Guidelines for Corporations Engaged in Nationalized or Partly Nationalized Activities

The Philippine Securities and Exchange Commission (SEC) has issued Memorandum Circular No. 8 with the title “Guidelines on Compliance with the Filipino-Foreign Ownership Requirements Prescribed in the Constitution and/or Existing Laws by Corporations Engaged in Nationalized and Partly Nationalized Activities” or “Guidelines” for short.

The memorandum provides a regulatory framework for the implementation of the Supreme Court’s decision in Wilson P. Gamboa v. Finance Secretary Margarito Teves, et. al. which defines “capital” in Section 11, Article XII under the 1987 Constitution as shares of stock entitled to vote in the election of directors.

The Guidelines are a major departure from the “Draft Circular,” or the regulation that the SEC initially proposed in November 2012 to implement the decision on the Gamboa Case.

With the Draft Circular, any corporation engaged in partially nationalized or nationalized activity must observe the statutory or constitutional ownership restrictions for every class of shares. If the class of shares has been divided into a series of shares with different limitations, rights, and privileges, then the corporation has to follow the same ownership restriction for the entire series of shares.

The foreign equity limitation has to be applied separately for each class of shares under the Draft Circular, whether preferred voting, preferred non-voting, common, or other class of shares.

The Guidelines, on the other hand, have done away with the separate application for foreign equity limitation for each class of shares. As a point of departure, the Guidelines have applied the foreign equity restriction to the shares of stock or voting stock that are entitled to vote in the election of directors. Moreover, the total outstanding capital stock is now composed of both non-voting and voting shares.

Salient points include:

1. The memorandum covers corporations involved in enterprises or activities reserved partly or wholly to Philippine Nationals by the Foreign Investments Act, the Constitution, and other laws.
2. All concerned corporations must observe at all times the statutory or constitutional ownership requirement.
3. The percentage of Filipino ownership should be reflected in “the total number of outstanding shares of stock entitled to vote in the election of directors,” as well as“the total number of outstanding shares of stock, whether entitled to vote in the election of directors or not.”
4. Corporate Secretaries of concerned corporations must observe and monitor compliance. The Corporate Secretary cannot delegate the responsibility without express authority from the Board of Directors or Trustees.
5. Failure to comply will result in punishment with administrative sanctions specified in Section 14 under the Foreign Investments Act:

• Juridical entity –Fine of1/2 of 1% of paid-in capital, but not more than Php5,000,000.00
• President / officials responsible – Fine not exceeding Php200,000.00
• Any person, firm, or juridical entity – Forfeiture of all benefits granted under the Foreign Investments Act as amended

In another case, Roy III v. Chairperson Teresita Herbosa, et. al., the SC upheld the Guidelines issued by the SEC regarding the matter.

For more information on the Guidelines, you can get in touch with Duran & Duran-Schulze here. The attorneys at Duran & Duran-Schulze can offer a free case evaluation for your convenience.