OPLE, Lester Nazarene

2010 – 0002
Investment Law – Prof. Mary Ann Reyes
Assignment # 5

Q.I.

The control test provides that shares belonging to corporations or

partnerships at least 60% of the capital of which is owned by Filipino citizens shall
be considered as of Philippine nationality, but if the percentage of Filipino
ownership in the corporation or partnership is less than 60%, only the number of
shares corresponding to such percentage shall be counted as of Philippine
nationality. On the other hand, the grandfather rule provides that if the percentage
of the Filipino ownership in the corporation or partnership is less than 60%, only
the number of shares corresponding to such percentage shall be counted as
Philippine nationality. The control test is used as the standard in determining the
nationality of a corporation, or when it is clear that at least 60% of the shares are
owned by Filipinos, while the grandfather test is to be applied if there are doubts
surrounding the compliance of a corporation with the 60-40 rule as defined in the
Constitution.

Q.II.

The Securities and Exchange Commission has held that the control test
prevails, and that DoJ’s 1989 Opinion explaining the control test has gained
legislative acceptance through the enactment of the Foreign Investment Act, RA No.
7042. The FIA explicitly adopted, in its implementing rules, that the control test
shall be used when determining the nationality of a corporation for the purpose of
availing financial privileges. This does not mean, however, that the grandfather rule
has been abandoned. The SEC pointed out that the grandfather rule shall not be
applied in cases when the 60-40 Filipino equity ownership is not in doubt, therefore
in cases when it appears doubtful that the 60-40 rule is satisfied, such as when the
60% equity is not owned by natural persons who are Filipino citizens, and are
instead held by juridical persons or corporations with a mix of Filipino and non-
Filipino shareholders, the grandfather rule is to be applied.

Q.III.

The nationality of a corporation matters because our Constitution as well as

certain special laws, provides for limitations on the degree of participation of non-
Filipinos in certain economic activities. These are the so-called “nationalization
laws” that aim to reserve participation in activities exclusively for Filipinos. As a
matter of fact, Art. XII, Section 2 of the 1987 Constitution explicitly reserves to either
the State directly, or the State in conjunction with Filipino citizens or corporations
at least 60% owned by Filipino citizens. Further, in availing of certain incentives,
concessions, and other favorable treatment from the government, as well as licenses
granted by regulatory authorities, nationality becomes material since Filipino
nationality is a requisite for eligibility.

Q.IV.

Generally yes. The SEC in its advisory states that as long as the association or
non-stock corporation does not intend to engage in a nationalized activity, or is not
covered by ownership limits, a foreigner may serve as chairman or be a member of
the board of trustees. However, this presupposes that the trustees are all members
of the association, and that a majority of the trustees are residents of the
Philippines. On the other hand, if the association engages in partly nationalized
activities, or those that do not require 100% Filipino capital ownership, while
placing a cap on foreign participation, foreigners may sit in the board, but only in
proportion to their allowable membership in the organization, subject to applicable
laws.

Q.V.

The Anti-Dummy Law is intended to prevent the circumvention and evasion

of nationalization laws, as well as prohibits foreigners from intervening in the
management, operation, administration, or control of any nationalized activity.
There are also so-called badges of “dummy status” of a corporation, which are
external manifestations that a corporation is likely engaged in acts violative of the
Anti-Dummy Law, such as all funds used for the undertaking be supplied by the
foreign investor, or that the foreign investor undertook to provide practically all
technological support for the venture, or that the foreign investors, despite their
minority stockholder status on paper, manage the company and prepare all
economic viability studies.

Q.VI.

With respect to the control test, if Filipino citizens own at least 60% of the
corporation’s capital, all the shares of the corporation, including those owned by
foreigners, shall be considered of Philippine nationality.
If the Filipinos’ stake is below 60%, only the number of shares corresponding to that
percentage will be considered of Filipino nationality. But as long as Filipinos—in
their personal capacity or through a Filipino-owned or -controlled corporation—can
prove that they own at least 60% of the corporation’s capital stock, no further
inquiries shall be made on the nationality of the owners of the remaining 40%.
Whenever that company owned at least 60% by a Filipino invests in another
company, its investment shall be treated as one made by a Filipino company. The
foreign-owned portion in the investing corporation is disregarded.
On the other hand, the grandfather rule is applied if Filipino citizens own
60% of the corporation’s capital and foreigners own the remaining 40%, then it is
considered a straightforward 60-40 venture, and whenever the 60-40 corporation
invests in another company that is also covered by the 60-40 ownership rule, the
foreign component in the cascade company is aggregated.
Once foreign ownership exceeds 40%, then a corporation covered by the 60-40
ownership rule, is considered to have breached the nationality test.

Q.VII.

I think that the Constitutional mandate reserving certain economic activities

exclusively in favor of Filipino citizens is no longer in the best interests of the
country. In today’s increasingly globalized world, capital, technology, and talent are
all mobile, and no longer the land-locked resources they once were during the
mercantilist age, and until recently, the late 20th century. I favor opening the
economy to foreign capital subject to stricter controls and monitoring of other
compliance items, such as compliance with labor, safety, and environmental laws
because this will ultimately benefit the economy at large through increased
domestic spending, as well as macroeconomic trickle down effects.