SEC on ‘capital’ requirement: Adding substance to constitutional spirit

Section 10, Article XII of the Philippine Constitution provides that the Congress must reserve certain areas of investment to Filipinos or to corporations or associations of which at least 60 percent of capital is owned by Filipinos. Section 3 of the Foreign Investments Act of 1991 defines a “Philippine national” as a citizen of the Philippines or a domestic partnership or association wholly owned by citizens of the Philippines; or a corporation organized under the laws of the Philippines of which at least 60 percent of the capital stock outstanding and entitled to vote is owned and  held by citizens of the Philippines, and where a corporation and its non-Filipino stockholders own stocks in a SEC registered enterprise, at least 60 percent of the capital stocks outstanding and entitled to vote of both corporations must be owned and held by citizens of the Philippines and at least 60 percent of the members of the Board of Directors of both corporations must be citizens of the Philippines.

In support of this State policy, the Supreme Court, in the case of Heirs of Gamboa v. Teves, G.R. No.176579 dated 28 June 2011 and in a resolution dated Oct. 9, 2012, interpreted the term “capital” for the first time. In this case, the Supreme Court ruled that “capital” under the 1987 Constitution and the Foreign Investments Act of 1991 refers to shares with voting rights, as well as full beneficial ownership, and not to the total outstanding capital stock. Simply put, the 60-40 ownership requirement in favor of the Filipino citizens must apply separately to each class of shares, whether common, preferred non-voting, preferred voting or any other class of shares.

In arriving at this judgment, the Supreme Court reasoned that the foreign ownership limitation also applies to non-voting preferred stocks, that, although denied the voting rights in the election of directors, are nevertheless entitled to vote on certain fundamental corporate acts like amendment of the articles of incorporation; adoption and amendment of by-laws; sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property; incurring, creating or increasing bonded indebtedness; increase or decrease of capital stock; merger or consolidation of the corporation with another corporation or other corporations; investment of corporate funds in another corporation or business; and dissolution of the corporation.

Pursuant to the Heirs of Gamboa case, the Securities and Exchange Commission issued on May 20, 2013 Memorandum Circular No. 8, which sets the guidelines for the compliance of businesses engaged in nationalized and partly nationalized activities. In gist, the said memorandum circular provides that the required percentage of Filipino ownership shall be applied to both the total number of outstanding shares of stock entitled to vote in the election of directors, and the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors. Consequently, all existing covered corporations which are not compliant with the guidelines are given a period of one year from the effectivity of the issuance within which to comply with the said ownership requirement.

Certainly, the Securities and Exchange Commission issuance upholds the protection of vital industries and certain investment areas from foreign control. It is effectively backing Article XII of the Constitution, the Foreign Investment Act definition of what constitutes a “Philippine national”, and the ruling of the Supreme Court in Heirs of Gamboa case to reserve certain areas of investment to Filipinos. It adheres to the constitutional directive without compromising the actual and potential foreign investments. While the Securities and Exchange Commission issuance is providing a guiding principle in support of the conservative approach of the government with regard to development of the national economy, it is likewise recognizing the important role of the foreign investors in the effort to improve the economic standing of the Philippines.

Arianne C. Artugue is a supervisor from the tax group of Manabat Sanagutin & Co. (MS&Co.), the Philippine member firm of KPMG International.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The view and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or MS&Co. For comments or inquiries, please email manila@kpmg.com or rgmanabat@kpmg.com