions that align with the FIA highlight the 60-40 ownership requirement for Filipino nationals.
Even for enterprises not seeking incentives, compliance with the Foreign Investments Negative List remains mandatory.
Intent of the framers of the Constitution
"Capital" refers to controlling interest of a corporation, not just total outstanding shares.
"Capital" replaced "stock" to include associations without stocks that can operate public utilities, provided they meet the 60-40 Filipino ownership rule.
Commissioners Nolledo and Villegas clarified that the 60% Filipino equity refers to voting stock, which determines control.
The "grandfather rule" was acknowledged to ensure Filipino control in multi-tiered corporate investments.
Commissioner Azcuna noted the anomaly where foreigners, owning voting shares (even minority capital), could control corporations if Filipinos held only non-voting shares.
The framers stressed that the omission of "controlling interest" did not imply inclusion of all types of shares.
The Constitution mandates that public utilities must remain effectively controlled by Filipinos to foster a self-reliant and independent national economy.
Illustration of Anomalies:
Foreigners holding 100 voting shares can control a corporation, even if Filipinos hold 1,000,000 non-voting shares.
This violates the intent of the Constitution, as Filipinos would hold 99.999% of equity but no control.
Allowing foreigners to elect a controlling board—even if the board is composed of Filipinos—circumvents the Constitution’s intent.
Directors elected by foreign shareholders may lack independence, undermining true Filipino control.
The framers’ clear intent was to ensure Filipino control in public utilities by emphasizing control through voting stock, not mere equity percentages.
Final Word
The Constitution declares the State policy of developing an economy "effectively controlled" by Filipinos.
Ownership and operation of public utilities are reserved for Philippine nationals, as defined by the Foreign Investments Act (FIA) of 1991, which includes Filipino citizens and corporations where at least 60% of capital with voting rights is owned by Filipinos.
The FIA's implementing rules specify that stocks must have both full beneficial ownership and appropriate voting rights to meet the "Filipino equity" requirement.
The term "capital" in Section 11, Article XII of the 1987 Constitution refers to shares with voting rights and full beneficial ownership to ensure Filipino control of corporations.
Any other interpretation of "capital" would violate the Constitution and allow foreign control over activities meant for Filipinos.
A reminder of the historical exploitation under the Parity Amendment, which gave Americans the same rights as Filipinos, highlights the need to avoid such situations.
The expiration of the Parity Amendment in 1974 saw public utilities like PLDT transition from American to Filipino control without economic harm.
The movants' interpretation of "capital" would effectively reintroduce foreign control, this time not limited to Americans but also to other foreign nationals.
The 1935, 1973, and 1987 Constitutions all uphold the 60% Filipino ownership requirement for public utilities.
Any deviation from this requirement would require a constitutional amendment, a power that the Court cannot exercise, as its duty is only to interpret and apply the Constitution.
SEC Memorandum Circular No. 8, Series of 2013
WHEREAS, the Constitution, the Foreign Investments Act of 1991, (“FIA”) as amended, and other existing laws mandate that a certain percentage of ownership in corporations engaged in identified areas of activities and enterprises be reserved to Philippine Nationals;
WHEREAS, Section 15 of the Corporation Code of the Philippines provides that a corporation which will engage in business or activity reserved for Filipino citizens shall include in its Articles of Incorporation a provision stating that no transfer of stock or interest which shall reduce the ownership of Filipino citizens to less than the required percentage of the capital stock as provided by existing laws, shall be allowed;
WHEREAS, Section 17 of the Corporation Code provides that the Securities & Exchange Commission may reject or disapprove articles of incorporation or amendments thereto if the percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been complied with as required by existing laws or the Constitution;
WHEREAS, Section 14 of the FIA empowers the Commission to impose administrative sanctions provided therein for violation of the FIA and its implementing rules and regulations (“IRR”);
WHEREAS, the Supreme Court in Heirs of Gamboa v. Teves et al, ruled that the term ‘capital’ in Section 11, Article XII of the 1987 Constitution refers only to shares of stock entitled to vote in the election of directors;
WHEREAS, Section 1 (b) of the IRR of FIA clearly requires the existence of full beneficial ownership of the stocks and appropriate voting rights in determining whether stocks are owned and held by Philippine nationals;
WHEREAS, it is essential to ensure that full beneficial ownership and effective control of the appropriate voting rights lie with Philippine nationals;
WHEREAS, Section 143 of the Corporation Code and Sections 5 and 72 of the Securities Regulation Code (“SRC”) empower the Commission to promulgate guidelines, rules and regulations that will enable it to implement the provisions and purpose of the laws it implements;
NOW, THEREFORE, the Commission hereby issues and promulgates the following guidelines on compliance with the ownership requirements in the Constitution and/or existing laws by corporations engaged in nationalized or partly nationalized activities:
Section 1. This Circular shall apply to all corporations (“covered corporations”) engaged in identified areas of activities or enterprises specifically reserved, wholly or partly, to Philippine Nationals by the Constitution, the FIA and other existing laws, amendments thereto and IRRs of said laws, except as may otherwise be provided therein.
Section 2. All covered corporations shall, at all times, observe the constitutional or statutory ownership requirement. For purposes of determining compliance therewith, the required percentage of Filipino ownership shall be applied to BOTH (a) the total number of outstanding shares of stock entitled to vote in the election of directors; AND (b) the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors.
Corporations covered by special laws which provide specific citizenship requirements shall comply with the provisions of said law.
Section 3. All Corporate Secretaries of covered corporations are directed to monitor and observe compliance with the provisions on ownership requirements provided in the Constitution, the FIA, its IRR, other applicable laws, rules and regulations and with the provisions of this Circular.
The Corporate Secretary cannot delegate the responsibility of complying with the provisions of this Circular without the express authority from the Board of Directors or Trustees, as the case may be.
Section 4. This Circular shall take effect immediately after its publication in two (2) national newspapers of general circulation, provided: that all existing covered corporations which are non-compliant with Section 2 hereof shall be given a period of one (1) year from the effectivity of this Circular within which to comply with said ownership requirement. The Commission may extend the period of compliance but only in meritorious and exceptional cases, and upon proper petition.
Failure to comply with this Circular shall subject the juridical entity, any person, and the corporate officers responsible, to sanctions provided in Section 14 of the Foreign Investments Act of 1991, as amended.
The SEC issued this circular following the decision in Gamboa, which was decided by the Supreme Court after it attained finality. The "guideline" provided by the SEC in determining corporate nationality is that "the required percentage of Filipino ownership shall be applied to BOTH (a) the total number of outstanding shares of stock entitled to vote in the election of directors; AND (b) the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors."
The Circular provided two layers of scrutiny:
A determination based only on shares entitled to vote, consisting of the common shares.
A determination based on the total number of outstanding shares, including both common and preferred shares.
What Prompted the SEC to Issue the Guideline? In issuing this guideline, did the SEC violate Gamboa, which clearly stated that only common shares should be included in the computation? In the main decision, the Court in Gamboa ruled:
"The term 'capital' in Section 11, Article XII of the 1987 Constitution refers only to shares of stock entitled to vote in the election of directors, and thus, in the present case, only to common shares, and not to the total outstanding capital stock (common and non-voting preferred shares)."
The Court directed the SEC to apply this definition in determining foreign ownership limits and to impose appropriate sanctions if there was a violation of the Constitution.
The decision is clear that only common shares should be included in determining the nationality of a corporation. The SEC’s Circular has raised the question of whether this is in violation of Gamboa.
SEC's Possible Basis for the Circular:
The SEC may have relied on a passage in the Gamboa Resolution denying motions for reconsideration, which stated:
"Since a specific class of shares may have rights, privileges, or restrictions different from the rest of the shares in a corporation, the 60-40 ownership requirement in favor of Filipino citizens in Section 11, Article XII of the Constitution must apply not only to shares with voting rights but also to shares without voting rights. Preferred shares, denied the right to vote in the election of directors, are still entitled to vote on specific corporate matters. Therefore, if a corporation issues a mixture of common and preferred non-voting shares, at least 60 percent of both the common and preferred non-voting shares must be owned by Filipinos."
This passage, though an obiter dicta, seems to be the basis for the SEC’s decision to apply two layers of computation.
Some argue that the SEC Circular may violate the Gamboa decision by providing a rule materially different from the dispositive portion of the Court's ruling. The validity of the Circular will only be conclusively determined when the Supreme Court rules on it.
Validity of SEC Memorandum Circular No. 8, Series of 2013:
The issue of the validity of the SEC Memorandum Circular No. 8, Series of 2013, was decided by the Supreme Court on November 22, 2016. The Court upheld the validity of the Circular, noting that a "restrictive interpretation of the term 'capital'" would have a significant negative impact on the country and all Filipinos.
The Court pointed out that invalidating the Circular could lead to foreign investors divesting their investments, resulting in massive capital flight from the Philippines.
Roy vs. Herbosa 808 Phil. 838 (2016)
On May 20, 2013, SEC issued SEC-MC No. 8, providing guidelines on compliance with Filipino-foreign ownership requirements for corporations engaged in nationalized or partly nationalized activities. Section 2 requires Filipino ownership to be applied to both voting and non-voting shares.
On June 10, 2013, petitioner Roy filed for certiorari, arguing that SEC-MC No. 8 violated the Gamboa Decision by applying the 60-40 Filipino ownership requirement across all classes of shares of a public utility corporation, not separately for each class.
Whether the SEC abused its discretion in issuing SEC-MC No. 8 in light of the Gamboa Decision and Resolution. No.
No grave abuse of discretion by the SEC.
Interpretation of Gamboa Decision:
The Court clarified that the definition of "capital" in Section 11, Article XII of the Constitution refers only to voting shares (common shares), not the total capital stock, as per the Gamboa Decision.
Gamboa Resolution: The Court reiterated that the SEC must apply the Voting Control Test and the Beneficial Ownership Test to determine Filipino ownership in corporations.
Definition of Capital:
The Court emphasized that "capital" refers only to shares with voting rights, and that this interpretation was not modified in the Gamboa Resolution.
SEC-MC No. 8 Compliance:
The SEC-MC No. 8 was in line with the Court's definition, applying the 60-40 ownership requirement to both voting and non-voting shares.
Application to Class of Shares:
The Court ruled that the 60% Filipino equity requirement does not apply separately to each class of shares (e.g., preferred, common).
The law ensures effective Filipino control of public utilities through overall capital ownership and voting rights.
Both the Voting Control Test and Beneficial Ownership Test must apply to determine a "Philippine national," ensuring Filipino control of public utilities.
No Grave Abuse of Discretion:
The SEC was within its authority to issue SEC-MC No. 8, which followed the Court's clear pronouncements in the Gamboa Decision and Resolution.
Interestingly, the ponente of the Gamboa decision, Justice Antonio Carpio, dissented from the decision of the majority, insisting that:
"The Court clarified [in the Gamboa Decision], in no uncertain terms, that the 60 percent constitutional requirement of Filipino ownership applies uniformly and across the board to all classes of shares comprising the capital of a corporation. The 60 percent Filipino ownership requirement applies to each class of share, not to the total outstanding capital stock as a single class of share. Since the constitutional requirement of at least 60 percent Filipino ownership applies not only to voting control of the corporation but also to the beneficial ownership of the corporation, it is therefore imperative that such requirement applies uniformly and across the board to all classes of shares, regardless of nomenclature and category, comprising the capital of a corporation. Under the Corporation Code, capital stock consists of all classes of shares issued to stockholders, that is, common shares as well as preferred shares, which may have different rights, privileges, or restrictions as stated in the articles of incorporation, controlled by Filipinos."
As we held in our 28 June 2011 Decision, to construe narrowly the term "capital" as the total outstanding capital stock, treated as a single class regardless of the actual classification of shares, grossly contravenes the intent and letter of the Constitution that the "State shall develop a self-reliant and independent national economy effectively controlled by Filipinos."
While the Court did not explicitly state in the dispositive portion of the Gamboa Decision and Resolution that the minimum 60 percent Filipino ownership must be uniformly applied to each class of shares, the body of the Gamboa Resolution categorically declared that "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."